Keller Foundations, LLC v. Zurich American Ins. Co., 16 Civ. 6751(PAE), 2017 U.S. Dist. LEXIS 68902 (S.D.N.Y. May 4, 2017).

Although this case involves a dispute as to the authority of a cedent to settle a third-party claim under a commercial general liability (CGL) policy, the dispute arose because the settlement triggered a reinsurance payment by a captive reinsurer formed by the named insured's parent company, resulting in an unexpected cost to the parent company.

In this case, a property damage loss occurred and the named insureds and a third party (claiming it was an addition insured) sought coverage from the cedent under the CGL policy. Mediation ensued and the cedent settled the third party's claims against it. After the settlement was paid, the cedent submitted a reinsurance claim to the captive reinsurer, which paid the claim. This payment resulted in the insured's parent company having to pay a US$50,000 deductible toward the reinsurance payment. The parent company also complained that the settlement would increase its future CGL premium.

Unhappy about these costs, the parent company and the named insureds sued the cedent, claiming that the cedent did not have authority to settle the third-party claims against the cedent. In dismissing these claims, the court held: (1) the parent company was neither an insured nor a third party beneficiary under the CGL policy and, therefore, did not have standing to sue the cedent and (2) the plaintiffs failed to allege a breach of the cedent's obligations under the CGL policy because cedent paid the third-party claims and also defended its named insureds. In addition, there was no provision in the CGL policy that required the cedent to notify the insureds or obtain their consent, to settle a third-party claim to the contrary, the cedent had broad discretion to do so.

The court further held that the parent company's protest regarding the US$50,000 deductible was a dispute with the reinsurer, not the cedent, and if the parent company wanted to contest the reinsurance payment or its obligation to pay a deductible, it needed to contest the matter with the captive reinsurer, not the cedent. On these grounds, the court granted the cedent's motion to dismiss, but without prejudice, recognizing that later-arising facts may support a claim of breach of the CGL policy.