Patton Boggs Reinsurance Newsletter - December 2012: Connecticut Appellate Court Rules That a Commutation Agreement Terminated Reinsurer’s Obligations to Cedent

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Trenwick Am. Reinsurance Corp. v. W.R. Berkley Corp., 54 A.3d 209 (Conn. App. Ct. 2012).

A Connecticut appellate court affirmed a trial court judgment holding that an agreement between the reinsurer and the cedent commuted their prior reinsurance contract.  The parties originally entered a reinsurance contract explicitly providing for the reinsurer to accept a portion of the cedent’s overall losses in exchange for part of the premiums the cedent collected.  Subsequent to this reinsurance contract, the parties entered a commutation agreement.  The commutation agreement, by its express terms, terminated all prior “reinsurance agreements” between the parties.  The commutation agreement defined “reinsurance agreements” as contracts in which a reinsurer reinsures certain liabilities of the cedent.  Despite the commutation agreement, the parties, for four years, continued exchanging reinsurance payments for premiums, as per the terms of the original reinsurance contract.  Then, the reinsurer terminated payments citing the global language of the commutation agreement and filed suit seeking restitution for the amounts unnecessarily paid to the cedent.  The cedent argued that the commutation agreement should be reformed because the parties were mistaken as to whether the original reinsurance contract was commuted. 

The court refused to reform the contract because the parties agreed to an unambiguous commutation agreement terminating the original reinsurance contract.  The court bound the cedent to the commutation agreement because the cedent’s experienced officer drafted the commutation agreement with the help of counsel, and the clear language of the agreement terminated all prior reinsurance contracts.  Moreover, the commutation agreement was not ambiguous when, by its terms, it terminated all “reinsurance agreements.”  The commutation agreement’s definition of reinsurance as agreements where a reinsurer reinsures certain liabilities of an insurer clearly encompassed the parties’ prior reinsurance contract.

The court also affirmed the denial of restitution because both parties for four years performed their respective obligations under the contract notwithstanding the commutation agreement.  Because there was no evidentiary foundation for a court to have determined that one party had been unjustly enriched at the expense of the other, restitution was not appropriate.

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