Finally, the court considered whether the assignee had acquired
the right to compel arbitration under arbitration clauses in the
reinsurance contracts between the cedent and reinsurer. The Seventh
Circuit affirmed the district court’s conclusion that the assignment
agreement did not convey that right. It reasoned that because the
clause concerning enforcement of the debts in the assignment
agreement was narrower than a preceding provision concerning
obtaining information about the debts, which conveyed the power to
obtain information “to the same extent” that the assignor could, the
enforcement provision did not include the contractual right to compel
arbitration. Instead, the court concluded the assignee obtained only
those rights included in the narrower provision: to demand, sue,
compromise, or recover the debts owed under the contract.
Second Circuit Affirms Ruling that Interest on a Judgment
is Not a Covered Loss Under the Terms of the Reinsurance
Seneca Ins. Co. v. Everest Reins. Co., No. 13-4201-cv, 2014 U.S. App.
LEXIS 19929 (2d Cir. Oct. 16, 2014) (Summary Order).
In a case that was discussed in our December 2013 Reinsurance
Newsletter, the Second Circuit Court of Appeals, in an unpublished
Summary Order, has affirmed the district court’s ruling that interest
amounts included in the judgments entered against the insured
were properly considered “interest on a judgment,” which under the
reinsurance agreement is not a covered loss. Because interest was
not part of the covered loss, the US$5 million loss trigger to reach
the reinsurance coverage was not met and the reinsurer had no
obligation to pay.
Massachusetts Federal Court Grants Motion to Compel
Arbitration of Reinsurance Dispute, Vacates Previous Arbitral
Nationwide Mut. Ins. Co. v. Liberty Mut. Ins. Co., Nos. 13-cv-12910-
PBS and 14-cv-12046-PBS, 2014 U.S. Dist. LEXIS 157595 (D. Mass.
Nov. 6, 2014).
A Massachusetts federal court granted in part and denied in part
a reinsurer’s motion to compel arbitration of “new” claims under a
series of excess-of-loss treaties between the parties, and granted
the reinsurer’s motion to vacate a clarification issued by a previous
arbitration panel. The motions concerned whether the arbitration
panel’s award applied to six previously billed, but unresolved, claims
not raised as part of the original proceedings.
The reinsurer filed a petition to compel arbitration as to those claims
in Massachusetts federal court under the Federal Arbitration Act (9
U.S.C. § 4). In a proceeding before the Massachusetts state court, an
order had issued partially enforcing the prior arbitration award on the
six “new” claims, but the court stated that it had neither considered
nor relied on a clarification of the original award issued by the
Congratulations to John Nonna and Larry Schiffer, who
were named to Who’s Who Legal 100 2014 for Insurance &
Congratulations to John Nonna, who was elected to serve
as Co-Chair of the Board of Directors and Trustees of the
Lawyers’ Committee for Civil Rights Under Law.
Recent Case Summaries
Seventh Circuit Holds FSIA Overrides State Statute Requiring
Pre-Answer Security from Foreign Government-Owned
Reinsurer and Rejects Right to Arbitrate
Pine Top Receivables of Ill., LLC v. Banco de Seguros del Estado, Nos.
13-1364 & 13-2331, 2014 U.S. App. LEXIS 2129 (7th Cir. Nov. 7, 2014).
This dispute arose over the assignee of a cedent’s rights to collect
debts against a foreign reinsurer wholly owned by the government
of Uruguay. When the assignee was unable to collect amounts
it claimed were due under the reinsurance contracts, it sued the
reinsurer in federal court. The reinsurer failed to post prejudgment
security with its answer as required by Illinois law. The reinsurer
argued, and the district court held, that the Federal Sovereign
Immunities Act’s (“FSIA”) prohibition on attaching a foreign state’s
property prevented application of the Illinois security requirement.
The Seventh Circuit affirmed, holding that a law requiring a foreign
state to deposit money in a court pending the outcome of a case
falls squarely within the definition of “attachment” under FSIA,
because the requirement would totally prevent the foreign state
from using those funds for the duration of the litigation. It further
rejected arguments that the reinsurer had waived FSIA’s protections
by conducting business in Illinois and because of a reserves clause in
the contract, concluding that prejudgment security differed from any
contractual requirement and that the reinsurer may have conducted
business in Illinois unaware of the Illinois requirement or believing
FSIA would protect it.
The assignee also attempted to argue that the McCarran–Ferguson
Act (a statute requiring generic federal laws to give way to state
insurance statutes) required FSIA, not an insurance specific statute,
to give way to the Illinois requirement. The Seventh Circuit did not
reach the merits of that argument because it concluded the assignee
had waived the argument.
