Copyright © 2007 Matthew Bender & Company, Inc., a member of the LexisNexis Group. Republished with permission from New Appleman Insurance Law Practice Guide.
All rights reserved.
Chapter 40
UNDERSTANDING REINSURANCE
by David M. Raim and Joy L. Langford*
I. OVERVIEW
40.01
Scope
40.02
Key Practice Insights
40.03
Master Checklist
II. APPRECIATING PURPOSE OF REINSURANCE
40.04
Types of Reinsurance
40.04[1] Facultative vs. Treaty
40.04[2]
40.04[3]
40.04[4]
40.04[5]
40.05
Lack
40.05[1]
40.05[2]
Proportional vs. Non-proportional
Catastrophe Reinsurance
Finite Reinsurance
Fronting Arrangements
of Privity of Contracts
Know General Rule
Consider Cut-Throughs
III. CONSIDERING REINSURANCE REGULATION
40.06
40.07
40.08
Credit for Reinsurance
Letters of Credit
Insolvency Clause
IV. CONSIDERING INSURER’S OBLIGATIONS TO REINSURERS IN CASE
OF CLAIM
40.09
Consider Insurer’s Notice Obligations
40.09[1] Know What Notice Clause Requires
New Appleman Insurance Practice Guide
40.09[2]
40.10
Reinsurer’s Assertion of Late Notice As Defense to Payment
of Its Reinsurance Obligations
40.09[2][a]
Jurisdictions Requiring Proof of Prejudice
40.09[2][b]
Jurisdictions Recognizing Late Notice As Defense
Regardless of Ability to Prove Prejudice
Consider Reinsurer’s Right to Access Insurer’s Records
40.10[1]
Consider What Access to Records Clause Requires to Be
Made Available to Reinsurer
40.10[2]
Consider Whether Insurer’s Disclosure of Privileged
Documents to Its Reinsurer Constitutes Waiver As to Third
Parties, Including Its Insureds
40.10[2][a]
Common Interest Doctrine
40.10[2][b]
Disclosure Made Prior To Insurance Coverage
Litigation
40.10[2][c]
Disclosure Made During Course of Insurance
Coverage Litigation
40.10[2][d]
Disclosure Made After Resolution of Insurance
Coverage Litigation But Prior to Institution of
Arbitration or Litigation Between Cedent And Reinsurer
40.10[2][e]
Disclosure Made During Course of Reinsurance
Litigation
40.10[2][f]
Use of Confidentiality and Common Interest
Agreements
40.10[3]
Consider Reinsurer’s Ability to Compel Production of
Cedent’s Privileged Documents
40.10[3][a]
Consider Whether Inclusion of Access to Records
Clause Constitutes Waiver
40.10[3][b]
Know When Privileged Documents Are “In Issue”
Therefore Requiring Production by Cedent
40.10[3][c]
Consider Application of Common Interest Doctrine to
Compel Production of Cedent’s Privileged Documents
40.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer
40.10[3][c][ii] During Reinsurance Dispute Between Cedent and
Reinsurer
40.10[4]
40.11
Understand When Insured Is Entitled to Discover Its Insurer’s
Reinsurance Information
Consider Reinsurer’s Rights Under Right to Associate Clause
or Claims Control Clause
40-2
Understanding Reinsurance
V. CONSIDERING REINSURER’S OBLIGATIONS
40.12
Determine Extent of Coverage
40.13
Consider Obligation to Reimburse Insurer for Declaratory
Judgment Expense
40.14
Consider Obligation to Reimburse Insurer for ExtraContractual Obligations and Excess of Policy Limits (“ECO/
XPL”) Damages
VI. CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE
FIDEI
40.15
Consider Insurer’s Duty to Disclose to Reinsurer All Material
Facts About Risk Being Reinsured
40.16
Consider Application of Duty of Utmost Good Faith Beyond
Disclosure at Inception of Reinsurance Relationship
40.16[1]
Application of Duty of Utmost Good Faith to Parties’
Conduct During Life of Reinsurance Contract
40.16[2]
Application of Duty of Utmost Good Faith to Underwriting
and Administration of Ongoing Business
40.16[3]
Application of Duty of Utmost Good Faith to Obligation to
Give Notice of Claim
40.16[4]
Application of Duty of Utmost Good Faith to Reinsurer to
Pay Under Reinsurance Agreement
VII. CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE
SETTLEMENTS
40.17
Understand Distinction Between Follow the Fortunes and
Follow the Settlements
40.18
Consider Reinsurer’s Preclusion from Second-Guessing
Reinsured’s Good Faith Claims Decisions
40.19
Consider Application of Follow the Fortunes/Follow the
Settlements to Allocation Decisions
VIII. CONSIDERING BROKERED MARKET
40.20
Brokered vs. Direct Market
40.21
Understand Which Entity Broker Represents
40-3
New Appleman Insurance Practice Guide
IX. CONSIDERING REINSURANCE ARBITRATION
40.22
40.23
40.24
40.25
40.26
40.27
Consider Obligation to Arbitrate
Neutral Panel or Party Advocate System
Strict Rule of Law vs. Obligations Pursuant to Honorable
Engagement
Discovery in Arbitration
Summary Disposition in Arbitration
Reasoned Awards
40.28
40.29
Know When to Move to Vacate or Affirm Arbitration Award
ARIAS Forms
X. FORMS
40.30
BRMA Reinsuring Clause Form 44 C (Quota Share
Agreement)
40.31
40.33
BRMA Reinsuring Clause Form 44 B (Surplus Share
Agreement)
BRMA Reinsuring Clause Form 61 C (Excess of Loss
Agreement)
BRMA Unauthorized Reinsurance Clause Form 55 A
40.34
40.35
40.36
40.37
40.38
BRMA Insolvency Clause Form 19 M
BRMA Offset Clause Form 36 A
BRMA Loss Notice Clause Form 26 B
Notice of Loss Clause Incorporating Right to Associate
BRMA Loss Notice Clause Form 26 A
40.39
40.40
BRMA Access to Records Clause Form 1 B
BRMA Confidentiality Clause Form 69 D
40.41
40.42
40.43
40.44
40.45
BRMA
BRMA
BRMA
BRMA
BRMA
40.46
40.47
BRMA Arbitration Clause Form 6 E
ARIAS-U.S. Umpire Questionnaire Sample Form 2.1
40.32
Claims Cooperation Clause Form 8 A
Excess of Original Policy Limits Clause Form 15 A
Extra Contractual Obligations Clause Form 16 D
Intermediary Clause Form 23 A
Arbitration Clause Form 6 A
40-4
I.
OVERVIEW.
40.01 Scope. In essence, reinsurance is insurance for insurance compa-
nies. It is a contractual arrangement under which an insurer secures
coverage from a reinsurer for a potential loss to which it is exposed under
insurance policies issued to original insureds. The risk indemnified
against is the risk that the insurer will have to pay on the underlying
insured risk. Because reinsurance is a contract of indemnity, absent specific
cash-call provisions, the reinsurer is not required to pay under the contract
until after the original insurer has paid a loss to its original insured.
Reinsurance enhances the fundamental financial risk-spreading function
of insurance and serves at least four basic functions for the direct
insurance company: increasing the capacity to write insurance (under
prevailing insurance-regulatory law); stabilizing financial results in the
same manner that insurance protects any other purchaser against spikes
from realized financial losses; protecting against catastrophic losses; and
financing growth.
The reinsurance relationship is structured in the following manner:
original insured > insurer > reinsurer. The insurer is called, for reinsurance
purposes, the cedent (or cedant). There is typically no contractual relationship between the reinsurer and the original insured. Reinsurance may,
but need not, dovetail with the scope of the original insurance. Basically,
all of the risks that are insured can be reinsured, unless contrary to public
policy under the relevant governing law for the reinsurance contract.
This chapter principally discusses how insurance claims and coverage
litigation can evolve into reinsurance claims and in that context presents
the most common legal issues that arise from reinsurance relationships.
The coverage afforded insurers through the most commonly purchased
types of reinsurance is explained to provide a context for most reinsurance
claims. Certain aspects of reinsurance regulation are set forth to illustrate
the role of reinsurance in the entire insurance scheme and the payment of
policyholder claims. Also described are the special rights and obligations
of cedents and reinsurers as between them and important aspects of
reinsurance arbitration (the common form of dispute resolution), both of
which strongly influence reinsurance recoveries. This chapter provides a
background in reinsurance and explains how an insured’s relationship
with its insurer fits within the context of the entire reinsurance scheme.
Reinsurance, like many areas of business law, has a language of its own.
The insurance company purchasing reinsurance is called the “ceding
company” (or the “cedent” (or “cedant”), “reinsured” or “ceding insurer”)
because it “cedes” or transfers part of the risk. The company selling
40-5
40.01
New Appleman Insurance Practice Guide
reinsurance is called the “reinsurer”. Typically, these are the only parties to
the reinsurance agreement; all rights and obligations run only between
them. The reinsurance contract does not change the direct, or original,
insurer’s responsibility to its policyholder (the “original insured” or
“policyholder”), and the insurer must fulfill the terms of its policy whether
or not it has reinsurance or whether or not the reinsurer is rightly or
wrongly refusing to perform. The liability or risk ceded is called a
“cession,” and the original policy that the cedent issues to a policyholder
is referred to as “direct” insurance. A reinsurer also can purchase its own
reinsurance protection, and such reinsurance of reinsurance is called a
“retrocession.” A reinsurer that transfers all or part of its assumed
reinsurance is called a “retrocedent,” and the company reinsuring this risk
is called the “retrocessionaire.” Retrocessions need not incorporate the
original reinsurance and often do not. (Retrocessionaires in turn can
purchase reinsurance again, ad infinitum.)
Reinsurance relationships can be simple or complex. A cedent can cede
certain loss exposures under one contract or purchase several contracts
covering different aspects or portions of the same policy to achieve the
desired degree of coverage. A layering process involving two or more
reinsurance agreements is commonly employed to obtain sufficient monetary limits of reinsurance protection. When a claim is presented, the
reinsurers respond in a predetermined order to cover the loss.
The reinsurance relationship is evidenced by a written contract reflecting
the negotiated terms. Although reinsurance contracts between different
cedents and reinsurers can include clauses with similar purposes, the
wording of particular provisions varies significantly, depending on the
parties’ specific needs, customs and practices. Sample clauses are provided where instructive.
Payments that are due pursuant to a reinsurance agreement are considered an asset of the cedent; in contrast to other types of contingent
payments, the applicable regulatory regime may permit the cedent to
count a reinsurance recoverable as a present asset on its own balance
sheet. Reinsurance is payable only after the cedent has paid losses due
under its own insurance agreements. However, most U.S. reinsurance
contracts include an insolvency clause, which allows the receiver of an
insolvent insurer to collect on reinsurance contracts as if the insolvent
insurer had paid the claim in full even if it did not [see § 40.08 below
discussing the insolvency clause].
Reinsurance should not be confused with other commercial arrangements.
It is not co-insurance, where separate insurers assume shares of the same
insurance risk. Nor is it a novation as between the original insured and its
40-6
Understanding Reinsurance
40.01
insurer or substitution of one insurer for another. A reinsurance agreement
does not establish a partnership between the insurer and the reinsurer or
a separate joint venture as between them, although some pro rata contracts
provide that the parties share proportionally in the premiums collected by
the cedent and in losses paid by it. Reinsurance ordinarily does not confer
third-party beneficiary status on the original insured. Absent a “cutthrough” clause or similar modification [see § 40.05 below for discussion of
these exceptions], there is no privity of contract between the insurance
policyholder and the reinsurer. In the absence of language in the reinsurance agreement granting the original insured rights against the reinsurer
or unusual factual circumstances, attempts by original insureds to sue
reinsurers directly generally fail; claimants against the original insureds
similarly are unsuccessful in bringing suit directly against reinsurers, even
where, in direct-action states or in other circumstances, the claimant might
be able to sustain an action against the original insurer (cedent).
Underlying claims and coverage litigation can trigger reporting and notice
obligations of cedents to reinsurers. Reinsurers that potentially owe
indemnity may commence investigations, monitor claims, and establish
claim reserves. Counsel for original insureds in coverage litigation sometimes seek production of communications generated between the cedent
and reinsurer on the grounds that insurance covering a defendant is
generally discoverable (even though in the circumstance the “insurance”
is reinsurance), or for more narrowly tailored purposes such as to collect
evidence that the original insurance policy existed at one time even if it is
no longer is available. In some instances, the disclosure of cedent/
reinsurer communications can potentially be detrimental to the cedent’s
coverage position vis-a-vis its insured.
Typical reinsurance claim issues that are discussed here include: reporting
and notice obligations; defenses stemming from interpretation of the
reinsurance wording to the indemnity sought; cooperation and claimhandling obligations; and defenses seeking rescission of the reinsurance
contract including nondisclosure and misrepresentation with respect to
the details of risk. The nature of the reinsurance relationship — especially
the notion of “utmost good faith” or uberimae fidei — may provide a gloss
on how certain issues get resolved in the reinsurance context that may
differ from how similar issues are resolved in the ordinary insured-insurer
context. Other common issues addressed here include the reinsurer’s
obligations to indemnify the insurer for declaratory judgment expenses
incurred in defending or prosecuting coverage litigation against the
original insured, and payments by insurers in excess of policy limits or
payments of extracontractual damages.
40-7
40.02
New Appleman Insurance Practice Guide
Reinsurance claims generate certain legal issues distinct from issues that
typically arise in the context of direct insurance. Rules found in insurance
law in different arenas may not apply or may apply with different nuances
in the context of reinsurance disputes, and the duties and obligations
between a cedent and reinsurer may differ from those between an original
insurer and policyholder, considering some of the differences in the
relative sophistication and bargaining power, custom and practice, or
different aspects in which one party is largely dependent upon another.
Several important distinctions between the resolution of insurance and
reinsurance disputes are examined in this chapter, including the effect of
the bilateral duty of utmost good faith, which is perhaps unique to
reinsurance agreements. Reinsurance disputes also are distinguished by
their typical resolution through arbitration, rather than courtroom litigation. Among other differences, in typical U.S. arbitrations, the availability
and weight of legal precedent is less predictable and meaningful than in
litigation in the courts. Arbitrators may not be bound by strict legal rules
and do not always strictly apply contract law and other legal principles to
reinsurance agreements; indeed, some reinsurance contracts eschew reliance upon legal rules in favor of construing the reinsurance relationship
memorialized by the reinsurance contract as principally an honorable
engagement pursuant to industry custom and practice.
Lexis.com Searches: To find statistics on reinsurance premiums, try
this source: RDS TableBase. Enter this search: PUB(Reinsurance).
To find articles on specific cases involving reinsurance, try this source:
Reinsurance: Mealey’s Litigation Report. Enter specific search terms or
date ranges.
40.02 Key Practice Insights. The parties to reinsurance contracts are
typically sophisticated insurers transferring the financial risk assumed in
insuring businesses, homes, cars and individuals. Note that sometimes
reinsurers create the instrument that is to be sold to an insured and then
look for a middleman (cedent) to (i) issue the policy to the insured and (ii)
purchase the corresponding reinsurance. Indeed, in such transactions,
sometimes the cedent will 100 percent reinsure the risk undertaken to the
policyholder, in exchange for a ceding commission deducted from the
premium collected from the direct insured, which is ultimately passed on
to the reinsurer.
There are no standard reinsurance contracts, although many include
commonly used provisions and clauses sometimes required by state law.
Each reinsurance treaty or facultative certificate reflects the special needs
of the parties with respect to the type and amount of risk covered, the
40-8
Understanding Reinsurance
40.02
calculation of the premium, the role of the reinsurance intermediary, the
method and timing of notice and submission of claims, various reporting
obligations, and resolution mechanisms for potential disputes. Reinsurance contracts therefore are often complex and unique and must be
carefully drafted and, in the event of dispute, carefully interpreted.
Lawyers practicing in the reinsurance field must become familiar with the
specialized business of reinsurance, including the purposes and types of
reinsurance and the financial goals and consequences typically involved.
Practitioners also must be knowledgeable about the meaning, use and
legal effect of commonly employed reinsurance contract provisions,
including insolvency, access to records, claims control, notice, extracontractual obligations (“ECO”), excess of policy limits (“XPL”), follow
the fortunes/settlements, intermediary and arbitration provisions. Attorneys also should carefully review complete versions of reinsurance
wordings, including endorsements and amendments. (Indeed, sorting out
which is the governing wording particularly when insurers operating in
different markets or in different countries are involved can prove tedious
and time consuming.)
Although regulation of the reinsurance industry in the United States is
more limited than that of the insurance industry in general, lawyers
should be mindful of the insurer’s statutory licensing, solvency and
accounting requirements. Attorneys should understand how insurers
must account for finite risk reinsurance, as this subject recently has
attracted significant regulatory attention. Also of particular concern are
“fronting” arrangements and cut-through endorsements, which may not
be allowed or may be subject to special regulations in certain jurisdictions.
Reinsurance disputes are typically resolved through arbitration, and
practitioners should be familiar with arbitration law, particularly the
Federal Arbitration Act (“FAA”) and statutory law applicable to nonadmitted reinsurers and the availability of pre-answer or pre-judgment
security. Of course, counsel handling a dispute should be familiar with
how reinsurance arbitrations are generally handled. A thorough knowledge of the reinsurance industry is needed as many issues are decided
based upon the custom and practice in the industry (especially where the
arbitration panel is comprised of non-lawyers, as is often the case).
Lawyers also should know that leading industry and professional organizations offer practice guides, forms, and other resources useful for
reinsurance arbitrations (such as lists of professional trained reinsurance
arbitrators).
40-9
40.03
New Appleman Insurance Practice Guide
40.03 Master Checklist.
□
Understand whether the reinsurance contract at issue is a facultative certificate or a treaty.
Discussion: § 40.04[1]
□
Understand whether the reinsurance at issue is proportional or
non-proportional.
Discussion: § 40.04[2]
Forms: §§ 40.30-40.32
□
Become familiar with specific types of reinsurance such as catastrophe reinsurance, clash cover and finite reinsurance.
Discussion: §§ 40.04[3]-40.04[4]
□
Understand how insurers must account for finite risk reinsurance
under applicable regulations.
Discussion: § 40.04[4]
□
Determine all of the parties’ responsibilities and liabilities in a
fronting arrangement, including any obligation to monitor a managing general agency.
Discussion: § 40.04[5]
□
Confirm that fronting is permissible in the jurisdiction where the
arrangement is executed.
Discussion: § 40.04[5]
□
Determine if special circumstances exist which may provide
grounds for a policyholder of the ceding insurer to assert a direct
action against the reinsurer.
Discussion: § 40.05[1]
□
Research the legality and enforceability of cut-through clauses (or
assumption of liability endorsements) contained in insurance contracts covered by reinsurance.
Discussion: § 40.05[2]
□
Understand the credit for reinsurance laws governing your reinsurance transaction.
40-10
Understanding Reinsurance
40.03
Discussion: § 40.06
□
Confirm that a letter of credit obtained by a ceding company that
intends to take financial statement credit for reinsurance placed
with a non-admitted reinsurer complies with statutory requirements.
Discussion: § 40.07
□
Ensure that an adequate insolvency clause is included in the
reinsurance contract if required in your jurisdiction. Most states
require that the reinsurance contract include an insolvency clause
for the ceding insurer to take credit for reinsurance on its financial
statement.
Discussion: § 40.08
Form: § 40.34
□
Understand the effect of an offset clause, or any applicable common
law or statutory set-off rights, on the rights and obligations under
the reinsurance agreement.
Discussion: § 40.08
Form: § 40.35
□
Understand the requirements of the reinsurance contract’s notice
provision.
Discussion: § 40.09[1]
Forms: §§ 40.36-40.38
□
Determine whether, in your jurisdiction, the reinsurer must demonstrate prejudice in order to successfully assert a late notice
defense.
Discussion: § 40.09[2]
□
Understand the effect of an access to records clause in the reinsurance agreement.
Discussion: § 40.10[1]
Form: § 40.39
□
If your client is the ceding insurer, beware the consequences of
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New Appleman Insurance Practice Guide
disclosing privileged information to reinsurers pursuant to an
access to records clause.
Discussion: § 40.10[2]
□
Research the applicability in your jurisdiction of the common
interest doctrine to a cedent’s disclosure of privileged communications to its reinsurer.
Discussion § 40.10[2]
□
Determine whether the parties to a reinsurance contract should
execute a confidentiality or common interest agreement to try to
preserve applicable privileges or immunities against disclosure to
third parties.
Discussion: § 40.10[2][f]
□
Understand the circumstances under which a reinsurer can compel
disclosure of its cedent’s privileged communications.
Discussion: § 40.10[3]
□
Understand the circumstances under which an insured will be
entitled to discover its insurer’s reinsurance information.
Discussion: § 40.10[4]
□
Become familiar with the rights and obligations presented by right
to associate and claims control clauses in reinsurance contracts.
Discussion: § 40.11
Forms: § 40.41
□
Draft the reinsuring or business covered clause of the reinsurance
agreement carefully to avoid disputes concerning the scope of
coverage.
Discussion: § 40.12
□
Understand whether the reinsurance contract wording (in many
cases the definition of “allocated loss expenses”) obligates the
reinsurer to reimburse its cedent for declaratory judgment expenses.
Discussion: § 40.13
□
Understand the coverage provided by excess of policy limits
40-12
Understanding Reinsurance
40.03
(“XPL”) and/or extra-contractual obligations (“ECO”) clauses in
the reinsurance contract.
Discussion: § 40.14
Forms: §§ 40.42-40.43
□
Understand the duty of utmost good faith that is central to the
relationship between cedent and reinsurer.
Discussion: § 40.15
□
If your client is the cedent, determine the facts that must be
disclosed during the underwriting process.
Discussion: § 40.15
□
If your client is the cedent, ensure that all proper and businesslike
steps are taken in underwriting the underlying business and in
settling claims.
Discussion: § 40.16[2]
□
Understand the effect of follow the fortunes or follow the settlements wording in the reinsurance contract.
Discussion: § 40.17
佡 Cross References: §§ 40.18-40.19
□
Determine the extent to which follow the fortunes or follow the
settlements language in the reinsurance contract requires a reinsurer to follow its cedent’s allocation and aggregation decisions as
respects it direct insurance obligations.
Discussion: § 40.19
□
Understand the obligations of the reinsurance intermediary.
Discussion: § 40.20
□
Determine whether, and for what purposes, the reinsurance broker
or intermediary is the agent of the ceding company, the reinsurer,
or both parties.
Discussion: § 40.21
Form: § 40.44
40-13
40.03
□
New Appleman Insurance Practice Guide
Understand what disputes are arbitrable under the reinsurance
contract’s arbitration clause.
Discussion: § 40.22
Forms: §§ 40.45-40.46
□
In drafting reinsurance agreements, counsel should determine
whether the scope of the arbitration clause in the reinsurance
contract is intended to be broad or narrow.
Discussion: § 40.22
Forms: §§ 40.45-40.46
□
Arbitration counsel should consider whether non-signatories to the
arbitration agreement may be forced to arbitrate.
Discussion: § 40.22
□
Consider whether or not to include consolidation and joinder
provisions in an arbitration agreement, or whether to request
consolidation once arbitration has commenced.
Discussion: § 40.22
Form: § 40.45
□
Consider what procedures should be included in the arbitration
provision concerning the selection of arbitrators and/or umpires,
what qualifications the arbiters should have, and whether the
arbiters should be neutral or non-neutral.
Discussion: § 40.23
□
Make certain that your client appoints its arbiter on a timely basis.
Discussion: § 40.23
□
Become familiar with the standards and procedures for selecting
arbitrators and the lists of qualified individuals published by
arbitration and reinsurance organizations.
Discussion: § 40.23
Form: § 40.47
□
Understand the effect of any honorable engagement wording in the
40-14
Understanding Reinsurance
40.03
reinsurance agreement.
Discussion: § 40.24
Form: § 40.46
□
Counsel drafting a reinsurance contract should determine whether
specific discovery procedures should be included in the reinsurance contract’s arbitration provision and, if so, whether they
should incorporate any procedures published by reinsurance or
arbitration organizations.
Discussion: § 40.25
□
Counsel should determine how and whether a reinsurance intermediary can be required to participate in the discovery process in
the event of a reinsurance arbitration.
Discussion: § 40.25
□
Arbitration counsel should consider whether to submit a motion
for summary disposition of a reinsurance claim or dispute.
Discussion: § 40.26
□
Arbitration counsel should consider whether to move to confirm a
favorable arbitration award in court.
Discussion: § 40.28
□
Arbitration counsel should consider whether grounds exist to
move to vacate an arbitration award in court.
Discussion: § 40.28
□
Arbitration counsel should consider whether there are grounds to
request a court to modify or correct an arbitral award.
Discussion: § 40.28
□
Become familiar with the forms provided by ARIAS.
Discussion: § 40.29
Form: § 40.47
40-15
II.
APPRECIATING PURPOSE OF REINSURANCE.
40.04 Types of Reinsurance.
40.04[1] Facultative vs. Treaty. There are two basic types of reinsur-
ance: “treaty” and “facultative.” Facultative reinsurance is a contract
only covering all or part of a single specific policy of insurance. For
each transaction sought to be reinsured, the reinsurer reserves the
“faculty” to accept or decline all or part of any insurance policy
presented, and the cedent chooses whether to secure reinsurance for
a particular policy. The reinsurer and cedent negotiate the terms for
each facultative certificate. Facultative reinsurance is commonly
purchased for large, unusual or catastrophic risks. Reinsurers thus
must have the necessary resources to underwrite individual risks
carefully. (“Treaty” reinsurance, discussed further below, involves a
preexisting commitment by the reinsurer to cover a predetermined
class and amount of coverage that will be sold by the insurer-cedent.)
Other uses of facultative reinsurance include:
1.
When an insurer is offered a risk that exceeds its standard
underwriting or reinsurance limits for that class, facultative
reinsurance can permit the ceding company to accept the risk.
2.
Insurers can fill gaps in coverage caused by reinsurance treaty
exclusions by seeking separate facultative coverage for a
specific policy or group of policies.
3.
A reinsurer can issue facultative reinsurance to participate in a
market in the short term to minimize risk and take advantage
of favorable rates.
4.
A treaty reinsurer may purchase facultative reinsurance to
protect itself and its treaty reinsurers.
Insurers sometimes purchase both facultative and treaty reinsurance
to cover the same risk. Unless there are contract terms to the contrary,
the facultative reinsurance will perform first and completely before
any of the treaty reinsurance performs. Sometimes the facultative
reinsurance only applies to the ceding company’s net retention; other
times facultative coverage also inures to the benefit of the treaty
reinsurers. Ideally, the wording of the facultative certificate will make
this clear. As a general matter, whether the facultative reinsurance
inures to the benefit of the treaty reinsurers will depend on whether
the treaty reinsurers paid a portion of the premium for the facultative
40-16
Understanding Reinsurance
40.04[1]
coverage. If not, the facultative reinsurance likely will not inure to the
treaty reinsurers’ benefit.
Facultative certificates are often one or two page documents. The
front of a typical contract identifies the parties, the underlying
policyholder and policy number reinsured, amounts of the policy
ceded and retained, the type of reinsurance (proportional or nonproportional) and the premium. The back of each certificate usually
contains the following provisions: notice of loss; net retention;
coverage for loss adjustment expenses; claims handling; cancellation;
insolvency; tax; offset and intermediaries. Many facultative certificates do not include an arbitration provision [see § 40.22 below for a
discussion of arbitration clauses in reinsurance agreements].
Treaty reinsurance, the most common form of reinsurance, covers
some portion of a defined class of an insurance company’s business
(e.g., an insurer’s products liability or property book of business).
Reinsurance treaties cover all of the risks written by the ceding
insurer that fall within their terms unless exposures are specifically
excluded. Thus, in most cases, neither the cedent nor the reinsurer
has the “faculty” to exclude from a treaty a risk that fits within the
treaty terms. Therefore, treaty reinsurers rely heavily on the cedent’s
underwriting. Treaty relationships are often long-term; treaties sometimes are renewed automatically unless a change in terms is requested. A typical treaty can include thirty or forty articles or clauses
which describe the class or classes of business covered, the type of
treaty (proportional or non-proportional), the amount of reinsurance
provided and details about the parties’ obligations with respect to
treaty operation.
佡 Cross Reference: For a thorough discussion of the distinction
between facultative and treaty reinsurance, see Compagnie de
Reassurance D’Ile de France v. New England Reinsurance Corp.,
825 F. Supp. 370 (D. Mass. 1993), aff’d in part and rev’d in part, 57
F.3d 56 (1st Cir. 1995).
z Strategic Point: Reinsurance treaties that run consecutively for
many years can present certain difficulties in terms of claims
processing. Contracts are often amended by endorsements which
can add or delete reinsurers, change premium or ceding commission rates or add, delete or alter important contract terms. These
changes may be retroactive to contract inception or have a
different effective date. Practitioners evaluating indemnity under
reinsurance treaties must take care to review complete versions of
40-17
40.04[2]
New Appleman Insurance Practice Guide
the wordings, including endorsements and amendments.
40.04[2] Proportional vs. Non-proportional. Proportional or pro-rata
reinsurance is characterized by a proportional division of liability
and premium between the ceding company and the reinsurer. The
cedent pays the reinsurer a predetermined share of the premium, and
the reinsurer indemnifies the cedent for a like share of the loss and
the expense incurred by the cedent in its defense and settlement of
claims (the “allocated loss adjustment expense” or “LAE”). According to the percentage agreed, the cedent and reinsurer share the
premium and losses from the business reinsured. Proportional reinsurance spreads the risk of loss and creates a broad identity of
interests between the cedent and the reinsurer, which effectively
co-venture in relationship to their relative shares of the risk, even
though only the cedent has contractual privity with the direct
insured.
The two most common types of proportional reinsurance are “quota
share” and “surplus share” reinsurance. Under quota share reinsurance, the reinsurer assumes an agreed percentage of each risk from
the first dollar, up to any limit assigned. For example, if there is a $100
loss under a 40 percent quota share reinsurance contract, the cedent
would bear $60 of that loss and the reinsurer concurrently would bear
$40 of that loss. The percentage always reflects the percentage of loss
borne by the reinsurer. The portion of the risk that the reinsurer
assumes is called the “ceded risk,” and the portion that the cedent
keeps is referred to as the reinsurance “retention.” Although it is not
a partnership, quota share reinsurance presents a greater identity of
interests between the ceding insurer and the reinsurer than does
excess of loss reinsurance (discussed below).
Surplus share is similar to quota share reinsurance in that premiums
and losses are shared on a proportional basis, but differs in that the
portion of the reinsured policy the direct insurer retains is expressed
as a fixed monetary amount, and the reinsurance may or may not
apply from the first dollar (i.e., the reinsurance may apply only in
excess of the fixed dollar amount or the cedent and reinsurer may
together share losses as they are incurred until the cedent incurs an
amount equal to its overall retention). Premium is shared based on
the ratio of retained liability, and the reinsurer agrees to pay the same
pro rata portion of any loss and expense incurred by the cedent.
Examples: Where the policy limit is $150,000, and the cedent’s
retention is $25,000, the amount ceded to the reinsurer is $125,000
40-18
Understanding Reinsurance
40.04[2]
and the ratio of what is ceded to what is retained is 5:1. Losses
therefore will be shared in that proportion. For a loss of $100,000,
the cedent is responsible for $16,667 and the reinsurer pays five
times more, or $83,333.
In addition, in surplus share reinsurance contracts, the proportion of
premium and liability ceded can vary, at the cedent’s option, from
risk to risk. Although it can be advantageous for the direct insurer to
vary the percentage of premium and liability ceded for each risk,
these variations make a surplus share contract more difficult to
administer than a simple quota share.
Under non-proportional or excess of loss reinsurance (sometimes
referred to as “XL” or “XOL”), the reinsurer’s liability is not triggered
until the cedent’s losses exceed a specified monetary amount, called
the “retention.” If losses to the ceding company are less than the
retention, the reinsurer owes nothing. The reinsurance agreement
will include a limit of liability for each claim above which the
reinsurer is not obligated to pay. Excess of loss reinsurance can be
provided on an individual risk, an occurrence or an aggregate basis,
and is typically placed in layers. Non-proportional reinsurance tends
to cost less than does quota share reinsurance because the reinsurer
does not participate in every loss. However, because the level of risk
under non-proportional reinsurance depends on the nature of the
reinsurance undertaking, there is a great deal of uncertainty with this
coverage. In addition to the underlying risk, reinsurers must consider
the layer of coverage on which it will participate.
Whether a potential cedent seeks to obtain or place coverage on a first
dollar basis versus excess of loss reinsurance depends on several
factors, including the cedent’s anticipated loss profile. For example, if
the cedent expects to incur frequent losses at low levels, it may make
economic sense for the cedent to secure quota share reinsurance, so it
has some protection for even the smallest losses. In contrast, if the
cedent expects to have infrequent losses at significant levels or wishes
to guard against risk of a significant loss, it may choose to purchase
excess of loss coverage.
z Strategic Point — Reinsurer: Because non-proportional reinsur-
ance is characterized by unpredictability and potentially high
losses, XOL reinsurers may incur a disproportionate share of total
losses. This is especially problematic with respect to “long tail”
lines of insurance where the incidence of loss and determination
of damages can extend well beyond the period in which the
insurance or reinsurance is in force. In such cases, premiums may
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40.04[3]
New Appleman Insurance Practice Guide
be received long before liability is manifested or developed, and
liability may be difficult to estimate because it is determined by
the prevailing legal or economic environment in the future. (On
the other hand, the reinsurer is able to hold on to the premium
paid by the cedent for a longer period, offering it the opportunity
to “earn out” losses through investment return.) Examples of
long-tail lines of insurance include malpractice, products liability,
and errors and omissions.
佡 Cross Reference: For discussion of the advantages and disad-
vantages of proportional and non-proportional reinsurance contracts, see Eric Mills Holmes, Appleman on Insurance 2d § 102.3.
佡 Cross References: For an example of a reinsuring clause for a
quota share reinsurance agreement, see § 40.30 below. For an
example of a reinsuring clause for a surplus share reinsurance
agreement, see § 40.31 below. For an example of a reinsuring
clause for an XOL reinsurance agreement, see § 40.32 below.
40.04[3] Catastrophe Reinsurance. Catastrophe reinsurance is a form
of excess of loss reinsurance which, subject to a specific limit,
indemnifies the cedent for the amount of loss in excess of its retention
with respect to an accumulation of individual losses affecting multiple policies resulting from a catastrophic event. Rather than single
large losses, even an unexpected number of such losses within the
reinsurance policy term, catastrophe coverage principally provides
protection for the cedent against the concentration of several losses,
each of which may stem from different direct insureds but which
altogether arise from a common event (or closely related series of
events). The reinsurance contract is typically called a “catastrophe
cover.” Catastrophe reinsurance can be provided on an aggregate
basis with coverage for losses over a certain amount for each loss in
excess of a second amount in the aggregate for all losses in all
catastrophes occurring during a certain time period (often one year).
