Companion Prop. & Cas. Ins. Co. v. United States Nat’l Ass’n, No. 3:15-cv-01300-JMC, 2016 U.S. Dist. LEXIS 152406 (D.S.C. Nov. 3, 2016).

The cedent participated in a fronted insurance program with two reinsurance companies under which the fronting company received a fee for allowing its name and paper to be used. As part of the program and in accordance with the reinsurance agreements, reinsurance collateral trusts were established, securing the reinsurers’ obligations to the fronting company. The bank trustee was substituted as trustee under two trust agreements, which stated that the reinsurers could direct the trustee to substitute assets of comparable value for assets held in the trust account and that the trustee had to comply with any such direction. The trust agreements also provided that the reinsurers would make specific representations and warranties as to the quality and value of the assets. 

The fronting company sued the trustee alleging that it had allowed for the substitution of offending assets. The trustee filed a third-party complaint, alleging that the reinsurers, their affiliated companies and/or the affiliates’ beneficial owner were liable to the fronting company. The beneficial owner counterclaimed against the trustee. The court denied the trustee’s motion to dismiss in part, finding that should the beneficial owner be found liable to the fronting company the beneficial owner could pursue a claim for contribution against the trustee.