In this Issue
• Recent Case Summaries
• Recent Regulatory Developments
• Recent Speeches and Publications
The court first examined the reinsurer’s claim that the arbitration
panel did not address all of the parties’ prospective rights and
obligations. The cedent argued that the award resolved the entire
scope of the parties’ relationship. The court first analyzed the state
court’s decision, noting that it had declined to interpret the term
“future claims” as included in the award, or to decide whether
the resubmitted claims so qualified. The state court based its
enforcement of the award on alternate grounds not raised in the
federal court. The court declined to revisit aspects of state court
decision on the grounds of issue preclusion. Instead, it granted the
reinsurer’s motion to compel arbitration as to the six claims, but not
insofar as it would require relitigation of the original award.
The reinsurer further argued that the clarification was both untimely
and that the panel lacked authority to issue the clarification. The
court agreed, noting that under the applicable Massachusetts
law, application for modification of an arbitration award must be
made within twenty days after issuance. The cedent argued that
the clarification did not fall within the state statute’s terms for a
modification, and so the time limit did not apply. The court rejected
the cedent’s arguments, finding that the language of the statute,
as further interpreted by courts, itself states that a modification or
amendment of an award may be “for the purpose of clarifying the
award.” The court found that the cedent’s request for clarification
was made outside of the require time limit, and thus granted the
reinsurer’s motion to vacate the clarification.
New York Federal Court Confirms an Interim Security Award
Against Reinsurer and Rejects Motion to Disqualify Panel
Companion Prop. & Cas. v. Allied Provident, No. 12-cv-7865, 2014
U.S. Dist. LEXIS 136473 (S.D.N.Y. Sept. 26, 2014).
The cedent petitioned a New York federal court to confirm an interim
arbitration award that required the reinsurer to post security and
the reinsurer sought to vacate the interim award and replace the
arbitration panel. The court found that it had the authority to confirm
the interim arbitration award due to extenuating circumstances and
thus the award was confirmed.
The dispute arose out of a fronted private passenger automobile
program produced by a managing agency, written on the cedent’s
paper and reinsured by a non-US reinsurer. A dispute arose when
the reinsurer failed to pay amounts due under the quota share
reinsurance agreement. The treaty contained an arbitration clause
and the cedent demanded arbitration along with collateral for the
reinsurer’s obligations. The cedent moved for an interim security
award sometime after the panel was constituted. Apparently, the
reinsurer’s party-appointed arbitrator became ill at around the same
time. The parties dispute how much the reinsurer’s party-appointed
arbitrator was involved in panel decisions, but ultimately the panel
issued an interim award directing that security be provided by
depositing funds in escrow with the panel or by providing a letter of
As the court found, more than a month after the interim award
issued by the arbitration panel, the reinsurer had not complied with
the panel’s interim award to post the required security. Because,
according to the court, the reinsurer did not seek reconsideration
of the interim award or seek to vacate the award, but instead
appeared to ignore the ruling, the court found that cedent was
left with no choice but to petition the federal court to confirm the
award. The court held that there was no basis to vacate the interim
award, reasoning that reinsurer did not establish that the award
was fundamentally unfair or that the arbitrators exhibited evident
partiality. The court ultimately directed the reinsurer to appoint a new
arbitrator because its arbitrator ultimately resigned because of his
The case provides a fascinating and detailed recitation of the
communications between the panel and the parties over both the
security issue as year-end approached and concerning scheduling the
hearing on the merits where a panel member has a medical condition.
New York Federal Court Allows Attorney Disqualification
Utica Mut. Ins. Co. v. Emplrs. Ins. Co., No. 6:12-CV-1293, 2014 U.S.
Dist. LEXIS 132271 (N.D.N.Y. Sept. 22, 2014).
A New York federal court was asked to address disqualification of
counsel in a reinsurance dispute that is subject to arbitration. After
the arbitration demand was served, the reinsurer demanded that the
cedent’s counsel withdraw based on counsel’s prior representation of
the cedent and, allegedly, the reinsurer in the underlying claim. The
cedent responded by going to court seeking an order declaring that
its counsel should not be disqualified. The reinsurer counterclaimed
The cedent moved for summary judgment and the reinsurers moved
for discovery. The cedent’s motion was denied and the reinsurers’
motion was granted. The court concluded that inquiry into the
potential conflict was warranted because the reinsurers sufficiently
alleged a relationship with cedent’s counsel. The relationship, while
admittedly not a formal attorney-client relationship, allegedly arose
during the underlying coverage case where the cedent’s counsel
represented the cedent in the coverage matter against the insured
and allegedly represented the reinsurers’ interests as well as part of
a joint defense agreement.