Catastrophe cover is typically secured to protect the cedent against an
intolerable accumulation of actual loss and to stabilize its underwriting experience.
Another variant of reinsurance purchased by insurers is “clash
cover,” which requires two or more coverages or policies issued by
the reinsured to be involved in a loss, for coverage to apply. This
reinsurance typically attaches above the limits of any one policy.
Clash covers are often catastrophe covers.
40-20
Understanding Reinsurance
40.04[4]
佡 Cross Reference: For discussion of the typical terms of catastro-
phe cover, see Eric Mills Holmes, Appleman on Insurance 2d
§ 102.3[B][2].
40.04[4] Finite Reinsurance. There is no generally accepted definition
of finite risk (sometimes called “financial”) reinsurance. Broadly
speaking, it is a form of reinsurance that carefully controls and limits
the amount and type of risk transferred to the reinsurer, but often
involves the transfer of money, a return premium from the reinsurer,
to the cedent as a result of how losses developed under the
reinsurance contract. Finite reinsurance can be distinguished from
other non-finite or “traditional” types of reinsurance based on the
extent to which there are limitations on the “underwriting risk,” the
risk that the amount of losses will exceed premiums. Participants in
finite risk reinsurance transactions tend to focus primarily on financial risks, such as timing risk (the risk that losses will need to be paid
sooner than expected), investment risk (the risk that the reinsurer will
earn less investment income than expected on the reinsurance
premium) and credit risk (the risk that the cedent will not make the
required premium payments).
Finite risk reinsurance contracts are typically treaties that are closely
tailored to meet the particular needs of a cedent. They can be quota
share or excess of loss treaties and may cover losses that have yet to
be quantified or to have occurred at all or losses that have already
occurred in part but where the amount and timing of the loss is still
uncertain. Finite risk reinsurance contracts often include some or all
of the following:
1.
A ceiling on the amount of underwriting risk assumed by the
reinsurer;
2.
An explicit recognition of the time value of money through the
use of experience accounts funded by large reinsurance premiums, which accumulate investment income over time and
fund the loss payments;
3.
Inclusion of a commutation clause that allows for profit
sharing between the cedent and reinsurer based on the financial results of the reinsurance contract;
4.
Multi-year contracts that allow the cedent to mitigate volatility
by recognizing a loss gradually, rather than all at once.
Finite risk transactions are legitimate and widespread, though some
forms of transactions have been criticized as being in substance
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40.04[4]
New Appleman Insurance Practice Guide
distinguished loans but which as something other than a loan obtains
more favorable tax or accounting treatment (until challenged). The
key issue is how to account for the transaction. If there has been
sufficient risk transfer, the contract can be accounted for as reinsurance. If not, then contract deposit accounting is appropriate.
t Warning: Significant regulatory attention has recently been
directed at how insurers account for finite risk reinsurance and
whether the principal objective of these transactions is untethered
from an underlying business rationale but instead is designed to
improve the appearance of the balance sheet of the cedent (and
thus implicitly, or so the argument goes, to mislead investors and
regulators as to the true financial condition of the cedent).
Insurers and reinsurers in the United States and elsewhere have
been investigated by the SEC, state Attorneys General, state
Insurance Departments, and other law-enforcement officials with
jurisdiction. A common element in many of the finite risk
reinsurance transactions under attack by regulators is an allegation that the transactions were presented and accounted for as if
they genuinely transferred material risk, when in fact the transactions did not do so and thus were more in the nature of loans
or deposits on account. They were instead allegedly intended
only to achieve a particular result on a company’s balance sheet
— what is sometimes referred to as “financial engineering” or
more commonly “smoothing” of earnings.
Example: Effective in 2006 and 2007, the National Association of
Insurance Commissioners (“NAIC”) amended the disclosure requirements for companies that purchase finite risk reinsurance,
and the new requirements demand substantial and ongoing
management attention. The new requirements include several
new interrogatories (which are part of the “General Interrogatories” section of the Annual Statement) that apply to “ceded”
reinsurance and are intended to identify reinsurance agreements
that have characteristics of contracts which the regulators have
identified as prone to abuse and which warrant closer review. For
example, under Interrogatory 9.1, the reporting company is asked
to identify any ceded reinsurance which meets three conditions:
(1) the agreement alters surplus by more than 3% (positive or
negative) or represents more than 5% of premiums or losses; (2)
the contract was accounted for as reinsurance and not as a
deposit; and (3) the contract has one or more of the following
features “or other features that would have similar results”:
40-22
Understanding Reinsurance
•
•
•
•
40.04[4]
non-cancelable contract terms longer than two years;
a provision whereby cancellation triggers an obligation by
the ceding company or an affiliate to enter into a new
contract with the reinsurer or an affiliate;
aggregate stop loss reinsurance coverage;
an unconditional or unilateral right by either party to
commute, unless triggered by a decline in the counterparty’s credit status;
•
a provision permitting reporting or payment of losses less
frequently than quarterly;
•
payment schedule, accumulating retentions from multiple
years or any features inherently designed to delay timing
of cedent reimbursement (e.g. experience accounts).
In the event conditions (1), (2) and (3) are satisfied, the reporting
company must provide certain supplemental information including:
(a) a summary of the terms of the responsive contracts; (b) a brief
discussion of the principal objectives and “economic purpose” for
entering into the contract; and (c) the aggregate financial statement
impact of all such contracts on the balance sheet and income
statement.
A second interrogatory (9.2) is intended to ferret out additional
arguably abusive reinsurance arrangements. Here, the reporting
company must identify any ceded risks (other than to captives or
under approved pooling arrangements) for which it recorded a
positive or negative underwriting result greater than 5% of prior
year-end surplus as regards policyholders or it reported calendar
year written premium ceded or year-end loss and loss expense
reserves ceded greater than 5% of prior year-end surplus as regards
policyholders where: (1) the ceded written premium is 50% or more
of the entire direct and assumed premium written by the assuming
reinsurer, based on its most recent financial statement; or (2) twentyfive percent or more of the written ceded premium has been
retroceded back to the ceding company in a separate reinsurance
contract. Cessions by or to affiliates, including multiple contracts with
the same reinsurer or its affiliates, are included in determining if the
conditions are met. If either condition 1 or 2 of this interrogatory is
met, the reporting company must provide the same supplemental
information noted above.
An additional interrogatory (9.4) requires the cedent to identify
40-23
New Appleman Insurance Practice Guide
40.04[4]
contracts that it has accounted for as reinsurance for statutory
accounting purposes yet accounted for as a deposit for GAAP
purposes (or vice versa). For any such contract, an explanation for the
differing treatment must be provided in a supplemental filing.
The NAIC also now requires CEOs and CFOs to complete a “Reinsurance Attestation Supplement” that is similar to provisions of the
Sarbanes-Oxley Act (“SOX”), for “all reinsurance contracts for which
the reporting entity is taking credit on its current financial statement.” The attestation includes the following four parts, which share
in the common objectives to encourage transparency and auditability
for reinsurance transactions of certain forms and to memorialize,
preferably concurrent to entry into the reinsurance contract in
question, the underlying business rationale and purpose for the
transaction as a safeguard against market participants coopering up
paper with or without oral side deals that negate the apparently
legitimate business objective of the paperwork.
Consider: Note that this regulatory purpose is not to preclude
participants from making ill-considered, underpriced, or even
foolish deals — shareholders may have other recourse for such
non- or misfeasance; instead, preservation of the integrity of the
largely self-reported financial and insurance regulatory systems is
meant to be buttressed through these disclosure requirements.
1.
2.
No side agreements exist, written or oral, that would “under
any circumstances reduce, limit, mitigate or otherwise affect
any actual or potential loss to the parties.” This prong of the
attestation applies to every reinsurance contract, and not just
to those that may be characterized as “finite” in nature or
appearance. Verifying the absence of all such oral and written
arrangements as to all contracts will likely require both
documentary review and interviews of underwriting personnel, perhaps even including prior employees. Companies and
their auditors should develop a plan for accomplishing this
review and documenting its methodology and results.
For reinsurance contracts entered into, renewed or amended
after January 1, 1994, for which risk transfer is not reasonably
considered to be self-evident, there is documentation evidencing proper accounting treatment under SSAP 62. Because
Statement of Standard Accounting Practice (“SSAP”) 62 and
Financial Accounting Standards Board (“FASB”) 113 (related to
GAAP and statutory reinsurance accounting and risk transfer)
did not apply until 1994, the NAIC recognizes that risk transfer
40-24
Understanding Reinsurance
40.04[5]
analysis may not have been memorialized contemporaneously.
In terms of which contracts have reasonably self-evident risk
transfer, the ceding company may want to look back to the
Interrogatories. Certainly, any contract reportable under the
conditions delineated will be subject to this prong of the
attestation. Companies will want to obtain guidance from
counsel and auditors as to what constitutes sufficient “risk
transfer analysis” in today’s environment.
3.
The reporting entity complies with all requirements of SSAP
62. This deceptively simple sounding prong will require the
careful exercise of “due diligence.” Each company will determine, perhaps based on consultation with accountants, lawyers and independent auditors, what constitutes sufficient due
diligence to establish compliance with all of the risk transfer
and accounting requirements of SSAP 62.
4.
The reporting entity has appropriate controls in place to
monitor the use of reinsurance and adhere to the provisions of
SSAP 62. This prong is the key to the ability to make the
CEO/CFO attestations on an ongoing basis. Some companies
will have sufficient controls already in place; others will need
to develop such controls and put them in place as soon as
possible.
40.04[5] Fronting Arrangements. There is not a general agreement in
the reinsurance industry as to how fronting is defined, and there are
varying perceptions of whether the general duties and relationships
between cedent and reinsurer change in the context of a “fronting”
arrangement. At a minimum, fronting involves the reinsurance of all
or substantially all of a book of business. The ceding company retains
little or no net liability on the ceded business and receives a fee
(through the ceding commission and perhaps other forms of compensation such as service fees) in exchange for allowing the business
to be written on its paper. Sometimes, the goal of a fronted arrangement is to have the insurance that is sought to be brought to the
marketplace sold through the auspices of an “admitted” carrier, even
though the real party in interest — with underwriting expertise and
per the reinsurance contract financial exposure vis-a-vis the cedent/
front — is the reinsurer. In many fronting arrangements, a managing
general agency (“MGA”) underwrites the business and handles
claims on the reinsured policies. There is disagreement as to what
extent responsibility for monitoring the MGA and responsibility for
the MGA’s misdeeds lies with cedent or reinsurer. It is clear, however,
40-25
40.04[5]
New Appleman Insurance Practice Guide
that a fronting insurer remains contractually liable to perform with
respect to its insureds under the direct policies, whether or not it is
indemnified by its reinsurer [Am. Special Risk Ins. Co. v. Delta Am.
Re-Insurance Co., 836 F. Supp. 183, 185 (S.D.N.Y. 1993)]. The reinsurer, lacking privity with the direct insured, may be exposed to
claims of tortious interference with contract or for prospective
economic advantage if it directs the cedent/front not to pay a valid
claim. At the same time, the cedent faces the risk that if it pays the
direct claim without the support of its reinsurer a risk that it thought
it may be only fronting may remain on its doorstep, for the reinsurer
may assert that the payment to the direct insured was never owed in
the first place under the direct insurance policy and thus represents
an uncovered, ex gratia or gratuitous payment for which indemnification under the reinsurance arrangement is not owed.
z Strategic Point: The reinsurance contract in a fronting arrange-
ment should optimally specify who is responsible for oversight of
the MGA and who is responsible if the MGA breaches its duties.
Consider: Parties should confirm that fronting is allowed in their
jurisdiction, and that there are no specific regulations that are
relevant to their arrangements.
z Strategic Point: Fronting arrangements enable reinsurers to
accept 100 percent of the liability in states where they are not
licensed to write such business on a direct basis [Reliance Ins. Co.
v. Shriver, 224 F.3d 641, 642 (7th Cir. 2000); Union Sav. Am. Life
Ins. Co. v. N. Central Life Ins. Co., 813 F. Supp. 481, 484 (S.D. Miss.
1993); Equity Diamond Brokers, Inc. v. Transnational Ins. Co., 785
N.E.2d 816, 818 (Ohio Ct. App. 2003)]. In some instances, fronting
allows alien insurers to accept 100 percent of the exposure on
risks it is prohibited by regulatory restrictions to write directly
[Gallinger v. Vaaler Ins., 12 F.3d 127, 128 n.1 (8th Cir. 1994)
(applying North Dakota law)]. It should be noted that fronting
can be done as a retrocession also. Fronting allows ceding
insurers to receive reinsurance credit that would not be available,
at least without security, if the reinsurance was issued directly by
an unauthorized reinsurer [see § 40.06 below for a discussion of
credit for reinsurance]. A licensed reinsurer can front for an
unauthorized reinsurer or a reinsurance syndicate, to permit the
ceding insurer to take credit for the reinsurance without need for
security [Am. Special Risk Ins. Co. v. Delta Am. Re-Insurance Co.,
836 F. Supp. 183, 185 (S.D.N.Y. 1993)].
40-26
Understanding Reinsurance
40.05[1]
40.05 Lack of Privity of Contracts.
40.05[1] Know General Rule. A fundamental principle of reinsurance
is that the reinsurer ordinarily is not liable to the original policyholder of the ceding insurer; it is not a co-signer of the policy issued
to the original policyholder, and it is not jointly and severally
obligated to make good on the benefits the policyholder sought to
obtain under the insurance contract sold by the insurer/cedent.
Many court decisions have recognized that the reinsurer is in
contractual privity only with the ceding company and has no
contractual obligation to the original insured, underlying claimants,
or any third parties [Barhan v. Ry-Ron, Inc., 121 F.3d 198 (5th Cir.
1997) (applying Texas law); Travelers Cas. & Sur. Co. v. Prudential
Reinsurance Corp., 2001 U.S. Dist. LEXIS 10913 (N.D. Ohio 2001),
citing Stickel v. Excess Ins. Co. of Am., 23 N.E.2d 839 (Ohio 1939);
Prudential Reinsurance Co. v. Superior Court (Garamendi), 842 P.2d
48 (Cal. 1992)]. Moreover, most courts have rejected claims brought
by original policyholders against reinsurers based on agency and
third-party beneficiary theories [Aetna Ins. Co. v. Glens Falls Ins. Co.,
453 F.2d 687, 690 (5th Cir. 1972) (applying Georgia law); Reid v.
Ruffin, 469 A.2d 1030 (Pa. 1983)].
Exception: While the rule of lack of privity is generally respsected
by the courts, there have been some cases, particularly arising out
of the insolvency of the direct insurer/cedent, where a court has
characterized the original policyholder as a third-party beneficiary of the reinsurance arrangement, thus possessing the rights
to enforce a contract to which it is not a party in accordance with
the ordinary contract-law rules governing third-party beneficiaries. Policyholders may seek to skip over the insurer with which
it has privity by arguing that the reinsurer is the alter ego of the
insurer, at least insofar as the particular policy or particular
insurance program is concerned. For example, in the bankruptcy
context, reinsurers were considered to be the true risk bearers
where the ceding insurer merely acted as the fronting company,
bore no underwriting risk, and left responsibility for claims
handling and funding to the reinsurers [Koken v. Legion Ins. Co.,
831 A.2d 1196, 1237-38 (Pa. Commw. Ct. 2003)]. In another case,
the court found that an insured had third-party beneficiary status
where the insurer acted as a fronting company and the reinsurers
bore all responsibility for underwriting and claims handling and
managed the defense of coverage claims [Venetsanos v. Zucker,
Facher & Zucker, 638 A.2d 1333, 1339-40 (N.J. Super. Ct. App. Div.
40-27
40.05[2]
New Appleman Insurance Practice Guide
1994)]. [See § 40.04[5] above for a discussion of fronting arrangements]. However a federal district court in Missouri rejected the
theory that a reinsurer’s conduct in paying claims alone can make
the reinsurer liable directly to the original insured [Allendale
Mut. Ins. Co. v. Crist, 731 F. Supp. 928, 932-33 (W.D. Mo. 1989)].
Similarly, a federal district court in New Jersey rejected the
policyholders’ assertion that a reinsurer’s involvement in the
“adjustment and settlement of claims” (as is common where there
is a claims-control clause) allowed the court to “pierce the alleged
reinsurance veil” [G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S.
Dist. LEXIS 19060, at *40-41 (D.N.J. 2007)].
Exception: It may be possible for an insured to bring a direct
action against a reinsurer if the reinsurer allegedly induced the
direct insurer to breach the underlying policy by denying the
claims in question. For example, a tort claim based on this theory
asserted by policyholders against a reinsurer recently survived a
motion to dismiss in a federal district court in Florida [Law
Offices of David J. Stern v. SCOR Reinsurance Corp., 354 F. Supp.
2d 1338, 1341-42 (S.D. Fla. 2005)].
佡 Cross Reference: For a general discussion of a reinsurer’s
potential liability to the policyholder of the ceding insurer, see Eric
Mills Holmes, Appleman on Insurance 2d § 106.7.
40.05[2] Consider Cut-Throughs. A significant exception to the gen-
eral rule that an insured may not seek payment directly from a
reinsurer is present where a cut-through endorsement is contained in
the original underlying policy. A cut-through provision gives an
insured a contractual right to pursue a direct action against the
reinsurer; it can be conceived of as an express grant of third-party
beneficiary status of the putative non-party direct insured. Cutthroughs most often apply only when the direct insurer is insolvent
and provide that the loss which the reinsurer would have paid to the
estate of the insolvent insurer is instead paid directly to the original
policyholder [compare Wilcox v. Anchor Wate, 2006 UT 6]. A cutthrough is similar to an “assumption reinsurance” arrangement,
which effectively is the consensual substitution of the reinsurer for
the cedent as the agent for performance, which in turn typically vests
in the direct insured the right to pursue either the original direct
insurer (with which it has contract privity) or the assumer of the
direct insurer’s liability, at the insured’s election. One difference
between a cut through and an assumption arrangement, is that cut
40-28
Understanding Reinsurance
40.05[2]
throughs more often are agreed ex ante, that is, when the policy is
placed, and assumptions occur when the cedent effects a lossportfolio transfer to a reinsurer by which the reinsurer steps into its
shoes inter sese. The assumption must be an explicit written assumption of liability to the original policyholder who acquires a direct
right of action against the reinsurer; note that since the assumption
takes place on only one side of the transaction, it is not a “novation,”
freeing the original contracting party from its contractual duties; it is
not fictive, however, which is why the direct insured often will be
permitted to elect to pursue either the original party in privity or the
assumption reinsurer. Many state statutes permit reinsurers to enter
into cut-through endorsements. [Cal. Ins. Code § 922.2; N.Y. Ins.
Code § 1308(a)(2)(B); Tex. Ins. Code § 493.055]. This right has been
recognized by many courts as well [Martin Ins. Agency, Inc. v.
Prudential Reinsurance Co., 910 F.2d 252-53 (5th Cir. 1990) (interpreting Louisiana law); Bruckner-Mitchell, Inc. v. Sun Indem. Co., 82 F.2d
434, 444 (D.C. Cir. 1936); Klockner Stadler Hurter, Ltd. v. Ins. Co. of
Pennsylvania, 785 F. Supp. 1130, 1134 (S.D.N.Y. 1990)].
Exception: Cut-through endorsements that interfered with admin-
istration of an insolvent insurer’s estate were found to be
unenforceable [Colonial Penn Ins. Co. v. Am. Centennial Ins. Co.,
1992 U.S. Dist. LEXIS 17552, at *15-18 (S.D.N.Y. 1992), discussing
Foster v. Mutual Fire, Marine & Inland Ins. Co., 531 Pa. 598, 614
(1992)].
t Warning: Cut-through endorsements are unenforceable under
Bermuda law [Dunlop Pneumatic Tire Company Ltd. v. Selfridge
& Co. Ltd. [1915] A.C. 847]. Insurers and reinsurers should
carefully research the legality and enforceability of cut-through
clauses before using them.
佡 Cross Reference: For a discussion of cut-through endorsements
and related contract provisions, see Eric Mills Holmes, Appleman
on Insurance 2d § 167.2[B][1].
40-29
III.
CONSIDERING REINSURANCE REGULATION.
40.06 Credit for Reinsurance. Credit for reinsurance laws constitute a key
component of the regulation of reinsurance in the United States. These
laws determine the circumstances in which a ceding insurer can take
financial statement credit for reinsurance recoverables as an asset and as a
reduction of its unearned premium and loss reserves on account of
reinsurance ceded. Where an insurer can take credit for reinsurance, it can
increase its “surplus” and thus expand its allowed capacity to write new
insurance business. In order to qualify for financial statement credit, most
states require that the reinsurer be licensed or accredited in the same state
where the direct insurer does business, or that the reinsurer be domiciled
and licensed in a state that employs substantially similar credit for
reinsurance standards to those imposed by the direct insurer’s state of
domicile. Most states also allow credit for reinsurance ceded to a nonUnited States reinsurer that maintains a trust fund in the U.S. for the
protection of its U.S. ceding insurers. In addition, the reinsurance contract
must actually materially transfer risk from the cedent to the reinsurer and
include an insolvency clause [see § 40.08 below for a discussion of the
insolvency clause]. Some states also require that the reinsurer assume all
credit risks of any intermediary receiving payments [N.Y. Comp. Codes R.
& Regs. tit. 11, § 125.6].
Exception: A significant portion of the reinsurance in the U.S. is ceded
to unlicensed alien reinsurers that are not regulated for solvency in any
state. A ceding insurer can still take credit for reinsurance ceded to
unlicensed or unaccredited reinsurers if the recoverables are adequately collateralized. This requirement is satisfied if the reinsurer
maintains certain trust deposits for the protection of all of its U.S.
cedents. Alternatively, the reinsurer can provide individual cedents
with collateral. The ceding company can reduce its balance sheet
liabilities by an amount equal to the collateralization. Ceding insurers
typically secure the payment of reserves on reinsured liabilities (i.e.,
case reserves, incurred but not reported reserves (“IBNR”), unearned
premium reserve and reserve for allocated loss adjustment expenses
(“LAE”)) by means of a clean letter of credit issued or confirmed by a
financial institution approved by the state insurance commissioner [see
§ 40.06 below for a discussion of letters of credit]. In these circumstances, the reinsurer is the applicant requesting the bank to issue the
letter of credit in favor of the beneficiary, the ceding insurer. Trust
funds, reinsurer funds held by the cedent as security (“funds
withheld”) or other approved mechanisms also may be viewed as
40-30
Understanding Reinsurance
40.06
collateral sufficient to permit credit for reinsurance [N.Y. Comp. Codes
R. & Regs. tit. 11, § 126.3]. Many of these rules, however, are currently
under review by the National Association of Insurance Commissioners
(“NAIC”) and the federal government.
Example: The NAIC develops model laws, regulations and financial
statements in order to achieve substantial similarity of state laws and
procedures in key areas of solvency, including credit for reinsurance.
The NAIC has issued a recommended credit for reinsurance model
law and regulation, some variation of which has been promulgated by
every state [Model Law on Credit for Reinsurance (2003) and Model
Regulation on Credit for Reinsurance reprinted in Eric Mills Holmes,
Appleman on Insurance 2d].
Example: The State of California recently adopted a comprehensive set
of regulations, referred to as the “Reinsurance Oversight Regulations,”
which cover the following three general topics: (1) the ceding company’s accounting for reinsurance on its financial statements; (2) requirements applicable to the form and content of reinsurance agreements;
and (3) oversight of reinsurance transactions and related sanctions.
The requirements are intended “to elicit from insurers a true exhibit of
their financial condition and to safeguard the solvency of licensees”
and apply to all insurers licensed or accredited in California, all
approved U.S. trusts of otherwise unauthorized reinsurers and licensed reinsurance intermediaries. In addition, reinsurers that are not
licensed in California but assume risks from California domestic and
foreign insurers may also be affected by changes in the regulations
with respect to approved forms of security securing reinsurance
obligations. The regulations contain detailed requirements for licensed
insurers intending to receive credit for reinsurance on their financial
statements, requirements for risk transfer and requisites for reinsurance arrangements, including, specifically:
•
Credit for reinsurance ceded to admitted insurers and accredited reinsurers;
•
•
•
Credit for reinsurance secured by an approved U.S. trust;
•
•
Credit for reinsurance required by law;
Credit for reinsurance secured by a single beneficiary trust, a
letter of credit, or funds withheld;
Credit for reinsurance of foreign insurers;
Transfer of risk for both life and disability and property and
casualty business;
40-31
New Appleman Insurance Practice Guide
40.07
•
•
Contract requirements for statement credit; and
Requirements regarding the form of reinsurance arrangements
[Cal. Code Regs. tit. 10, §§ 2303-2303.25].
Example: New York similarly provides credit for reinsurance as
follows:
Ҥ 1301. Admitted assets
(a) In determining the financial condition of a domestic or foreign
insurer or the United States branch of an alien insurer for the purposes
of this chapter, there may be allowed as admitted assets of such insurer,
unless otherwise specifically provided in this chapter, only the following assets owned by such insurer:
*
*
*
(14) Reinsurance recoverable by a ceding insurer: (i) from an insurer
authorized to transact such business in this state, except from a captive
insurance company licensed pursuant to the provisions of article seventy of
this chapter, in the full amount thereof; (ii) from an accredited reinsurer . . .
to the extent allowed by the superintendent on the basis of the insurer’s
compliance with the conditions of any applicable regulation; or (iii) from an
insurer not so authorized or accredited or from a captive insurance company
licensed pursuant to the provisions of article seventy of this chapter, in an
amount not exceeding the liabilities carried by the ceding insurer for
amounts withheld under a reinsurance treaty with such unauthorized insurer
or captive insurance company licensed pursuant to the provisions of article
seventy of this chapter as security for the payment of obligations thereunder
if such funds are held subject to withdrawal by, and under the control of, the
ceding insurer” [N.Y. Ins. Law § 1301].
佡 Cross Reference: For an example of an unauthorized reinsurance
clause applying to reinsurance ceded to an unauthorized reinsurer, see
§ 40.33 below.
40.07 Letters of Credit. Sometimes, reinsurance contracts require licensed
reinsurers to post letters of credit. However, letters of credit are more
commonly obtained by ceding companies which place reinsurance with
non-admitted reinsurers and wish to take credit for reinsurance on their
financial statements [see § 40.06 above for a discussion of letters of credit
as security under credit for reinsurance laws]. The “Asset or Reduction
from Liability” section of the NAIC’s Model Law on Credit for Reinsurance, adopted in the same or an equivalent form by most states, sets forth
the requirements for collateralization of recoverables from non-admitted
reinsurers. The NAIC provision stipulates that letters of credit securing the
40-32
Understanding Reinsurance
40.08
payment of reinsurance obligations must be issued or confirmed by a
qualified U.S. financial institution and be clean, irrevocable, unconditional
and “evergreen,” requiring the financial institution to provide notice prior
to expiration [Model Law on Credit for Reinsurance, Section 23 (2003)].
The NAIC Model Letter of Credit regulations further provide that letters
of credit must not be subject to side agreements and must stipulate that the
beneficiary need only draw a sight draft under the letter of credit and
present it to obtain funds and need not present any other document
[Credit for Reinsurance Model Regulation, Section 11A (July 2003)].
z Strategic Point — Cedent: Ceding insurers should make sure that
letters of credit comply with statutory requirements so they can
properly take credit for reinsurance.
Example: Regulation 133 issued by the New York State Insurance
Department sets forth conditions for letters of credit which may be
treated as an asset by a ceding insurer. Among other things, an
acceptable letter of credit must: be irrevocable; be clean and unconditional; be issued, presentable and payable at an office of the qualified
bank in the U.S.; contain a statement that identifies the beneficiary;
contain a statement that it is not subject to any agreement, condition or
qualification outside of the letter of credit; contain a statement to the
effect that the obligation of the issuing bank under the letter of credit
is an individual obligation of such bank and is in no way contingent
upon reimbursement with respect thereto; contain an issue date and a
date of expiration; have a term of at least one year and contain an
evergreen clause which provides at least 30 days’ written notice to the
beneficiary prior to expiry date for nonrenewal; and state that it is
subject to and governed by New York law [N.Y. Comp. Codes R. &
Regs. tit. 11, § 79.2].
40.08 Insolvency Clause. In most states, a rehabilitator or liquidator under
the direction of the domiciliary state’s insurance department takes control
of an insurance company that is determined to be insolvent. Although
reinsurance agreements are indemnity contracts, they usually include an
insolvency clause which alters the indemnity nature of the contract when
the ceding insurer becomes insolvent. The insolvency clause permits a
liquidator to collect from the reinsurer the amount of reinsurance proceeds
that would have become due if the ceding insurer had not become
insolvent, even if the cedent has not paid its original policyholders. The
liquidator of the estate assumes the insurer’s rights and obligations under
the reinsurance agreement, including the reporting, settlement and de40-33
40.08
New Appleman Insurance Practice Guide
fense of claims, and can promptly discharge the insolvent insurer’s
obligations to claimants.
Most states have encouraged the inclusion of insolvency clauses by
enacting legislation providing that the original insurer may not take credit
for reinsurance on its financial statement unless the reinsurance contract
contains an insolvency provision [Cal. Ins. Code § 922.2; N.Y. Ins. Law
§ 1308[a][2]; Mass. Ann. Laws ch. 175, § 20A]. This is a significant
incentive, as one of the primary reasons for obtaining reinsurance is
defeated if the cedent is forced to maintain reserves for the full amount of
reinsurance ceded [see § 40.06 above which discusses the advantages of
obtaining credit for reinsurance]. As a result, these statutes have had the
effect of ensuring that virtually all reinsurance agreements issued to U.S.
cedents include an insolvency clause.
z Strategic Point — Cedents: Cedents should ensure that the insol-
vency clause meets the requirements of the insurance department of
their domiciliary state. There are generally five key provisions included in the insolvency clause: (1) there is no diminution of the claims
paid by virtue of the cedent’s insolvency; (2) the liquidator must
provide notice of the pendency of a claim; (3) the reinsurer has the
right to investigate and defend claims; (4) the expenses incurred by the
reinsurer in defense of claims may be reimbursable; and (5) the
reinsurance proceeds are payable to the liquidator with statutory
exceptions (i.e. cut-throughs) [Robert C. Reinarz, et al., Reinsurance
Practices, Vol. I, 67-68 (1st ed. 1990)].
佡 Cross Reference: For an example of a standard insolvency clause, see
Business Insurance Law and Practice Guide § 14.08[3]; see also § 40.34
below.
z Strategic Point — Reinsurer: There can be a tension between the
liquidator’s interests and those of the insolvent company’s reinsurers;
if the liquidator agrees to pay a direct insurance claim, it can collect
reinsurance on the claim even if the estate does not have sufficient
assets to pay the claim, in whole or in part [see Robert W. Hammesfahr
and Scott W. Wright, The Law of Reinsurance Claims 254 (1992)].
Therefore, reinsurers often monitor liquidators to ensure that they
handle claims properly until a full settlement is concluded. Many state
statutes provide that the insolvency clause may permit the reinsurer to
investigate claims against the insolvent ceding company and interpose
any defense or defenses which it may deem to be available to the
ceding company or its liquidator, receiver or statutory successor in the
proceeding where the claim is adjudicated [N.Y. Ins. Law § 1308(a)(3);
40-34
Understanding Reinsurance
40.08
Cal. Ins. Code § 922.2(a)(2)]. Reinsurers should ensure that their
insolvency clauses include this wording.
z Strategic Point — Reinsurer: Many reinsurance contracts include an
offset clause providing for net accounting between the parties [see
§ 40.35 for an example of a typical offset clause]. In addition, a
reinsurer may have a statutory or common law right of set-off (or
offset) against amounts owed to an insolvent insurer’s estate for any
amounts that the insolvent insurer owed to the reinsurer. In the event
of the cedent’s insolvency, an offset clause protects the reinsurer by
allowing it to reduce the sum that would otherwise be payable to the
insolvent estate by the amount it is owed. In the absence of a right of
offset, the reinsurer would be forced to pay claims in full, and it would
possess an independent claim for any premiums or other sums owed
by the cedent (which might be paid at only a fraction of the amount
due given that the cedent is insolvent). Several state insurance statutes
expressly permit set-offs when the insolvent insurer owed the debt
before the date of liquidation and the debts and credits are considered
mutual [Cal. Ins. Code § 1031; Fla. Stat. Ann. § 631.281; N.Y. Ins. Law
§ 7427]. Several courts have held that inclusion of a statutory insolvency clause in the reinsurance contract does not destroy the reinsurer’s right to set-off [Comm’r of Ins. v. Munich Am. Reinsurance Co.,
706 N.E.2d 694, 697 (Mass. 1999); Prudential Reinsurance Co. v.
Superior Court, 842 P.2d 48, 63-64 (Cal. 1992); In re Midland Insurance
Co., 590 N.E.2d 1186, 1192 (N.Y. 1992)]. However, at least one court has
found that the insolvency clause’s directive that reinsurance be
payable without “diminution due to the insolvency of the ceding
insurer” abrogates the reinsurer’s right to offset unpaid premiums
from sums due under the insurer’s policies [Bluewater Ins., Ltd. v.
Balzano, 823 P.2d 1365, 1371-74 (Colo. 1992)]. Another court has
determined that allowing a reinsurer to set-off unpaid premiums
against sums owed the insolvent insurer under the reinsurance
agreement would conflict with the priority of claims established by
state statute and thus, in effect, is a disguished preference in favor of
one creditor (the reinsurer) [Allendale Mut. Ins. Co. v. Melahn, 773 F.
Supp. 1283, 1287-88 (W.D. Mo. 1991) (applying Missouri law)].
t Warning: Reinsurers of insolvent companies must take care to pay
claims to the appropriate party; they are generally obligated to pay the
liquidator administering the insolvent company’s estate, who is
deemed the “statutory successor” to the insolvent insurer [Martin Ins.
Agency, Inc. v. Prudential Reinsurance Co., 910 F.2d 249 (5th Cir. 1990)
(applying Missouri law); Excess & Cas. Reinsurance Ass’n v. Ins.
40-35
40.08
New Appleman Insurance Practice Guide
Comm’r of Cal., 656 F.2d 491 (9th Cir. 1982) (applying California law);
Skandia Am. Reinsurance Corp. v. Schneck, 441 F. Supp. 715 (S.D.N.Y.
1977) (applying New York law)].
Exception: A significant exception to the general rule that the reinsurer
must pay an insolvent cedent’s liquidator occurs when the reinsurance
contract contains a cut-through endorsement, [see § 40.05[2] above for
a discussion of the operation of cut-throughs].
