The reinsurance industry has always had reinsurance auditors that performed various tasks for cedents and reinsurers to monitor programs and determine whether the counter-parties were complying with the contracts. In the past few years, a newish type of auditor has appeared (at least newish to me). This type of auditor looks at reinsurance programs to determine if the cedent has overpaid reinsurance premiums and has been underpaid for reinsurance recoveries. A recent case in Pennsylvania highlights this type of audit work.
In Boomerang Recoveries, LLC v. Guy Carpenter & Co., LLC, No. 16-0222, 2016 U.S. Dist. LEXIS 53795 (E.D. Pa. Apr. 21, 2016), a reinsurance program review company sued a reinsurance broker and two of its officers for various torts, including intentional interference with contract, unfair competition, commercial disparagement and other claims. The court decision is about whether removal of the action from state court to federal court was proper given the forum defendant rule, 28 U.S.C. § 1441(b)(2). The outcome was that the case was improperly removed from state court and was remanded by the federal court back to Pennsylvania state court for lack of federal subject matter jurisdiction.
What was interesting, however, were the factual allegations underlying the case. Here, the review company had allegedly identified significant premium overcharges in favor of its client, the cedent. The review company stood to earn 35% of the recovered overcharges. These overcharges were allegedly caused by errors made the intermediary in calculating the reinsurance premium. What happened next, according to the various complaints (the last complaint was the 5th Amended Complaint), was that instead of the intermediary requesting a refund from the reinsurers, the intermediary did its own review and found almost a completely offsetting undercharge of premiums to the cedent. Ultimately, the cedent did not pursue the claim against the reinsurers and the review company never got its 35% pay day.
This case has a long way to go and there has been no discovery, motion for summary judgment or trial. What makes the case unusual is the interplay between the cedent’s new hire–the review company–and the intermediary who obviously placed the cedent’s business with the reinsurance market. From the allegations in the complaint it appears that the review company’s position was that the intermediary had to pass along the reimbursement request to the reinsurers and had no authority to do its own audit and contest the review company’s findings. From the intermediary’s perspective, according to the court, the review company did not do any “net accounting,” but merely looked for overcharges of premiums and not undercharges. By failing to audit for both over and undercharges, the intermediary allegedly claimed that the review company was acting improperly if not fraudulently.
Many industries have service providers that will look at your contracts, your electric bills, your lease obligations and determine whether you have been overcharged. All of them will perform this service for either a percentage of the recovery or for a flat fee. In the reinsurance world, the percentage of recovery seems to be the typical methodology, which obviously incentivizes the auditor to maximize the overcharges to maximize its recovery. This is something we have seen in other cases.
What is the duty of the intermediary in this situation? Perhaps this case, if it gets to a merits resolution, will provide some guidance. It is clear, however, that when an intermediary is accused of overcharging premium (thereby maximizing its brokerage), the intermediary will perform its own internal audit to determine if that charge is true. Here, the intermediary did so by allegedly checking all transactions and netting out overcharges and undercharges to determine the extent of the overcharging. It seems that by reconciling all the reinsurance financial transactions and coming up with a net result the intermediary found a fair way to address the reinsurance premium overcharging claim.