This is an important issue because the ultimate decision after
discovery, assuming it goes that far, will add to the jurisprudence
of attorney disqualification in the context of counsel representing a
cedent and also providing information to a reinsurer. Whether and
what information a cedent should provide to a reinsurer about a
claim is already under pressure because of the myriad court decisions
allowing for the discovery of reinsurance information by policyholder
counsel. This case has the potential to exacerbate that already
existing tension between cedents and reinsurers on the disclosure of
Massachusetts Federal Court Dismisses Petition to Confirm
Interim Arbitration Award
First State Ins. Co. v. Nationwide Mut. Ins. Co., No. 13-cv-11322-IT,
2014 U.S. Dist. LEXIS 149649 (D. Mass. Oct. 21, 2014).
A Massachusetts federal court granted a reinsurer’s motion to
dismiss a petition to confirm an interim arbitration award concerning
contract interpretation and application of the contract. As the court
stated, an award was issued after initial briefing on a threshold
issue raised by the cedent at the organizational meeting. The award
was labeled a final award on the motion for an award on contract
interpretation. Thereafter, other interim awards were issued and
ultimately the panel issued a final award and payment order on the
After the 90-days to petition to vacate an award expired, on the 100th
day the cedent petitioned the court to confirm the interim award. The
reinsurer moved to dismiss the petition, which the court granted.
In granting the reinsurer’s motion to dismiss the cedent’s petition to
confirm the interim award, the court indicated that even though the
award was labeled a final award, the panel expressed no intention
to resolve all claims submitted in the demands for arbitration. In
fact, said the court, the award directed the parties to report back
on a schedule for the remaining matters. Because, according to the
court, both parties did not agree to bifurcation, the evidence showed
no understanding that the parties agreed to resolve a separate,
independent claim. The court also noted that what the arbitration
panel called the award is immaterial to the court’s decision. Thus,
said the court, although it is true to that an interim award maybe final
in some circumstances, those circumstances did not exist here.
When and how an interim award can be confirmed has been subject
to much commentary. Security awards are typically confirmed. Here,
however, the court found that because the parties did not agree to
treat this interim contract interpretation as a separate, independent
issue, the award was not “final” and was not subject to confirmation.
Michigan Federal Court Grants in Part and Denies in Part
Request to Seal on Motion to Confirm Arbitration Award
Amerisure Mut. Ins. Co. v. Everest Reins. Co., No. 14-cv-13060, 2014
U.S. Dist. LEXIS 153013 (E.D. Mich. Oct. 29, 2014).
As is quite common, a Michigan federal court was faced with a
request by a cedent to allow it to file its motion to confirm a final
arbitration award under seal. In this case, the reinsurer opposed the
motion to seal in part.
In granting the motion in part, the court relied on well-established
precedents in the Sixth Circuit and found that neither party had
provided any cognizable basis to file the final award under seal in
its entirety. The court advised that it would transmit to the parties a
highlighted version of the final award showing the parts that will be
From the decision, it appears that references to non-parties to the
arbitration likely will be sealed, but the substantive rulings of the
arbitration panel will likely not be sealed. The court made it clear
that sealing cannot be used to prevent unhelpful portions of a final
award from being public in an effort to avoid future use in other
legal proceedings. Essentially, the court took the view consistent
with precedent that a corporation’s interest in shielding prejudicial
information from the public’s view, standing alone, cannot justify the
sealing of that information.
This decision is consistent with other recent decisions where
requests to seal reinsurance arbitration awards and related papers
have been denied.
New York Federal Court Decides Rare Cat Bond Case
Mariah Re Ltd. v. Am. Family Mut. Ins. Co., No. 13-cv-4657 (RJS),
2014 U.S. Dist. LEXIS 140859 (S.D.N.Y. Sept. 30, 2014)
We don’t see many Cat Bond cases, but a few are starting to appear.
The most recent decision involves a dispute in New York federal court
about whether the Property Claims Service could issue a supplement
to its original bulletin on a weather event and whether the calculation
of the event and its effect on the reinsurance agreement should have
considered the supplemental information.
The supplemental information concerned whether the losses arising
from the severe weather event were properly categorized as metro
or non-metro. The characterization made a difference as to whether
the cedent received the proceeds of the Cat Bond or whether
the investors would not have to pay. The special purpose vehicle
reinsurer argued that the changes to the original bulletin via the
supplement violated the terms of the agreements and could not be
considered. Essentially, according to the court, the reinsurer argued
that once the bulletin was sent, it could not be altered even if the
actual facts were different upon subsequent analysis.
The court essentially found that there was no breach of any duties
or contract and that the supplemental information added to the
original bulletin was not prohibited by the terms of the agreement.
These non-traditional alternative risk transfer transactions are very
complicated and the triggers are equally complicated. The court in
this case found that the documents were unambiguous and that no
relief was available to the reinsurer. The cedent’s recovery under the
Cat Bond was upheld. This case is on appeal so we will see if the
Second Circuit agrees with the district court’s analysis.
New York Federal Court Decides Another “Bellefonte” Case in
Favor of the Reinsurer
Utica Mut. Ins. Co. v. Clearwater Ins. Co., No. 6:13-cv-1178, 2014 U.S.
Dist. LEXIS 162645 (N.D.N.Y. Nov. 20, 2014).
