A federal district court has ruled that a facultative reinsurer does not owe reinsurance for the costs to repair an unsafe bridge that had significant cracks due to defective design or construction. The City of Renton v. Lexington Ins. Co., No. 06-203RSM, 2007 WL 2751356 (W.D. Wash. Sept. 19, 2007).

A local municipality in Washington made extensive repairs to a 1887-foot long bridge that was found to have numerous cracks and was at risk for total failure. A property insurer for the municipality paid a portion of the repair costs. Both the property insurer and the municipality sought reimbursement from a reinsurer that had issued a facultative certificate for the property insurance policy.

The court held that the facultative reinsurer did not owe reinsurance based on an “inherent vice” exclusion in the property insurance policy. Under Washington law, “inherent vice” means “a loss entirely from internal decomposition” rather than a loss caused by an external event, such as an earthquake. Experts determined that the cracks to the bridge were caused by defective construction or design of the bridge.

The insurer and the municipality argued that the facultative reinsurer was liable based on the principle of “follow the fortunes.” The court rejected the “follow the fortunes” argument. “The reinsurer is not bound to pay where the primary insurer paid on a claim that was completely outside the scope of the policy, and not in good faith.” The court further found that the property insurer did not pay the claim in good faith because the insurer paid the claim late in this suit, after discovery had closed, and after the reinsurer had raised the “inherent vice” exclusion.