On 26 September 2011, the federal district court for the Northern District of Oklahoma granted a reinsurer’s motion to dismiss a third-party complaint brought by a policyholder against one of its insurers reinsurers.
The case began as a declaratory judgment action by an insurer against Montello Inc, seeking a declaration that the insurer was not obligated to cover Montello for liability alleged in numerous underlying asbestos lawsuits. Montello asserted third-party claims against several other insurers that had issued policies to it during the relevant timeframe, including Continental Casualty Company. In addition to naming Continental as a third-party defendant, Montello also named National Indemnity Company as a third-party defendant. NICO had never insured Montello, but Montello alleged that NICO was liable to it because of a recent reinsurance agreement that NICO had entered into with Continental. Montello recognized that the general rule is that a policyholder cannot proceed directly against a reinsurer, but argued that two exceptions to the rule applied:
- that there was an implied “cut through” clause in the reinsurance agreement; and
- that the reinsurance agreement constituted “assumption
reinsurance”. The court rejected both arguments. The court reviewed the reinsurance agreement and determined that it did not contain any express cut-through provision. Montello attempted to argue that there should be an implied cut-through provision because NICO and Continental also entered into an administrative services agreement pursuant to which NICO agreed to provide extensive administrative services, including handling and paying claims. But the court found that both the reinsurance agreement and the administrative services agreement contained express negation clauses pursuant to which NICO “disavows undertaking any direct liability to a third party by way of the reinsurance agreement.” Under New York law (which applied to the contracts at issue), the negation clauses were dispositive. As the court explained, “These agreements that authorize NICO to administer claims for ‘the benefit of’ or ‘on behalf of’ the reinsured cannot be read to create a direct link to the original insured.”
The court also rejected the argument that the reinsurance agreement constituted assumption reinsurance where the reinsurer stepped into the shoes of the ceding company. The court noted that the reinsurance from NICO contained an aggregate limit of liability of US$4 billion and that the definition of “Ultimate Net Loss” in the agreement included most of Continental’s liabilities net of other reinsurance and recoveries. Thus, the court found that “because NICO has not assumed all of [Continental’s] liabilities, the reinsurance contract does not create assumption reinsurance”.
Therefore, the court ruled that Montello had no direct action against NICO and granted NICO’s motion to dismiss.
Canal Insurance Company v. Montello, Inc. United States District Court for the Northern District of Oklahoma 26 September 2011