A New York federal court has ruled for the reinsurer in yet another
dispute involving the limits of a facultative reinsurance certificate,
this time in the context of underlying asbestos losses arising from
Consistent with the many “Bellefonte” progeny, here the facultative
certificates reinsuring underlying umbrella policies contained a
preamble noting the statements contained in the declarations and
terms and conditions of the certificates. The certificates had a liability
and basis of acceptance clause, which identified the exposure
This dispute concerns the reinsurer’s motion for partial summary
judgment that its liability is capped at US$5 million and US$2.5
million, respectively, under the facultative certificates. As the court
noted, the sole issue is whether the cedent can recover defense costs
or other expenses in excess of the sums stated in the liability clauses
in the certificates. Unremarkably, the reinsurer relied on Second
Circuit precedent on this issue. Even more unremarkably, the court, in
granting the motion, relied on Bellefonte Reins. Co. v. Aetna Cas. &
Sur. Co., 903 F.2d 910 (1990), and the cases that followed it.
In finding for the reinsurer, the court agreed with the reinsurer that
the holdings of these cases were directly applicable to the language
in the reinsurer’s facultative certificates. The court was not persuaded
by the cedent’s argument that the lack of the word “limit” in the
facultative certificates was a distinguishing factor. The court also
rejected the cedent’s arguments concerning the follow-the-forms
and claims clauses. Finally, the court rejected the cedent’s request
for further discovery and the introduction of custom and practice
evidence. The court held that the facultative certificates were
unambiguous and, therefore, consideration of extrinsic evidence
would not be considered.
Illinois Appellate Court Finds for Reinsurer on Facultative
Cont’l Cas. Co. v. Midstates Reins. Corp., No. 1-13-3090, 2014 Ill.
App. Unpub. LEXIS 2456 (Ill. App. 1st Dist. Nov. 4, 2014).
In yet another “Bellefonte” case, an Illinois appeals court has found
for the reinsurer where the facultative certificates clearly and
unambiguously provided an aggregate policy limit on the reinsurance
assumed. In this case the cedent sought a declaratory judgment of its
rights under multiple facultative certificates. The underlying claims
were environmental liabilities. The reinsurer paid the claims up to
the total amount of the reinsurance limits under the certificates. The
motion court granted the reinsurer’s motion for judgment finding that
the facultative certificates were not ambiguous and limited both loss
and expense. The appellate court affirmed.
In affirming the motion court, the appellate court followed the “four
corners” approach to contract construction. The court agreed with
the motion court’s reliance on Bellefonte and held that the facultative
certificates provided a clear policy limit, inclusive of expenses. As
in the case discussed above, the court adopted and relied upon the
holding Bellefonte and subsequent cases as being widely accepted.
The court found that none of the provisions of the facultative
certificates removed expenses from the overall liability cap provided.
The court held that the certificates clearly and unambiguously
provided for an aggregate policy limit that included both losses and
New York State Court Addresses Various Late Notice and
Lexington Ins. Co. v. Sirius Am. Ins. Co., No. 651208/2012, 2014 N.Y.
Misc. LEXIS 4138 (N.Y. Sup. Ct. Sept. 15, 2014).
A New York state court was faced with multiple motions in a dispute
over the bulk settlement of asbestos bodily injury claims. The cedent
sought damages and a declaratory judgment against the reinsurer
under a series of facultative reinsurance certificates reinsuring the
excess umbrella exposure to Foster Wheeler.
Ultimately, the cedent settled the massive asbestos claims
against Foster Wheeler and billed the reinsurer for its share of the
settlement. The reinsurer defended based on failure to provide
prompt notice and sought discovery on allegations of bad faith. The
cedent countered by relying on the follow-the-fortunes doctrine and
the following clauses in the facultative certificates.
In analyzing each of the certificates, the court noted that one of the
certificates had a condition precedent that the cedent must provide
promptly a definitive statement of loss for claims involving death,
serious injury or a lawsuit. The court also noted that notices of
loss provided by an affiliate do not fulfill the cedent’s obligation to
provide notice by the actual entity itself. Accordingly, the court found
that under that facultative certificate, the cedent failed to provide
timely notice as a matter of law. Because the certificate required
prompt notice as a condition precedent, the reinsurer did not have to
demonstrate prejudice to rely on the defense of late notice.
Nevertheless, the court found that the evidence demonstrated that
the reinsurer waived its contractual right and coverage defenses,
including the right to prompt notice, on a November 2011 billing
because the reinsurer paid that billing. The court ruled, however, that
the waiver did not apply to later billings.
In a second set of facultative certificates, the court found that
prompt notice was not a condition precedent and that the reinsurer is
required to demonstrate prejudice to avoid its obligations. The court
held that because the reinsurer could not demonstrate prejudice,
the cedent was entitled to summary judgment on those facultative
What makes this case interesting is the court’s useful analysis of the
distinction between notice provisions that are conditions precedent
and are not conditions precedent and how that changes the way a
late notice defense is reviewed.
