Hartford Steam Boiler Insp. & Ins. Co. v. Int’l Glass Prods., LLC., No. 2:08 cv 1564 (W.D. Pa. Sep. 29, 2016).
A Pennsylvania federal court dismissed direct action claims by a reinsurer against a policyholder for lack of contractual privity. In this case, a business insurance policy was issued by the cedent to the policyholder. Included within the business insurance coverage was coverage for equipment breakdown, which was reinsured by the reinsurer at 100%. The reinsurance contract provided that, while the ceding company would make all direct payments and would handle all the communications with the policyholder, the reinsurer would investigate the claim at its own expense, including entering into settlement agreements and defending all claims, but the cedent could participate in those activities. Essentially, the reinsurer was responsible for addressing equipment breakdown claims as the real party in interest.
After paying substantial claims through the cedent for catastrophic equipment failures, the reinsurer brought accusations of fraud against the policyholder and sought a declaration that there was no coverage and that the underlying policy should be rescinded. The policyholder moved to dismiss all the reinsurer’s claims, arguing that the reinsurer’s claims against the policyholder should be dismissed for lack of contractual privity.
In granting the motion in favor of the policyholder, the court focused directly on the lack of privity argument. The court found that, while there was an insurance policy issued between the cedent and the policyholder, the reinsurer was not a party to that policy and was only a party to a separate reinsurance contract with the cedent. Because the reinsurer was never in contractual privity with the policyholder, held the court, the reinsurer’s claims could not be sustained. Thus, the court found that the reinsurer was not entitled, in its capacity as the cedent’s insurer, to a judicial declaration that the policy was void and was not entitled to recover payments. The reinsurer, said the court, could not enforce provisions of the underlying policy and could not use follow-the-fortunes concepts to overcome the lack of contractual privity.
Nor would the court accept the reinsurer’s argument that the unique facts of this case established an exception to the general rule and would allow a contractual right of action against the policyholder. The lack of contractual privity was fatal to this argument. The court also rejected the reinsurer’s claim for statutory insurance fraud and reverse bad faith for the same reason.
The lack of privity argument is regularly made by reinsurers when sued in direct actions by policyholders or other third parties. In most circumstances, a policyholder’s direct action against a reinsurer will fail because of lack of privity. This is the unusual case where the claim was brought by the reinsurer, yet the same lack of contractual privity argument was used to dismiss the claims.