40-36
IV.
CONSIDERING INSURER’S OBLIGATIONS TO REINSURERS IN
CASE OF CLAIM.
40.09 Consider Insurer’s Notice Obligations.
40.09[1] Know What Notice Clause Requires. Most reinsurance con-
tracts include a provision requiring the ceding insurer to notify the
reinsurer of losses or claims that may require the reinsurer to
indemnify the cedent. Notice provisions typically include information sufficient to:
1.
Apprise the reinsurer of potential liabilities to enable it to set
reserves;
2.
Enable the reinsurer to associate in the defense and control of
underlying claims; and
3.
Assist the reinsurer in determining whether and at what price
to renew reinsurance coverage [Unigard Sec. Ins. Co. v. N.
River Ins. Co., 4 F.3d 1049, 1065 (2d Cir. 1993), reh’g denied, 4
Mealey’s Reins. Rep., No. 15, at 7 (1993), aff’d in part and rev’d
in part, 762 F. Supp. 566 (S.D.N.Y. 1991)].
Consider: As a practical matter, the cedent should be mindful of
the need of the reinsurer to provide notice in turn to its retrocessionaires.
Notice requirements may differ with respect to proportional and
non-proportional reinsurance. Proportional contracts sometimes do
not require individual notice of losses, but instead obligate the ceding
insurer to report losses paid and premiums received on a quarterly or
monthly basis, so that accounts between the parties can be settled.
Non-proportional contracts generally include wording requiring
timely notice of individual claims. The wording used to convey this
requirement varies but usually conveys the need to give notice
promptly, immediately or as soon as reasonably possible or practicable. In many reinsurance disputes, industry custom and practice
are often reviewed to determine whether notice was timely. Ceding
insurers should establish standards and procedures to ensure that
notice is given to reinsurers in a timely fashion.
Notice clauses also incorporate varying standards for the event or
occurrence which triggers the requirement to give notice of a loss or
claim. Some of the wording frequently used is as follows:
•
any event or development which, in the judgment of the
40-37
40.09[2]
New Appleman Insurance Practice Guide
reinsured, might result in a claim . . . hereunder
• any occurrence or accident which appears likely to involve
this reinsurance
• any accident in which the reinsurance is or may probably be
involved
• all losses which, in the opinion of the Company, may result in
a claim hereunder
• any occurrence likely to give rise to a claim hereunder; and
• in the event of an accident, disaster, casualty or occurrence
occurring which either results in or appears to be of a serious
nature as probably to result in a loss involving this Agreement.
Other notice clauses include specific or objective standards mandating notice, such as when the cedent’s reserve exceeds a certain
percentage or when particular types of injuries occur. Some notice
clauses require the cedent to inform the reinsurer of significant
developments that arise after initial notice of a claim has been
provided. [For an example of a notice clause requiring notice of
subsequent developments, see § 40.36 below.]
The notice clause sometimes is part of a reports and remittances
clause or is included in the “conditions” section of the reinsurance
contract (though the obligation to provide notice may be considered
to be a covenant rather than a genuine condition of the reinsurer’s
performance).
佡 Cross Reference: One of the primary purposes of the notice
clause is to permit reinsurers to determine whether it is necessary
to take action to protect their interests. Many reinsurance contracts include wording permitting the reinsurer to associate in the
defense of a claim. The claims cooperation wording can be
included in the notice clause or as a separate provision [see § 40.11
below for a discussion of claims control and right to associate
clauses; see § 40.37 below for an example of a notice clause
incorporating the right to associate with the ceding insurer in the
defense of claims].
佡 Cross Reference: For a discussion of the notice requirement in
reinsurance agreements covering environmental business, see
Mitchell L. Lathrop, Insurance Coverage for Environmental
Claims, § 10.06[1].
40.09[2] Reinsurer’s Assertion of Late Notice As Defense to Payment
of Its Reinsurance Obligations.
40-38
Understanding Reinsurance
40.09[2][b]
40.09[2][a] Jurisdictions Requiring Proof of Prejudice. Most courts
have held that a reinsurer may refuse to perform on the basis of
“late” notice only if it shows that it was prejudiced by late notice
of a claim [British Ins. Co. of Cayman v. Safety Nat’l Cas., 335 F.3d
205, 207 (3d Cir. 2003) (interpreting New Jersey law); Zenith Ins.
Co. v. Employers Ins. Co. of Wausau, 141 F.3d 300, 307 (7th Cir.
1998) (applying Wisconsin law); Ins. Co. of Pa. v. Associated Int’l
Ins. Co., 922 F.2d 516, 523-24 (9th Cir. 1991) (applying California
law)]. The particular nuances of late-notice law varies from state to
state. In North Carolina, for example, the reinsurer is required to
prove prejudice only if the cedent first has demonstrated that its
failure to give notice was in good faith [Fortress Re, Inc. v. Central
Nat’l Ins. Co. of Omaha, 766 F.2d 163, 165-67 (4th Cir. 1985)
(applying North Carolina law)]. In Pennsylvania, the reinsurer
must show that it was “unduly” prejudiced by untimely notice of
loss [Life & Health Ins. Co. of Am. v. Fed. Ins. Co. & Great Nat’l Ins.
Co., 1993 U.S. Dist. LEXIS 12165, at *4 (E.D. Pa. 1993) (applying
Pennsylvania law)]. In Connecticut, the cedent has the burden of
showing that the reinsurer suffered no prejudice [Travelers Ins. v.
Central Nat’l Ins. Co. of Omaha, 733 F. Supp. 522, 528 (D. Conn.
1990) (applying Connecticut law)].
Exception: In some jurisdictions, late notice may entitle the
reinsurer to relief without a showing of prejudice if the cedent
acted in bad faith, i.e., was grossly negligent or reckless in
failing to provide notice [Unigard Sec. Ins. Co. v. North River
Ins. Co., 4 F.3d 1049, 1069-70 (2d Cir. 1993) (applying New York
law); Fortress Re Inc. v. Central Nat’l Ins. Co., 766 F.2d 163,
165-66 (4th Cir. 1985) (applying North Carolina law); Certain
Underwriters at Lloyd’s London v. Home Ins. Co., 783 A.2d
238, 240 (N.H. 2001)].
z Strategic Point — Cedent: In some jurisdictions, a reinsurer
may waive its defense of late notice if it fails to object promptly
and specifically [Cal. Ins. Code § 554; Nat’l Am. Ins. Co. v.
Certain Underwriters at Lloyd’s London, 93 F.3d 529, 538 (9th
Cir. 1996); Michigan Twp. Participating Plan v. Fed. Ins. Co.,
292 N.W.2d 760, 767 (Mich. Ct. App. 1999)].
40.09[2][b] Jurisdictions Recognizing Late Notice As Defense Regardless of Ability to Prove Prejudice. Some courts have determined
that breach of a notice provision is a complete bar to recovery,
without a showing of prejudice [Liberty Mut. Ins. Co. v. Gibbs, 773
40-39
40.10[1]
New Appleman Insurance Practice Guide
F.2d 15, 18-19 (1st Cir. 1985) (applying Massachusetts law); Allstate
Ins. Co. v. Employers Reinsurance Corp., 441 F. Supp. 2d 865, 875
(N.D. Ill. 2005), citing INA Ins. Co. of Ill. v. City of Chi., 379 N.E.2d
34, 36 (Ill. App. Ct. 1978) (applying Illinois law); Highlands Ins. Co.
v. Employers’ Surplus Lines Ins. Co., 497 F. Supp. 169, 171-73 (E.D.
La. 1980) (applying Texas law)]. These cases thus construe the
notice provision as a condition precedent to performance.
Exception: The Ninth Circuit has stated that, even where notice
is denominated a condition precedent, the reinsurer still must
demonstrate prejudice to be relieved of liability [Nat’l Am. Ins.
Co. v. Certain Underwriters at Lloyd’s London, 93 F.3d 529, 539
(9th Cir. 1996) (applying California law)].
佡 Cross Reference: For a discussion of reinsurance cases considering late notice defenses and what constitutes prejudice to
a reinsurer from late notice, see Eric Mills Holmes, Appleman
on Insurance 2d § 105.7.
40.10 Consider Reinsurer’s Right to Access Insurer’s Records.
40.10[1] Consider What Access to Records Clause Requires to Be Made
Available to Reinsurer. Most reinsurance contracts include a provision
granting the reinsurer the right to inspect or audit the ceding
insurer’s books and records. This clause might be called “Access to
Records,” “Inspection of Records” or simply “Audit.” The right to
audit or inspect is important to the reinsurer, as the nature of
reinsurance dictates that the cedent maintain all of the information
about the business written and the claims made. The inspection
clause allows the reinsurer to evaluate the performance of the
reinsurance contract, specifically, what business the reinsured is
underwriting, how it is handling claims and whether they are
covered by the reinsurance agreement. Access to documents enables
the reinsurer to determine whether the cedent acted reasonably and
in good faith in handling underlying claims and in settling and
ceding claims to the reinsurer. Some inspection clauses provide
access to claims files only.
Reinsurers may choose to inspect cedents’ records on a regular basis.
Requests for inspections or audits also may arise in the following
circumstances: in preparation for the annual renewal of a reinsurance
contract; when there is a change in the loss reporting pattern; when
the cedent has not provided sufficient information in presenting
losses; when there is a marked change in premium volume; or when
40-40
Understanding Reinsurance
40.10[1]
there is another unusual event regarding either the claims or
underwriting/premium activity. Reinsurers also often seek audits or
inspection when cedents enter run-off or exit certain business sectors.
The right of inspection is as broad or narrow as the particular contract
wording provides. A typical inspection or audit clause defines
broadly the records to which the reinsurer is entitled; clauses
enabling the reinsurer to review “all documents referring to the
business” under the reinsurance agreement or “any records relating
to this reinsurance or claims in connection therewith” are common.
Access often is provided to the reinsurer and its authorized representatives, allowing the use of consultants to conduct inspections.
Use of consultants to assist in audits has become increasingly
common as the magnitude and complexity of claims, especially in
long-tail casualty lines, have caused reinsurers to engage independent auditors or consultants to perform records inspections. Access
usually is permitted at all reasonable times and is typically provided
where the records are normally kept.
Documents typically requested by reinsurers during claims inspections include the following:
1.
The claims register;
2.
Claims bordereaux (i.e., summaries);
3.
Selected underlying claims files; and
4.
Inspection reports on claims handling facilities.
Documents typically sought during underwriting and financial audits or inspections include the following:
1.
Basic underwriting information for the direct insurance, including the name of the insured, insured’s location, policy
number and period, limits of liability, name of underwriter
and underwriting analysis, broker, type of coverage and policy
provisions;
2.
Premium information;
3.
Documentation regarding brokers, third-party administrators
and delegations of underwriting authority;
4.
Reinsurance contract wording, underwriting guidelines,
evaluation of risks, negotiation files; and
5.
Accounting files showing cessions of premiums and losses.
A frequent inspection-related issue is the impasse that occurs when a
40-41
New Appleman Insurance Practice Guide
40.10[1]
reinsurer’s claim payments are delinquent and it has demanded an
audit to verify the claims’ validity. The cedent may then refuse to
allow the audit until the claims are paid; as a result, each party claims
the other has breached the contract and thus the obligation to
perform is suspended until the prior breach is remedied. Arbitration
panels usually elide this dilemma by ordering an inspection or audit
as a part of discovery. In one case, a court ordered a reinsurer to make
its payments current, despite the reinsurer’s complaint that the
cedent had refused it access to records regarding one of the treaties at
issue. The court found the cedent’s insistence that payment be
current before access to records was permitted to be “commercially
reasonable” given the reinsurer’s failure to object to the cedent’s
statement of account or pay them. The reinsurer was ordered “to
prove the sort of mistakes cognizable in law to support an adjustment
of the stated account” or to pay the claim [Am. Home Assurance Co.
v. Instituto Nacional de Reaseguros, 1991 U.S. Dist. LEXIS 501, at *11
(S.D.N.Y. 1991)]. This decision may be limited by the specific facts of
this reinsurance relationship.
佡 Cross Reference: For an example of a typical access to records
clause in a reinsurance agreement, see § 40.39 below.
佡 Cross Reference: For additional examples of inspection clauses,
see Eric Mills Holmes, Appleman on Insurance 2d § 106.4[A].
z Strategic Point — Reinsurer: Reinsurance agreements should be
drafted with an Access to Records clause allowing the reinsurer
the right to examine the books and records of the ceding insurer
that relate to the reinsurance. The clause should include the
following provisions:
1.
The reinsurer has the right to inspect all books and
documents relating to business ceded to the reinsurer
under the reinsurance agreement;
2.
The right of inspection survives contract termination;
3.
The inspection right vests in the reinsurer or in any of its
authorized representatives; and
4.
Access for inspection will be allowed at all reasonable
times.
Exception: A federal court affirmed an arbitration panel’s finding
that, even in the absence of an audit or inspection clause, the
cedent is obligated to furnish information reasonably requested
40-42
Understanding Reinsurance
40.10[1]
by the reinsurer. The panel had denied recovery to the cedent
after it failed to support its reinsurance claim with sufficient
information [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d
826, 832 (9th Cir. 1995)]. At least one commentator has expressed
the view that access to records is so vital to the reinsurance
relationship that it constitutes an implied right of the reinsurer in
the absence of express wording [Robert W. Hammesfahr & Scott
W. Wright, The Law of Reinsurance Claims 6.4 (1994)].
t Warning: A reinsurer’s failure to exercise the right of inspection
may have a negative impact in a later dispute with its cedent. One
court found a reinsurer’s fraudulent concealment claim “untenable” in the light of the reinsurance contract’s inclusion of a
typical access to records clause. The court explained that the
absence of any indication that the cedent failed to honor the
access to records provision defeated the fraudulent concealment
claim [Gerling Global Reinsurance Corp. v. Safety Mut. Cas.
Corp., 1981 U.S. Dist. LEXIS 13864, at * 7 (S.D.N.Y. Aug. 7, 1981)].
z Strategic Point — Cedent: To the extent possible, cedents should
develop a policy regarding the privileged information they will
or will not disclose to their reinsurers. Some courts have found
that coverage opinions prepared by cedent’s counsel and other
privileged materials that are shared with reinsurers lose their
privileged status and therefore must be disclosed to policyholders
in direct insurance coverage litigation (at least where there is a
conflict between the cedent and the reinsurer) [see § 40.10[2]
below discussing the cedent’s dilemma in providing privileged
documents to its reinsurer].
Consider: While reinsurers can enforce the right to inspection
through arbitration or, if the contract does not include an arbitration clause, through a lawsuit, at least one court has held that
allowing the reinsurer to inspect is not a condition precedent to
the right to arbitrate. The court granted the cedent’s petition to
compel arbitration despite its refusal to allow the reinsurer access
to its records [Phila. Reinsurance Corp. v. Universale Ruckversicherungs A.G., 1994 U.S. Dist. LEXIS 56, at *1 (S.D.N.Y. Jan. 5,
1994)].
佡 Cross Reference: The inspection and audit provision is often
included within the claims cooperation clause of the reinsurance
contract. For a discussion of claims cooperation or control (and
40-43
40.10[2][a]
New Appleman Insurance Practice Guide
right to associate) clauses in reinsurance contracts, see § 40.11
below.
Consider: Cedents often ask reinsurers to sign confidentiality
agreements before permitting access to records. While there do
not appear to be any published decisions on this issue, it is likely
that courts or arbitration panels would permit cedents to condition inspections in this manner. Arbitrators have demonstrated a
general trend towards imposing confidentiality on the parties
beyond that strictly provided in the reinsurance contract. For
example, arbitrators may order the parties to treat the entire
arbitration process, not just the outcome, as confidential. A
reinsurer that objects to executing a reasonable confidentiality
agreement pertaining to the inspection of records may risk
alienating the adjudicators.
佡 Cross Reference: See § 40.10[2][f] below for a discussion of the
use of confidentiality agreements to protect a cedent’s privileged
documents.
佡 Cross Reference: For an example of a clause requiring confiden-
tiality that can be added to or used in conjunction with an access
to records provision, see § 40.40 below.
40.10[2] Consider Whether Insurer’s Disclosure of Privileged
Documents to Its Reinsurer Constitutes Waiver As to Third
Parties, Including Its Insureds.
40.10[2][a] Common Interest Doctrine. There is no cedent-reinsurer
privilege, so whether the disclosure of otherwise privileged materials from one party to the other waives the privilege is determined
by ordinary principles of privilege law, considered in the light of
the nature of the relationship between the parties and the circumstances that exist at the time of disclosure. Thus, a cedent will be
able to disclose its privileged communications to a reinsurer
without waiving the right to assert its privilege as to other parties
(including its insureds), depending on the nature of the cedent/
reinsurer relationship, specifically, whether the cedent and reinsurer had a “common interest” when the disclosure was made.
(The question of nonwaiver of privilege is separate from the
question whether the cedent is required to share privileged communications with the reinsurer.) The “common interest” doctrine is
an exception to the general rule that disclosure of a privileged
communication to a third party who is not an agent or employee of
40-44
Understanding Reinsurance
40.10[2][b]
counsel waives any privilege that otherwise would apply to the
communication. It is most often used as a “shield,” enabling
parties with a common interest to share privileged information
without waiving privilege against a third party. The common
interest doctrine is most commonly recognized when multiple
parties are represented by the same attorney. Communications
made to the shared attorney to establish a litigation strategy are
privileged as against all others, although not privileged inter sese
[N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 366
(D.N.J. 1992), aff’d in part and rev’d in part on other grounds, N. River
Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995)]. The
doctrine has been extended to situations where the parties are
represented by separate counsel but are engaged in a common
legal enterprise or share an identical legal interest with respect to
the subject matter of a communication between an attorney and
client pertaining to legal advice. The doctrine is not applicable,
however, when the parties’ shared interests are only commercial
[Blanchard v. Edgemark Fin. Corp., 192 F.R.D. 233, 237 (N.D. Ill.
2000); Aetna Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s
London, 676 N.Y.S.2d 727, 731-34 (N.Y. Sup. Ct. 1998)].
40.10[2][b] Disclosure Made Prior To Insurance Coverage Litigation.
Cedents and reinsurers that have shared privileged materials
sometimes argue that their “common interest” in the outcome of a
coverage claim should avoid a waiver of the privilege as against
the insured. Where coverage opinions and other privileged materials are generated prior to a reservation of rights or denial of claim
by the insurer or in the absence of the anticipation of a direct
coverage dispute, courts often reject assertion of the common
interest doctrine and find a waiver of privilege when the cedent
has disclosed the materials to its reinsurer. The rationale for this
result is in part that the motivation of the cedent to provide the
coverage opinion is to induce the reinsurer to perform under its
contract rather than to coordinate common legal strategy.
Example: A court found that coverage opinions disclosed by a
cedent to its reinsurer were not protected by the attorney-client
privilege or the work product doctrine but that even if they had
been privileged, the common interest doctrine did not apply
because: (i) there was no evidence that the documents were
disclosed in anticipation of litigation; (ii) any common interest
was commercial and not legal; and (iii) the disclosures were
made in the ordinary course of business [Allendale Mut. Ins.
40-45
40.10[2][b]
New Appleman Insurance Practice Guide
Co. v. Bull Data Sys., Inc., 152 F.R.D. 132, 141 (N.D. Ill. 1993)].
Example: In a case involving a cedent’s demand for discovery
from a group of reinsurers, a court refused to find a common
legal interest among the reinsurers sufficient to avoid waiver of
attorney-client privilege, where the parties were not in litigation and the reinsurers’ common interests were purely commercial [Aetna Cas. & Sur. Co. v. Certain Underwriters at
Lloyd’s London, 676 N.Y.S.2d 727, 731-34 (N.Y. Sup. Ct. 1998)].
Example: Even where a reinsurer had anticipated that coverage
litigation would arise from a large policyholder claim, the court
refused to recognize a common interest between the ceding
insurer and the reinsurer and found that the attorney-client
privilege had been waived by the disclosure of documents
[Am. Prot. Ins. Co. v. MGM Grand Hotel — Las Vegas, 1983
U.S. Dist. LEXIS 16423, at *15 (D. Nev. June 9, 1983)].
Example: A cedent’s production of documents to its reinsurer
waived any applicable privileges as “the relationship between
insurer and reinsurer is simply not sufficient” to invoke the
common interest doctrine [McLean v. Cont’l Cas. Co., 1996 U.S.
Dist. LEXIS 17503, at *2 (S.D.N.Y. 1996)].
Exception: A court refused to find waiver of privilege based on
the reinsurer’s need to review the cedent’s documents to
determine the extent of its reinsurance exposure [Great Am.
Surplus Lines Ins. Co. v. Ace Oil Co., 120 F.R.D. 533, 538-39
(E.D. Cal. 1988)].
z Strategic Point — Reinsurer: It is in both the cedent’s and the
reinsurer’s best interests to minimize the risk that a policyholder might gain access to privileged information, especially
that which reveals the strategies and thought processes of the
cedent and its counsel in evaluating and litigating a policyholder’s claim. Thus, the reinsurer’s requests for privileged
information from a cedent should be made carefully, regardless
of whether the reinsurer believes it is entitled to the information or whether the cedent has customarily provided it.
z Strategic Point — Cedent: Given the inconsistent views of
courts considering the applicability of the common interest
doctrine, a cedent that discloses privileged communications to
a reinsurer risks a later finding that it has waived its privileges.
40-46
Understanding Reinsurance
40.10[2][b]
The outcome of a privilege dispute also may depend on the
particular jurisdiction or the forum within the jurisdiction at
the time of disclosure. Cedents that wish to avoid waiver of
privilege as against their policyholders by disclosing privileged materials to their reinsurers may consider taking the
following measures (which may or may not be successful):
1.
Try to establish the foundation for assertion of the
common interest doctrine by expressly stating in the
reinsurance contract that the parties share a common
interest and do not intend the sharing of privileged
documents to waive any applicable privileges or protections.
2.
Consider whether disclosure of privileged information
to the reinsurer is really necessary. For example, the facts
necessary for a reinsurer to evaluate a settlement can be
provided through means other than the disclosure of
privileged materials;
If disclosure must occur, enter into a confidentiality or
common interest agreement that acknowledges a common interest between the cedent and reinsurer, restricts
further disclosure of the material and endeavors to
preserve all applicable privileges or immunities against
disclosure [see § 40.10[2][f] for a discussion of the use
and efficacy of confidentiality and common interest
agreements];
3.
4.
If litigation or arbitration between the cedent and the
reinsurer is already in progress, obtain a protective order
that seeks to preserve privileges and immunities against
waiver and includes a ruling that the parties have a
common interest requiring the cedent to produce the
documents. An order finding common interest might
bolster the assertion of privilege against a claim of
waiver in a subsequent dispute between the cedent and
a policyholder.
佡 Cross Reference: For a discussion of cases considering the
availability of protection for privileged or confidential information provided by a cedent to its reinsurer, see Mitchell L
Lathrop, Insurance Coverage for Environmental Claims
§ 10.06[4][c].
z Strategic Point: Cedents and reinsurers invoking the com-
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40.10[2][c]
New Appleman Insurance Practice Guide
mon interest doctrine to avoid waiver of privilege as against a
policyholder cannot later assert the privilege against each other
if their interests become adverse [N. River Ins. Co. v. Phila.
Reinsurance Corp., 797 F. Supp. 363, 366 (D.N.J. 1992)]. This can
be an advantage or a disadvantage in a subsequent dispute
over reinsurance payment, depending on the content of the
privileged material.
40.10[2][c] Disclosure Made During Course of Insurance Coverage
Litigation. The majority of courts that have addressed the issue
have determined that a cedent’s disclosure of privileged documents and communications to a reinsurer during the course of
insurance coverage litigation does not constitute a waiver of the
attorney-client privilege. This determination is based on the theory
that the cedent and its reinsurer share a “common interest” in the
outcome of the coverage litigation [Minn. Sch. Bds. Ass’n Trust v.
Employers Ins. Co. of Wausau, 183 F.R.D. 627, 632 (N.D. Ill. 1999);
U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS
8280, at *6-7 (S.D.N.Y. 1989); Great Am. Surplus Lines Ins. Co. v.
Ace Oil Co., 120 F.R.D. 533, 537-38 (E.D. Cal. 1988)]. The fact that
the reinsurer is not a party defendant is of little significance. Some
courts have emphasized the cedent’s obligation to keep its reinsurer apprised of the status of the coverage dispute and the
necessity of disclosure — particularly where such disclosure is
made pursuant to an inspection or cooperation clause. The doctrine was similarly applied to preclude waiver of privilege as
against an excess insurer overlying the cedent, where the cedent
had disclosed a memorandum to its reinsurer [U.S. Fire Ins. Co. v.
Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280, at *6-8
(S.D.N.Y. 1989)] and as against a reinsurer, where the insurer had
disclosed privileged material to another reinsurer [Employer Reinsurance Corp. v. Laurier Indem. Co., 2006 U.S. Dist. LEXIS 10943,
at *6 (M.D. Fla. 2006)]. In most circumstances, the involvement of
a broker as a conduit for disclosure of privileged information does
not by itself effect a waiver [see Minn. Sch. Bds. Ass’n Ins. Trust v.
Employers Ins. Co. of Wausau, 183 F.R.D. 627, 631 (N.D. Ill. 1999);
U.S. Fire Insurance Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist.
LEXIS 8280, at *4-7 (S.D.N.Y. July 19, 1989); but see U.S. v. Pepper’s
Steel & Alloys, Inc., 1991 U.S. Dist. LEXIS 21563, at *8-10 (S.D. Fla.
1991)].
Exception: A court found that there was no “unity of interest”
protecting from disclosure correspondence between an insurer
40-48
Understanding Reinsurance
40.10[2][e]
and reinsurer regarding an insured’s claim that had ripened
into litigation. Although their commercial interests coincided
to some extent, the insurer failed to establish that it coordinated
legal strategy with its reinsurer [Reliance Ins. Co. v. Am. Lintex
Corp., 2001 U.S. Dist. LEXIS 7140, at *10-11 (S.D.N.Y. 2001)].
40.10[2][d] Disclosure Made After Resolution of Insurance Coverage
Litigation But Prior to Institution of Arbitration or Litigation Between
Cedent And Reinsurer. When a cedent wishes to disclose privileged
information to its reinsurer after settlement or adjudication of an
underlying coverage action, but prior to the institution of arbitration or litigation against the reinsurer (perhaps in an effort to
persuade the reinsurer of the legitimacy of the ceded losses and to
avoid a reinsurance dispute), it is unclear whether the common
interest doctrine will apply. At least one court has declared that a
cedent’s disclosure to its reinsurer is not in furtherance of a
“common interest” where disclosed after settlement with the
insured but prior to litigation/arbitration between the cedent and
reinsurer. As the court explained:
North River and CIGNA had no common legal interest. On the
contrary, their interests . . . were antagonistic. In the process of seeking
payment from CIGNA under their reinsurance contract, North River
provided the [privileged memos], apparently hoping that CIGNA
would be persuaded to pay. It was not, and litigation ensued. At no
point did North River and CIGNA engage in a common legal enterprise, and the common interest doctrine therefore does not apply”
[North River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at
*22-23 (S.D.N.Y. 1995)].
40.10[2][e] Disclosure Made During Course of Reinsurance Litigation.
When a cedent voluntarily discloses privileged communications to
a reinsurer during the course of a dispute involving a claim for
reinsurance, it may not have the ability to assert the common
interest doctrine to protect against the assertion that the privilege
has been waived. A case where a reinsurer attempted to compel
production of its cedent’s privileged documents by arguing that
the parties had a common interest sheds some light on the issue. In
that case, the court rejected the common interest argument, finding
that “[t]he interests of the ceding insurer and the reinsurer may be
antagonistic in some respects and compatible in others. Thus, a
common interest cannot be assumed merely on the basis of the
status of the parties” [N. River Ins. Co. v. Columbia Cas. Co., No.
90 Civ. 2518 (MLJ), 1995 U.S. Dist. LEXIS 53, at *12 (S.D.N.Y. Jan. 5,
1995)]. The court added: “[w]hile their commercial interests coin40-49
40.10[2][f]
New Appleman Insurance Practice Guide
cided to some extent, their legal interests sometimes diverge, as
demonstrated by the instant litigation. In short [the reinsurer’s]
only argument for finding a common interest is that the two parties
stand in the relation of reinsurer to ceding insurer, and that is
insufficient” [id. at 15].
40.10[2][f] Use of Confidentiality and Common Interest Agreements.
A cedent that discloses privileged materials to its reinsurer risks
waiving the privilege as against its policyholders, unless it can
demonstrate a common interest between the cedent and reinsurer
that avoids the waiver [see § 40.10[2][b] above discussing application of the common interest doctrine to the reinsurance relationship]. Courts have inconsistently recognized a common interest
between cedents and reinsurers, and the outcome of a waiver
dispute may depend on the reinsurer/cedent relationship at the
time of disclosure. Cedents and reinsurers that wish to avoid a
waiver of privilege can execute confidentiality or common interest
agreements to try to preserve applicable privileges or immunities
against disclosure or, more precisely, to indicate the factual circumstances and understandings that exist at the time of disclosure.
A demonstration through an agreement that the cedent and
reinsurer mutually intended to respect and maintain the confidentiality of privileged documents may persuade a court that the
privilege and work product protection should be maintained as
against a policyholder who is using the fact of disclosure to gain
access to documents to which it ordinarily would not be entitled.
A confidentiality agreement may not, however, provide full protection against a claim for disclosure. Put differently, a confidentiality or common interest agreement does not create a privilege;
rather, it confirms the underlying circumstances at the time of
disclosure so as to confirm the lack of any intention to effect a
waiver as against third parties.
Thus, a common interest (or joint defense) agreement may provide
waiver protection by laying out the bases for the existence of a
common interest between the cedent and its reinsurer. This may
better the parties’ position if a waiver claim is later asserted. A
well-drafted common interest agreement may convince a court
that the parties have carefully considered the waiver issue and
intended to protect against further disclosure.
Examples — Waiver: A court allowing disclosure despite the
existence of a confidentiality agreement reasoned that: “[t]he
agreement does not alter the objective fact that the confidenti40-50
Understanding Reinsurance
40.10[2][f]
ality has been breached voluntarily . . . The agreement is
merely a contract between two parties to refrain from raising
the issue of waiver or from otherwise utilizing the information
disclosed. Plaintiff has no genuine claim of confidentiality to
the documents it produced . . . .” [Chubb Integrated Sys. Ltd.
v. Nat’l Bank of Wash., 103 F.R.D. 52, 67-68 (D.D.C. 1984)].
Another court, refusing to find a common interest precluding
waiver, explained that: “[a] private agreement by the parties to
protect communications cannot create a privilege” [Aetna Cas.
& Sur. Co. v. Certain Underwriters at Lloyd’s London, 676
N.Y.S.2d 727, 733 (N.Y. Sup. Ct. 1998)].
Examples — No waiver: One court found that disclosure to a
party pursuant to a confidentiality agreement did not substantially increase the opportunity for an adversary to obtain the
document and therefore did not constitute waiver of work
product protection, although the court did not determine
whether the common interest doctrine actually applied [BASF
Aktiengesellschaft v. Reilly Indus., 2004 U.S. Dist. LEXIS 21969,
at *13 (S.D. Ind. Oct. 19, 2004)]. Another court similarly found
that, “while not dispositive,” disclosure pursuant to a confidentiality agreement militated against a finding of waiver of
work product protection [SmithKline Beecham Corp. v. Pentech Pharm., Inc., 2001 U.S. Dist. LEXIS 18281, at *15-16 (N.D.
Ill. 2001)]. A court considering the confidential exchange of
legal advice and information pursuant to a cross-consultation
agreement among insurance companies and Lloyd’s syndicates
determined that the parties shared a common interest sufficient
to preclude waiver of attorney-client privilege and that it was
clear they shared the expectation that their communications
would remain confidential [Travelers Cas. & Sur. Co. v. Excess
Ins. Co., Ltd., 197 F.R.D. 601, 607 (S.D. Ohio 2000)].
z Strategic Point — Cedent: A confidentiality or common inter-
est agreement may be particularly helpful in maintaining
protection under the work product doctrine, which could
apply to many of the disclosed documents. While courts have
often taken a stricter view of the attorney-client privilege and
have been quick to find a waiver where the confidentiality that
the privilege protects has been breached, courts applying the
work product immunity generally have been more tolerant of
disclosure to third parties. The work product immunity will
not be deemed waived “unless the disclosure is inconsistent
40-51
New Appleman Insurance Practice Guide
40.10[3][a]
with maintaining secrecy from possible adversaries” [U.S. Fire
Ins. Co. v. Gen. Reinsurance Corp., 1989 U.S. Dist. LEXIS 8280,
at *7 (S.D.N.Y. July 20, 1989) (citation omitted); Mitchell L.
Lathrop, Insurance Coverage for Environmental Claims
§ 25.04]. The analysis should “focus on whether the disclosures
in issue increased the likelihood that a current or potential
opponent in litigation would gain access to the disputed
documents” [In re Imperial Corp. of Am. v. Shields, 167 F.R.D.
447, 454 (S.D. Cal. 1995), aff’d on subsequent appeal, 92 F.3d 1503
(9th Cir. 1996)]. In some circumstances, a cedent should be able
to argue that disclosure of work product material to a reinsurer
under the auspices of a confidentiality agreement has not
increased the likelihood that a current or potential opponent in
litigation (i.e., a policyholder) would gain access to the disputed documents.
40.10[3] Consider Reinsurer’s Ability to Compel Production of Cedent’s
Privileged Documents.
40.10[3][a] Consider Whether Inclusion of Access to Records Clause
Constitutes Waiver. In some circumstances, a ceding insurer may
wish to withhold privileged documents from a reinsurer, perhaps
to avoid a potential waiver of privilege which would obligate the
cedent to provide the documents to its insured. A frequently raised
issue is the extent to which access-to-records clauses allow reinsurers to compel production of documents contained in the
cedent’s files that are subject to attorney-client privilege or work
product protection. Several types of documents in a ceding insurer’s files could be subject to privilege or immunity as against the
reinsurer, including:
1.
Claims counsel reports regarding the defense of policyholders;
2.
Expert reports or analyses of a claim by the insurer’s or
insured’s personnel concerning the defense of a claim;
3.
Coverage analyses by the cedent’s in-house or outside
counsel; and
4.
Draft pleadings and communications with counsel regarding those pleadings.