Pennsylvania State Appeals Court Finds Non-Commercial
Insurance Company Entered Into a Reinsurance Agreement for
Claims Priority Purposes
Ala. Ins. Guar. Ass’n v. Reliance Ins. Co., No. 6 REL, 2012, Pa.
Commw. LEXIS 10758 (Sept. 12, 2014).
By a split panel decision, a Pennsylvania state intermediate appellate
court found that a liquidator had not erred in deeming the guaranty
association a reinsurer, or in characterizing the benefits paid by the
guaranty association as arising from a reinsurance contract.
The dispute concerned whether a distribution claim against the
estate of an insolvent insurance company should be regarded as
one arising from direct insurance—which would confer a higher
distribution priority level—or whether it arose from reinsurance.
The guaranty association asserted the distribution claim for
reimbursement of payment that had been made only under the
Alabama Supreme Court’s mandate.
That collateral Alabama case challenged the guaranty association’s
refusal to pay claimed benefits. The guaranty association’s refusal
was based on the ground that the benefits were reinsurance benefits,
and therefore not covered under the Alabama Guaranty Association
Act. Disagreeing, the Alabama Supreme Court ruled that the relevant
policy could not be deemed a true reinsurance contract. Among other
reasons, the Alabama Supreme Court maintained that the buyer of
the policy was not a commercial insurance company engaged in the
business of selling insurance. The guaranty association was required
to pay the claim.
Notwithstanding this Alabama Supreme Court decision, the liquidator
denied the guaranty association the “b” priority level accorded
direct insurance claims. Instead, the distribution claim was assigned
priority level “e.” The guaranty association sought review of this
determination in the Commonwealth Court. The Commonwealth Court
affirmed the liquidator’s determination.
Applying the reasoning of a prior opinion, CSAC Excess Ins. Auth.
v. Reliance Ins. Co., No. 1 REL 2007 (Pa. Cmwlth), the majority
concluded that, if both parties understand coverage to be reinsurance
and their agreement operates as reinsurance, then any claim arising
from that agreement is entitled to the priority level of reinsurance
policy claims—level “e”—regardless of whether both parties are
commercial insurance companies that sell insurance.
The dissent found that the role of the trust purchasing the policy was
to provide coverage, not to pay for coverage. In so doing, the trust
did not act as a reinsurer, but as an entity entering the marketplace
to purchase excess coverage for members. Unable to find any other
decisions where a state rejected the payment of a claim made in
accordance with another state’s law, the dissent observed that the
decision controverted the Alabama Supreme Court and, “set a
worrisome precedent” by creating “unnecessary uncertainty in the
insurance solvency system that requires cooperation among the
Priority of distribution is a critical factor in insurance insolvency. By
relegating the claim to priority level “e,” which applies to reinsurance
claims, it is unlikely that the claim will ever be paid.
New York Appellate Court Dismisses All Claims Against
Reinsurer and Claims Adjuster
OneBeacon Am. Ins. Co. v. Colgate-Palmolive Co., No. 651193/11,
2014 N.Y. App. Div. LEXIS 7255 (N.Y. App. Div. 1st Dep’t Oct. 28, 2014).
A New York appellate court was asked to address whether a
reinsurer could be joined as a counterclaim defendant in a contract
dispute between the insured and its insurer. The court held that
based on the total absence of a contractual relationship between the
insured and the reinsurer and its affiliated claims adjuster all claims
against the reinsurer and its claims adjuster should be dismissed.
The underlying dispute was about the right to control the insured’s
defense against a series of asbestos bodily injury cases. The cedent/
insurer claimed that the insured did not allow the insurer to control
the defense. The insured counterclaimed against the insurer and
joined the reinsurer and its affiliated claims adjuster. The reinsurer
and claims adjuster moved to dismiss all the counterclaims. The
motion court dismissed some, but not all of the counterclaims and the
On appeal, the insured argued that the insurer’s contractual
relationship with the reinsurer and its claims adjuster created a
conflict of interest because of the dual role as both the reinsurer
of the cedent’s liability and the claims adjuster under the reinsured
policies. Essentially, according to the court, the insured wants to
vigorously defend the asbestos cases and the reinsurer and its claims
adjuster want to settle.
In finding for the reinsurer on appeal, the court held that none of
the counterclaims stated a cause of action. The court found that the
reinsurer’s and the claims adjuster’s “dual role” does not give rise
to any liability to the insured because the insured lacks contractual
privity with the reinsurer and claims adjuster. There can be no claim
for breach of contract, held the court, if there is no privity. The court
found that the reinsurance agreement is a separate and distinct
contract from the underlying insurance policies. Moreover, held the
court, nothing in the reinsurance agreement suggested an assignment
or assumption of the obligations of the underlying policies. The court
found no special circumstances that would allow for a direct right of
action against the reinsurer.
