You know the old saying: if it walks like a duck and quacks like a duck it must be a duck! So when a contract is called a Facultative Reinsurance Agreement is it a reinsurance contract or an insurance contract? Recently a Missouri appellate court addressed this issue to determine an appeal of the denial of a motion to compel arbitration in the face of a Missouri law that prohibits mandatory arbitration clauses in insurance contracts.
In Leonberger v. Missouri United School Ins. Council, No. ED103669, 2016 Mo. App. LEXIS 521 (Mo. Ct. of App. May 24, 2016), the Facultative Reinsurance Contract between a protected self-insurance program for school districts and a reciprocal risk retention group had a mandatory arbitration clause for any disputes that arise between the reinsured and the reinsurer concerning the interpretation of the agreement or rights concerning any transaction under the agreement. The contract also had a following clause that required the reinsurer’s liability to follow that of the cedent subject to all terms, conditions, exclusions and limits of liability of the underlying policy. It also required notice of claim to the reinsurer as soon as practicable, gave the reinsurer the right to approve in advance counsel and to associate with the defense of the claim and take it over by exercising the defense and settlement obligations of the cedent.
Even though the contract was titled Facultative Reinsurance Contract and had many of the traditional provisions of a reinsurance contract, the court determined that the contract was not a true reinsurance contract, but was also an insurance contract that fell within the arbitration prohibition of Missouri law. According to the court, “a reinsurance contract is purely a contract indemnifying against loss and no action will lie until the loss has been paid.” In contrast, an insurance contract is a contract of indemnity against liability where the obligation of the insurance company becomes fixed when the liability attaches to the insured.
In comparing loss versus liability, the court construed the following clause in the reinsurance contract to mean that the contract plainly inserts the reinsurer into the claims and allows it to declare control of the claims. The control terms and the ability to exercise the defense and settlement rights of the insureds was construed by the court similarly to an earlier case where the Missouri Supreme Court held that the contract was one of insurance rather than reinsurance. O’Hare v. Pursell, 329 S.W.2d 614 (Mo. 1959). The court found that all these provisions lead to the reinsurer’s third-party liability directly to the original insured and makes the contract one of insurance and not reinsurance.
Many reinsurance contracts allow the reinsurer to have various rights concerning claims and settlements. In this case, the court determined that the control over the defense and settlement, as well as a pretty standard following clause, meant that the contract was not just to indemnify the cedent, but was to indemnify the insured for the loss. Care must be taken when drafting claims control-type and following-type provisions to make clear the true nature of the contract. In this case, it precluded the reinsurer from arbitrating the dispute under Missouri’s anti-arbitration law for insurance.