Nevertheless, reinsurers may have a legitimate interest in reviewing such documents. However, the courts that have addressed the
interplay between the contractual obligation to permit inspection
40-52
Understanding Reinsurance
40.10[3][b]
and claims of privilege or work product protection have found that
the mere inclusion of “access to records” and “cooperation”
clauses in reinsurance contracts do waive the cedent’s privilege as
against the reinsurer [N. River Ins. Co. v. Phila. Reinsurance Corp.,
797 F. Supp. 363, 369 (D.N.J. 1992), aff’d in part and rev’d in part on
other grounds, N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d
1194 (3d Cir. 1995); Gulf Ins. Co. v. Transatlantic Reinsurance Co.,
788 N.Y.S.2d 44, 45-46 (N.Y. App. Div. 2004)]. As one court
explained: “Although a reinsured may contractually be bound to
provide its reinsurer with all documents or information in its
possession that may be relevant to the underlying claim adjustment and coverage determination, absent more explicit language,
it does not through a cooperation [or inspection] clause give up
wholesale its right to preserve the confidentiality of any consultation it may have with its attorney concerning the underlying claim
and its coverage determination” [N. River Ins. Co. v. Phila.
Reinsurance Corp., 797 F. Supp. at 369]. Another court reasoned
that the access to records and cooperation clauses do not waive
privilege because the cedent’s obligations under these provisions
end when the cedent and reinsurer become adversaries [U.S. Fire
Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug.
7, 1992), reported in Mealey’s Litigation Reports: Reinsurance, Vol.
4, No. 4 at F-2].
40.10[3][b] Know When Privileged Documents Are “In Issue” Therefore Requiring Production by Cedent. Some reinsurers seeking access
to privileged documents under an inspection clause have argued
that the cedent waived any applicable privileges by putting the
subject matter of the documents in issue in the dispute between the
parties. The “in issue” or “at issue” exception to the attorney-client
privilege applies when a party asserts a claim or defense that he
intends to prove by use of the privileged materials [N. River Ins.
Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at *17 (S.D.N.Y.
1995)]. Often, the “in issue” exception is an application of waiver
principles, where the courts find that the party intending to rely on
privileged materials to prove its claim or defense implicitly waives
the privilege. (The question of the scope of that waiver is tethered
to the offer of proof the party relying on the privileged materials
intends to make.) In the majority of the reported decisions considering the “in issue” exception in the context of a reinsurance
dispute, courts have determined that the “in issue” exception has
not applied. [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist.
LEXIS 53, at *16-17 (S.D.N.Y. 1995); N. River Ins. Co. v. Phila.
40-53
40.10[3][b]
New Appleman Insurance Practice Guide
Reinsurance Corp., 797 F. Supp. at 370-71; U.S. Fire Ins. Co. v.
Phoenix Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992),
reported in Mealey’s Litigation Reports: Reinsurance, Vol. 4, No. 4 at
F-2]. Several courts have reasoned that merely placing the broad
question of coverage in issue is insufficient to constitute a waiver of
the privilege [N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S.
Dist. LEXIS 53, at *17; N. River Ins. Co. v. Phila. Reinsurance Corp.,
797 F. Supp. at 370-71].
It should be noted, however, that in a recent decision a court did
find a limited waiver based on the “in issue” doctrine. In American
Re-Insurance Co. v. United States Fid. & Guar. Co. [No. 604517/02
(N.Y. Sup., App. Div., 1st Dept. May 29, 2007), reported in Mealey’s
Litigation Reports: Reinsurance, Vol. 18, No. 3 at B-1], the court
ruled that a cedent waived attorney-client privilege when its
reinsurance director responsible for preparing the bill to the
reinsurers testified during a deposition that in preparing the bill he
sought guidance from an in-house attorney who explained to him
that the settlement of the insured’s claim was based on California’s
“all sums” and “non-accumulation” rules. The court ruled that the
reinsurers were entitled to seek further testimony and the production of documents regarding the presentation of the reinsurance
claim to the extent that such discovery related to the disclosures
made by the reinsurance director during his deposition.
Example: A cedent refused to produce privileged documents
that revealed its internal legal assessments of the claims for
which it was requesting reinsurance payment in a reinsurance
arbitration. Although the arbitration panel ordered the cedent
to produce the documents and warned that it would draw
whatever negative inference it deemed appropriate from a
failure to produce, after the cedent refused to produce the
material (on the basis that it wished to avoid waiver of
privilege in future dealings with its insureds) the panel ordered
the reinsurer to pay the balance owed. The reinsurer’s motion
to vacate the panel’s order was denied [Nat’l Cas. Co. v. First
State Ins. Group, 430 F.3d 492, 494-97 (1st Cir. 2005)].
Exception — Notice Condition Precedent to Coverage: In a direct
insurance coverage dispute where timely notice was a condition precedent to coverage, a court found that, by seeking
coverage, the insured put “in issue” its knowledge regarding
its potential liability to the claimant and regarding its notice
40-54
Understanding Reinsurance
40.10[3][c]
obligations. The court emphasized that the insured had the
burden to prove that notice was timely, and therefore it had
impliedly waived the attorney-client privilege as to communications with its attorney relevant to knowledge of its potential
liability [Century 21, Inc. v. Diamond State Ins. Co., 2006 U.S.
Dist. LEXIS 56733, at *5-10 (S.D.N.Y. 2006)].
40.10[3][c] Consider Application of Common Interest Doctrine to
Compel Production of Cedent’s Privileged Documents.
40.10[3][c][i] Prior to Dispute Between Cedent and Reinsurer. Re-
insurers have tried to use the common interest doctrine as a
“sword” — to gain access to a privileged materials over its
cedent’s objection. It is unclear whether courts will find that a
common interest exists if the parties are not involved in a legal
dispute. In many of the cases finding common interest protection as against the policyholder [see § 40.10[2][c] above], the
cedents and reinsurers were found to be united in interest due to
the cedent’s involvement in coverage litigation at the time of
disclosure. In contrast, in the few reported cases rejecting
common interest claims by reinsurers, the interests between
cedents and reinsurers were already adverse [see § 40.10[3][c][ii]
below]. The absence of an adversarial relationship between
cedent and reinsurer may not guarantee a common interest
forcing disclosure, however. At least one court has advised that
a cedent’s disclosure to its reinsurer was not in furtherance of a
“common interest” at the time the cedent sought payment under
the reinsurance contract and before there was a legal dispute [N.
River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53, at
*15 (S.D.N.Y. 1995)]. In another case, the court ordered disclosure of allegedly privileged documents to a policyholder based
on the cedent’s disclosure to a reinsurer, when there was no
indication as to whether the reinsurer/cedent relationship was
adversarial at the time of disclosure [McLean v. Cont’l Cas. Co.,
1996 U.S. Dist. LEXIS 17503, at *2 (S.D.N.Y. 1996)]. In addition,
one court has gone so far as to reject the theory that a common
interest ever exists between cedent and reinsurer, even at the
pre-dispute stage, stating that “the common interest doctrine is
completely unlashed from its moorings in traditional privilege
law when it is held broadly to apply in contexts other than when
there is dual representation” [N. River Ins. Co. v. Phila. Reinsurance Corp., 797 F. Supp. 363, 367 (D.N.J. 1992) aff’d in part and
rev’d in part on other grounds, N. River Ins. Co. v. CIGNA
40-55
40.10[4]
New Appleman Insurance Practice Guide
Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995)].
40.10[3][c][ii] During Reinsurance Dispute Between Cedent and
Reinsurer. In general, reliance on the purported “common inter-
est” between parties at odds with each other is not a sound basis
to predicate the compelled disclosure of privileged communications. In the courts, reinsurers seeking privileged documents
under the common interest doctrine have been unsuccessful
when the parties are already embroiled in a reinsurance dispute
[N. River Ins. Co. v. Columbia Cas. Co., 1995 U.S. Dist. LEXIS 53,
at *5-15 (S.D.N.Y. 1995); N. River Ins. Co. v. Phila. Reinsurance
Corp., 797 F. Supp. 363, 366-68 (D.N.J. 1992) aff’d in part and rev’d
in part on other grounds, N. River Ins. Co. v. CIGNA Reinsurance
Co., 52 F.3d 1194 (3d Cir. 1995); U.S. Fire Ins. Co. v. Phoenix
Assurance Co., No. 7712/91 (N.Y. Sup. Ct. Aug. 7, 1992), reported
in Mealey’s Litigation Reports: Reinsurance, Vol. 4 No. 4 at F-2].
Reinsurers may be less likely to obtain a cedent’s privileged
documents during reinsurance litigation because the reinsurer’s
alleged breach of the reinsurance agreement suspends the
cedent’s disclosure obligations pursuant to the inspection clause
[U.S. Fire Ins. Co. v. Phoenix Assurance Co., No. 7712/91 (N.Y.
Sup. Ct. Aug. 7, 1992), reported in Mealey’s Litigation Reports:
Reinsurance, Vol. 4 No. 4 at F-1].
Reinsurers are more likely to obtain a cedent’s privileged
documents regarding the underlying claim in arbitrations, however, where arbitrators can more easily impose confidentiality
restrictions and are not bound to follow strict rules of law or
evidence. In all likelihood, if the Panel orders disclosure in a
confidential proceeding over the cedent’s objection, that should
not waive privilege vis-a-vis others.
40.10[4] Understand When Insured Is Entitled to Discover Its Insurer’s
Reinsurance Information. Policyholders often seek access to correspon-
dence, reports, agreements and other materials exchanged between
the cedent and its reinsurer which may or may not otherwise be
subject to protection by the attorney-client privilege or the work
product doctrine. In some instances, policyholders hope to
strengthen coverage claims by finding admissions or inconsistencies
in these materials. Ceding insurers typically oppose requests for
reinsurance information by arguing that it is not relevant to the
underlying coverage dispute or that the information is confidential
and proprietary.
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Understanding Reinsurance
40.10[4]
A majority of courts have held that the existence of reinsurance
agreements and the terms of coverage are relevant to insurance
coverage disputes and therefore discoverable. Many of these decisions are premised on the disclosure mandated by Rule 26(a)(1)(D) of
the Federal Rules of Civil Procedure, which states that “a party shall,
without awaiting a discovery request, provide to other parties . . .
any insurance agreement under which any person carrying on an
insurance business may be liable to satisfy part or all of a judgment
which may be entered in the action or to indemnify or reimburse for
payments made to satisfy the judgment” [Country Life Ins. Co. v. St.
Paul Surplus Lines Ins. Co., 2005 U.S. Dist. LEXIS 39691, at *28-29
(C.D. Ill. 2005); Medmarc Cas. Ins. Co. v. Arrow Int’l, Inc., 2002 U.S.
Dist. LEXIS 15082, at * 9 (E.D. Pa. 2002); Mo. Pac. R.R. Co. v. Aetna
Cas. & Sur. Co., 1995 U.S. Dist. LEXIS 22157, at *6-7 (N.D. Tex. 1995);
Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Cont’l Ill. Corp., 116
F.R.D. 78, 83-84 (N.D. Ill. 1987)]. In some instances, courts have
acknowledged that reinsurance agreements contain proprietary or
confidential information and ordered production of the contracts
pursuant to a protective order, or have simply noted the existence of
a confidentiality agreement precluding wider dissemination of the
material [Ohio Mgmt., LLC v. James River Ins. Co., , 2006 U.S. Dist.
LEXIS 47516, at *6 (E.D. La. 2006); Peco Energy Co. v. Ins. Co. of N.
Am., 852 A.2d 1230, 1234 (Pa. Super. Ct. 2004)].
Ceding insurers’ attempts to block access to other types of reinsurance information, including reports and other correspondence between cedents and reinsurers, have yielded mixed results. Efforts to
avoid discovery are most successful when the policyholder fails to
indicate how the reinsurance information is relevant to the coverage
dispute or might lead to the discovery of admissible evidence. For
example, access to communications between cedents and reinsurers
has been denied where the policyholder has argued that it hoped to
gather evidence showing that the policy language at issue was
ambiguous [Zurich Am. Ins. Co. v. Keating Bldg. Corp., No. 04-1490
(D.N.J. Dec. 29, 2006), reported in Mealey’s Litigation Reports: Insurance, Vol. 21, No. 16, at 7; Country Life Ins. Co. v. St. Paul Surplus
Lines Ins. Co., 2005 U.S. Dist. LEXIS 39691, at *30-32 (C.D. Ill. 2005);
Medmarc Cas. Ins. Co. v. Arrow Int’l, Inc., 2002 U.S. Dist. LEXIS
15082, at * 13 (E.D. Pa. 2002); Rhone-Poulenc Rorer, Inc. v. Home
Indem. Co., 139 F.R.D. 609, 612 (E.D. Pa. 1991)].
Reinsurance communications have been found relevant and discoverable typically when there is a defense raised by the ceding insurer
in a direct coverage dispute, such as misrepresentation/
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New Appleman Insurance Practice Guide
nondisclosure or lack of late notice, which puts the reinsurance
information at issue, or to reconstruct a lost policy or provide
extrinsic evidence of an ambiguous policy provision.
Example — Reinsurance Communications Relevant: Insurers’ com-
munications with reinsurers were found relevant to a claim for
rescission of the policies based on the policyholder’s alleged
misrepresentations as to its financial condition. The court reasoned that pre-policy-issuance communications with reinsurers
could reveal what financial information the insurers relied upon
when deciding to issue the policies [Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Cont’l Ill. Corp., 116 F.R.D. 78, 82 (N.D. Ill.
1987)]. In addition, post-issuance communications with reinsurers were relevant to the insurers’ allegation that the policyholder
breached its duty to cooperate with insurers [id. at 82-83].
Similarly, communications between an insurer and its reinsurer
were relevant to an insurer’s claim for rescission based on the
policyholder’s alleged misrepresentation concerning his health
[Sotelo v. Old Republic Life Ins., 2006 U.S. Dist. LEXIS 68387, at *
8 (N.D. Cal. 2006)].
Example — Reinsurance Communications Relevant: Reinsurance
information was directly relevant to rebutting the insurer’s
affirmative defense of late notice because evidence that reinsurers
were given timely notice would tend to establish that the insurers
themselves had notice [Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 1991 U.S. Dist. LEXIS 16336, at *6-7 (E.D. Pa. 1991); Peco
Energy Co. v. Ins. Co. of N. Am., 852 A.2d 1230, 1233-34 (Pa.
Super. Ct. 2004)].
Example — Reinsurance Communications Relevant: Notes and
memoranda prepared by reinsurers’ claim representatives concerning information relayed by the cedent’s claims personnel
concerning a policyholder’s claim were relevant to a direct
coverage dispute. The court reasoned that the materials were
likely to elucidate conflicts between the cedent and its reinsurers
which might explain why the ceding insurer had refused to pay
the claim [Allendale Mut. Ins. Co. v. Bull Data Sys., Inc., 152 F.R.D.
132, 139 (N.D. Ill. 1993)].
Example — Reinsurance Communications Irrelevant: A federal dis-
trict court for the District of Columbia ordering discovery of the
existence and contents of the ceding insurer’s reinsurance agree40-58
Understanding Reinsurance
40.11
ments denied discovery of other reinsurance communications on
relevance grounds, also noting that “the correspondence may
well constitute proprietary information” [Potomac Elec. Power
Co. v. Cal. Union Ins. Co., 136 F.R.D. 1, 3 (D.D.C. 1990)].
t Warning: If a cedent summarizes advice given by coverage
counsel in correspondence with its reinsurer, the summary information may be deemed to constitute ordinary business communications and will therefore not be protected from disclosure
under the attorney-client privilege or work product immunity [see
Am. Cas. Co. of Reading Pa. v. Gen. Metals of Tacoma, No. C
92-5192B (W.D. Wash. April 13, 1994), reported in Mealey’s Litigation Reports: Reinsurance, Vol. 4, No. 23, at B-1].
佡 Cross Reference: For a discussion of additional cases consider-
ing the discovery of reinsurance information in coverage actions
between a ceding insurer and its insured, see Eric Mills Holmes,
Appleman on Insurance 2d § 107.3; Mitchell L. Lathrop, Insurance Coverage for Environmental Claims § 25.05[2][c].
40.11 Consider Reinsurer’s Rights Under Right to Associate Clause or Claims
Control Clause. Related to the right to inspect the cedent’s records is the
reinsurer’s right to associate in, or to control, the defense of claims. These
rights are embodied in “right to associate” or “claims control” clauses.
Under a right to associate (sometimes called a “claims cooperation”)
clause, the reinsurer’s exercise of the right is discretionary, but the cedent
is required to make prompt disclosure of information that the reinsurer
needs to decide whether to associate with the cedent in defense of a claim.
A right to associate clause typically gives the reinsurer the right to
participate “in the defense and control of any claim, suit or proceeding
which may involve [the] reinsurance with the full cooperation of [the
cedent]” [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1055
(2d Cir. 1993)]. A court considering this language declared that the phrase
“which may involve [the] reinsurance” does not mean “which may
involve insurance underlying this reinsurance” [Unigard Sec. Ins. Co. Inc.
v. N. River Ins. Co., 762 F. Supp. 566, 587 (S.D.N.Y. 1991), aff’d in part, rev’d
in part, 4 F.3d 1049, 1055 (2d Cir. 1993)]; therefore, there is no right to
associate if there is no direct impact on the reinsurance coverage [id.].
Claims control clauses are not typical. They go further than right to
associate clauses in giving the reinsurer control over claims settlements.
These provisions, sometimes termed “counsel and concurrence” or “concur and consent” clauses,” not only give the reinsurer the right to be
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40.11
New Appleman Insurance Practice Guide
involved in the adjustment of a claim but also obligate the cedent to confer
with and secure the agreement of the reinsurer to settle claims of certain
types or amounts in order to be indemnified. In the U.S. market, counsel
and concur provisions are usually found in clauses that provide excess
limits and extra-contractual (“ECO”) coverage [see § 40.14 below for a
general discussion of the reinsurer’s obligation to reimburse the cedent for
these types of losses]. Some clauses go further still and give the reinsurer
broad authority over claims handling.
A cedent’s failure to provide the notice required by a claims cooperation
clause can arguably provide a defense to coverage [Liberty Mut. v. Gibbs,
773 F.2d 15, 17-18 (1st Cir. 1985); see § 40.09 above for a complete
discussion of the cedent’s notice obligations and the consequences of a
breach of this obligation]. Similarly, a cedent’s failure to comply with the
terms of a claims control clause may provide an affirmative defense to a
claim for payment [Certain Underwriters at Lloyd’s London v. Home Ins.
Co., 783 A.2d 238, 239-242 (N.H. 2001); Argonaut Ins. Co. v. Certain
London Mkt. Reinsurers, No. 03-317805 (Cal. Super. Ct. Nov. 13, 2006),
reported in Mealey’s Litigation Report: Reinsurance, Vol. 17, No. 15 at A-4].
However, denial of coverage for a violation of the right to associate may
not succeed if the reinsurer cannot show that it was prejudiced and the
cedent did not act in bad faith [see N. River Ins. Co. v. Cigna Reinsurance
Co., 52 F.3d 1194, 1216 (3d Cir. 1995); Unigard Sec. Ins. Co. v. N. River Ins.
Co., 4 F.3d 1049, 1068-70 (2d Cir. 1993)].
Example: Reinsurers were required to indemnify a cedent for expenses
incurred after instructing the cedent how to handle a claim pursuant to
a claims control clause providing for indemnification “for any and all
loss or expense which the Reinsured may sustain by reason of having
fulfilled [Reinsurers’] instruction” [La Reunion Francaise v. Martin,
1996 U.S. App. LEXIS 9578, at *3-4 (2d Cir. 1996) (unpublished
opinion)].
t Warning: Reinsurers that choose to associate in the handling of a
claim should do so cautiously, in order to preserve the legal position
that there is no privity of contract between an insured or a third-party
claimant in an action against an insured and the reinsurer [see
§ 40.05[1] above discussing the general lack of privity of contract in
reinsurance arrangements]. Reinsurers that are intimately involved in
the claims-handling process run the risk of being held directly liable to
policyholders or third parties for the cedent’s insurance obligations or
its settlement actions [see Slotkin v. Citizens Cas. Co. of New York, 614
F.2d 301, 316-17 (2d Cir. 1979), adhered to on rehearing, 614 F.2d 301, 323;
40-60
Understanding Reinsurance
40.11
O’Hare v. Pursell, 329 S.W.2d 614, 621 (Mo. 1959)]. At a minimum, a
reinsurer increases the likelihood that a court will order discovery
against it in a coverage case so as to enable the policyholder to test
whether the reinsurer should be found to be an alter ego or the real
party in interest; this is especially a risk where the cedent is a fronting
insurer or where the reinsurer is exposed to paying the bulk of the
policyholder’s claim. In one case where the reinsurance contract was
viewed by the court as not otherwise covering punitive damages, a
reinsurer was obligated to pay its proportionate share of liability for its
cedent’s bad faith failure to settle a third-party claim against its
insured, where the reinsurer was engaged in a joint enterprise with the
cedent in defending and settling the third-party action [Peerless Ins.
Co. v. Inland Mut. Ins. Co., 251 F.2d 696, 703-04 (4th Cir. 1958); but see
Reid v. Ruffin and Granite Mut. Ins. Co., 469 A.2d 1030, 1033 (Pa.
1983)]. To avoid potential liability for claims handling and settlement,
reinsurers should carefully consider whether or not to incorporate a
claims control or counsel and concurrence clause in their reinsurance
agreements and the appropriate degree of participation in the claims
process.
Consider: A clause requiring the reinsurer’s consent to settlements may
be in conflict with a “follow the settlements” provision, which
obligates the reinsurer to indemnify its cedent for any losses within the
terms of the original policy, as long as the cedent has acted in good
faith.
佡 Cross Reference: For a discussion of follow the settlements clauses in
reinsurance agreements, see § 40.17 below.
佡 Cross References: For an example of a claims cooperation clause, see
§ 40.41 below.
40-61
V.
CONSIDERING REINSURER’S OBLIGATIONS.
40.12 Determine Extent of Coverage. The “reinsuring” or “business cov-
ered” clause of a reinsurance treaty typically determines the extent of the
reinsurer’s liability to the cedent [see §§ 40.30, 40.31 and 40.32 below for
examples of reinsuring clauses]. This clause specifies the types of risks
included in the agreement and the percentage of business covered (for a
quota share contract) or the attachment point and limits of the agreement
(for an excess of loss contract). Facultative certificates, in turn, typically
include a “liability” clause, which specifies the liability of the reinsurer
and provides that the reinsurance certificate will cover only the kinds of
liability covered in the original policy. Facultative certificates often include
“follow the form” clauses, which provide that the reinsurance coverage
dovetails with or adopts as its own the terms of the coverage of the
underlying policy. This presumption is not absolute, however, and can be
overridden by express wording in the certificate creating a nonconcurrency as to liability. As a general rule, in both treaties and
facultative certificates, the extent of the reinsurer’s liability is determined
by the express wording of the reinsurance agreement.
A reinsurer will not be held liable beyond the terms of the reinsurance
contract merely because the ceding insurer has sustained a loss. The fact
that the direct insurer has paid a claim does not establish that it is entitled
to indemnity from the reinsurer because the claim might have been one for
which the insurer was not bound to make payment [Mich. Millers Mut.
Ins. Co. v. N. Am. Reinsurance Corp., 452 N.W.2d 841, 842-43 (Mich. Ct.
App. 1990); Independence Ins. Co. v. Republic Nat’l Life Ins. Co., 447
S.W.2d 462, 467-69 (Tex. Civ. App. 1969)]. For example, cedents that make
ex gratia or “voluntary” payments (payments made in the absence of any
legal obligation to pay) are not entitled to indemnity from their reinsurers
unless the reinsurance contract provides to the contrary [Am. Ins. Co. v. N.
Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 81 (2d Cir. 1982); Lexington Ins.
Co. v. Prudential Reinsurance Co. of Am., 1997 Mass. Super. Lexis 593, at
* 10-19 (Mass. Super. Ct. 1997)].
Reinsuring clauses should be drafted carefully to avoid disputes concerning the scope of coverage [N. River Ins. Co. v. Cigna Reinsurance Co., 52
F.3d 1194, 1206-07 (3d Cir. 1995)].
Example: A reinsurer was not liable to cover a payment for lost cargo
under a facultative certificate where the loss was due to a “shore risk”
because “the defendant never consented to reinsure this loss not
covered in the original insurance policy” [Ins. Co. of N. Am. v. U.S. Fire
40-62
Understanding Reinsurance
40.12
Ins. Co., 322 N.Y.S.2d 520, 524 (N.Y. Sup. Ct. 1971)].
Example: A reinsurance certificate referring to the direct policy’s terms
as the limitations on liability could not be construed to provide
coverage for claims that were expressly excluded by the underlying
policy [Ambassador Ins. Co., Inc. v. Fortress Re, Inc., 1983 U.S. Dist.
LEXIS 14685, at *31 (M.D.N.C. Aug. 12, 1983)].
Example: A cedent’s motion for summary judgment on its indemnity
claim against its reinsurer was denied where a substantial portion of
the settlement paid to the insured was attributable to legal expenses, a
loss not reinsured under the facultative certificate [Affiliated FM Ins.
Co. v. Employers Reinsurance Corp., 2004 U.S. Dist. LEXIS 27961, at
*43 (D.R.I. 2004)]. The cedent also had failed to demonstrate that the
losses actually occurred during the coverage period of the certificate
[id. at 46].
Example: Indemnity under facultative certificates was limited to the
amounts expressly stated in the certificates and was not coextensive
with the underlying policies: “if [the ceding insurer] were allowed to
recover its full liability to [the insured] simply because it held some
amount of reinsurance, the negotiated coverage limits of the reinsurance certificates would be rendered meaningless” [Travelers Cas. and
Sur. Co. v. Constitution Reinsurance Corp., 2004 U.S. Dist. LEXIS
21829, at *13 (E.D. Mich. 2004)].
Cedent’s Perspective: Many reinsurance contracts include “follow the
fortunes” or “follow the settlements” clauses, which have been interpreted to embody the principle that a reinsurer will indemnify its
cedent for any losses arguably within the terms of the original policy
so long as the cedent has acted in good faith. These clauses operate
primarily for the benefit of cedents, allowing them some measure of
certainty in calculating expected reinsurance recoveries and discouraging reinsurers from challenging a cedent’s coverage decisions [See
§§ 40.17, 40.18 and 40.19 for a complete discussion of follow the
fortunes and follow the settlements clauses]. Occasionally disputes
arise in which cedents assert that “follow the fortunes” or “follow the
settlements” clauses obligate a reinsurer to provide indemnity despite
reinsurance contract wording excluding the particular loss from
coverage or for other ex gratia payments. This argument is usually
unsuccessful because the general doctrine of follow the fortunes/
settlements must yield to the express terms of the reinsurance agreement, requiring only that the cedent make the underlying payment in
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40.13
New Appleman Insurance Practice Guide
good faith and exercise ordinary prudence. [Bellefonte Reinsurance
Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910, 913 (2d Cir. 1990); Am. Ins.
Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 80-81 (2d Cir. 1982);
Commercial Union Ins. Co. v. Swiss Re Am. Corp., 2003 U.S. Dist.
LEXIS 4974, at *32-48 (D. Mass. 2003)]. Even in the absence of a follow
the settlements provision, many cedents argue that they are invested
with a zone of discretion to make loss payments in good faith;
otherwise, public policies fostering settlements would be undermined
inasmuch as the cedent might choose to litigate claims with its
policyholder so as to avoid creating an unintended gap with its
reinsurance recovery.
Consider: Some reinsurance agreements include “cash call” provisions.
Cash call clauses can provide for reinsurance payment to be made
before, or at the same time, the ceding company makes a payment to
its insured.
40.13 Consider Obligation to Reimburse Insurer for Declaratory Judgment
Expense. Declaratory judgment expenses are the expenses an insurance
company incurs in seeking a judicial determination of its obligation to
provide insurance coverage to its policyholder and pay claims under an
insurance policy. These legal expenses can arise when either the insured or
the insurer initiates a lawsuit to determine whether a claim is covered.
Ceding insurers often seek indemnity from their reinsurers for declaratory
judgment expenses. A reinsurer’s obligation to reimburse its cedent for
declaratory judgment depends on the wording of the reinsurance contract,
often its definition of “allocated loss expenses” to be paid by the reinsurer.
The most recent reported decisions evidence a trend toward allowing
cedents to recover declaratory judgment expenses; importantly, however,
the reinsurance contract wording controls in all circumstances, so counsel
must evaluate the language of the particular reinsurance agreement
carefully.
Example — Declaratory Judgment Expenses Recoverable: Reinsurance
certificates providing for coverage of “expenses” incurred in the
“investigation and settlement of claims or suits” was ambiguous; after
consideration of evidence of custom and usage, the court found that
the disputed language covered the declaratory judgment expenses
sought by the cedent [Fireman’s Fund Ins. Co. v. Gen. Reinsurance
Corp., 2005 U.S. Dist. LEXIS 43650, at *31-33 (N.D. Cal. 2005)].
Example — Declaratory Judgment Expenses Recoverable: There was “no
question” that the allocated loss expense provision requiring payment
40-64
Understanding Reinsurance
40.13
for “all expenses incurred in the investigation and settlement of claims
or suits” included the declaratory judgment expenses incurred by a
reinsured attempting to avoid coverage for a claim [Employers Ins. Co.
of Wausau v. Am. Reinsurance Co., 256 F. Supp. 2d 923, 925 (W.D. Wis.
2003)]. A sentence in the provision stating that “allocated loss expenses
shall not include expenses incurred by [the cedent] in regard to any
actual or alleged liability that is not within the circumscribed provisions of the policy reinsured” was an exclusion of expenses relating to
the cedent’s extracontractual or tortious (i.e., bad faith) conduct and
was not an exclusion of declaratory judgment expenses [id.].
Example — Declaratory Judgment Expenses Recoverable: A reinsurance
provision requiring reimbursement of “claim expenses,” defined as
“all payments under the supplementary payments provision of [the
ceding insurer’s] policy, including court costs, interest upon judgments, and allocated investigation, adjustment and legal expenses,”
required payment of fees and expenses incurred in a declaratory
judgment action [Employers Reinsurance Corp. v. Mid-Continent Cas.
Co., 202 F. Supp. 2d 1221, 1235-36 (D. Kan. 2002), aff’d, 358 F.3d 757, 768
(10th Cir. 2004)].
Example — Declaratory Judgment Expenses Recoverable: A facultative
certificate stating that “the Reinsurer shall pay its proportion of
expenses (other than office expenses and payments to any salaried
employee) incurred by the [cedent] in the investigation and settlement
of claims or suits” was ambiguous with respect to the payment of
declaratory judgment expenses, so evidence of industry standards and
customs was reviewed to determine contractual intent [Affiliated FM
Ins. Co. v. Constitution Reinsurance Corp., 626 N.E.2d 878, 881-82
(Mass. 1994). A jury reviewing evidence of reinsurance custom and
practice determined that a “common understanding” existed between
the parties requiring the reinsurer to indemnify the cedent for declaratory judgment expenses [see Affiliated FM Ins. Co. v. Constitution
Reinsurance Corp., No. 89-2411 (Mass. Super. Ct. Sept. 24, 1998),
reported in Mealey’s Litigation Reports: Reinsurance, Vol. 9, No. 10, at
1].
Example — Declaratory Judgment Expenses Not Recoverable: Recovery
of declaratory judgment expenses was denied where the reinsurance
certificates included a clause stating: “[t]his Certificate of Reinsurance
is subject to the same risks, valuations, conditions, endorsement
(except change of location), assignments and adjustments as are or
may be assumed, made or adopted by the reinsured, and loss, if any,
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40.14
New Appleman Insurance Practice Guide
hereunder is payable pro rata with the reinsured and at the same time
and place” [British Int’l Ins. Co. v. Seguros La Republica, S.A., 2001
U.S. Dist. LEXIS 11453, at *2 (S.D.N.Y. 2001)]. On appeal, the court
rejected the reinsured’s argument that the certificates were ambiguous
with respect to recovery of declaratory judgment expenses because the
word “expenses” did not appear anywhere in the certificates [British
Int’l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 82-83 (2d Cir.
2003)].
佡 Cross References: For a discussion of the equitable and policy
arguments advanced by cedents and reinsurers in disputes over
reimbursement of declaratory judgment expenses, see Mitchell L.
Lathrop, Insurance Coverage for Environmental Claims § 10.06[6]; Eric
Mills Holmes, Appleman on Insurance 2d § 106.6.
40.14 Consider Obligation to Reimburse Insurer for Extra-Contractual Obligations and Excess of Policy Limits (“ECO/XPL”) Damages.
9 Bad Faith: As a general rule, reinsurers are required to indemnify
ceding insurers only to the extent that the ceding insurer’s payments
or losses are within the scope of the original policy’s terms [Am. Ins.
Co. v. N. Am. Co. for Prop. & Cas. Ins., 697 F.2d 79, 81 (2d Cir. 1982)].
A reinsurer will not be held liable for payments in excess of policy
limits (“XPL”), that is, payment for what is sometimes called “thirdparty” bad faith, or for the extra-contractual obligations (“ECO”) of the
cedent, that is, payment for “first-party” bad faith, unless the reinsurance contract is interpreted as covering that exposure [see Reliance Ins.
Co. v. Gen. Reinsurance Corp., 506 F. Supp. 1042, 1050 (E.D. Pa. 1980)].
There are differing opinions as to whether the reinsurance contract
must cover such exposures expressly in order for the reinsurer to be
held liable for them.
An exception to the general rule that arises on rare occasions is when the
reinsurer actively participates in the defense or settlement of a claim under
the direct insurance policy. In those circumstances, a court may conclude
that the reinsurer has acted as a “co-insurer” or joint venture, thereby
subjecting itself to liability for losses in excess of the stated policy limits
[see Peerless Ins. Co. v. Inland Mut. Ins. Co., 251 F.2d 696, 703-04 (4th Cir.
1958); but see Employers Reinsurance Corp. v. Am. Fid. & Cas. Co., 196 F.
Supp. 553, 560-61 (W.D. Mo. 1959)].
Cedents can secure XPL or ECO coverage by including clauses in their
reinsurance contracts that specifically address these obligations. Most
cedents request these provisions to address the risk that tort claims against
40-66
Understanding Reinsurance
40.14
their insureds will not be resolved within applicable policy limits following the cedent’s unreasonable failure to effect a settlement or that bad faith
claims will be directed at the cedent’s conduct in handling the insured’s
claim for coverage. Inclusion of XPL and ECO clauses removes the
uncertainty as to whether such losses will be covered under the reinsurance contract.
An XPL clause specifically provides coverage for losses in excess of the
policy limits in the insurance policy issued by the cedent to its policyholder and typically appears in reinsurance treaties covering liability
business. An XPL clause covers payment by a cedent arising from a
judgment against its insured in excess of the reinsured’s policy limits, but
otherwise covered, where the size of the judgment was affected by the
cedent’s negligence, fraud or bad faith in handling the claim or in the
settlement or defense of the lawsuit against the insured. The reinsurance
contract usually limits the amount paid by a reinsurer on an XPL claim to
an amount within the overall reinsurance limit. An XPL clause is not
intended to cover amounts the cedent is found liable to pay directly to its
insured as compensation or punitive damages due to its own misconduct
to its insured, rather than indirectly on account of its failure to resolve the
policyholder’s liability to others. [See § 40.44 for an example of an XPL
clause included in a reinsurance treaty.]