The remaining claims, in addition to breach of contract, all filed
because there is no contract. The claim for tortious interference
failed, said the court, because the claims adjuster acted as a
designated agent and no action for tortious interference can be
brought against an agent acting within the scope of its duties on
behalf of a principal.
New York Federal Court Holds Cedent and Reinsurer Have
Identity of Interest Concerning Recovery from Third Party
Wells Fargo Bank, N.A. v. Wales LLC, No. 13 Civ. 6781 (PGG), 2014
U.S. Dist. LEXIS 132192 (S.D.N.Y. Sept. 19, 2014).
A New York federal court denied a reinsurer’s attempt to intervene
in a suit involving a dispute among the cedent, the administrator
of a residential mortgage-backed securitization trust, and certain
certificate holders under the trust (whom the cedent insured). The
dispute between the cedent and the certificate holders concerned a
disputed interpretation of the trust documents. The cedent contended
it was entitled to an independent right of reimbursement from the
trust proceeds for paid insurance claims. The certificate holders,
however, contended the cedent was entitled only to subrogation of
The trust administrator had adopted the cedent’s interpretation of the
trust documents for two years, distributing in excess of US$47 million
of trust proceeds to the cedent. At the objection of the certificate
holders to this interpretation, the trust administrator instituted a suit
against the cedent and the certificate holders, seeking a declaration
of their rights under the trust documents. The reinsurer sought to
intervene in this suit, arguing that because of its agreement with the
cedent, it had an 85% stake in the trust’s proceeds regardless of the
The certificate holders objected to the reinsurer’s attempted
intervention, arguing that the cedent adequately represented the
reinsurer’s interests. The court agreed and denied the reinsurer’s
motion to intervene, finding that the cedent shared an identity of
interest with the reinsurer in seeking a declaration that the trust
documents should be interpreted in such a way so as to maximize
the cedent’s recovery from the trust proceeds. In so ruling, the court
found that even though the reinsurer might be entitled to 85%
of whatever the cedent recovered, the cedent’s interest was still
identical to the reinsurer’s because the more the trust distributed to
the cedent, the more the reinsurer also would recover.
The court also rejected the reinsurer’s argument that the reinsurer
and cedent might have divergent interests if the cedent were
required to pay back the US$47 million it already had received
due to differing interpretations of the reinsurance agreement. That
dispute, the court ruled, would be more properly handled by a
subsequent proceeding between the cedent and reinsurer and would
unnecessarily complicate this litigation involving interpretation of the
Iowa Federal Court Affirms Holding that Risk Management
Communications Between Cedent and Reinsurer Are Not
Privileged and Non-Party Reinsurer Must Produce Documents
Pursuant to Subpoena
Progressive Cas. Ins. Co. v. FDIC, No. C 12-4041 (MWB), 2014 U.S.
Dist. LEXIS 140709 (N.D. Iowa Sept. 3, 2014).
An Iowa federal court reviewed two components of a magistrate’s
discovery order after the cedent and non-party reinsurer filed
objections. In the course of discovery, the cedent produced
documents that contained communications between the cedent and
reinsurer, but which were redacted based upon the attorney-client
privilege and work product doctrine. The magistrate’s discovery order
required disclosure of the redacted portions of the communications
and also required the reinsurer, who was not party to the underlying
suit, to produce documents pursuant to plaintiff’s subpoena.
Concerning the issue of work product privilege, the cedent argued
that the question was not whether the information was prepared
in the ordinary course of business, but whether the information
contained within it work product information regarding the case
by plaintiffs that was ultimately filed. In affirming the magistrate’s
order, the court noted that prior Eighth Circuit precedent rejected
claims that the work product privilege covers “risk management
documents,” which had been “generated in an attempt to keep
track of, control, and anticipate the costs of … litigation.” The court
further concluded that work product privilege did not protect even
portions of the documents.
Concerning the issue of attorney-client privilege, the court affirmed
the finding that the privilege had been waived due to cedent’s
voluntary disclosure of the documents to the reinsurer. The court
rejected the cedent’s argument that the common interest doctrine
applied as between it and the reinsurer, reasoning that in order for
the common interest doctrine to apply, held that what is required
is evidence of an agreement (although not necessarily a written
agreement) between an insurer and its reinsurer that establishes
a “’cooperative and common enterprise towards an identical legal
strategy.” The court held that a contractual right on behalf of the
reinsurer to participate in the litigation did not alone meet this
Finally, the court also adopted a broad definition of relevancy and
held that the non-party reinsurer, which had not reinsured the specific
claim at issue in the underlying litigation, had to produce documents
in response to a subpoena despite the potential burden on reinsurer.
Reinsurance Contracts Are Relevant to Assist in Discovering
Smith v. ComputerTraining.com, Inc., No. 10-11490, 2014 U.S. Dist.
LEXIS 135904 (E.D. Mich. Sept. 26, 2014).
