Plaintiff Jurupa Valley Spectrum, LLC (“Jurupa”) is a beneficiary of certain surety bonds issued by Frontier Insurance Company, which were reinsured by National Indemnity Company (“NICO”).  See Jurupa Valley Spectrum, LLC v. National Indemnity Co. and National Liability & Fire Ins. Co., No. 07-cv-3211 (2d Cir. Feb. 4, 2009).  The reinsurance agreement provided that in the event of Frontier’s insolvency, NICO was obligated to pay Frontier’s rehabilitator, who would then make payment to its insureds, unless NICO either agreed to pay an insured directly or direct payment was required in order to comply with New York Insurance Law § 4118.  The reinsurance agreement further provided that no party other than Frontier or NICO, or their permitted assigns or successors, had any rights under that agreement.

Jurupa sued NICO directly for performance under the surety bond after it failed to collect from Frontier, which had become insolvent.  The U.S. District Court for the Southern District of New York granted NICO’s motion to dismiss Jurupa’s lawsuit for failure to state a claim upon which relief could be granted.   The district court found that the reinsurance agreement (a) explicitly stated that it did not extend any rights to third parties, precluding a direct action by Jurupa; (b) did not contain a “cut through” provision allowing an insured to recover directly from its reinsurer, nor was such recovery permitted by law; and (c) did not constitute an assumption reinsurance agreement for which NICO agreed to assume all of Frontier’s direct liabilities.  Jurupa appealed.

On appeal, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s decision.  First, the Second Circuit recognized that NICO was not obligated to make payments to direct insureds under the reinsurance agreement, unless it agreed to do so or such payment was required by the New York Insurance Law.  As this was not the case with respect to Jurupa’s claim, NICO had no obligation to indemnify Jurupa directly.

Next, the court held that the reinsurance agreement did not contain a so-called “cut through” provision, which is found in some reinsurance contracts and permits an insured to assert an action directly against a reinsurer.  The court rejected Jurupa’s argument that the following wording constituted a “cut through” clause:

[T]he parties to this Reinsurance intend that Reinsurer, through the Claims Administrator, shall pay all amounts…due Insureds and other persons as and when due directly on behalf of the Reinsured.  

Id. at 3-4 (noting that such wording did not amount to an express cut through provision, particularly since the reinsurance agreement also provided that only the reinsured had any rights or remedies against the reinsurer under the agreement).  The court further found that Jurupa did not have a direct right of action against NICO under New York Insurance Law §§ 1115 and 4118, since the surety bond issued to Jurupa did not exceed ten percent of Frontier’s surplus. Last, the court held that the reinsurance agreement did not constitute assumption reinsurance, in which the reinsurer steps into the shoes of the cedent with respect to the reinsured policy and assumes all of its liabilities.  The court noted that NICO did not assume all of Frontier’s liabilities under the reinsurance agreement, nor did it assume Frontier’s liability for the Jurupa claim.

The court also affirmed the district court’s ruling that Jurupa could not maintain a cause of action against the claims administrator to the reinsurance agreement, National Liability & Fire Insurance Company, for tortious interference with its contractual rights against NICO.  Under New York law, such an action required the existence of a valid contract between Jurupa and NICO, which, as noted above, was held not to exist.  Click here to review a copy of the Second Circuit’s decision.