An ECO clause is similar to an XPL clause in that it covers the liability of
the cedent due to mishandling or defense of claims but it focuses on the
cedent-insurer’s obligation to act in good faith relative to its own insured.
By definition, extra-contractual obligations incurred by the cedent are
“extra” or outside the coverage provided by the policy. For example, ECO
clauses can provide for indemnification of payments to an insured for
punitive damages and emotional distress caused by the cedent’s tortious
conduct or failing to treat the insured fairly and in good faith. [See § 40.43
for an example of an ECO clause.] In addition, an ECO clause may be
drafted to cover a ceding insurer’s exposure when its insured is found
liable to a third party for punitive damages, though this may be more
probably understood as an XPL exposure.
t Warning: In some states, public policy concerns preclude insurance
indemnification for punitive damages awards [see Home Ins. Co. v.
Am. Home Prod. Corp., 550 N.E.2d 930, 932 (N.Y. 1990)]. A reinsurance
contract including an ECO clause covering liability for bad faith
judgments may be interpreted not to cover punitive damages in states
where insurance for punitive damages awards is prohibited. A reinsurer could assert that, because the state’s public policy prohibits
insurance for punitive damages, reinsurance for punitive damage
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New Appleman Insurance Practice Guide
awards also should be prohibited. However, a federal district court in
Connecticut refused to vacate an arbitration award directing a reinsurer to reimburse its cedent for punitive damages where the reinsurance contracts included ECO clauses, despite Connecticut’s public
policy against insurance for such awards. The court ruled that the
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, which governed the international arbitration, preempted
Connecticut law, that the Convention looked to the public policy of the
country in which enforcement of the arbitral award is sought and that
the United States does not have a public policy against contractual
indemnification of punitive damages [Hartford Fire Ins. Co. v. Lloyd’s
Syndicate, 1997 U.S. Dist. LEXIS 10858, at *14-18 (D. Conn. 1997)].
Further, if a ceding insurer pays punitive damages in circumstances
where the legality of indemnification is unsettled, a reinsurer may be
obligated to follow the fortunes of its cedent and provide reimbursement.
z Strategic Point: The specific language of ECO or XPL clauses can
vary and make a significant difference in the coverage afforded. Parties
to the reinsurance agreement should draft these provisions carefully to
ensure appropriate coverage and to avoid disputes.
佡 Cross References: For discussions of circumstances under which
reinsurance potentially covers punitive damages, see Eric Mills
Holmes, Appleman on Insurance 2d § 127.5; Mitchell L. Lathrop,
Insurance Coverage for Environmental Claims, § 10.06[3].
40-68
VI.
CONSIDERING DUTY OF UTMOST GOOD FAITH OR UBERRIMAE
FIDEI.
40.15 Consider Insurer’s Duty to Disclose to Reinsurer All Material Facts
About Risk Being Reinsured. The law and practice of the reinsurance
industry recognize that the relationship between parties to a reinsurance
agreement is characterized by “uberrimae fidei” or “utmost good faith,”
which entails mutual trust and regard for the interest of the other party.
Both parties to a reinsurance contract must treat each other with the
utmost good faith in terms of disclosing all facts that are material to the
risk reinsured and in conducting themselves in business dealings that may
affect the other’s legal liability under the contract. Specifically, utmost
good faith means that the maxim caveat emptor does not apply to the
reinsurance relationship [Barry R. Ostrager and Mary Kay Vyskocil,
Modern Reinsurance Law and Practice (2d ed. 2000) § 3.01[a], citing
Black’s Law Dictionary 1520 (6th ed. 1990)].
The duty of utmost good faith arises from the recognition that the
reinsurer does not perform all the actions that would be taken if it was
placing original coverage, but has to rely on the cedent to do so. A
reinsurer is not intimately involved in underwriting the ceded business or
in handling claims subject to the reinsurance agreement; instead, the
reinsurer is dependent upon and must be able to rely on the cedent to
perform these functions. Although cases regarding the doctrine of utmost
good faith focus primarily on the cedent’s duties to the reinsurer,
particularly in terms of affirmatively disclosing material facts about the
ceded business during the reinsurance placement process, it is a mutual
obligation [Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 829 n.3
(9th Cir. 1995); United Fire & Cas. Co. v. Arkwright Mut. Ins. Co., 53 F.
Supp. 2d 632, 642 (S.D.N.Y. 1999)]. The facts and circumstances of the
reinsurance relationship are important in determining the existence and
scope of the duty.
The doctrine is most often referenced in terms of the cedent’s duty to
disclose material facts about the risk that the reinsurer is reinsuring [A/S
Ivarans Rederei v. Puerto Rico Ports Auth., 617 F.2d 903, 905 (1st Cir.
1980)]. A ceding company that conducts an investigation and is in
possession of all of the details relating to the risk must exercise the utmost
good faith in revealing all facts that materially affect the risk of which it is
aware and of which the reinsurer has no reason to know [Christiania Gen.
Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 278 (2d Cir. 1992)]. A cedent
is required “to place the [reinsurance] underwriter in the same position as
himself [and] to give to him the same means and opportunity of judging
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New Appleman Insurance Practice Guide
the value of the risks” [Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485,
510 (1883)].
A fact will be deemed “material” if it “would have either prevented a
reinsurer from issuing a policy or prompted a reinsurer to issue it at a
higher premium” had it been disclosed before the reinsurance contract
was executed [Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d.
at 279; In re Liquidation of Union Indem. Ins. Co. of N.Y., 674 N.E.2d 313,
320 (N.Y. 1996)]. Disclosure is required, for example, “[w]here the reinsured has offered extended coverage or an unusual term” [Sumitomo
Marine & Fire Ins. Co. v. Cologne Reinsurance Co., 552 N.E.2d 139, 143
(N.Y. 1990)].
The following are additional types of information that have been found to
be material to the underwriting process:
•
•
•
•
•
The premium rate, volume or sufficiency;
Prior significant losses or legal actions against the insured;
The underwriting agent’s role;
The geographical spread of the underlying risks; and
The type of business ceded.
The duty of utmost good faith also applies to the relationship between a
retrocedent and its retrocessionaire [Compagnie de Reassurance D’Ile de
France v. New England Reinsurance Corp., 57 F.3d 56, 66-70 (1st Cir.
1995)].
Whether the reinsurance intermediary is an agent of the cedent or the
reinsurer is a fact based inquiry. Under typical circumstances, the intermediary is the agent of the ceding company. Hence, a reinsurance
intermediary may be held to be the agent of the ceding company in terms
of the representations made to the reinsurer during the reinsurance
placement process [see Old Reliable Fire Ins. Co. v. Castle Reinsurance Co.,
Ltd., 665 F.2d 239 (8th Cir. 1981); Calvert Fire Ins. Co. v. Unigard Mut. Ins.
Co., 526 F. Supp. 623 (D. Neb. 1980)].
Example: The reinsurers’ defense of fraud in the inducement and
avoidance of the reinsurance treaties was upheld where the ceding
insurer failed to disclose its insolvency [In re the Liquidation of Union
Indem. Ins. Co. of N.Y., 674 N.E.2d 313, 320 (N.Y. 1996)].
Example: Reinsurers were entitled to rescission of a reinsurance
contract where the cedent failed to disclose the existence of unimplemented recommendations made as part of a survey report prepared in
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Understanding Reinsurance
40.15
connection with the underwriting of an earlier insurance policy, and
the reinsurers had previously informed the cedent that they considered compliance with the survey report recommendations to be
material [Allendale Mut. Ins. Co. v. Excess Ins. Co., 992 F. Supp. 278,
282-83 (S.D.N.Y. 1998)].
Example: Substantial evidence of material misrepresentations sup-
ported a jury verdict where the cedent hid from its reinsurer the
dangerous nature of the insured’s business, misstated the insured’s
previous loss record and did not reveal the nature of the underlying
insurance [Sec. Mut. Cas. Co. v. Affiliated FM Ins. Co., 471 F.2d 238,
241, 245-46 (8th Cir. 1972)].
Example: Where the ceding insurer had no reason to believe that its
reinsurer would consider the direct insured’s distribution of ATV’s
material to the nature of the risk because the insurer itself did not view
it as such when the reinsurance contract incepted, the failure to
disclose this information did not deprive the reinsurer of the same
opportunity the cedent had to assess the risk, and the reinsurer’s
misrepresentation claim was properly dismissed [Christiania Gen. Ins.
Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)].
Examples: Some courts have found that reinsurers have a duty to
investigate the reinsurance transaction, and a failure to do so may
provide a defense to a claim for rescission based on an omission where
the cedent lacked the intent to deceive. For example, in rejecting
certain claims of fraudulent inducement, the First Circuit Court of
Appeals stated: “[w]ithout first being asked by the other party, one
would not expect [the cedents] to volunteer a plethora of details on
their proposed underwriting practices. Matters would have been
different had [the cedents] affirmatively misrepresented their intended
underwriting practices or given incomplete, evasive or incorrect
answers to questions asked . . . .” [Compagnie De Reassurance D’lle
de France v. New England Reinsurance Corp., 57 F.3d 56, 80 (1st Cir.
1995); see also Old Reliable Fire Ins. Co. v. Castle Reinsurance Co., Ltd.,
665 F.2d 239, 244 (8th Cir. 1981); Unigard Sec. Ins. Co. v. Kansa Gen.
Ins. Co., Ltd., 1992 U.S. Dist. LEXIS 20677, at *22 (W.D. Wash. Nov. 9,
1992), aff’d 1994 U.S. App. LEXIS 35914 (9th Cir. 1994)].
Consider: In some states, the duty to disclose all material facts to the
reinsurer is required by statute [see Cal. Ins. Code § 622].
Consider: It has been argued that a cedent’s duty to disclose informa-
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New Appleman Insurance Practice Guide
tion to its reinsurer is broader in treaty relationships as compared to
facultative relationships. Cedents must arguably be more detailed in
their disclosures because treaty reinsurers are unable to reject individual risks that fall within the class of risk covered by the treaty [see
Barry R. Ostrager and Mary Kay Vyskocil, Modern Reinsurance Law
and Practice § 3.03[a] (2d ed. 2000); Steven W. Thomas, Utmost Good
Faith in Reinsurance: A Tradition in Need of Adjustment, 41 Duke L.J. 1548,
1571 (June 1992)].
佡 Cross References: For discussions of the doctrine of utmost good
faith and cases considering its application, see Mitchell L. Lathrop,
Insurance Coverage for Environmental Claims §§ 10.01[4], 10.05; Eric
Mills Holmes, Appleman on Insurance 2d § 105.5.
40.16 Consider Application of Duty of Utmost Good Faith Beyond Disclosure
at Inception of Reinsurance Relationship.
40.16[1] Application of Duty of Utmost Good Faith to Parties’ Conduct
During Life of Reinsurance Contract. The mutual duty of utmost good
faith extends to the parties’ actions during the entire course of the
reinsurance relationship. For example, the cedent’s duty to disclose
all material facts is not just relevant in the contract formation stage of
the reinsurance relationship: “[i]n fact, because the reinsurer places
complete trust in the underwriting capability, claims-handling ability
and general integrity of the reinsured, the reinsured owes the
reinsurer the highest duty of fair dealing and utmost good faith
throughout the reinsurance relationship” [New York Insurance Law
§ 15.02 (Walcott B. Dunham, Jr., ed.).
40.16[2] Application of Duty of Utmost Good Faith to Underwriting and
Administration of Ongoing Business. The duty of utmost good faith
requires the cedent to act honestly and to follow all proper and
businesslike steps in underwriting reinsured business and in settling
claims [Am. Marine Ins. Group v. Neptunia Ins. Co., 775 F. Supp. 703,
705 (S.D.N.Y. 1991)]. Moreover, a cedent’s failure to act in good faith
in handling or resolving claims may excuse the reinsurer from
following the fortunes or settlements of the cedent [for a discussion
of the follow the fortunes doctrine and the reinsurer’s preclusion
from second-guessing the reinsured’s good faith claims decisions, see
§ 40.18 below]. Many courts considering what constitutes good faith
in the context of a ceding insurer’s payment or settlement of claims
have concluded that negligence alone cannot establish bad faith [Am.
Bankers Ins. v. Nw. Nat’l Ins., 198 F.3d 1332, 1336 (11th Cir. 1999);
Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d 1049, 1069 (2d
40-72
Understanding Reinsurance
40.16[2]
Cir. 1993)]. Instead, the appropriate standard for bad faith in these
circumstances is deliberate deception, gross negligence or recklessness [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4 F.3d at 1069].
Example: A federal district court found that application of the
follow the settlements doctrine is subject to the requirement that
the cedent conduct a reasonable, businesslike investigation before
paying a claim. The cedent’s superficial investigation of claims
stemming from implantation of a heart valve, failure to obtain
technical advice as to whether injury occurred during the policy
period, and failure to secure a legal opinion as to the appropriate
trigger of coverage were grossly negligent and relieved the
reinsurer of the duty to follow the settlements of the cedent [Suter
v. Gen. Accident Ins. Co., 2006 U.S. Dist. LEXIS 48209, at *84-86
(D.N.J. 2006)].
Example: The Third Circuit Court of Appeals reversed the District
Court’s finding that a ceding insurer breached its duty of good
faith by agreeing to participate in the Wellington Agreement,
which established an orderly mechanism for the application of
insurance policies to underling asbestos-related bodily injury
claims, and by failing to schedule the underlying policies according to the Agreement in order to avoid paying defense costs. The
appellate court found that mere negligence could not support a
violation of the duty, that none of the cedent’s actions amounted
to gross negligence or recklessness and that the reinsurer did not
prove that it had suffered the requisite separate economic injury
(apart from its obligation to make payment under the reinsurance
certificate) [N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d
1194, 1212-17 (3d Cir. 1995)].
Example: An appellate court directed the trial court on remand to
consider whether a cedent violated its duty to act in good faith by
failing to disclose its increased use of intermediaries to produce
“non-system” business that was ceded under the reinsurance
treaties and by abandoning plans set forth in the placing documents to establish direct relationships with insurers [Compagnie
de Reassurance D’Ile de France v. New England Reinsurance
Corp., 57 F.3d 56, 79-82 (1st Cir. 1995)].
Example: Reinsurers sufficiently alleged claims for breach of
reinsurance contracts based on proven “irregularities” in the
cedent’s underwriting [Int’l Ins. Co. v. Certain Underwriters at
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40.16[3]
New Appleman Insurance Practice Guide
Lloyd’s London, 1991 U.S. Dist. LEXIS 12948, at * 18, 36 (N.D. Ill.
1991)].
Example: An arbitration panel acknowledged that a cedent could
have handled claims better but concluded that “the estimated
savings that might have resulted from improved claims handling
was relatively modest and well within the amount of slippage
that would be expected under industry standards for average
claims handling of a large book of workers’ compensation claims”
and ordered the reinsurer to pay the claims [Superior Nat’l Ins.
Co. v. U.S. Life Ins. Co., No. 07-01458 (C.D. Cal. Feb. 18, 2007),
reported in Mealey’s Litigation Reports: Reinsurance, Vol. 17, No.
21 at 4].
Example: A federal District Court confirmed two arbitration
awards reducing the amount of reinsurers’ participations in
treaties, where the cedent had made cessions to the treaties that
were not of the type of business that it represented would be
produced [Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., Ltd., 1988 U.S. Dist. LEXIS 6277, at *3-7 (E.D. Pa. June 28,
1988)].
40.16[3] Application of Duty of Utmost Good Faith to Obligation to Give
Notice of Claim. Reinsurers rely on their cedents for the information
necessary to properly assess risks. Therefore, the duty of utmost good
faith applies to the obligation of cedents to notify reinsurers of
potential claims where the reinsurance contract so requires [Certain
Underwriters at Lloyd’s London v. Home Ins. Co., 783 A.2d 238, 240
(N.H. 2001)]. In most states, a cedent’s failure to provide prompt
notice of a claim entitles the reinsurer to refuse to perform only if the
reinsurer was prejudiced by the untimely notice or where the cedent
acted in bad faith [Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 4
F.3d 1049, 1069 (2d Cir. 1993); Certain Underwriters at Lloyd’s
London v. Home Ins. Co., 783 A.2d at 240-41; for a discussion of the
ceding insurer’s notice obligations and late notice as a defense to
payment of reinsurance obligations, see § 40.09 above].
9 Bad Faith: Bad faith can be established by proof that the
reinsured acted in a grossly negligent or reckless manner in
failing to implement practices and controls to ensure proper and
timely notice of claims to the reinsurer [see Unigard Sec. Ins. Co.,
Inc. v. N. River Ins. Co., 4 F.3d at 1069]. “[I]f a ceding insurer has
implemented routine practices and controls to ensure notification
40-74
Understanding Reinsurance
40.16[4]
to reinsurers but inadvertence causes a lapse, the insurer has not
acted in bad faith. But if a ceding insurer does not implement
such practices and controls, then it has willfully disregarded the
risk to reinsurers and is guilty of gross negligence. A reinsurer,
dependent on its ceding insurer for information, should be able to
expect at least this level of protection” [id. at 1069-70].
Example: A reinsurer was relieved of its obligation to indemnify
its reinsured where the reinsured failed to implement notification
practices, procedures and controls, made no effort to determine
what its duties were under the reinsurance agreement and failed
to give timely notice of a significant claim in violation of the
agreement’s claims control clause [Certain Underwriters at
Lloyd’s London v. Home Ins. Co., 783 A.2d at 240-42].
Example: A cedent’s untimely notice of loss to its facultative
reinsurers did not amount to bad faith where it had established a
“coordinated and coherent policy of dealing with [asbestos]
claims,” and the failure to provide notice to the facultative
reinsurers was merely negligent [Unigard Sec. Ins. Co., Inc. v. N.
River Ins. Co., 4 F.3d at 1070].
40.16[4] Application of Duty of Utmost Good Faith to Reinsurer to Pay
Under Reinsurance Agreement. Most of the cases dealing with the
reinsurer’s duty of utmost good faith to its reinsured involve
obligations to make payments under reinsurance agreements [Arkwright Mut. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.,
1995 U.S. Dist. LEXIS 11, at *14-15 (S.D.N.Y. 1995); Commercial Union
Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49, 69-70 (D. Mass.
1998), aff’d, 217 F.3d 33 (1st Cir. 2000)]. “Utmost good faith . . .
requires a reinsurer to indemnify its cedent for losses that are even
arguably within the scope of the coverage reinsured, and not to
refuse to pay merely because there may be another reasonable
interpretation of the parties’ obligations under which the reinsurer
could avoid payment” [United Fire & Cas. Co. v. Arkwright Mut. Ins.
Co., 53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999)].
Example: A reinsurer violated the duty of utmost good faith and
unfair claims practices law by adopting a “moving target”
strategy of seeking to achieve a commutation of all of its
obligations to the cedent by engaging in protracted delays in
payment of the cedent’s claim. Among other things, the reinsurer
raised constantly shifting defenses and objections to payment and
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40.16[4]
New Appleman Insurance Practice Guide
unreasonably questioned the cedent’s settlement allocation
[Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp.
2d at 64-65].
Example: A reinsurer may have acted in bad faith by exercising its
contractual right to determine the amount of incurred loss in a
manner designed to evade the spirit of the reinsurance contract
and deny the cedent the benefit of its bargain. Denial of the
cedent’s bad faith claim was reversed, as the appellate court
found that if the reinsurer’s selection of a particular method for
calculating the amount of incurred loss was specifically designed
to trigger a contractual provision enabling the reinsurer to avoid
its payment obligation it would have acted in bad faith [BJC
Health Sys. v. Columbia Cas. Co., 478 F.3d 908, 914-16 (8th Cir.
2007)].
t Warning — Reinsurers: Reinsurers may violate the duty of
utmost good faith in other circumstances. In one case, a reinsurer
may have breached an implied term of the reinsurance contract
when its attorneys disclosed confidential information obtained
from the ceding insurer by filing it in a court file accessible to the
public without first attempting to file it under seal. A federal
district court refused to dismiss the cedent’s claim for breach of
contract, stating that it may be able to prove that the “customs
and practices of the reinsurance industry include preservation of
confidences” [Int’l Ins. Co. v. Certain Underwriters at Lloyd’s
London, 1991 U.S. Dist. LEXIS 12911, at *5-12 (N.D. Ill. 1991)].
Consider: One reason for the reinsurer’s duty to exercise utmost
good faith in its relationship with a cedent is the permission to
examine the cedent’s records that is granted by the access to
records provision of the reinsurance contract. The reinsurer is
often granted intimate access to the inner workings of the cedent
and accordingly has a higher duty to exercise good faith in its
dealings with the reinsured.
40-76
VII.
CONSIDERING FOLLOW THE FORTUNES/FOLLOW THE
SETTLEMENTS.
40.17 Understand Distinction Between Follow the Fortunes and Follow the
Settlements. The duty of utmost good faith inherent in all reinsurance
relationships extends beyond contract placement and includes the claimshandling process [for a discussion of the duty of utmost good faith, see
§§ 40.15 and 40.16 above]. The parties’ continued good faith is manifested
in the “follow the fortunes” and “follow the settlements” doctrines.
“Follow the fortunes” and “follow the settlements” clauses have been
interpreted to embody the principle that a reinsurer will indemnify its
cedent for any losses arguably within the terms of the underlying policy,
as long as the cedent has not acted in bad faith. The provisions operate
primarily for the benefit of cedents, allowing them some measure of
certainty in calculating expected reinsurance recoveries and discouraging
reinsurers from challenging a cedent’s coverage decisions and the amount
of any settlement. If the follow the fortunes/settlements doctrine did not
apply, there would be no reinsurance liability unless a claim was expressly
covered under the direct policy. If the ceding insurer settled a coverage
dispute and the reinsurer denied liability, the coverage case likely would
have to be tried again.
Although many U.S. court decisions fail to distinguish between following
fortunes and following settlements [see, e.g., Nat’l Am. Ins. Co. of Cal. v.
Certain Underwriters at Lloyd’s, London, 93 F.3d 529, 535 n.15 (9th Cir.
1996); N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199, 1205
(3d Cir. 1995); Houston Cas. Co. v. Lexington Ins. Co., 2006 U.S. Dist.
LEXIS 45027, at *9 n.8 (S.D. Tex. June 15, 2006)], there is a meaningful
distinction between the two concepts. As one court explained: “[t]he
’follow the fortunes’ doctrine requires reinsurers to accept a reinsured’s
good faith decision that a particular loss is covered by the terms of the
underlying policy, while the ’follow the settlements’ doctrine requires
reinsurers to abide by a reinsured’s good faith decision to settle, rather
than litigate, claims on that policy” [Commercial Union Ins. Co. v. Seven
Provinces Ins. Co., Ltd., 9 F. Supp. 2d 49, 66 (D. Mass. 1998)]. The phrases
are often used interchangeably, but “the term ’follow the fortunes’ more
accurately describes the reinsurer’s obligation to follow the reinsured’s
underwriting fortunes, whereas ’follow the settlements’ refers to the duty
to follow the actions of the reinsured in adjusting and settling claims” [N.
River Ins. Co. v. Employers Reinsurance Corp., 197 F. Supp. 2d 972, 978 n.1
(S.D. Ohio 2002)].
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New Appleman Insurance Practice Guide
t Warning: Although U.S. practice and case law tends to conflate
follow the fortunes and follow the settlements clauses, counsel should
not expect that other jurisdictions do not draw sharper distinctions
between the two, especially English precedent which may govern
reinsurance contracts or inform the thinking or approach of reinsurance arbitrators.
The “follow the fortunes” doctrine requires the reinsurer to indemnify the
cedent for all claims paid in good faith and reasonably within the coverage
provided under the direct policy. The “follow the fortunes” obligation is
broad, but a reinsurer’s liability is still limited to losses covered by the
direct policy and not excluded by the reinsurance agreement. “Follow the
fortunes” clauses do not override or alter express coverage limits in a
reinsurance certificate, i.e., a follow the settlements provision does not
require the reinsurer to indemnify for ex gratia payments.
Under the “follow the settlements” doctrine, a reinsurer will be obligated
to reimburse a cedent for a settlement or judgment paid by the cedent in
good faith. The purpose of the “follow the settlements” doctrine is to
prevent the reinsurer from second guessing the settlement decisions of the
ceding company and from obtaining de novo review of judgments of the
reinsured’s liability to its insured [N. River Ins. Co. v. CIGNA Reinsurance
Co., 52 F.3d 1194, 1199 (3d Cir. 1995); Aetna Cas. & Sur. Co. v. Home Ins.
Co., 882 F. Supp. 1328, 1346 (S.D.N.Y. 1995)]. Absent exceptional circumstances, the ceding insurer’s interpretation and application of its policy to
the underlying claim cannot be revisited by reinsurers or the courts.
Ceding insurers that know their settlement decisions cannot be freely
challenged have more incentive to settle with their insureds and avoid
costly litigation.
Some courts have found that the duty to follow the fortunes or settlements
of a cedent can be implied in a reinsurance contract where a “follow the
fortunes” or “follows the settlements” clause is not expressly included,
based on the custom and practice of the reinsurance industry [see Aetna
Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1349 (S.D.N.Y. 1995);
Int’l Surplus Lines Ins. Co. v. Certain Underwriters at Lloyd’s, London,
868 F. Supp. 917, 920 (S.D. Ohio 1994)]. Other courts, however, have
refused to imply such a duty [see Am. Ins. Co. v. Am. Re-Insurance Co.,
2006 U.S. Dist. LEXIS 95801, at *16-17 (N.D. Cal. 2006); N. River Ins. Co. v.
Employers Reinsurance Corp., 197 F. Supp. 2d 972, 986 (S.D. Ohio 2002)
(applying New Jersey law); cf. Affiliated F.M. Ins. Co. v. Employers
Reinsurance Corp., 369 F. Supp. 2d 217, 227 (D.R.I. 2005)]. This issue has
been hotly contested in recent litigation [see Am. Motorists Ins. Co. v. Am.
Re-Insurance Co., 2007 U.S. Dist. LEXIS 41257 (N.D. Cal. 2007) (where
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Understanding Reinsurance
40.18
cedent failed to produce evidence to support its claim that custom and
practice in the reinsurance industry dictates that “follow the settlements”
is implied in a reinsurance contract even absent an express provision to
that effect, “follow the settlements” provision cannot be read into a
certificate of facultative reinsurance contract as a matter of law)].
Follow the fortunes and settlement obligations also apply to a retrocessionaire in its agreements with a retrocedent [Am. Bankers Ins. Co. of Fla.
v. Nw. Nat’l Ins. Co., 198 F.3d 1332 (11th Cir. 1999)].
Disputes frequently arise regarding the scope of the obligations of a
reinsurer who has agreed to “follow the fortunes” or “follow the settlements” of a cedent. Although most disputes are resolved in reinsurance
arbitrations, where the opinions are typically confidential, several courts
have published decisions considering this issue. [For examples of decisions involving reinsurer’s obligations under “follow the fortunes” or
“follow the settlement” provisions, see §§ 40.18 and 40.19 below].
Distinguish: Many facultative certificates include a “follow the form”
provision, under which the reinsurer agrees to indemnify the cedent as
if the reinsurance certificate adopted or incorporated the terms and
conditions of the reinsured policy [for a discussion of “follow the
form” clauses, see § 40.12 above]. “Follow the fortunes” and “follow
the settlements” clauses help define the scope of the reinsurer’s
indemnification obligation in terms of a specific loss, while a “follow
the form” provision confirms that the reinsurer’s undertaking is in
step with that of the cedent. As one court explained:
“Following form simply obliges the reinsurer to indemnify the ceding
company fully within the scope of the reinsured risk when the claim falls
within the scope of that risk as a matter of law (subject to exclusions
explicitly delineated within the certificate of reinsurance); the follow the
fortunes/settlements doctrine vests in the ceding company the right to
decide what the scope of coverage actually is when the cedent’s policy is
subject to more than one reasonable interpretation, and to make adjustments and settlements in conformity with its interpretation” [Aetna Cas.
& Sur. Co. v. Home Ins. Co., 882 F. Supp. 1328, 1349 (S.D.N.Y. 1995)].
佡 Cross References: For discussions of the “follow the fortunes” and
“follow the settlements” doctrines and examples of typical clauses that
embody these principles in reinsurance agreements, see Eric Mills
Holmes, Appleman on Insurance 2d §§ 106.2 and 102.5[D]; Business
Insurance Law and Practice Guide § 14.08[5]].
40.18 Consider Reinsurer’s Preclusion from Second-Guessing Reinsured’s
Good Faith Claims Decisions. The “follow the fortunes” and “follow the
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settlements” doctrines preclude reinsurers from challenging cedents’
payments of claims and settlements that are reasonable and made in good
faith.
9 Bad Faith: The burden of demonstrating bad faith is high. The
reinsurer must show that the cedent acted with gross negligence,
recklessness or evident bad faith or demonstrate that the payment or
settlement was not even arguably within the scope of the reinsurance
coverage [Am. Bankers Ins. Co. of Fla. v. Nw. Nat’l Ins. Co., 198 F.3d
1332, 1335-36 (11th Cir. 1999); Mentor Ins. Co. (U.K.) v. Norges
Brannkasse, 996 F.2d 506, 517 (2d Cir. 1993)]. Some courts have
determined that the duty to act in good faith obligates cedents to be
“honest and businesslike” in the claims settlement process [Am.
Marine Ins. Group v. Neptunia Ins. Co., 775 F. Supp. 703, 709 (S.D.N.Y.
1991), aff’d, 961 F.2d 372 (2d Cir. 1992); Aetna Cas. & Sur. Co. v. Home
Ins. Co., 882 F. Supp. 1328, 1347 (S.D.N.Y. 1995)]. It is difficult for
reinsurers to avoid following cedents’ fortunes or settlements by
proving their decisions were not made in good faith. Courts and
arbitrators typically require some element of intentional misconduct
rather than inadvertent error.
Example: A reinsurer was found not liable to its reinsured for payment
of its share of a settled claim, even though the reinsurance agreement
contained a “follow the settlements” clause. The court concluded that
the settled claims were not even arguably covered by the underlying
policies and that the cedent had not conducted a reasonable, businesslike investigation before paying the claims [Karen L. Suter v. Gen.
Accident Ins. Co. of Am., 2006 U.S. Dist. LEXIS 48209, at *82, 84-86
(D.N.J. 2006)].
Example: The Court of Appeals for the Eleventh Circuit found that a
reinsurer was obligated to follow the fortunes of a ceding insurer that
made a good faith determination of coverage based on existing law,
regardless of whether its decision was ultimately correct [Am. Bankers
Ins. Co. of Fla. v. Nw. Nat’l Ins. Co., 198 F.3d 1332, 1336-37 (11th Cir.
1999)]. Because there was legitimate debate at the time of payment
about whether a large group of similar claims constituted a single
occurrence, the ceding insurer’s decision to pay those claims on an
aggregate basis was not grossly negligent or reckless [id.].
Consider: Although courts have recognized limits on the scope of the
“follow the fortunes” and “follow the settlements” doctrines, the
reinsurance industry largely measure their mutual relationships as if a
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40.19
particular contract included a broad follow the settlements clause.
Most arbitration panels, heeding provisions in reinsurance contracts
directing them to consider reinsurance agreements as “honorable
engagements,” and not merely legal obligations, uphold these principles in reinsurance payment disputes. [For a discussion of honorable
engagement language in reinsurance contracts, see § 40.24 below].
40.19 Consider Application of Follow the Fortunes/Follow the Settlements to
Allocation Decisions. One of the more common issues in reinsurance
coverage disputes is the extent to which the follow the fortunes/
settlements doctrine requires reinsurers to follow the cedent’s allocation
and aggregation decisions in the case of settlements of its direct insurance
obligations, viz., the allocation of loss to particular policy years and the
aggregation of losses to satisfy minimum per-occurrence retentions or to
disaggregate losses to multiply the available reinsurance policy limits.
Allocation issues typically arise when insureds seek coverage for injuries
to multiple parties or multiple properties under several policies spanning
many years and the case is settled without a judicial determination as to
how the losses should be allocated to particular policies. Cedents must
determine how to allocate these losses among their underlying policies,
which allocation in turn affects their reinsurers. This tension has arisen
largely in the context of asbestos, product liability and environmental
coverage cases. Reinsurers have often challenged cedents’ allocation
decisions on the grounds they were incorrect or made only to maximize
reinsurance recovery. Many courts have held that the follow the fortunes/
settlements doctrine applies to preclude reinsurers from avoiding liability,
where the allocation decisions are made reasonably and in good faith as
part of the settlement with the insured. In addition, some courts have
regularly found that the “follow the settlements” doctrine extends to a
cedent’s post-settlement allocation decisions, even if there is an inconsistency between the cedent’s allocation and its pre-settlement assessment of
risk as long as the allocation was made in good faith and was reasonable
[Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of Am., 419
F.3d 181, 188-91 (2d Cir. 2005); N. River Ins. Co. v. ACE Am. Reinsurance
Co., 361 F.3d 134, 140-41 (2d Cir. 2004)].
Reinsurers will still be relieved from following cedents’ settlements if the
allocation at the direct insurance level is trumped by the specific terms of
the reinsurance contracts.
Example: A facultative reinsurer was bound to pay its share of the
direct insurer’s settlement of certain products liability claims under
the certificate’s “follow the fortunes” clause. The court interpreted the
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“follow the fortunes” clause as having the same effect in the settlement
context as would a “follow the settlements” clause. The court determined that the cedent’s allocation of the settled claims to the reinsured
policy was “at least arguably correct, and therefore . . . could not have
been unreasonable” [Nat’l Union Fire Ins. Co. v. Am. Re-Insurance Co.,
441 F. Supp. 2d 646, 652 (S.D.N.Y. 2006)]. The court stated that the
reinsurer’s challenges to the ceding company’s allocation decisions
invite “exactly the type of inquiry [by the reinsurer and the court] that
the follow-the-fortunes doctrine is intended to prevent,” and that
permitting reinsurers to “second guess [the propriety of the cedent’s
allocation] ’would . . .make settlement impossible and reinsurance in
itself problematic”’ [id., citing Travelers Cas. & Sur. Co. v. Gerling
Global Reinsurance Corp., 419 F.3d 181, 189 (2d Cir. 2005)].
