The recent decision by the United States District Court for the District of Massachusetts, in Trenwick America Reinsurance Corp. v. IRC, Inc.,5 is noteworthy in two respects. First, based on expert testimony regarding custom and practice in the reinsurance industry, the court determined that the “follow the fortunes”/“follow the settlements” doctrines applied to a reinsurance arrangement between the parties even in the absence of an express written contract. Second, the court concluded that, pursuant to the Massachusetts Consumer Protection Act, chapter 93A, the plaintiff retrocedents seeking to collect balances from defendant retrocessionaire IRC Re were entitled to double damages from IRC Re and the two other defendants, along with interest, attorneys’ fees and expenses.

The case involved a workers’ compensation insurance and employers liability program known as the Compcare 2000 program, which was managed by defendant IRC, Inc. Plaintiff Trenwick America Reinsurance Corporation (“Trenwick”) reinsured Reliance National Insurance Company (“Reliance”), which provided direct insurance for the Compcare 2000 program. Trenwick retroceded 100% of its risk to plaintiff Unum Life Insurance Company of America (“UNUM”) through a reinsurance facility. Both Trenwick and UNUM acted through Duncanson & Holt (“D&H”) on this program, and D&H had authority to purchase retrocessional protections on Trenwick’s and UNUM’s behalf. According to the plaintiffs, D&H had retroceded 19% of the Trenwick/UNUM share to defendant IRC Re. IRC Inc. and IRC Re were both founded and controlled by defendant Malcolm Swasey (“Swasey”), who was also responsible for the creation of the Compcare 2000 program.

Beginning in 2004, D&H’s successor, AUL Reinsurance Management Services (“AUL RMS”), began attempting to collect past due balances relating to the Compcare 2000 program from IRC Re. Over the course of the following three years, IRC Re requested various calculations and documentation, all of which were provided. IRC Re disagreed with AUL RMS’s calculations, sent its own revised calculations, and requested proof of adherence to certain reporting requirements. After three years of these requests for information and responses, IRC Re ultimately denied that there was any reinsurance arrangement in place between IRC Re and the plaintiffs, as the plaintiffs were unable to produce a copy of the reinsurance agreement between Trenwick and IRC Re. Swasey contended that “if any type of agreement existed between IRC Re and Trenwick, it was merely ‘an agreement to agree.’” 6

After hearing all the evidence, the court concluded that the evidence of a contract between IRC Re and Trenwick was “overwhelming.” The witness testimony made clear that the parties intended for 19% of the Compcare 2000 risk to be retroceded to IRC Re, and both parties acted as if a binding retrocessional arrangement existed. For example, IRC Re received and retained premium and received quarterly account statements reflecting the ceded premium and losses for each quarter as respects the Compcare 2000 program. The defendants also acknowledged IRC Re’s participation on the program to IRC Re’s auditors and regulators; and IRC Re’s financial statements and reserve analyses included its retrocession of the Compcare 2000 program.

The court then addressed the defendants’ assertion that they should be permitted to relitigate the defenses to coverage that Trenwick had raised in a separate arbitration that it had had with Reliance, which dispute was settled. The court noted that the “follow the fortunes” doctrine would prevent IRC Re from retreading this ground, and examined whether the “follow the fortunes” doctrine applied to the parties’ retrocessional arrangement in the absence of an express written contract. (The court recognized that the “follow the fortunes” and “follow the settlements” doctrines were both implicated in the case, and elected to use what it called the “broader” term “follow the fortunes” to refer to both doctrines.) The court concluded that because Massachusetts law did not clearly provide that the “follow the fortunes” doctrine should be implied in a reinsurance agreement as a matter of law, expert testimony as respects the custom and practice of the reinsurance industry was necessary to resolve whether the doctrine should be implied. The court noted that even the defendants’ expert witnesses agreed that the “follow the fortunes” doctrine is “a core tenet of the reinsurance business,” and that, without the doctrine, “the risk transfer mechanism of a reinsurance program would not work.”7 Based on this testimony and that of the plaintiffs’ expert, who opined that the “follow the fortunes” doctrine is a customary component of every reinsurance agreement, the court found sufficient grounds to imply the doctrine into the retrocessional relationship between IRC Re and the plaintiffs.

The court also examined whether the Massachusetts Statute of Frauds prevented the plaintiffs from pursuing reimbursement from IRC Re. The statute provided, in pertinent part:

No action shall be brought: ... [u]pon an agreement that is not to be performed within one year from the making thereof ... [u]nless the promise, contract or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or by some person thereunto by him lawfully authorized.8

Noting that it was not uncommon for reinsurance agreements not to be reduced to a formal contract, the court concluded that there was ample written evidence of the specific terms of the retrocessional arrangement between Trenwick and IRC Re.

The court determined that there was insufficient evidence to support the plaintiffs’ claims that the defendants fraudulently induced the plaintiffs into participating in the Compcare 2000 program while intending that IRC Re would not fulfill its contractual obligations, or that the defendants made negligent misrepresentations to that effect. The court also determined there was insufficient evidence to pierce the corporate veil to hold defendants IRC Inc. and Swasey liable for the obligations of IRC Re (which plaintiffs claimed lacked sufficient funds to pay the damages alleged). However, the court did find that all three defendants were complicit in conduct that violated the Massachusetts Consumer Protection Act, chapter 93A, which provides that “unfair or deceptive acts or practices” are unlawful. In this instance, these activities were found to include disavowing the reinsurance contract in bad faith, raising a specious defense, and “[stringing] the plaintiffs along, pre- and post-litigation, all in a bad faith effort to avoid payment.”9 The defendants’ post-litigation activities included engaging in various discovery abuses and raising two arguments at a late stage in the litigation (that the plaintiffs lacked standing to bring the suit and that the dispute should be resolved through arbitration), both of which the court determined had been waived. Accordingly, the court awarded the plaintiffs double damages against all three defendants, together with attorneys’ fees and expenses.

It is interesting to note that the judge who rendered the opinion, Nancy Gertner, was also the judge who decided the Commercial Union v. Seven Provinces case, where treble damages were awarded to the plaintiff ceding company against a reinsurer that had engaged in numerous delay tactics to postpone claims payments and continued to shift positions during the litigation that ensued over the claims.