A Michigan federal court entered a default judgment in a class
action against a policyholder for injuries stemming from its abrupt
termination of a computer training program in which the plaintiffs
had enrolled. In post-judgment proceedings, plaintiffs learned that
the policyholder had a general liability insurance policy. Plaintiff then
sought discovery from the non-party cedent for, among other things,
information regarding the insurance policy and any reinsurance
contracts the cedent had concerning the policyholder’s policy. The
cedent objected to the relevance of the document requests.
In allowing the non-party discovery, the district court held that the
insurance policies, any reinsurance policies, loss run information, and
any other information regarding the policyholder that the cedent held,
was relevant and had to be produced to plaintiffs. The court theorized
that although the reinsurance policies and other information might
not directly involve or be “directly relevant,” disclosure could lead to
the discovery of admissible evidence, including the financial status
of the policyholder. As such, the court required production of the
insurance and reinsurance information, or if the information did not
exist, then to provide an affidavit to that effect.
Reinsurance Contracts Are Discoverable if They Relate to
Harleysville Lake States Ins. Co. v. Lancor Equities, Ltd., No. 13 C
6391, 2014 U.S. Dist. LEXIS 154685 (N.D. Ill. Oct. 31, 2014).
Cedent sought a declaratory judgment that its commercial property
insurance policy did not cover losses and damages stemming from
a fire at insured’s property. In discovery, the insured requested all
documents and correspondence relating to cedent’s reinsurance
coverage for first-party property claims for the previous six years
on the basis that this information could lead to the discovery of
relevant information. The cedent objected to the discovery requests,
and in response to a subsequent motion to compel, objected on the
grounds that reinsurance information was not relevant and that any
communications between insurers were protected by the common
The Illinois federal court, in allowing some of the discovery
requested, noted that federal courts disagreed whether reinsurance
information was discoverable in insurance coverage declaratory
judgment actions. The court pointed out the tension between federal
rules that required disclosure of insurance agreements that could
satisfy judgment, and case law from Illinois that distinguished
reinsurance agreements from direct insurance policies because of
substantive differences in both type and form. The court ultimately
resolved this tension by looking to previous decisions in the district
that required the disclosure of reinsurance agreements.
The court reduced the scope of discovery, holding that the cedent had
to disclose any reinsurance agreement that might indemnify reinsured
for the claim at issue. Additionally, the district court only required
the production of any relevant reinsurance policies, agreeing with the
cedent that communications with reinsurers might be privileged or
subject to the common interest extension of attorney-client privilege.
Michigan Federal Court Addresses Document Production
Dispute and Grants in Part Fees and Costs Against Cedent
Mich. Millers Mut. Ins. Co. v. Westport Ins. Corp., No. 1:14-cv-00151-
PLM (W.D. Mich. Nov. 7, 2014).
In a reinsurance dispute arising from coverage for multiple deaths
from a gas explosion on a farm, a reinsurer sought fees and expenses
following a motion to compel discovery. In granting the motion in
part, the court noted that the cedent had promised disclosure of
certain documents and had not complied with its promise. The court
found that a three-month delay in producing the documents was a
sufficient basis to award reasonable attorney fees and expenses.
The court held that the cedent’s actions were both unjustified and
unreasonable under the circumstances. The court ultimately limited
the attorney fees based on the parties’ agreement, but nevertheless
ordered the sanctions.
Second Circuit Dismisses Appeal on Breach of Reinsurance
Underwriting Agreement Dispute
Acumen Re Mgt. Corp. v. Gen. Sec. Nat’l Ins. Co., 769 F.3d 135 (2d Cir.
In a contentious dispute over the breach of a reinsurance
underwriting agreement, the Second Circuit dismissed an appeal
by the underwriting agent of the district court’s partial summary
judgment order in favor of the reinsurer. We discussed the summary
judgment decision in our March 2013 Reinsurance Newsletter.
The dispute was over alleged contingent commissions claimed due by
an underwriting manager against its principal, a specialty reinsurer.
The district court granted summary judgment in favor of the reinsurer
on four out of five breach of contract theories and held that only
nominal damages would be available for the remaining theory that
was not dismissed. The agent appealed and the reinsurer argued, in
part, that the Second Circuit had no jurisdiction to hear the appeal
because the partial summary judgment order was not appealable.
In a reasonably lengthy opinion, the Second Circuit agreed and held
that the underlying order was not amenable to certification under
Rule 54(b) and the court lacked jurisdiction to hear the appeal.
Essentially, the court agreed with the district court that the five
theories of breach of contract did not qualify as separate claims, but
were so untied and mutually referential as to not be separate claims.
Oklahoma Federal Court Dismisses Bad Faith Claim, But
Denies Summary Judgment on Contract Claim on Assumption
Evans v. Liberty Nat’l Life Ins. Co., No. 13-CV-0390-CVE-PJC, 2014
U.S. Dist. LEXIS 159507 (N.D. Okla. Nov. 12, 2014).