Example: The Second Circuit Court of Appeals held that “a cedent’s
post-settlement allocation must be deferred to under a follow-thefortunes clause, regardless of any pre-settlement position taken by the
cedent, whether that position is articulated in a pre-settlement risk
analysis or is implicit in the settlement with the underlying insured”
[Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp. of
America, 419 F.3d 181, 188 (2d Cir. 2005)]. Granting summary judgment to the cedent on its claim for reinsurance payment, the court
explained that a reinsurer seeking to avoid application of follow the
fortunes must make an “extraordinary showing of a disingenuous or
dishonest failure” [id. at 191] and that “a cedent choosing among
several reasonable allocation possibilities is surely not required to
choose the allocation that minimizes its reinsurance recovery to avoid
a finding of bad faith” [id. at 193].
Example: A reinsurer disputed its cedent’s allocation of non-products
asbestos claims that differed from its pre-settlement analysis. The
Second Circuit Court of Appeals upheld the allocation, ruling that the
“follow the settlements” doctrine obligated the reinsurer to indemnify
the cedent for its share of the settlement as allocated by the cedent,
regardless of whether there was an inconsistency between the allocation and the reinsured’s pre-settlement assessment of risk, as long as
the allocation met the typical “follow the settlements” requirements,
i.e., was in good faith, reasonable and within the applicable policies [N.
River Ins. Co. v. Ace Am. Reinsurance Co., 361 F.3d 134, 141 (2d Cir.
2004)]. The court explained that “[r]equiring post-settlement allocation
to match pre-settlement analyses would permit a reinsurer, and
require the courts, to intensely scrutinize the specific factual information informing settlement negotiations and would undermine the
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certainty that the general application of the doctrine to settlement
decisions creates” [id.].
Example: The New York Court of Appeals rejected a cedent’s argument
that “follow the fortunes” clauses in reinsurance treaties permitted it
to recover under a single occurrence theory, where the language of the
treaties did not support such allocation [Travelers Cas. and Sur. Co. v.
Certain Underwriters at Lloyd’s of London, 760 N.E.2d 319, 327-29
(N.Y. 2001)]. The court determined that the treaties’ definition of
“disaster and/or casualty” as “resulting from a series of accidents,
occurrences and/or causative incidents” incorporated spatial boundaries and precluded aggregation of environmental losses that occurred
at various sites across the country [id. at 326-27]. The court emphasized
that the “follow the fortunes” clause could not override the specific
language of the reinsurance contracts [id. at 328].
Example: A federal district court denied a cedent’s motion for summary judgment on its claim for indemnity from its reinsurer premised
on a “follow the settlements” provision in facultative certificates,
where there were facts that could support the inference that the
cedent’s conduct in allocating environmental liability to only one site
was grossly negligent or reckless. The cedent’s classification of the
settlement as a single occurrence, where there were claims from over
50 different sites, may have been motivated by its desire to maximize
reinsurance recovery and was done without following the customary
practice of consulting an environmental expert [Hartford Accident &
Indem. Co. v. Columbia Cas. Co., 98 F. Supp. 2d 251, 258-60 (D. Conn.
2000)].
Example: The Appellate Division of the New York Supreme Court
reversed the trial court’s grant of summary judgment to the cedent,
which was premised on the “follow the fortunes” doctrine. During an
insurance coverage dispute, the cedent took the position with its
insured that damage allegedly sustained due to environmental pollution at various sites constituted multiple occurrences at each individual site. In a trial of one site at issue, the court found that one of the
individual sites constituted seven occurrences. In the subsequent
settlement of 16 additional sites, the cedent took the position that there
were 95 occurrences in all; however, when it came time to cede its
losses under facultative reinsurance agreements, the cedent took the
position that each site constituted a single occurrence. Had the cedent
billed the losses based on the same number of occurrences determined
in the underlying coverage action, there would have been no reinsur40-83
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40.19
ance recovery because no single occurrence would have breached the
reinsurance retention. The trial court granted the cedent summary
judgment regardless of the inconsistency between the pre and post
settlement allocation positions declaring that to do otherwise would
require it to engage in an “intrusive factual inquiry” into the cedent’s
settlement process. The Appellate Division reversed this decision
finding that “[a] reinsurer is not bound by the follow-the-fortunes
doctrine where the reinsured’s settlement allocation, at odds with its
allocation of the loss with its insured, designed to minimize its loss,
reflects an effort to maximize unreasonably the amount of collectible
reinsurance.” Allstate Ins. Co. v. Am. Home Assurance Co., N.Y. Slip
Op. 05170 (N.Y. App. Div., 1st Dept., June 12, 2007).
Consider: Most allocation disputes are decided in arbitration, rather
than litigation, and it is uncertain whether or to what extent court
decisions on this issue are truly representative of industry practice or
will be followed and applied in the arbitral arena.
z Strategic Point — Cedents: The following factors may influence what
allocation position a cedent should take in seeking indemnification
from reinsurers:
1.
Whether the positions taken by the cedent when negotiating or
litigating with the insured are consistent with positions advanced by the company in the past;
2.
Whether an underlying allocation is consistent with applicable
state law;
3.
If there is an environmental cession, whether the liability has
been apportioned to the various underlying sites in proportion
to estimates developed by environmental consultants with
respect to damages attributable to the individual sites;
4.
Whether there are annualization of limits issues;
5.
Whether more than a single occurrence limit has been paid to
the insured to settle the liability;
6.
Whether the settlement is a policy buy-back, and if so whether
any of the settlement amount should be allocated to known
and/or unknown future claims (or to bad faith).
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VIII.
CONSIDERING BROKERED MARKET.
40.20 Brokered vs. Direct Market. Reinsurance companies are generally
known as either direct markets or brokered markets, depending on
whether the reinsurers deal directly with their cedents or deal with them
through an intermediary. Direct markets operate through salaried employees of ceding insurers and reinsurers who negotiate and bind reinsurance
contracts. In brokered markets, reinsurers assume business by dealing
with brokers or intermediaries. Whether the intermediary is the agent of
the cedent or the reinsurer or is a dual agent is determined by an
application of the facts to standard agency principles. Under typical fact
patterns, although the intermediary commission is generally paid by the
reinsurer, the intermediary is held to be the agent of the cedent [In re
Pritchard & Baird, Inc., 8 B.R. 265 (D.N.J. 1980)].
Reinsurance brokers perform many of the same functions as brokers in the
direct insurance market. Reinsurance brokers try to secure the most
advantageous terms for ceding insurers from the reinsurance marketplace.
A reinsurance broker or intermediary also may perform administrative
functions during the operation of the reinsurance agreement. Reinsurance
intermediaries often serve as a conduits for communications between
cedents and reinsurers, transmit payments, collect sums due, settle losses
and prepare periodic statements of account. Reinsurance brokers may
have functions akin to claim handlers in the gathering of information,
conveyance of attorney advice and the like concerning the submission of
claims for indemnification. Additional responsibilities may include drafting reinsurance contract wording and creating complex reinsurance
programs tailored to the ceding insurer’s specific needs.
z Strategic Point — Cedent: Although a reinsurance intermediary’s
duties may be limited by specific instructions from the ceding insurer,
it is generally required to fulfill its client’s reinsurance needs with
reasonable care. For example, there is case law which suggests that a
reinsurance broker has a duty to determine whether the reinsurance
company the broker is recommending is financially solvent [Master
Plumbers Ltd. Mut. Liab. Co. v. Cormany & Bird, Inc., 255 N.W.2d 533,
535-36 (Wis. 1977)]. This requirement exists as of the time the broker
issues the policy [see Cherokee Ins. Co. v. E.W. Blanch Co., 66 F.3d 117,
123 (6th Cir. 1995)]. In analyzing potential liability, courts have stated
that the broker must conduct a diligent inquiry that is consistent with
industry standards [id.]. In addition, many states have enacted statutory schemes similar to the National Association of Insurance Commissioners (NAIC) Reinsurance Intermediary Model Act (“NAIC
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Model Act”), requiring special licensing for reinsurance intermediaries
[see Cal. Ins. Code §§ 1781.1 to 1781.13; 215 Ill. Comp. Stat. 100/1 to
100/60; N.Y. Ins. Law § 2100 et seq.]. The NAIC Model Act is republished in full at Eric Mills Holmes, Appleman on Insurance 2d § 104.3.
In New York, regulations require intermediaries to inquire into the
financial status of unauthorized reinsurers, disclose any findings to the
cedent and provide a copy of the reinsurer’s most recent financial
statement [N.Y. Comp. Codes R. & Regs. tit. 11, § 32.1(c); for a
discussion of the regulation of reinsurance intermediaries in New
York, see New York Insurance Law § 15.04[3] (Walcott B. Dunham, Jr.,
ed.)].
z Strategic Point — Cedents: A broker also can be liable for breach of an
obligation to procure reinsurance for an insurer [see Nw. Nat’l Ins. Co.
v. Marsh & McLennan, 817 F. Supp. 1424, 1430-34 (E.D. Wis. 1993)].
Similarly, a reinsurance intermediary may be liable for failure to
inform the cedent that reinsurance coverage was not obtained in full or
in part or is inferior to that which was expected [see Commonwealth
Ins. Co. v. Thomas A. Greene & Co., Inc., 709 F. Supp. 86, 88 (S.D.N.Y.
1989); La. Home Builders Ass’n Self-Insurers’ Fund v. Adjustco, Inc.,
633 So. 2d 630, 635-36 (La. Ct. App. 1993)].
佡 Cross Reference: For a discussion of direct and brokered reinsurance
markets, see California Insurance Law & Practice § 11.01.
40.21 Understand Which Entity Broker Represents. The issue often arises as
to whose agent the reinsurance broker or intermediary is with respect to
a specific transaction. The general rule is that the broker or intermediary
is the agent of the ceding company, unless there are facts demonstrating
otherwise [Houston Cas. Co. v. Certain Underwriters at Lloyd’s London,
51 F. Supp. 2d 789, 799-800 (S.D. Tex. 1999); Banco Ficohsa v. Aseguradora
Hondurena, S.A., 937 So. 2d 161, 165 (Fla. Dist. Ct. App. 2006)]. Under
applicable state law principles of agency law, the specific conduct and
relationship of the parties determines the nature and extent of agency
status, and the most critical factor is control [St. Paul Fire and Marine Ins.
Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS 8916, at *18-19 (S.D.N.Y. 1997)].
Where the broker or intermediary is found to be an agent of the cedent, the
cedent may be responsible for the agent’s actions, including misrepresentations [see Houston Cas. Co. v. Certain Underwriters at Lloyd’s London,
51 F. Supp. 2d 789, 802-05 (S.D. Tex. 1999); Reliance Ins. Co. v. Certain
Member Companies, 886 F. Supp. 1147, 1152-55 (S.D.N.Y. 1995); Calvert
Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 638-39 (D. Neb.
1980)].
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Understanding Reinsurance
40.21
It is also possible for a reinsurance intermediary to be a dual agent [see
Capitol Indem. Corp. v. Smith Intermediaries, Inc. 593 N.E.2d 872, 876 (Ill.
App. Ct. 1992); Paul M. Hummer, Reinsurance Intermediaries: When Are They
Liable and To Whom?, Mealey’s Litigation Reports § Commentary; Vol. 7,
No. 10 (Sept. 25, 1996)].
Example: A reinsurance broker or intermediary may serve as the agent
for the reinsurer in order to receive or transmit money. In that case,
payment of a premium to the ceding insurer’s agent is likely to
constitute a valid premium payment on the reinsurance contract,
whether or not the reinsurer knows of the payment [see ArkwrightBoston Mfrs. Mut. Ins. Co. v. Calvert Fire Ins. Co., 887 F.2d 437, 440 (2d
Cir. 1989)].
That an intermediary functions as an agent for one party for part of the
transaction, and the other party for a different part, does not mean that the
intermediary is the agent of both for all purposes.
Most reinsurance agreements include an intermediary clause that sets
forth the intermediary’s role in communications and its agency status in
terms of receiving monies due between the parties. In most jurisdictions,
a reinsurer will receive statutory credit for reinsurance only if the
reinsurance agreement provides for the reinsurer to assume the credit risk
of the intermediary (i.e., the reinsurer is not permitted to refuse to perform
simply because the intermediary failed to transmit premium payments
from the cedent). Therefore, reinsurance agreements involving intermediaries include an intermediary clause providing that the intermediary acts
as the agent of the reinsurer, and not as the agent of the cedent, with
respect to transmission of payments. [For a sample intermediary clause
transferring the credit risk to the reinsurer, see § 40.44 below.]
On rare occasions, a non-signatory to the arbitration agreement such as a
reinsurance intermediary may become a party to a reinsurance arbitration.
[For a discussion of the inclusion of non-signatories in reinsurance
arbitrations, see § 40.22 below.] There are conflicting decisions on whether
pre-hearing discovery can be compelled from an intermediary that is not
a party to a reinsurance arbitration, especially whether pre-hearing
deposition examination is available. [For a discussion of discovery in
reinsurance arbitrations, see § 40.25 below.]
Example: Court found that there was no agency relationship between
a broker and a ceding insurer where the broker was not acting with the
knowledge and consent or under the control of the ceding insurer [St.
Paul Fire and Marine Ins. Co. v. Eliahu Ins. Co., 1997 U.S. Dist. LEXIS
8916, at *14 (S.D.N.Y. 997)]. The court stated “[a]lthough in most cases
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New Appleman Insurance Practice Guide
the primary insurer is the principal and the reinsurance broker its
agent, the cases do not establish this relationship as a matter of law”
[id. at *5].
Example: An employee of the cedent who erroneously ceded a risk to
a treaty was acting as an agent of the ceding company and not of the
reinsurers. The fact that the reinsurers knew of and were satisfied with
his underwriting did not establish the element of control necessary to
the agency relationship [Aetna v. Glens Falls, 453 F.2d 687, 690-91 (5th
Cir. 1972)].
Example: A reinsurance treaty was rescinded because of misrepresentations by the intermediary, who was found to have been acting as the
agent of the cedent [Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526
F. Supp. 623, 633 (D. Neb. 1980)].
Example: A reinsurance broker was the ceding insurer’s agent, and its
misrepresentation of the underlying policy’s terms was made within
the scope of its actual authority and voided the reinsurance policy
[Houston Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F.
Supp. 2d 789, 799-805 (S.D. Tex. 1999)].
Example: The insurer entered into a general agency agreement with a
company which was also “an intermediary with Lloyd’s” [Brougher
Agency, Inc. v. United Home Life Ins. Co., 622 N.E.2d 1013, 1015 (Ind.
Ct. App. 1993)]. This agent negotiated the purchase of reinsurance
from Underwriters at Lloyd’s, London. In a reinsurance coverage
dispute between the insurer and the Lloyd’s Underwriters, the insurer
argued that the underwriters were bound by the agent’s statements
about coverage during the placement process. An arbitration panel
rejected this claim, determining that the agent had only “ministerial”
authority relating to the reinsurance and no binding authority on
behalf of Lloyd’s Underwriters. Because the agent was not authorized
to act as the agent for Lloyd’s Underwriters, they could not be liable
for any alleged fraud by the intermediary [id. at 1016-17].
佡 Cross Reference: For a discussion of cases considering the agency
status of reinsurance brokers and intermediaries, see Bertram Harnett,
Responsibilities of Insurance Agents and Brokers § 2.10[7].
40-88
IX.
CONSIDERING REINSURANCE ARBITRATION.
40.22 Consider Obligation to Arbitrate. Most reinsurance treaties include a
clause providing for resolution of disputes through arbitration, and U.S.
courts strongly favor the enforcement of arbitration provisions. Even in
the absence of an arbitration provision, the parties to a reinsurance
contract may agree after the fact to arbitrate a particular dispute. One
advantage of arbitration is that it enables parties to a reinsurance
agreement to have their disputes adjudicated by a tribunal that is
knowledgeable about the reinsurance industry; arbitrators may also be
free to eschew fidelity to strict rules of law pursuant to “honorable
engagement” clauses.
The Federal Arbitration Act (“FAA”) [9 U.S.C. §§ 1 et seq.], which applies
to arbitrations arising from transactions that affect interstate or international commerce, is the primary source of arbitration law in the U.S. and
“enunciates a liberal policy in favor of arbitration” [Argonaut Ins. Co. v.
Travelers Ins. Co., 744 N.Y.S.2d 24, 25 (N.Y. App. Div. 2002); see also
Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venez., 991
F.2d 42, 45 (2d Cir. 1993)]. The FAA includes provisions concerning the
following: compelling a party to arbitrate; staying litigation pending
arbitration; appointing an arbitrator if the agreement does not so provide;
submitting motions before courts; subpoenaing arbitration witnesses; and
listing grounds and procedures for confirmation, vacatur, and modification of arbitral awards [9 U.S.C. §§ 3-16].
Another body of law governing and favoring commercial arbitration in
the U.S. is the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (the “New York Convention”) [9 U.S.C. §§ 201-208],
which applies to arbitrations arising from commercial transactions where
at least one party is not a U.S. citizen or where the arbitration has some
“reasonable relation with one or more foreign states,” even if all parties are
U.S. citizens [9 U.S.C. § 202]. State arbitration statutes, many of which are
modeled after the Uniform Arbitration Act, generally apply to disputes
that do not affect interstate or international commerce.
When one party tries to avoid arbitrating a dispute, the other party may
file a motion to compel arbitration (which is in its nature a request for
specific performance of the arbitration clause). Whether a claim is arbitrable is a legal question for a court to decide, unless there is “clear and
unmistakable” evidence that the parties have agreed to arbitrate arbitrability [First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944(1995), citing
AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649
(1986); see also Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d
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New Appleman Insurance Practice Guide
Cir. 2005) (citation omitted)]. Although arbitration is favored by the courts,
it will not be ordered unless the parties have agreed to arbitrate their
dispute [Ace Capital Re: Overseas Ltd v. Central United Life Ins. Co., 307
F.3d 24, 29 (2d Cir. 2002)]. There must be “clear and unmistakable”
evidence of an agreement to arbitrate [First Options of Chi., Inc. v. Kaplan,
514 U.S. 938, 947 (1995)], although most courts seem, as a practical matter,
to rule in favor of arbitrability or to remand the question of arbitrability to
arbitrators — either way referring a particular matter to arbitration. In
addition, the duty to arbitrate is limited by “the scope of the particular
arbitration clause to which the parties have agreed,” so certain types of
disputes, such as tortious interference or bad faith, might be found to be
outside the scope of an arbitration clause governing contractual performance [Argonaut Ins. Co. v. Travelers Ins. Co., 744 N.Y.S.2d 24, 25 (N.Y.
App. Div. 2002)].
The arbitration clause in a reinsurance contract typically sets forth the
following: the types of disputes subject to arbitration; the initiation of the
arbitration process; the process of selecting the arbitration panel and the
qualifications of arbitrators; the place and time of the arbitration hearing;
the governing law; the procedures and timeframes to be followed in the
arbitral process; and enforcement of the arbitration award. Arbitrations
can be conducted under many different rules and in various fora. Some
reinsurance arbitrations are conducted pursuant to procedures set forth by
the following organizations:
•
•
•
•
•
•
The American Arbitration Organization;
The International Chamber of Commerce;
The Reinsurance Association of America;
ARIAS-U.S.;
The Insurance and Reinsurance Dispute Resolution Task Force; and
The International Institute for Conflict Prevention and Resolution.
The presumption favoring arbitrability of a particular dispute is strengthened when the language in the arbitration clause defining arbitrable
disputes is “broad” [Leadertex, Inc. v. Morganton Dyeing & Finishing
Corp., 67 F.3d 20, 27 (2d Cir. 1995)]. The following are examples of
language included in arbitration clauses that have been viewed as broad
and encompassing a variety of disputes beyond interpretation of the
contract:
•
Any dispute, controversy or claim arising in connection with the
performance or breach of the agreement;
•
Any controversy, claim or dispute between the parties arising out
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Understanding Reinsurance
40.22
of or relating in any way to the agreement;
•
Any dispute arising from the making, performance or termination
of the contract;
•
All claims and disputes of whatever nature arising under the
contract; and
•
Any dispute between the parties to the agreement over the terms of
the agreement or any claim of breach by either of the parties.
佡 Cross Reference: For an example of a broad arbitration clause in a
reinsurance agreement, see § 40.45 below.
In contrast, included below are examples of language in arbitration
clauses that have been viewed as narrow, limiting arbitration to particular
types of disputes:
•
All disputes or differences arising out of the interpretation of the
agreement;
•
Any matter involving the interpretation or application of the
agreement;
•
An irreconcilable difference of opinion as to the interpretation of
the contract.
Parties are free to limit by agreement the claims they wish to arbitrate,
requiring the “federal policy favoring arbitration [to] yield” to the parties’
agreement [Hartford Accident and Indem. Co. v. Swiss Reinsurance Am.
Corp., 246 F.3d 219, 223 (2d Cir. 2001) (citation omitted); see also Ace
Capital Re: Overseas Ltd v. Central United Life Ins. Co., 307 F.3d 24, 29 (2d
Cir. 2002)].
In determining whether a particular dispute is arbitrable, courts typically
engage in a two-part inquiry: whether there is an agreement to arbitrate
and, if so, whether the scope of the agreement encompasses the asserted
claims [Hartford Accident and Indem. Co. v. Swiss Reinsurance America
Corp., 246 F.3d 219, 226 (2d Cir. 2001) (citation omitted)]. “[A]ny doubts
concerning the scope of arbitrable issues should be resolved in favor of
arbitration” [Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24-25 (1983)]. Therefore, a court should compel arbitration “unless
it may be said with positive assurance that the arbitration clause is not
susceptible of an interpretation that covers the asserted dispute” [David L.
Threlkeld & Co., Inc. v. Metallgesellschaft Ltd., 923 F.2d 245, 250 (2d Cir.
1991) (citations omitted)]. In determining whether a particular claim falls
within the scope of an arbitration agreement, courts focus on the factual
allegations rather than the legal claims asserted. If the allegations under40-91
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lying the claims “touch matters” covered by the parties’ contract, then
those claims are arbitrable [see Mitsubishi Motors Corp. v. Soler ChryslerPlymouth Inc., 473 U.S. 614, 625 n.13 (1985); Genesco, Inc. v. Kakiuchi &
Co., Ltd., 815 F.2d 840 (2d Cir. 1987)]. Appellate courts review decisions to
compel arbitration de novo [Sphere Drake Ins. Ltd. v. Clarendon Nat’l Ins.
Co., 263 F.3d 26, 29 (2d Cir. 2001)], but such review may not be available
on an interlocutory basis.
Courts can sever arbitrable claims from nonarbitrable claims. When a
court determines that only some claims are arbitrable, it must decide
whether to stay litigation of the remaining claims pending arbitration or to
let them proceed concurrently [JLM Industries, Inc. v. Stolt-Nielsen SA,
387 F.3d 163, 169 (2d Cir. 2004) (citation omitted); Benson v. Lehman Bros.,
Inc., 2005 U.S. Dist. LEXIS 8542, at *4-5 (S.D.N.Y. May 9, 2005) (citation
omitted)]. [For a discussion of when courts stay litigation pending
arbitration, see New York Insurance Law, § 15.08[2] (Walcott B. Dunham,
Jr., ed.).] If factual questions on which the non-arbitrable claim turns may
be resolved in the arbitration, courts typically stay the non-arbitrable
claim.
Absent a contract provision to the contrary, questions of mere delay, laches
and untimeliness raised to defeat arbitration are generally issues of
procedural arbitrability reserved for resolution by the arbitrator [Glass v.
Kidder, Peabody & Co., Inc., 114 F.3d 446, 454-56 (4th Cir. 1997); All Am.
Termite & Pest Control, Inc. v. Albert Bedford Walker, 830 So. 2d 736, 739
(Ala. 2002); Amtower v. William C. Roney & Co., 590 N.W.2d 580, 583
(Mich. Ct. App. 1998); but see In the Manner of Donaldson Acoustics, Inc.
v. N.Y. Inst. of Tech., 671 N.Y.S.2d 114, 115 (N.Y. Sup. Ct. 1998)].
Another issue that most courts have found to be within the purview of the
arbitration panel, unless the parties’ agreement provides otherwise, is
whether or not arbitrable disputes can be consolidated, that is, whether
arbitration under separate contracts can be resolved in a single proceeding
[Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 581
(7th Cir. 2006); Shaw’s Supermarkets, Inc. v. United Food & Commercial
Workers Union, 321 F.3d 251, 254-55 (1st Cir. 2003); Markel Int’l Ins. Co. v.
Westchester Fire Ins. Co., 442 F. Supp. 2d 200, 203-05 (D.N.J. 2006), aff’d
Certain Underwriters at Lloyd’s London. v. Westchester Fire Ins. Co., 2007
U.S. App. LEXIS 13714 (3d Cir. 2007)].
z Strategic Point — Consolidation of Arbitrations: There are potential
advantages and disadvantages posed by the consolidation of arbitration proceedings. On the one hand, consolidation may prevent inconsistent and conflicting decisions, provide arbitrators with a more
complete understanding of the issues involved in the disputes and
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promote more efficient and cost-effective dispute resolution. On the
other hand, consolidation may be more costly for a party only
peripherally involved in a series of complex disputes, may create a risk
that the panel’s decision will be tainted by facts irrelevant to a
particular dispute and may raise additional confidentiality concerns. It
also may be difficult to restructure an arbitration proceeding to
accommodate the rights of additional parties or related disputes. Thus,
contracting parties should carefully consider whether or not to include
consolidation and joinder provisions in their arbitration agreements or
to request consolidation once arbitration has commenced. Parties
seeking consolidation should approach their arbitration panel quickly
to ensure that the decision regarding consolidation will be made by the
panel they chose, and not a panel adjudicating another dispute.
Some parties have argued that inclusion of a service of suit clause in a
reinsurance agreement conflicts with an arbitration clause in the same
agreement and indicates that the parties did not intend all issues to be
arbitrable. Most courts have harmonized these clauses, however, by
assuming that the parties did not intend to eviscerate the arbitration
clause through the service of suit clause [see Montauk Oil Transp. Corp. v.
Steamship Mut. Underwriting Ass’n (Bermuda), 79 F.3d 295, 298 (2d Cir.
1996); Ochsner/Sisters of Charity Health Plan, Inc. v. Certain Underwriters at Lloyd’s, London, 1996 U.S. Dist. LEXIS 12561, at *5-7 (E.D. La. Aug.
30, 1996); W. Shore Pipe Line Co. v. Associated Elec & Gas Ins. Servs., Ltd.,
791 F. Supp. 200, 204 (N.D. Ill. 1992)]. Courts have found that the service
of suit clause is intended to provide jurisdiction over a foreign party, and
where it co-exists with an arbitration clause, its purpose is to permit
enforcement of an arbitration decision or to allow a petition to compel
arbitration to be adjudicated in a particular court [W. Shore Pipe Line Co.
v. Associated Elec. & Gas Ins. Servs., Ltd., 791 F. Supp. 200, 204 (N.D. Ill.
1992)].
The arbitration clause is also the starting point for a determination of the
remedies that can be imposed by an arbitral panel. “[S]ubject to the terms
of the empowering clause, arbitrators possess latitude in crafting remedies
as wide as that which they possess in deciding cases” [Advest, Inc. v.
McCarthy, 914 F.2d 6, 10-11 (1st Cir. 1990)], including equitable remedies
such as pre-judgment attachment or security. Consistent with the federal
policy favoring arbitration, courts have been reluctant to find that an
arbitrator exceeded his authority in ordering relief, where the arbitration
agreement does not specifically restrict the arbitrator’s authority [Mich.
Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 831 (9th Cir. 1995);
Rhone-Poulenc, Inc. v. Gould Elecs., Inc., 1998 U.S. Dist. LEXIS 15848, at *7
(N.D. Cal. Oct. 6, 1998)]. For example, under a broadly worded arbitration
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clause, arbitrators are empowered to reform a contract [Mut. Fire, Marine
& Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989);
Mich. Mut. Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832-33 (9th Cir.
1995)]. Assuming the arbitration clause is broad enough, arbitrators also
can grant rescission of a reinsurance contract (in part because arbitration
clauses are generally thought to be separable from the underlying
contract) [Ace Capital Re Overseas Ltd. v. Central United Life Ins. Co., 307
F.3d 24, 26, 33 (2d Cir. 2002)]. In some circumstances, arbitrators can award
temporary equitable relief where necessary to ensure that the final award
is meaningful [Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp.,
935 F.2d 1019, 1022-23, 1026 (9th Cir. 1991); British Ins. Co. of Cayman v.
Water St. Ins. Co., 93 F. Supp. 2d 506, 516 (S.D.N.Y. 2000); but see Recyclers
Ins. Group v. Ins. Co. of N. Am., 1992 U.S. Dist. LEXIS 8731, at *14 (E.D. Pa.
1992]. Arbitrators also generally are empowered to award prejudgment
interest [Rhone-Poulenc, Inc. v. Gould Elecs., Inc., 1998 U.S. Dist. LEXIS
15848, at *7-8 (N.D. Cal. 1998); J.A. Jones Constr. Co. v. Flakt, Inc., 731 F.
Supp. 1061, 1064 (N.D. Ga. 1990)].
Courts also may look to the parties’ submissions of the issues to the
arbitrators to determine the scope of the arbitrators’ power to grant relief
[Trade & Transp., Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191,
195 (2d Cir. 1991); Mut. Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868 F.2d 52, 56 (3d Cir. 1989)]. Further, the power to grant relief
may not be limited by the scope of the parties’ agreement, if the
background rules governing the arbitration provide broad equity powers
[see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991); Brown
v. Coleman Co., 220 F.3d 1180, 1183 (10th Cir. 2000)].
The attempted inclusion of non-signatories to the arbitration agreement in
an arbitration proceeding is frequently a subject of dispute. Because
arbitration is a contractual right, non-signatories to an arbitration agreement generally may not be bound to, nor able to, enforce an agreement to
arbitrate [Mut. Benefit Life Ins. Co. v. Zimmerman, 783 F. Supp. 853, 865-67
(D.N.J. 1992)]. However, in certain circumstances, a non-signatory may
force a signatory to an arbitration agreement to submit to an arbitration
with the non-signatory under principles of contract, agency and estoppel
[see Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659
F.2d 836, 838-41 (7th Cir. 1981); Gulf Guar. Life Ins. Co. v. Conn. Gen. Life
Ins. Co., 957 F. Supp. 839, 841-42 (S.D. Miss. 1997); Cont’l Cas. Co. v.
Certain Underwriters at Lloyd’s London, 2004 U.S. Dist. LEXIS 4060, at
*13-14 (S.D.N.Y. 2004)]. In addition, non-signatories to an arbitration
agreement may be bound to arbitrate pursuant to several legal doctrines,
including: assumption; agency; estoppel; veil piercing; and incorporation
by reference [Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen
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GMBH, 206 F.2d 411, 416-18 (4th Cir. 2000); Thomson-CSF, S.A. v. Am.
Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995); but see Grundstad v. Ritt,
106 F.3d 201, 204-05 (7th Cir. 1997)].
The right to arbitrate a dispute may be waived if a party fails to comply
with the terms of the arbitration agreement, excessively delays commencing arbitration or takes action that is inconsistent with the arbitral process
[see Gen. Star Nat’l Ins. Co. v. Administratia Asigurarilor De Stat, 289 F.3d
434, 438 (6th Cir. 2002); Menorah Ins. Co. v. INX Reinsurance Corp., 72 F.3d
218, 221-22 (1st Cir. 1995); Kramer v. Hammond, 943 F.2d 176, 179-80 (2d
Cir. 1991)]. If a party waits while a matter is being litigated to assert a right
to arbitrate, the court may find it to be estopped from asserting the
arbitration clause if the litigation has proceeded substantially.
Example: Some courts have found that inclusion of the phrase “arbi-
tration clause” in an executed placement slip or cover note constitutes
evidence of a binding agreement to arbitrate [Zurich Am. Ins. Co. v.
Cebcor Serv. Corp., 2003 U.S. Dist. LEXIS 10346, at *6-11 (N.D. Ill.
2003); Guarantee Trust Life Ins. Co. v. Am. United Life Ins. Co., 2003
U.S. Dist. LEXIS 22777, at *7-8 (N.D. Ill. Dec. 18, 2003) (applying
Pennsylvania law); but see Frank B. Hall Co. of Colo. v. Colo. Sch. Dists.
Self-Insurance Pool, No. 92 CV 225 (Colo. Dist. Ct., City and Co. of
Denver Mar. 26, 1997), reported in Mealey’s Litigation Reports: Reinsurance, Vol. 3, No. 24 at D].
Example: A narrow arbitration clause applying only to “irreconcilable
differences of opinion” that concern “the interpretation” of facultative
certificates did not encompass a claim that the certificates were void ab
initio because of the cedent’s failure to disclose asbestos litigation
[Gerling Global Reinsurance Co. v. Ace Prop. & Cas. Ins. Co., 2002 U.S.
App. LEXIS 15571, at *5-7 (2d Cir. Aug. 1, 2002) (unpublished
opinion)].
Example: A reinsurer sued to rescind a reinsurance contract based on
non-disclosures in the underwriting process. The federal district court
found that the arbitration clause covering “[a]ll disputes or differences
arising out of the interpretation of this Agreement” was too narrow to
encompass claims for rescission based on misrepresentation and
refused to stay those claims in favor of arbitration [Farm Bureau Mut.
Ins. Co. v. Am. Int’l Group, Inc., 2003 U.S. Dist. LEXIS 14463, at *11-12
(S.D. Iowa 2004)].
Example: Under an arbitration clause providing that “any dispute or
difference of opinion hereafter arising with respect to this Contract . . .
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shall be submitted to arbitration,” the issue of a mutually agreeable
location for the underlying dispute is arbitrable [Trustmark Ins. Co. v.
Fire & Cas. Ins. Co. of Conn., 2002 U.S. Dist. LEXIS 7923, at *6-7 (N.D.
Ill. 2002)].
t Warning: A Missouri arbitration statute has been interpreted by a
federal district court to preclude the enforcement of arbitration clauses
in insurance and reinsurance agreements [Transit Cas. Co. v. Certain
Underwriters at Lloyd’s of London, 1996 U.S. Dist. LEXIS 22710, at *5-8
(W.D. Mo. 1996), citing Mo. Rev. Stat. § 435.350 (as then existing)].
Examples — Non-signatories: A non-signatory to arbitration agreements
was compelled to arbitrate disputes with a signatory of the agreements
because the guaranty signed by the non-signatory incorporated the
agreements and the arbitration provisions of the agreements were
sufficiently broad to bind non-signatories [Clarendon Nat’l Ins. Co. v.
Lan, 152 F. Supp. 2d 506, 519-521 (S.D.N.Y. 2001)]. A reinsured party
not specifically named in an excess of loss reinsurance agreement was
permitted to compel arbitration against the signatory reinsurer under
the agreement’s arbitration clause as a third-party beneficiary of the
agreement [Cont’l Cas. Co. v. Certain Underwriters at Lloyd’s London,
2004 U.S. Dist. LEXIS 4060, at *13-14 (S.D.N.Y. 2004)]. A reinsurance
intermediary that was not a signatory to reinsurance and retrocession
agreements containing arbitration clauses was nonetheless compelled
to arbitrate a dispute concerning a reinsurer’s obligations under those
agreements. The court found that the intermediary was estopped from
refusing to arbitration because of its allegations that it suffered harm
due to the reinsurer’s repudiation of the contracts and because the
intermediary received a direct benefit from the agreements [Int’l Ins.
Agency Services, LLC v. Revios Reinsurance U.S., Inc., 2007 U.S. Dist.
LEXIS 22229, at *14-19 (N.D. Ill. 2007)].
佡 Cross References: For discussions of whether an insolvent company’s
liquidator or receiver is bound by an agreement to arbitrate, see New
York Insurance Law § 15.08[4] (Walcott B. Dunham, Jr., ed.); Eric Mills
Holmes, Appleman on Insurance 2d § 107.2[F].
Lexis.com Search: To find a general discussion of arbitration in the
reinsurance law context, try this source: Reinsurance Law. Using the
Table of Contents, navigate to Chapter 6 Arbitration.
40.23 Neutral Panel or Party Advocate System. Arbitration agreements
typically include provisions stipulating the number of arbitrators and
their qualifications, the timing and method by which the panel is to be
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40.23
selected and whether one arbitrator is to act as an umpire or chairman of
the panel. Some agreements do not specifically list these procedures, but
instead incorporate the rules of an arbitration organization containing
such procedures. If the agreement is completely silent on the method for
selecting arbitrators, or if the parties “fail to avail” themselves of the
procedures agreed upon for selecting arbitrators, a court is authorized
under the Federal Arbitration Act (“FAA”) to appoint any one or all of the
arbitrators upon application of a party [9 U.S.C. § 5; see also Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 814 F.2d 1324, 1327-29 (9th
Cir. 1987); AIG Global Trade and Political Risk Ins. Co. v. Odyssey Am.
Reinsurance Corp., 2006 U.S. Dist. LEXIS 73258, at *15-17 (S.D.N.Y. 2006)].
In arbitrations conducted pursuant to reinsurance agreements, the tribunal is usually composed of three arbitrators.
Reinsurance arbitration agreements typically provide that each side is to
designate its own “party” arbitrator, and then the two designated “party”
arbitrators are to appoint a third “neutral” arbitrator, usually called an
“umpire.” Some agreements also include a default mechanism for selection of the neutral arbitrator that operates when the parties or party
arbitrators (where vested with the decision to elect a third, neutral umpire)
cannot agree on umpire selection. In some instances, parties request the
organization administering the arbitration to appoint the umpire.
Unless set forth in the contract, the arbitrators need not meet any
particular requirements beyond capably performing their task. Arbitration
clauses in reinsurance agreements, however, usually set forth objective
qualifications for arbitrators and umpires. Most arbitrators are required to
have some level of expertise in the reinsurance or insurance industry or to
be a present or former officer or director of an insurance or reinsurance
company. In the United States, party-appointed arbitrators may be nonneutral and predisposed towards the party that appointed them, unless
the parties or the contract specifies otherwise [Lozano v. Md. Cas. Co., 850
F.2d 1470, 1472 (11th Cir. 1988); Merit Ins. Co. v. Leatherby Ins. Co., 714
F.2d 673, 679 (7th Cir. 1983); Astoria Med. Group v. Health Ins. Plan of
Greater N.Y., 182 N.E.2d 85, 87-89 (N.Y. 1962)]. Although party-appointed
arbitrators may have a general predisposition or sympathy with a party or
its position, this is more in the nature of a duty to give the party
appointing them a fair hearing; party-appointed arbitrators are not
surrogates for the party and still must make independent judgments and
act fairly [Universal Reinsurance Corp. v. Allstate Ins. Co., 16 F.3d 125, 129
n.2 (7th Cir. 1994); Metro. Prop. & Cas. Ins. Co. v. J.C. Penney Cas. Ins. Co.,
780 F. Supp. 885, 892 (D. Conn. 1991)]. (There also may be more latitude in
discussing the merits of the dispute with a party-appointed arbitrator until
the umpire is selected.) In contrast, umpires are expected to remain
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New Appleman Insurance Practice Guide
completely neutral. Both neutral and non-neutral members of the panel
must participate in the arbitration process in a fair, honest and good faith
manner and may not exhibit “evident partiality or corruption” [9 U.S.C.
§ 10(a)(2); Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 644-49
(6th Cir. 2005); Scott v. Prudential Sec., 141 F.3d 1007, 1015 (11th Cir. 1998)].
Arbitrators must disclose to the parties any potentially disqualifying
interests or relationships [Commonwealth Coatings Corp. v. Cont’l Cas.
Co., 393 U.S. 145, 147-49 (1968); see also U.S. Wrestling Fed’n v. Wrestling
Div. of AAU, Inc., 605 F.2d 313, 319 (7th Cir. 1979)]. Failure to disclose
business or financial relationships that would create an objectively reasonable impression of bias could result in vacation of the award [Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir. 2002); Nw.
Nat’l Ins. Co. v. Allstate Ins. Co., 832 F. Supp. 1280, 1286-87 (E.D. Wis.
1993); Barcon Assocs., Inc. v. Tri-County Asphalt Corp., 430 A.2d 214,
218-21 (N.J. 1981); for a discussion of the circumstances under which
arbitral awards may be vacated, see § 40.28 below].
Court challenges to an arbitrator’s qualifications to serve can only be
raised after issuance of the award, except in limited circumstances [Gulf
Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 489-90 (5th Cir.
2002); Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 895-96 (2d Cir. 1997); Ins.
Co. of N. Am. v. Pennant Ins. Co., Ltd., 1998 U.S. Dist. Lexis 2466, at *5-7
(E.D. Pa. 1998)]. Some courts have recognized that arbitrators can be
disqualified prior to rendition of an award, based on courts’ “inherent
powers” or on general contract principles [see Aviall, Inc. v. Ryder Sys.,
Inc., 110 F.3d 892, 895-96 (2d Cir. 1997); First State Ins. Co. v. Employers Ins.
of Wausau, No. 99-12478-RWZ (D. Mass. Feb. 23, 2000), reported in
Mealey’s Litig. Report: Reinsurance, Vol. 10, No. 21 (Mar. 9, 2000) at C-1;
Evanston Ins. Co. v. Kansa Gen. Int’l Ins. Co., Ltd., No. 94 C 4957 (N.D. Ill.
Oct. 17, 1994), reported in Mealey’s Litig. Report: Reinsurance, Vol. 5, No.
14 (Nov. 23, 1994) at A-1].
t Warning: Many arbitration agreements include a provision, some-
times called an “adverse selection clause,” stating that if a party fails
to appoint an arbitrator within a specified time following receipt of a
written request to designate an arbitrator, the other party may appoint
both “party-appointed” arbitrators. Section 5 of the FAA requires that
the parties follow the contractually specified method for appointing
arbitrators [9 U.S.C. § 5]. Parties should carefully observe any timetable or procedures set forth in their contracts for selecting arbitrators
to avoid forfeiting the right to appointment [see Universal Reinsurance
Corp. v. Allstate Ins. Co., 16 F.3d 125, 128-29 (7th Cir. 1994); Evanston
Ins. Co. v. Gerling Global Reinsurance Corp., 1990 U.S. Dist. LEXIS
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Understanding Reinsurance
40.23
12521, at *7-8 (N.D. Ill. 1990); Employers Ins. of Wausau v. Jackson, 527
N.W.2d 681, 688-89 (Wis. 1995)]. Some courts have been reluctant,
however, to find that a party making an untimely selection forfeited its
appointment right, unless the parties expressly made time of the
essence in the contract’s arbitration provision [see Ancon Ins. Co.
(U.K.) v. GE Reinsurance Corp., 2007 U.S. Dist. LEXIS 24822, at *23-24
(D. Kan. 2007); RLI Ins. Co. v. Kansa Reinsurance Co., 1991 U.S. Dist.
LEXIS 16388, at *9 (S.D.N.Y. 1991); New England Reinsurance Corp. v.
Tenn. Ins. Co., 780 F. Supp. 73, 77-78 (D. Mass. 1991)].
佡 Cross Reference: For an example of an adverse selection clause in a
facultative certificate, see California Insurance Law and Practice
§ 11.07[2][c].
佡 Cross Reference: For a survey and discussion of the standards for
selection of party-appointed arbitrators that are set forth in the major
private international arbitration rules, see Doak Bishop and Lucy Reed,
Practical Guidelines for Interviewing, Selecting and Challenging PartyAppointed Arbitrators in International Commercial Arbitration, in Arbitration International, Vol. 14, No. 4 (LCIA 1998) at 395.
佡 Cross References: Many arbitration agencies maintain lists of qualified individuals from which parties can select arbitrators. For example,
ARIAS-U.S. publishes a list of certified reinsurance arbitrators and
umpires [see www.arias-us.org]. The American Arbitration Association
also maintains a roster of prospective arbitrators and mediators
experienced in various industries [see www.adr.org].
z Strategic Point: Considerable care should be taken in appointing a
party arbitrator who is fair and knowledgeable. The party arbitrator
should understand the issues well and be able to articulate a coherent
view of the case. It is helpful if the arbitrator has sufficient standing in
the industry to influence other panel members or at least not to be
intimidated by other arbitrators with more experience or “better”
credentials Umpires ideally should have industry knowledge as well
arbitration experience.
z Strategic Point: The parties can dispense with some of the back and
forth in the appointment of arbitrators and umpires by agreeing to a
process — or a joint list of candidates — at the time their dispute
ripens.
佡 Cross Reference: The “Code of Ethics for Arbitrators in Commercial
Disputes,” prepared by a joint committee of the American Arbitration
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New Appleman Insurance Practice Guide
Association (“AAA”) and the American Bar Association (“ABA”), sets
forth generally accepted standards of ethical conduct for the guidance
of arbitrators and parties. The current (2004) version is available on the
American Bar Association website, at ww.abanet.org/dispute/
commercial_disputes.pdf.
佡 Cross Reference: For a sample questionnaire for prospective umpires,
see § 40.47 below.
佡 Cross Reference: The ARIAS-U.S. Umpire Appointment Procedure is
available on its website at www.arias-us.org. In addition, the “Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes,”
drafted by the Insurance and Reinsurance Dispute Resolution Task
Force, include a procedure for the selection of an all-neutral arbitration
panel [see Procedures at www.ArbitrationTaskForce.org].
40.24 Strict Rule of Law vs. Obligations Pursuant to Honorable Engagement.
Most reinsurance agreements include an honorable engagement clause
which typically instructs arbitrators to interpret the contract “as an
honorable engagement and not merely as a legal obligation,” and relieves
arbitrators from following the strict rules of law [for a sample arbitration
provision containing typical honorable engagement language, see § 40.46
below]. This language reflects the overriding commercial practicality
inherent in reinsurance relationships and embodies the mutual duty of
utmost good faith. [For a discussion of the duty of utmost good faith in
reinsurance relationships, see §§ 40.15 and 40.16 above]. Honorable engagement clauses can allow arbitrators to find a resolution that best
reflects the purpose and intent behind the transaction at issue. An
honorable engagement clause, however, does not necessarily supplant the
obligation of the panel formally to issue a statement of reasons for the
decision they reach, which is a separate issue.
Language relieving arbitrators from following strict rules of law permits
arbitrators to apply principles of fairness, equity and commercial practice
in resolving reinsurance disputes. “Courts have read honorable engagement clauses generously, consistently finding that arbitrators have wide
discretion to order remedies they deem appropriate” [Banco de Seguros
del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 261 (2d Cir. 2003); see
also Pac. Reinsurance Mgmt. Corp. v. Ohio Reinsurance Corp., 935 F.2d
1019, 1025 (9th Cir. 1991); Certain Underwriters at Lloyd’s v. Argonaut Ins.
Co., 264 F. Supp. 2d 926, 939 (N.D. Cal. 2003)]. Arbitrators may be
persuaded by relevant case law, but, as a general matter, are not required
to resolve matters based on how they believe a court would decide the
issue, which also reflects that the qualifications clause in the arbitration
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40.25
agreement often does not require that the arbitrators be trained in the law
[see U.S. Life Ins. Co. v. Ins. Comm’r of the State of Cal., 2005 U.S. App.
LEXIS 25763, at *7-8 (9th Cir. 2005) (unpublished decision); Nw. Nat’l Ins.
Co. v. Generali Mex. Compania De Seguros, S.A., 2000 U.S. Dist. LEXIS
7348, at *4 (S.D.N.Y. 2000); Employers Ins. of Wausau v. Certain Underwriters at Lloyd’s London, 552 N.W.2d 420, 427 n.8 (Wis. Ct. App. 1996);
for a discussion of the rare circumstances under which arbitral awards
may be vacated under the “manifest disregard of the law” standard, see
§ 40.28 below]. Instead, they may, and often do, apply industry custom
and practice as well as equitable principles to reach their decisions. Unless
the contract provides otherwise, arbitrators in U.S. arbitrations are not
obligated to issue a reasoned decision explaining the award. [For a
discussion of reasoned awards in reinsurance arbitrations, see § 40.27
below].
Example: Contract language permitting the arbitrators to “consider
this contract an honorable engagement rather than merely a legal
obligation” and absolving the arbitrators from “following the strict
rules of law” was broad enough to give the arbitrators the power to
determine the preclusive effect of a prior arbitration award [N. River
Ins. Co. v. Allstate Ins. Co., 866 F. Supp. 123, 129 (S.D.N.Y. 1994)].
Example: The court determined that a reinsurance treaty relieving
arbitrators of all judicial formalities and providing that they may
abstain from following strict rules of law empowered the arbitrators to
award relief in “any reasonable form or at any stage in the proceeding,” including ordering a party to post additional pre-hearing security [Meadows Indem. Co., Ltd. v. Arkwright Mut. Ins. Co., 1996 U.S.
Dist. LEXIS 14318, at *12-13 (E.D. Pa. 1996)].
40.25 Discovery in Arbitration. The broad and liberal rules governing
pretrial discovery in state and federal civil cases generally do not apply in
arbitrations, unless the parties so agree or the panel so orders. The nature
and extent of discovery available in reinsurance arbitrations varies widely,
depending upon the nature of the case, the arbiters’ views on the issue,
and the particular rules governing the arbitration. Document discovery is
almost universally permitted in arbitration; however, the amount of
document discovery can differ significantly. Some arbiters will allow
discovery only on the specific claims and reinsurance contracts at issue in
the arbitration, while others essentially will permit the parties to request
any documents they wish. In addition, some arbiters will allow depositions, while others will not (especially from third parties).
Although arbitration clauses often do not address the arbitrators’ author40-101
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ity to resolve discovery disputes, it is commonly recognized that arbitrators have the authority to resolve procedural disputes, including the scope
and nature of permissible discovery. As can be expected, the parties often
raise privilege and other production disputes during the discovery
process. These disputes typically are resolved by means of letter briefs to
the panel or a conference call with the umpire. Occasionally, the panel will
hold a hearing with counsel to resolve a discovery dispute.
Under Section 7 of the Federal Arbitration Act (“FAA”) [9 U.S.C. § 7], and
the laws of most states, arbitrators have broad power to issue subpoenas
and subpoenas duces tecum, if the evidence sought for the hearing is
material to the proceedings. The FAA does not, however, specifically
address the arbitrators’ power to require non-parties to submit to prehearing discovery. As a result, case law is split as to whether arbitrators
have the authority to order pre-hearing discovery of non-parties, particulary pre-hearing deposition discovery. The Fourth Circuit Court of Appeals has held that arbitrators’ powers should be limited to those
specifically set forth in the FAA; therefore, pre-hearing discovery of
non-parties is prohibited unless a party demonstrates a “special need” [see
Comsat Corp. v. Nat’l Science Found., 190 F.3d 269, 274-76 (4th Cir. 1999);
Application of Deiulemar Compagnia Di Navigazione S.P.A. v. M/V
Allegra, 198 F.3d 473, 480-81 (4th Cir. 1999)]. In contrast, the Eighth Circuit
Court of Appeals and several federal district courts have held that implicit
in an arbitration panel’s power to subpoena relevant documents for
production at a hearing is the power to order the production of documents
prior to the hearing [see In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71
(8th Cir. 2000); In re Arbitration between Douglas Brazell v. Am. Color
Graphics, Inc., 2000 U.S. Dist. LEXIS 4482, at *4-9 (S.D.N.Y. 2000); Amgen
Inc. v. Kidney Ctr. of Delaware County, Ltd., 879 F. Supp. 878, 880 (N.D. Ill.
1995)]. The Third Circuit Court of Appeals has determined that the text of
the FAA limits the subpoena power of arbitrators to compelling production of documents by non-parties only at an actual arbitration hearing
[Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir.
2004)]. In one case, the court approved a “special purpose hearing” for
non-parties to respond to arbitral subpoenas, reasoning that “[n]othing in
the language of the FAA limits the point in time in the arbitration process
when [the subpoena] power can be invoked or says that the arbitrators
may only invoke this power under section 7 at the time of the trial-like
final hearing” [Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 577 (2d Cir.
2005), quoting Odfjell ASA v. Celanese AG, 348 F. Supp. 2d 283, 287
(S.D.N.Y. 2004); see also Hay Group v. E.B.S. Acquisition Corp., 360 F.3d
404, 413-14 (3d Cir. 2004) (Chertoff, J., concurring)].
Some courts have approved pre-hearing subpoenas for production of
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40.25
documents, but not for depositions [see SchlumbergerSema, Inc. v. Xcel
Energy, Inc., No. 02-4304, 2004 U.S. Dist. LEXIS 389, at *7 (D. Minn. Jan. 9,
2004); Atmel Corp. v. LM Ericsson Telefon, AB, 371 F. Supp. 2d 402, 403-04
(S.D.N.Y. 2005); Integrity Ins. Co. v. Am. Centennial Ins. Co., 885 F. Supp.
69, 71 (S.D.N.Y. 1995)]. Other courts have acknowledged broad arbitral
power to order both documentary and testimonial discovery of nonparties before a final hearing, a result that can be justified especially where
such discovery may facilitate speedier resolution of the principal dispute
[see Stanton v. Paine Webber Jackson & Curtis, Inc., 685 F. Supp. 1241,
1242-43 (S.D. Fla. 1988)]. Several courts weighing the question of arbitral
power to summon pre-hearing evidence from non-parties have taken into
account the non-parties’ relationships to the parties and to the disputed
matters [see In re Sec. Life Ins. Co. of Am., 228 F.3d at 871; In re Arbitration
between Douglas Brazell v. Am. Color Graphics, Inc. 2000 U.S. Dist. LEXIS
4482, at *9; Meadows Indemnity Co., Ltd. v. Nutmeg Ins. Co., 157 F.R.D.
42, 45 (M.D. Tenn. 1994)].
佡 Cross Reference: Several arbitration organizations have published
discovery procedures that can be incorporated in arbitration agreements or otherwise adopted by parties for use in reinsurance arbitrations. ARIAS-U.S., for example, includes discovery procedures in its
“Practical Guide to Reinsurance Arbitration Procedure” [see ARIASU.S. Practical Guide at www.arias-us.org]. Discovery also is included
in the “Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes” published by the Insurance and Reinsurance Dispute
Resolution Task Force [see Procedures at www.arbitrationtaskforce.org]. In addition, “The CPR International Reinsurance Industry Dispute Resolution Protocol,” published by the International Institute for
Conflict Prevention & Resolution, includes procedures for the parties’
exchange of information [see Protocol at www.insurancemediation.org].
z Strategic Point: Given the conflicting case law interpreting arbitra-
tors’ subpoena power under Section 7 of the FAA, it is unclear whether
a pre-hearing arbitral subpoena issued to a non-party will be enforced
by a court. Reinsurance intermediaries are typically not parties to
arbitrations between ceding insurers and reinsurers but often possess
critical information relevant to reinsurance agreements. Parties who
wish to ensure that intermediaries will be required to provide prehearing testimonial and documentary evidence in the event a reinsurance dispute reaches arbitration have several options:
1.
The intermediary can be made a party to the reinsurance
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40.26
contract, making it a three-way agreement among the cedent,
reinsurer and intermediary;
2.
The intermediary can be made a party only to the intermediary
and arbitration clauses of the reinsurance agreement (in either
case, the arbitration clause could provide that the intermediary
submit to pre-hearing discovery in disputes arising out of the
agreement); and
3.
A provision in the agreement between the ceding insurer and its
intermediary can require the intermediary to cooperate with the
arbitration panel in pre-hearing discovery in any dispute arising
under an reinsurance contract placed by the intermediary.
Of course, intermediaries may resist such approaches. As a practical
matter, at the time of a dispute, both parties to the reinsurance contract
may wish to have access to the intermediary’s documents and witnesses,
and either or both may have ongoing commercial relations with the
intermediary, both of which counsel that the parties may be able to reach
a practical accommodation of the intermediary’s interest (including perhaps agreeing to defray part of the intermediary’s cost of compliance).
Consider: Nevertheless, the federal District Court for the District of
Massachusetts, following the Third Circuit’s decision in Hay Group
Inc., dismissed a petition to enforce a subpoena that had been issued
by an arbitration panel to a non-party [Liberty Mut. Ins. Co. v. White
Mountains Ins. Group Ltd., No. 06-11901 (D. Mass. 2007), reprinted in
Mealey’s Litig. Rep. Reinsurance, Vol. 17, No. 22 (Mar. 22, 2007) at 4].
40.26 Summary Disposition in Arbitration. Dispositive motions have tradi-
tionally been granted sparingly in reinsurance arbitrations; however, there
appears to be a growing understanding that such motions should be
granted in arbitrations where the facts and circumstances so warrant.
There is ample authority supporting an arbitration panel’s granting of a
motion for summary disposition without live testimony or a full evidentiary hearing, if the evidence omitted is not legally relevant or is
cumulative.
Although there is no express statutory authority under the Federal
Arbitration Act (“FAA”) [9 U.S.C. § 1, et seq.] for an arbitrator to respond
to a dispositive motion, arbitrators are generally assumed to have all
discretionary authority necessary to conduct the proceedings in a manner
that is not expressly prohibited by the arbitration agreement between the
parties or the FAA [Terry L. Trantina, “An Attorney’s Guide to Alternative
Dispute Resolution (ADR): ’ADR 1.01,”’ 1 A.B.A. Sec. Bus. L. 8 (Jan. 2003),
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40.26
available
at
http://www.abanet.org/buslaw/newsletter/0008/adr/
adr101.pdf; see also John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 557
(1964)]. The revised Uniform Arbitration Act (the “UAA”) expressly
permits arbitrators to decide a request for summary disposition based
solely on documentation, after a party submitting the request gives notice
and opposing parties have a reasonable time to respond [see UAA § 15(b)
(2000), available at http://www.nccusl.org]. The Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes issued by the Insurance
and Reinsurance Dispute Resolution Task Force also specifically authorize
consideration of summary disposition motions by reinsurance arbitration
panels [Reinsurance Ass’n of America, Procedures for the Resolution of
U.S. Insurance and Reinsurance Disputes § 13.1 (2004)]. In addition, the
American Arbitration Association (“AAA”) Commercial Arbitration Rules
give arbitrators wide latitude to conduct the proceedings and do not
prohibit the use of dispositive motions. The AAA Procedures for Large,
Complex Commercial Disputes also appear to permit summary adjudication by allowing arbitrators to “take such steps as they may deem
necessary or desirable to avoid delay and to achieve a just, speedy and
cost-effective resolution” of the cases [American Arbitration Ass’n, Commercial Arbitration Rules and Mediation Procedures R-30(b) (2005);
American Arbitration Ass’n, Procedures for Large, Complex Commercial
Disputes L-4(a) (2005)].
Parties may agree upon appropriate procedures by contract, but where
they do not, arbitrators have wide discretion to decide procedural matters
and determine the meaning of procedural rules [see Bell AtlanticPennsylvania, Inc. v. Communications Workers of Am., Local 13000, 164
F.3d 197, 201-02 (3d Cir. 1999); Raytheon Co. v. Computer Distrib., Inc., 632
F. Supp. 553, 557-58 (D. Mass. 1986); for a discussion of arbitrators’
freedom to dispense with judicial formalities and determine arbitration
procedures, see § 40.23 above]. Consistent with the goals of speed and
efficiency in arbitration, arbitrators are encouraged to take appropriate
action to simplify and expedite proceedings [see PaineWebber Group, Inc.
v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 995 (8th Cir. 1999); Cearfoss
Constr. Corp. v. Sabre Constr. Corp., 1989 U.S. Dist. LEXIS 9639, at *12-13
(D.D.C. Aug. 10, 1989)]. Unless otherwise restricted, this mandate leaves
arbitrators free to consider and grant motions for summary adjudication
of issues or summary judgment
The power of arbitrators to grant summary disposition may be restricted,
however, by arbitration agreements that expressly limit such authority.
The FAA requires courts to enforce privately negotiated agreements to
arbitrate, like other contracts, in accordance with their terms, and parties
may stipulate by contract the rules under which their arbitration will be
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conducted [see Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,
57 (1995); Baravati v. Josephthal, Lyon & Ross, Inc. 28 F.3d 704, 709 (7th Cir.
1994)]. Arbitrators generally are required to follow any procedures set
forth in the parties’ agreement [W. Employers Ins. Co. v. Jeffries & Co., 958
F.2d 258, 262 (9th Cir. 1992)]. Therefore, a contract provision prohibiting
summary adjudication in the arbitration proceeding most likely precludes
such action.
The authority of arbitrators to decide motions for summary disposition is
usually litigated in court proceedings to vacate or confirm the award.
Generally, there are very limited grounds for courts to vacate arbitral
awards under the FAA, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and state
arbitration acts. [For a discussion of the circumstances under which courts
vacate arbitral awards, see § 40.28 below]. Challenges to an arbitration
panel’s decision to grant a motion for summary disposition typically fall
into two categories. Parties contend that the arbitrators lacked the
authority to grant the dismissal motion (exceeded their powers) or assert
that the panel engaged in misconduct by improperly refusing to hear
evidence. Courts have made clear that misbehavior cognizable under
Section 10(a)(3) of the FAA “must amount to a denial of fundamental
fairness of the arbitration proceeding” in order to justify overturning an
award” [Max Marx Color & Chem. Co. Employees’ Profit Sharing Plan v.
Barnes, 37 F. Supp. 2d 248, 252 (S.D.N.Y. 1999)]. In the cases confirming
summary decisions, courts agreed with the arbitrators that an evidentiary
hearing was not necessary because any excluded evidence either was
duplicative or not material to the issues in dispute [see Hudson v. ConAgra
Poultry Co., 2007 U.S. App. LEXIS 7681, at *19-20 (8th Cir. 2007); Sheldon
v. Vermonty, 269 F.3d 1202, 1207 (10th Cir. 2001); Pegasus Constr. Corp. v.
Turner Constr. Co., 929 P.2d 1200, 1201-03 (Wash. Ct. App. 1997)].
Alternatively, courts vacating summary awards determined that summary
adjudication was inappropriate because the arbitrators’ failure to receive
pertinent evidence resulted in palpable prejudice to a party [see Int’l
Union, United Mine Workers of Am. v. Marrowbone Dev. Co., 232 F.3d
383, 387-90 (4th Cir. 2000); Prudential Sec., Inc. v. Dalton, 929 F. Supp. 1411,
1417-18 (N.D. Okla. 1996)]. Vacatur will not be granted simply because the
court might have come to a different result.
Examples: Several courts have found that the “hearing” mandated by
Section 10 of the FAA does not necessarily require oral presentation or
live witness testimony [see, e.g., Fed. Deposit Ins. Corp. v. Air Fla. Sys.,
Inc., 822 F.2d 833, 842-43 (9th Cir. 1987); Griffen Indus. v. Petrojam,
Ltd., 58 F. Supp. 2d 212, 219-21 (S.D.N.Y. 1999); but see British Ins. Co.
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Understanding Reinsurance
40.27
of Cayman v. Water St. Ins. Co., 93 F. Supp. 2d 506, 517-19 (S.D.N.Y.
2000)].
Examples: Courts have confirmed summary awards in arbitral pro-
ceedings despite the absence of explicit authorization for the procedure in the governing rules or statutes [see Melchers v. Corbin Assocs.,
LLC, 2006 U.S. Dist. LEXIS 18049, at *19-26 (E.D. Tenn. 2006); Pegasus
Constr. Corp. v. Turner Constr. Co., 929 P.2d 1200, 1203 (Wash. Ct. App.
1997); Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal. App. 4th
1096, 1104 (1995)].
Example: A federal district court confirmed an arbitration panel’s
summary award where a party, All American Life Insurance Co. (“All
American”), “admitted” in its position statement that a broker did not
have the authority to bind All American to the contracts at issue in the
dispute. The panel found that the position statement constituted a
pleading and that All American had made an irrevocable admission
that the broker did not have binding authority; therefore the contracts
were not valid [Sphere Drake Ins. Ltd. v. All Am. Life Ins. Co., 2004
U.S. Dist. LEXIS 3494, at *8-10 (N.D. Ill. 2004)]. In a motion to vacate
the award, All American argued that it had been denied a fundamentally fair hearing because the panel gave undue weight to the alleged
“admission,” exceeded its authority by deciding a legal issue reserved
for the courts and a factual issue not before it, and exhibited a manifest
disregard for the law by misinterpreting state contract law [id. at
*33-42]. In affirming the panel’s award, the court did not specifically
address whether or not the panel had the authority to decide the
matter by ruling on the motion for judgment on the pleadings.
However, the court’s opinion clearly assumes that the panel had this
power and rejects each of All American’s purported grounds for
vacatur [id.].
z Strategic Point: Dispositive motions can streamline the arbitral
process by eliminating specious claims and defenses. Although arbitrators are sometimes wary of the practice and courts will carefully
scrutinize summary rulings, submission of dispositive motions can be
a successful and appropriate tactic in arbitration where there is no
relevant or material evidence necessary for resolution of a particular
claim, or of the entire dispute.
40.27 Reasoned Awards. Reinsurance arbitration panels typically issue a
signed written decision articulating the award. If the decision is not
unanimous, a written dissent also may be issued. In the United States, an
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New Appleman Insurance Practice Guide
arbitration panel need not set forth the rationale supporting its award,
unless the parties’ arbitration agreement requires it to do so [N.Y. Stock
Exch. Arbitration between Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512,
516 (2d Cir. 1991); Koch Oil, S.A. v. Transocean Gulf Oil Co., 751 F.2d 551,
554 (2d Cir. 1985)]. Thus, many arbitral decisions are presented in a brief
statement outlining the nature of the dispute, stating the prevailing party
and describing any relief awarded. The parties may, however, require the
reinsurance arbitration panel to explain the reasoning for an award as a
pre-requisite for being appointed to the panel.
z Strategic Point: Although arbitration is sometimes derided as un-
duly allowing arbitrators to reach compromise awards, that also is one
virtue of the process, so parties should consider their philosophical
tolerance for one approach or the other when drafting an arbitration
clause. Note also that the absence of reasoned awards, especially when
honorable engagement clauses apply, may increase differences in
outcomes from one arbitration to the next; whether differences in the
outcomes in a portfolio of similar disputes is acceptable or not is
something parties should consider at the time they draft their arbitration agreements.
40.28 Know When to Move to Vacate or Affirm Arbitration Award. After a
reinsurance arbitration panel renders its award, the prevailing party may
submit a motion in court to confirm the award or the losing party may
move to have the award vacated, or both. These steps are not necessary if
the parties simply act in accordance with the award but are often taken to
conclude or challenge the process.
z Strategic Point: On balance, it is probably a good practice for the
prevailing party to have the award confirmed even if the losing party
intends to comply with the award. A confirmation action need not be
contentious, but it allows the prevailing party to have an executable
judgment.
s Timing: If the arbitration agreement specifies a particular court for
confirmation, the party seeking to confirm the award may request a
confirmation order from the specified court any time within one year
of the award [9 U.S.C. § 9].
Consider: If the arbitration agreement does not specify a confirmation
court, application for confirmation “may be made to the United States
court in and for the district within which [the] award was made” [id.].
An arbitration award will be summarily confirmed upon motion by a
party, absent grounds for vacatur, modification or correction [id.]. It
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Understanding Reinsurance
40.28
should be noted that moving to confirm or vacate an award under the
Federal Arbitration Act does not in and of itself constitute a basis for
federal court jurisdiction (so independent subject matter jurisdiction is
needed though the fact of an arbitration alone is sufficient to show an
“actual controversy”), although moving to confirm or vacate under the
New York Convention does provide an independent fount of jurisdiction in the appropriate court.
The grounds upon which an arbitration award can be vacated are
extremely narrow under the Federal Arbitration Act (“FAA”) [9 U.S.C.
§ 10], state statutes and the New York Convention. The “[e]xceptions to
confirmation are strictly limited so as not to frustrate the basic purpose of
arbitration to dispose of disputes quickly and to avoid the expense and
delay of protracted court proceedings” [Transit Cas. Co. v. Trenwick
Reinsurance Co., 659 F. Supp. 1346, 1351 (S.D.N.Y. 1987)]. While decades
ago courts were more receptive to challenges to arbitration awards, that is
not true today. Under Section 10 of the FAA, awards typically are vacated
only where arbitrators exhibited bias or procedural unfairness (as opposed
to procedural error). The district courts are not to function as an appellate
forum to second-guess what happened in the arbitration, and the standard
of review they apply is much narrower than the federal appellate courts
apply to decisions of the district courts. The following are the specific
statutory circumstances justifying vacatur of an arbitral award:
•
“Where the award was procured by corruption, fraud, or undue
means” [9 U.S.C. § 10(a)(1)]. A party who alleges that an arbitration
award was procured through fraud or undue means must demonstrate that the improper behavior was: (1) not discoverable by due
diligence before or during the arbitration hearing; (2) materially
related to an issue in the arbitration; and (3) established by clear
and convincing evidence [Houston Gen. Ins. Co. v. Certain Underwriters at Lloyd’s London, 2003 U.S. Dist. LEXIS 19516, at *3-4
(S.D.N.Y. 2003); Trans Chem. Ltd. v. China Nat’l Mach. Import &
Export Corp., 978 F. Supp. 266, 304 (S.D. Tex. 1997)]. Fraud typically
requires a showing of bad faith and may be evidenced by bribery
or by willful destruction or withholding of evidence [id.; Indocomex Fibres Pte., Ltd. v. Cotton Co. Int’l, Inc., 916 F. Supp. 721,
728 (W.D. Tenn. 1996)].
•
“Where there was evident partiality or corruption in the arbitrators,
or either of them” [9 U.S.C. § 10(a)(2)]. Although there is disagreement among courts as to precisely what an arbitrator must disclose
to avoid a claim of “evident partiality,” courts typically look for a
real and direct financial interest in the result of the arbitration or a
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direct business relationship with one of the parties that calls into
question his or her neutrality [see Commonwealth Coatings Corp. v.