An Oklahoma federal court was faced with interpreting the effect
of an assumption reinsurance agreement in a dispute between a
policyholder and the original policy issuing company for breach
of contract and bad faith. The policyholder purchases a cancer
treatment policy from the original insurer and some years later the
original insurer entered into an assumption reinsurance contract
with the assuming insurer. The policyholder made a claim after being
diagnosed with cancer and presented that claim to the assuming
insurer. The amount paid was not satisfactory and the policyholder
sued both insurers for bad faith and breach of contract. The original
insurer moved for summary judgment based on the assumption
In granting the motion on the bad faith claim and denying the motion
on the breach of contract claim, the court had the opportunity to
explore the nature of assumption reinsurance. The court noted that
assumption reinsurance is distinguishable from indemnity reinsurance
because assumption reinsurance is the sale of the underlying policies
and not the purchase of reinsurance protection. The court correctly
pointed out that while assumption reinsurance transfers direct
liability under the policy, the ceding company remains liable unless
there has been a novation substituting the reinsurer for the ceding
company. Thus, said the court, it could only grant summary judgment
to the original insurer if the agreement was assumption reinsurance
and there was an effective novation. While finding that the contract
was one of assumption reinsurance, the court found that there was
not sufficient evidence presented to show that a novation occurred.
The court, however, granted summary judgment on the bad faith
claim because the policyholder failed to present any evidence that
the original insurer dealt with the underlying claim in a tortious or
Recent Regulatory Developments
On November 6, 2015, the Financial Stability Board (FSB) and the
International Association of Insurance Supervisors (IAIS) published
an updated list of Global Systemically Important Insurers (G-SIIs).
The list includes the same G-SIIs previously identified as such in
2013. Of note, in the release, the FSB and IAIS stated that they would
postpone a decision on the G-SII status of reinsurers, pending further
development of the G-SII assessment methodology.
More recently, at a hearing held by the House Financial Services
Subcommittee on Housing and Insurance, lawmakers discussed
(1) developments related to capital standards for insurers;
(2) transparency at the IAIS; and (3) concerns regarding the
impact of IAIS determinations on the ability of US regulators to
make independent decisions regarding systemically important
financial institution (SIFI) designations and capital standards for
insurers. Absent from their discussion, however, was any mention
of the FSB and IAIS’s recent updates on G-SII designations or their
decision to postpone any designations of systemically important
In the next Congress, we expect the House Financial Services
Committee and the Senate Banking, Housing, and Urban Affairs
Committee to continue its increased oversight of FSB and IAIS
developments, and the systemically important designations of
insurers and reinsurers in the US and abroad.
Recent Speeches and Publications
• Micah Green, Norma Krayem, Larry Schiffer and Ellen Shapiro
spoke on a webinar entitled “The Terrorism Risk Insurance
Act (TRIA) Reauthorization Update, The Insurance Industry
Perspective,” on September 9, 2014.
• John Nonna spoke on “A Focus on Allocation of Toxic Tort,
Asbestos and Other Long Tail Claims,” at the American Conference
Institute’s National Forum on Insurance Allocation on October 29,
2014, in New York.
• John Nonna co-chaired the ARIAS•U.S. Fall Conference, “The
Arbitrators Speak: Insight and Perspective from the Arbitrators
Themselves,” on November 13-14, 2014, in New York. Suman
Chakraborty participated as a discussion break-out leader at the
• Suman Chakraborty is speaking on “Attorney Disqualification in
Reinsurance Disputes: Where Do We Draw The Line?,” at the IRU/
Reinsurance Networking Group meeting on December 9, 2015, in
New York City.
• Larry Schiffer, Eridania Perez, Suman Chakraborty, Kate Woodall,
Caroline Billet and Zachary Novetsky authored a free e-book
summarizing the most influential reinsurance cases litigated in
the United States. Entitled “50 Reinsurance Cases Every Risk
Professional Should Know,” the e-book was published by the
International Risk Management Institute, Inc. (IRMI) and provides
a detailed description of each case as well as its implications on
important reinsurance coverage issues. The 130-page e-book is
available for free here.
• Larry Schiffer and Alexandra Chopin authored “Best Practices for
Cost Effective and Compliant E-Discovery in Runoff,” in AIRROC
Matters, Vol. 10, No. 3, Fall 2014, the magazine of the Association
of Insurance and Reinsurance Run-off Companies.
• Larry Schiffer authored, “When Is a Reinsurance Treaty Not a
Reinsurance Treaty?,” an Expert Commentary on Reinsurance for
IRMI.com, the website of the IRMI, in September 2014.
The contents of this update are not intended to serve as legal advice related to individual situations or as legal
opinions concerning such situations nor should they be considered a substitute for taking legal advice.
© Squire Patton Boggs.
squirepattonboggs.com All Rights Reserved 2014
Authors of Squire Patton Boggs’
Larry P. Schiffer – Editor
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