Cont’l Cas. Co., 393 U.S. 145, 146-48 (1968); Sphere Drake Ins. Ltd.
v. All Am. Life Ins. Co., 307 F.3d 617, 621-23 (7th Cir. 2002); Hobet
Mining, Inc. v. Int’l Union, United Mine Workers, 877 F. Supp. 1011,
1021 (S.D. W. Va. 1994)]. Nondisclosure sufficient to vacate an
award usually creates a concrete, and not merely speculative,
impression of bias [see Positive Software Solutions, Inc. v. New
Century Mortgage Corp., 476 F.3d 278, 286 (5th Cir. 2007); Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th Cir.
2002); Gianelli Money Purchase Plan and Trust v. ADM Investor
Servs., Inc., 146 F.3d 1309, 1312-13 (11th Cir. 1998)]. Some courts
have stated that “evident partiality” is present when a reasonable
person would conclude that the arbitrator acted with partiality (but
mere unhappiness in or disagreement with the outcome is not
equated with the arbitrator’s having acted in a partial manner)
[Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1523 n.30 (3d Cir.
1994), (citations omitted); Lourdes Med. Ctr. of Burlington County
v. Jnesco, 2007 U.S. Dist. LEXIS 25458, at *24-25 (D.N.J. 2007);
Vigorito v. UBS Painewebber, Inc., 477 F. Supp. 2d 481, 486-87 (D.
Conn. 2007)].
•
“Where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; or of any
other misbehavior by which the rights of any party have been
prejudiced” [9 U.S.C. § 10(a)(3)]. Arbitrators are accorded wide
latitude in conducting hearings and are not constrained by formal
rules of procedure or evidence [Robbins v. Day, 954 F.2d 679, 685
(11th Cir. 1991); for discussions of arbitrators’ broad powers to
conduct proceedings, see §§ 40.24, 40.25 and 40.26 above]. They
may simplify and expedite proceedings, and they are not bound to
hear all of the evidence tendered by the parties [PaineWebber
Group, Inc. v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 995 (8th Cir.
1999); Robbins v. Day, 954 F.2d 679, 685 (11th Cir. 1992)]. Therefore,
an arbitral award will not be vacated unless an error in the arbitral
misconduct deprived a party of a fundamentally fair hearing [El
Dorado Sch. Dist. #15 v. Cont’l Cas. Co., 247 F.3d 843, 847-48 (8th
Cir. 2001); Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir.
1997)].
•
“Where the arbitrators exceeded their powers, or so imperfectly
executed them that a mutual, final and definite award upon the
subject matter submitted was not made” [9 U.S.C. § 10(a)(4)]. The
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Understanding Reinsurance
40.28
question whether arbitrators have exceeded their powers focuses
on whether the arbitration agreement, or the parties’ submissions
to the panel, gave the arbitrators the power to reach a particular
issue [Reliastar Life Ins. Co. of N.Y. v. EMC Nat’l Life Ins. Co., 2007
U.S. Dist. LEXIS 9861, at *3-4 (S.D.N.Y. 2007)]. An award will not be
vacated for indefiniteness unless it is not sufficiently clear or
specific enough to be enforced if judicially confirmed [IDS Life Ins.
Co. v. Royal Alliance Assocs, 266 F.3d 645, 650 (7th Cir. 2001);
Certain Underwriters at Lloyd’s v. BCS Ins. Co., 239 F. Supp. 2d 812,
816 (N.D. Ill. 2003)].
The burden of proof rests on the party seeking to vacate an arbitral award
[Transit Cas. Co. v. Trenwick Reinsurance Co., 659 F. Supp. 1346, 1351
(S.D.N.Y. 1987)].
Some courts have determined that an award also may be vacated when an
arbitrator exhibits a “manifest disregard of the law” [see Westerbeke Corp.
v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 208-09 (2d Cir. 2002); Mich. Mut.
Ins. Co. v. Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir. 1995)], a rule that
cannot be vigorously applied in the teeth of an honorable engagement
clause. Courts recognizing this doctrine will not disturb an arbitrator’s
interpretation of the law unless it is clear that the arbitrator “appreciated[d] the existence of a clearly governing legal principle but decided[d] to
ignore or pay no attention to it” [Merrill Lynch, Pierce, Fenner, & Smith,
Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986). “The error must have been
obvious and capable of being readily and instantly perceived by the
average person qualified to serve as an arbitrator” [id.]. Other courts have
rejected the “manifest disregard of the law” standard as “reflect[ing]
precisely that mistrust of arbitration . . . which the [United States
Supreme] Court [has] criticized” [Baravati v. Josephthal, Lyon & Ross, Inc.,
28 F.3d 704, 706 (7th Cir. 1994); see also Robbins v. Day, 954 F.2d 679, 684
(11th Cir. 1992)]. The “manifest disregard of the law” standard has not
been applied so as to vacate a reinsurance arbitration award in any
reported court decision; recent reported cases in both reinsurance and
non-insurance arbitrations should not provide confidence that this vein
will prove to be a particularly promising angle to mine.
Another potential challenge to an arbitral award is the assertion that the
award is contrary to public policy [see United Paperworkers Int’l Union v.
Misco, Inc., 484 U.S. 29, 43 (1987); Milwaukee Bd. of Sch. Dirs. v.
Milwaukee Teachers’ Educ. Ass’n, 287 N.W.2d 131, 135 (Wis. 1980)]. More
action has occurred in the non-insurance context on this argument,
especially concerning relationships between employers and employees,
health care providers and their members, and other relationships marked
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by imbalances of power such as consumer contracts. This exception to the
general deference granted arbitrators is very limited and can succeed only
if the decision clearly violates explicit, well-defined and dominant public
policy that can be easily seen in laws or judicial precedent [Commercial
Union Ins. Co. v. Lines, 378 F.3d 204, 208-09 (2d Cir. 2004); Painewebber,
Inc. v. Agron, 49 F.3d 347, 350 (8th Cir. 1995); Seymour v. Blue Cross/Blue
Shield, 988 F.2d 1020, 1024 (10th Cir. 1993)]. With sophisticated commercial
entities on both sides of a reinsurance contract, this style of argument too
is unlikely to gain much traction in the absence of some well-ensconced
public policy in the state (set forth in statute or prior high court decision).
In the following limited circumstances, a United States court may issue an
order modifying or correcting an arbitral award in order to “effect the
intent thereof and promote justice between the parties:”
•
“Where there was an evident material miscalculation of figures or
an evident material mistake in the description of any person, thing
or property referred to in the award;”
•
“Where the arbitrators have awarded upon a matter not submitted
to them, unless it is a matter not affecting the merits of the decision
upon the matter submitted;” and
•
“Where the award is imperfect in matter of form not affecting the
merits of the controversy” [9 U.S.C. § 11].
Consider: If the arbitration is conducted under the auspices of an
arbitration organization, then the rules of that agency concerning
appeals of arbitral awards may apply.
Example: The federal District Court for the District of the Virgin Islands
affirmed vacatur of an arbitral award where the arbitrator failed to
postpone the hearing after a party submitted an amended arbitration
claim and voluminous supporting documentation 24 hours before the
scheduled hearing and denied the opposing party a continuance to
investigate the amended claim [Coastal Gen. Constr. Servs., Inc. v.
Virgin Islands Hous. Auth., 238 F. Supp. 2d 707, 708-10 (D.V.I. 2002)].
Example: The Tennessee Court of Appeals affirmed the trial court’s
refusal to vacate an arbitral award on the basis of evident partiality,
where the party did not object to or seek clarification of the arbitrator’s
disclosed conflict of interest until after an unfavorable award was
issued [Bailey v. Am. Gen. Life and Accident Ins. Co., 2005 Tenn. App.
LEXIS 838, at *27-30 (Tenn. Ct. App. 2005)].
Examples: A federal district court ordered correction of an arbitral
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award to conform the amount of the written award to the amount the
panel had verbally announced [Nationwide Mut. Ins. Co. v. First State
Ins. Co., 213 F. Supp. 2d 10, 14-16 (D. Mass. 2002)]. A federal district
court remanded the case to the arbitrators with directions to reopen
the proceedings and correct an acknowledged material miscalculation
[Laurin Tankers Am., Inc. v. Stolt Tankers, Inc., 36 F. Supp. 2d 645,
652-53 (S.D.N.Y. 1999)]. All of these decisions are motivated by a
decision to correct an obvious clerical error, rather than to change the
relationship between the arbitrating parties following the arbitration
award.
40.29 ARIAS Forms. The AIDA Reinsurance and Insurance Arbitration
Society, ARIAS-U.S., is a not-for-profit corporation that promotes the
improvement of the insurance and reinsurance arbitration process for the
international and domestic markets. ARIAS-U.S. provides training, conferences and workshops to educate prospective arbitrators. ARIAS-U.S.
also provides a variety of forms related to specific stages of the arbitration
process that are referenced in its “Practical Guide to Reinsurance Arbitration Procedure.”
ARIAS-U.S. provides the following forms:
•
•
•
•
•
•
•
•
•
•
•
•
•
Application for Certification as an Arbitrator;
Application for Qualification as Mediator;
Hold Harmless Stipulation;
Confidentiality Agreement;
Confidentiality Affidavit;
Discovery & Briefing Schedule;
Order Requiring Respondent to Post Security;
Umpire Questionnaire [see § 40.47 below];
Umpire Selection Procedure Request Letter;
Neutral Selection Questionnaire;
Neutral Selection Procedure Request Letter;
Membership Application; and
Practical Guide to Reinsurance Arbitration Procedure — Complete
2004 Revised Edition.
These forms are available on the ARIAS-U.S. website at www.arias-us.org.
Lexis.com Search: For information on international reinsurance issues,
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try this source: Global Reinsurance. Enter specific search terms or date
ranges.
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X.
FORMS.
40.30 BRMA Reinsuring Clause Form 44 C (Quota Share Agreement).
Use of Form: The wording stipulating the quota share terms is typically
set forth in the contract’s “Reinsuring Clause,” “Limit and Retention”
or “Limit of Liability” clause. Several forms are reprinted from the
Brokers and Reinsurance Markets Association (“BRMA”) Contract
Reference Book, available at http://www.brma.org/frommembers/
frommemcontractwd01.htm.
Lexis.com Search: For further jurisdiction-specific forms, please see:
ISO Policy Forms. Enter this search request: reinsurance AND [state].
REINSURING CLAUSE
By this Contract the Company obligates itself to cede to the Reinsurer and
the Reinsurer obligates itself to accept
% quota share reinsurance of the Company’s net liability under policies, contracts and
binders of insurance or reinsurance (hereinafter called “policies”) in force
at and becoming effective at and after (hour) (date) (year), including
renewals, and classified by the Company as
.
“Net liability” as used herein is defined as the Company’s gross liability
remaining after cessions, if any, to
.
The liability of the Reinsurer with respect to each cession hereunder shall
commence obligatorily and simultaneously with that of the Company,
subject to the terms, conditions and limitations hereinafter set forth.
40.31 BRMA Reinsuring Clause Form 44 B (Surplus Share Agreement).
Use of Form: The details of a surplus share agreement are usually
contained in the “Reinsuring Clause,” the “Cessions and Limits” or the
“Business Covered” clause of the contract.
REINSURING CLAUSE
The Company shall cede to the Reinsurer and the Reinsurer shall accept
from the Company 100% of the first surplus liability, as hereinafter
defined, of the Company on risks insured under policies in force at or
becoming effective or renewed at and after hour (date) (year), covering the
lines of business set forth below, subject to the terms, conditions and
limitations hereinafter set forth:
LINES OF BUSINESS
A.
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B
C
A policy written on an installment premium, report from or continuous
basis shall be considered renewed as of the end of each annual period
commencing with the caption date of the policy.
The term “policies” as used herein means the Company’s binders, policies
and contracts providing insurance and reinsurance on the lines of business
covered under this Contract.
40.32 BRMA Reinsuring Clause Form 61 C (Excess of Loss Agreement).
Use of Form: The clause defining an excess of loss agreement can be
called the “Reinsuring Clause,” “Cover Clause,” “Business Reinsured
Clause” or “Application of Agreement Clause,” and it sets forth the
type of business covered and the method of determining whether a
loss falls within the scope of the agreement. “Excess liability” should
be defined in the contract.
REINSURING CLAUSE
“By this Contract the Reinsurer agrees to reinsure the excess liability that
may accrue to the Company under its policies, contracts and binders of
insurance or reinsurance (referred to herein as “policies”) in force at the
effective date hereof or issued or renewed on or after that date, and
classified by the Company as
, subject to the terms, conditions an limitations hereafter set forth.”
40.33 BRMA Unauthorized Reinsurance Clause Form 55 A.
Use of Form: This form applies only to a reinsurer that does not qualify
for full credit with any insurance regulatory authority having jurisdiction over the company’s reserves. The form covers unearned premium,
outstanding losses and incurred but not reported reserves (“IBNR”).
UNAUTHORIZED REINSURANCE
As regards policies or bonds issued by the Company coming within the
scope of this Contract, the Company agrees that when it shall file with the
insurance regulatory authority or set up on its books reserves for
unearned premium and losses covered hereunder which it shall be
required by law to set up, it will forward to the Reinsurer a statement
showing the proportion of such reserves applicable to the Reinsurer. The
Reinsurer hereby agrees to fund such reserves in respect of unearned
premium, known outstanding losses that have been reported to the
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Reinsurer and allocated loss adjustment expense relating thereto, losses
and allocated loss adjustment expense paid by the Company but not
recovered from the Reinsurer, plus reserves for losses incurred but not
reported, as shown in the statement prepared by the Company (hereinafter referred to as “Reinsurer’s Obligations”) by funds withheld, cash
advances or a Letter of Credit. The Reinsurer shall have the option of
determining the method of funding provided it is acceptable to the
insurance regulatory authorities having jurisdiction over the Company’s
reserves.
When funding by a Letter of Credit, the Reinsurer agrees to apply for and
secure timely delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit issued by a bank and containing provisions
acceptable to the insurance regulatory authorities having jurisdiction over
the Company’s reserves in an amount equal to the Reinsurer’s proportion
of said reserves. Such Letter of Credit shall be issued for a period of not
less than one year and shall be automatically extended for one year from
its date of expiration or any future expiration date unless thirty (30) days
(sixty (60) days where required by insurance regulatory authorities) prior
to any expiration date the issuing bank shall notify the Company by
certified or registered mail that the issuing bank elects not to consider the
Letter of Credit extended for any additional period.
The Reinsurer and Company agree that the Letters of Credit provided by
the Reinsurer pursuant to the provisions of this Contract may be drawn
upon at any time, notwithstanding any other provision of this Contract,
and be utilized by the Company or any successor, by operation of law, of
the Company including, without limitation, any liquidator, rehabilitator,
receiver or conservator of the Company for the following purposes, unless
otherwise provided for in a separate Trust Agreement:
(a) to reimburse the Company for the Reinsurer’s Obligations, the
payment of which is due under the terms of this Contract and which has
not been otherwise paid;
(b) to make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer’s Obligations under this Contract;
(c) to fund an account with the Company for the Reinsurer’s Obligations.
Such cash deposit shall be held in an interest bearing account separate
from the Company’s other assets, and interest thereon not in excess of the
prime rate shall accrue to the benefit of the Reinsurer; and
(d) to pay the Reinsurer’s share of any other amounts the Company claims
are due under this Contract.
In the event the amount drawn by the Company on any Letter of Credit
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is in excess of the actual amount required for (a) or (c), or in the case of (d),
the actual amount determined to be due, the Company shall promptly
return to the Reinsurer the excess amount so drawn. All of the foregoing
shall be applied without diminution because of insolvency on the part of
the Company or the Reinsurer.
The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only
upon the order of properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific statement
of the Reinsurer’s Obligations, for the sole purpose of amending the Letter
of Credit, in the following manner:
(a) If the statement shows that the Reinsurer’s Obligations exceed the
balance of credit as of the statement date, the Reinsurer shall, within thirty
(30) days after receipt of notice of such excess, secure delivery to the
Company of an amendment to the Letter of Credit increasing the amount
of credit by the amount of such difference.
(b) If, however, the statement shows that the Reinsurer’s Obligations are
less than the balance of credit as of the statement date, the Company shall,
within thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the
Letter of Credit reducing the amount of credit available by the amount of
such excess credit.
40.34 BRMA Insolvency Clause Form 19 M.
Use of Form: This Article contains “payable on demand” language in
the first sentence. Note that it also contains the word “or” rather than
“and” in the second sentence after “New York Insurance Law,” thus
making the exceptions to the direct payments to the Company (or its
liquidator, receiver, conservator or statutory successor) independent of
each other. The Offset provision in the final paragraph is for this
Contract only.
INSOLVENCY
In the event of the insolvency of the Company, reinsurance under this
Contract shall be payable on demand, with reasonable provision for
verification, on the basis of claims allowed against the insolvent Company
by any court of competent jurisdiction or by any liquidator, receiver,
conservator or statutory successor of the Company having authority to
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allow such claims, without diminution because of such insolvency or
because such liquidator, receiver, conservator or statutory successor has
failed to pay all or a portion of any claims. Such payments by the
Reinsurer shall be made directly to the Company or its liquidator, receiver,
conservator or statutory successor, except as provided by Section 4118(a)
of the New York Insurance Law or except (a) where the Contract
specifically provides another payee of such reinsurance in the event of the
insolvency of the Company, or (b) where the Reinsurer with the consent of
the direct insured or insureds has assumed such policy obligations of the
Company as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Company to such
payees.
It is agreed, however, that the liquidator, receiver, conservator or statutory
successor of the insolvent Company shall give written notice to the
Reinsurer of the pendency of a claim against the insolvent Company on
the policy or policies reinsured within a reasonable time after such claim
is filed in the insolvency proceeding and that during the pendency of such
claim the Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any
defense or defenses which it may deem available to the Company or its
liquidator, receiver, conservator or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court approval,
against the insolvent Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurer.
Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the expense
shall be apportioned in accordance with the terms of this Contract as
though such expense had been incurred by the insolvent Company.
Should the Company go into liquidation or should a receiver or conservator be appointed, all amounts due either Company or Reinsurer,
whether by reason of premium, losses or otherwise under this Contract,
shall be subject to the right of offset at any time and from time to time, and
upon the exercise of the same, only the net balance shall be due.
40.35 BRMA Offset Clause Form 36 A.
Use of Form: This is a broad offset clause which permits offset of
mutual debits and credits across all existing and future reinsurance
agreements.
OFFSET
The Company and the Reinsurer may offset any balance or amount due
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from one party to the other under this Contract or any other contract
heretofore or hereafter entered into between the Company and the
Reinsurer, whether acting as assuming reinsurer or ceding company. This
provision shall not be affected by the insolvency of either party to this
Contract.
40.36 BRMA Loss Notice Clause Form 26 B.
Use of Form: This clause requires the ceding company to provide
prompt notice of losses and of all subsequent developments.
LOSS NOTICE
The Company shall advise the Reinsurer promptly of all losses which, in
the opinion of the Company, may result in a claim hereunder and of
subsequent developments thereto which, in the opinion of the Company,
may materially affect the position of the Reinsurer.
40.37 Notice of Loss Clause Incorporating Right to Associate.
Use of Form: This notice of loss clause incorporates the reinsurer’s right
to associate in the defense of any claim.
Source of Form: This wording is provided in the Business Insurance
Law and Practice Guide § 14.08[7] (LexisNexis).
NOTICE OF LOSS
Prompt notice shall be given to the Reinsurer by the Company of any
occurrence or accident which appears likely to involve this reinsurance
and, while the Reinsurer does not undertake to investigate or defend
claims or suits, it shall nevertheless have the right and be given the
opportunity to associate with the company and its representatives at the
Reinsurer’s expense in the defense and control of any claim, suit or
proceeding involving this reinsurance, with the full cooperation of the
Company.
40.38 BRMA Loss Notice Clause Form 26 A.
Use of Form: This clause specifies that prompt notice to the reinsurer is
a condition precedent to recovery.
LOSS NOTICE
As a condition precedent to recovery hereunder, the Company shall advise
the Reinsurer promptly of all losses which, in the opinion of the Company,
may result in a claim hereunder and of all subsequent developments
thereto which, in the opinion of the Company, may materially affect the
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position of the Reinsurer.
40.39 BRMA Access to Records Clause Form 1 B.
Use of Form: This clause allows the reinsurer or its representative broad
access to all matters relating to the reinsurance at all reasonable times.
ACCESS TO RECORDS
The Reinsurer or its designated representatives shall have free access to
the books and records of the Company on matters relating to this
reinsurance at all reasonable times for the purpose of obtaining information concerning this Contract or the subject matter hereof.
40.40 BRMA Confidentiality Clause Form 69 D.
Use of Form: This clause can be used in conjunction with or added as
a paragraph of an access to records clause. It allows information
sharing with other entities if prior consent is obtained.
CONFIDENTIALITY
The Reinsurer, except with the express prior written consent of the
Company, shall not directly or indirectly communicate, disclose or divulge
to any third party any knowledge or information that may be acquired
either directly or indirectly as a result of the inspection of the Company’s
books, records and papers. The restrictions as outlined in this Article shall
not apply to communications or disclosures that the Reinsurer is required
to make to its statutory auditors, retrocessionaires, legal counsel or
arbitrators involved in any arbitration procedures under this Contract, or
to disclosures required under subpoena or other duly-issued order of a
court or other governmental agency or regulatory authority.
40.41 BRMA Claims Cooperation Clause Form 8 A.
Use of Form: This is a stand-alone claims cooperation clause. Other
clauses, in conjunction with the notice of loss provision or separately,
include an admonition that the reinsured (not the reinsurer) has a duty
to investigate and defend a claim.
CLAIMS COOPERATION
When so requested in writing, the Company shall afford the Reinsurer or
its representatives an opportunity to be associated with the Company, at
the expense of the Reinsurer, in the defense of any claim, suit or
proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or
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40.42
proceeding.
40.42 BRMA Excess of Original Policy Limits Clause Form 15 A.
Use of Form: This clause is for use in excess of loss contracts where the
percentage of coverage provided for XPL is specified in the Ultimate
Net Loss article of the contract.
EXCESS OF ORIGINAL POLICY LIMITS
This Contract shall protect the Company, within the limits hereof, in
connection with ultimate net loss in excess of the limit of its original policy,
such loss in excess of the limit having been incurred because of failure by
it to settle within the policy limit or by reason of alleged or actual
negligence, fraud or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against its insured
or reinsured or in the preparation or prosecution of an appeal consequent
upon such action.
However, this Article shall not apply where the loss has been incurred due
to fraud by a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any
individual or corporation or any other organization or party involved in
the presentation, defense or settlement of any claim covered hereunder.
For the purpose of this Article, the word “loss” shall mean any amounts
for which the Company would have been contractually liable to pay had
it not been for the limit of the original policy.
40.43 BRMA Extra Contractual Obligations Clause Form 16 D.
Use of Form: This clause is for use in a reinsurance contract where the
percentage of coverage provided for ECO is specified elsewhere in the
contract. Insurance or other reinsurance recoveries, which protect the
Company for ECO, shall be deducted when determining the total ECO
loss under this reinsurance contract.
EXTRA CONTRACTUAL OBLIGATIONS
A.
“Extra Contractual Obligations” are defined as those liabilities not
covered under any other provision of this Contract and which
arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the policy
limit, or by reason of alleged or actual negligence, fraud or bad
faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its insured or
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reinsured or in the preparation or prosecution of an appeal
consequent upon such action.
B.
The date on which an Extra Contractual Obligation is incurred by
the Company shall be deemed, in all circumstances, to be the date
of the original accident, casualty, disaster or loss occurrence.
C.
However, coverage hereunder as respects Extra Contractual Obligations shall not apply where the loss has been incurred due to
the fraud of a member of the Board of Directors or a corporate
officer of the Company acting individually or collectively or in
collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.
D.
Recoveries from any other form of insurance or reinsurance,
which protects the company against claims the subject matter of
this Article, shall inure to the benefit of the Reinsurer.
40.44 BRMA Intermediary Clause Form 23 A.
Use of Form: This typical intermediary clause creates an exception to
the usual agency relationship between an intermediary and the
reinsured and places the credit risk of the intermediary on the
reinsurer.
INTERMEDIARY
(Intermediary Name) is hereby recognized as the Intermediary negotiating
this Contract for all business hereunder. All communications (including
but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss
settlements) relating thereto shall be transmitted to the Company or the
Reinsurer through (Intermediary Name and Address). Payments by the
company to the Intermediary shall be deemed to constitute payment to the
Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed
to constitute payment to the Company only to the extent that such
payments are actually received by the Company.
40.45 BRMA Arbitration Clause Form 6 A.
Use of Form: This clause defines arbitrable matters as “any dispute or
other matter in question between the Company and the Reinsurer
arising out of, or relating to, the formation, interpretation, performance, or breach of this Contract.” This language is intended to grant
arbitrators broad authority to hear disputes that could arise under or
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with respect to the contract, including disputes relating to the formation and validity of the arbitration clause. The second paragraph
addresses the situation where more than one reinsurer has taken the
same position with respect to a dispute with the cedent. Under this
wording, the reinsurers must consolidate and act jointly for the
purposes of the arbitration. Parties seeking to avoid mandatory
consolidation in the event of a dispute can substitute the phrase “may
consolidate” for “shall consolidate.” This clause also expressly permits
the parties to agree upon a different location for the hearing from that
which is specified. In addition, it provides that “[j]udgment on the
award may be entered in any court having jurisdiction thereof,” which
paraphrases the language of the FAA, 9 U.S.C § 9, authorizing certain
courts to confirm an award.
ARBITRATION
Any dispute or other matter in question between the Company and the
Reinsurer arising out of, or relating to, the formation, interpretation,
performance or breach of this Contract, whether such dispute arises before
or after termination of this Contract, shall be settled by arbitration.
Arbitration shall be initiated by the delivery of a written notice of demand
for arbitration by one party to the other within a reasonable time after the
dispute has arisen.
If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for the purposes of this
Article, provided, however, that nothing herein shall impair the rights of
such reinsurers to assert several, rather than joint, defenses or claims, nor
be construed as changing the liability of the Reinsurer under the terms of
this Contract from several to joint.
Each party shall appoint an individual as arbitrator and the two so
appointed shall then appoint a third arbitrator. If either party refuses or
neglects to appoint an arbitrator within sixty (60) days, the other party
may appoint the second arbitrator. If the two arbitrators do not agree on
a third arbitrator within sixty (60) days, of their appointment, each of the
arbitrators shall nominate three individuals. Each arbitrator shall then
decline two of the nominations presented by the other arbitrator. The third
arbitrator shall then be chosen from the remaining two nominations by
drawing lots. The arbitrators shall be active or retired officers of insurance
or reinsurance companies or Lloyd’s London Underwriters; the arbitrators
shall not have a personal or financial interest in the result of the
arbitration.
The arbitration hearings shall be held in (City, State), or such other place
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as may be mutually agreed. Each party shall submit its case to the
arbitrators within sixty (60) days of the selection of the third arbitrator or
within such longer period as may be agreed by the arbitrators. The
arbitrators shall not be obliged to follow judicial formalities or the rules of
evidence except to the extent required by governing law, that is, the state
of the situs of the arbitration as herein agreed; they shall make their
decisions according to the practice of the reinsurance business. The
decision rendered by a majority of the arbitrators shall be final and
binding on both parties. Such decision shall be a condition precedent to
any right of legal action arising out of the arbitrated dispute which either
party may have against the other. Judgment upon the award rendered
may be entered in any court having jurisdiction thereof.
40.46 BRMA Arbitration Clause Form 6 E.
Use of Form: The third paragraph includes the phrase “[a]ll arbitrators
shall interpret this Contract as an honorable engagement rather than as
merely a legal obligation,” which has been included in arbitration
clauses for decades and is sometimes a subject of debate among parties
to reinsurance agreements [for a discussion of the meaning and import
of “honorable engagement” language, see § 40.24].
ARBITRATION
As a precedent to any right of action hereunder, if any differences shall
arise between the contracting parties with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether arising before or after termination of this Contract, such differences shall be submitted to arbitration upon the written request of one of
the contracting parties.
Each party shall appoint an arbitrator within thirty (30) days of being
requested to do so, and the two named shall select a third arbitrator before
entering upon the arbitration. If either party refuses or neglects to appoint
an arbitrator within the time specified, the other party may appoint the
second arbitrator. If the two arbitrators fail to agree on a third arbitrator
within thirty (30) days of their appointment, each of them shall name three
individuals, of whom the other shall decline two, and the choice shall be
made by drawing lots. All arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Underwriters at
Lloyd’s London, not under the control of either party to this Contract.
Each party shall submit its case to its arbitrator within thirty (30) days of
the appointment of the third arbitrator or within such period as may be
agreed by the arbitrators. All arbitrators shall interpret this Contract as an
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honorable engagement rather than as merely a legal obligation. They are
relieved of all judicial formalities and may abstain from following the
strict rules of law. They shall make their award with a view to effecting the
general purpose of this Contract in a reasonable manner rather than in
accordance with a literal interpretation of the language.
The decision in writing of any two arbitrators, when filed with the
contracting parties, shall be final and binding on both parties. Judgment
upon the award rendered may be entered in any court having jurisdiction
thereof. Each party shall bear the expense of its own arbitrator and shall
jointly and equally bear with the other party the expense of the third
arbitrator and of the arbitration. In the event that two arbitrators are
chosen by one party as above provided, the expense of the arbitrators and
the arbitration shall be equally divided between the two parties. Any
arbitration shall take place in the city in which the Company’s Head Office
is located unless some other place is mutually agreed upon by the
contracting parties.
40.47 ARIAS-U.S. Umpire Questionnaire Sample Form 2.1.
Use of Form: The AIDA Reinsurance and Insurance Arbitration Society,
ARIAS-U.S., certifies a pool of qualified arbitrators and serves as a
resource for parties involved in a dispute to find the appropriate
persons to resolve the matter in a professional, knowledgeable and
cost-effective manner. It is common practice for nominated panel
members to disclose their contacts with the parties (and their counsel
and any known witnesses) in the business world and in prior
arbitrations, and with the particular contracts involved in the dispute.
This proposed disclosure form designed for umpire candidates includes a variety of questions that may or may not serve as a basis to
disqualify a panel member. This form can be tailored for partyarbitrators if the parties so desire.
UMPIRE QUESTIONNAIRE
In the Matter of the Arbitration Between
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⎫
,
Petitioner,
⎪
⎪
⎬
- and ,
Respondent
⎪
⎪
⎭
UMPIRE QUESTIONNAIRE
To help the parties evaluate the qualifications of umpire nominees in the
above-captioned arbitration, and to identify any potential conflict of
interest, please supply the following information:
1.Name:
Company:
Address:
Telephone:
Fax:
Cell Phone:
Email:
Home Address:
Telephone:
2. EMPLOYMENT HISTORY (please attach a current résumé or CV).
A. Current Employment (if not apparent from the attached résumé or CV)
Position Title:
Length of Employment:
Principal Duties:
B. PAST QUALIFYING EMPLOYMENT (if not currently an officer of an
insurance or reinsurance company [or an Underwriter at Lloyd’s of
London] and if not apparent from the attached résumé or CV).
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
3. Please provide a copy of your current fee schedule, including any
refundable or non-refundable retainer.
4. INSURANCE ARBITRATION EXPERIENCE
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Have you previously participated as an arbitrator or umpire in connection
with insurance disputes?
[ ] Yes [ ] No
If yes, please set forth:
Number of appearances as an umpire:
_________________________________________________________________
_________________________________________________________________
Number of appearances as an arbitrator:
_________________________________________________________________
_________________________________________________________________
5. REINSURANCE ARBITRATION EXPERIENCE
Have you previously participated as an arbitrator or umpire in connection
with reinsurance disputes?
[ ] Yes [ ] No
If yes, please set forth:
Number of appearances as an umpire:
_________________________________________________________________
_________________________________________________________________
Number of appearances as an arbitrator:
_________________________________________________________________
_________________________________________________________________
6. POTENTIAL CONFLICTS
A. Are you presently or have you ever been an employee, officer, director,
shareholder, agent or consultant of any of the parties listed below, or of the
parties’ subsidiaries, affiliates or parent companies? [List of all applicable
parties, subsidiaries, affiliates and parent companies]
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
B. Have you ever served as an arbitrator, umpire, attorney or expert
witness in a matter involving any of the parties listed above or any
subsidiaries, affiliates or parent companies of such parties?
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[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
C. Have you ever had any involvement in an insurance or reinsurance
transaction or dispute involving any of the parties, or involving such
parties’ subsidiaries, affiliates or parent companies?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
D. Have you ever had any involvement in an insurance or reinsurance
transaction or dispute involving any of the specific claims, policies and/or
treaties at issue in this matter as described in Question 8 below?
[ ] Yes [ ] No
_________________________________________________________________
_________________________________________________________________
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
E. To your knowledge, do any companies with which you are presently
affiliated or in which you presently have a financial interest have an
ongoing business relationship with any of the parties and/or affiliates
listed above?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
EXPERIENCE WITH OTHER PANEL MEMBERS AND PARTIES’
COUNSEL
A. Have you ever served on an arbitration panel with
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?
Name of Arbitrator
[ ] Yes [ ] No
If yes, for each such arbitration, state the approximate date of commencement and termination (or whether still pending) and the respective
capacities in which you and
acted, i.e., as
arbitrator or umpire.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
B.
Have
you
ever
served
?
on
an
arbitration
panel
with
Name of Arbitrator
[ ] Yes [ ] No
If yes, for each such arbitration, state the approximate date of commencement and termination (or whether still pending) and the respective
capacities in which you and
acted, i.e., as
arbitrator or umpire.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
C. Have you ever served as an arbitrator, umpire, expert witness or
consultant in an arbitration or litigation at the request of any counsel
involved in this arbitration? [List counsel for all parties]
[ ] Yes [ ] No
If yes, identify counsel and disclose type of service and approximate date
so engaged.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
D. Have you ever served as an arbitrator, umpire, expert witness or
consultant in an arbitration or litigation in which any of the above-listed
counsel represented a party?
[ ] Yes [ ] No
If yes, identify counsel and disclose type of service and approximate date
so engaged.
_________________________________________________________________
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_________________________________________________________________
_________________________________________________________________
8. SUBJECT MATTER OF THE ARBITRATION
This arbitration involves [insert a neutral description of the dispute
between the parties]
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Might these facts or circumstances prevent you from rendering an
unbiased decision in this arbitration?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
9. OTHER CONSIDERATIONS
Are you aware of any facts or circumstances which (1) might impair your
ability to serve (including schedule availability) or (2) might create an
appearance of partiality on your part in the above-captioned arbitration?
[ ] Yes [ ] No
If yes, please explain.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Signature:
Date:
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