Patton Boggs Reinsurance Newsletter - December 2012: Texas Federal Court Finds for Managing Agent of Cedent Against Reinsurer


Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Servs., Inc., No. 3:10-CV-2307-B, 2012 WL 3777408 (N.D. Tex. Aug. 30, 2012).

A Texas federal court granted an underwriting agent’s motion for summary judgment in part in a complicated dispute arising out of the reinsurance of automobile insurance policies written by the underwriting agent and the manner in which losses and commissions were paid and calculated.  An earlier action was dismissed after a tentative settlement was reached, but the settlement failed and this action, with additional claims, was filed claiming that the underwriting agent improperly used funds and withheld and misappropriated nearly $18 million by manipulating the calculation of the contingent commission.

The court first addressed the issue of whether there was a fiduciary duty owed by the underwriting agent to the reinsurer.  After a detailed analysis of the relevant agreements, the court found that the reinsurer did not demonstrate that the underwriting agent owed it a fiduciary duty.  The agreements, consistent with Texas insurance law, required the underwriting agent to hold the premiums as a fiduciary on behalf of the insured or insurer, and must deposit the funds in an escrow account.  Essentially, while the underwriting agent acted as an agent for the reinsurer for certain activities, the provisions of the agreement cannot transfer fiduciary duties owed to the cedent directly to the reinsurer.  The court made the same findings concerning the interpretation of the relevant insurance code provisions.  Accordingly, the court granted the underwriting agent’s motion for summary judgment on the reinsurer’s claim for breach fiduciary duty.

The court also rejected the reinsurer’s claims for conversion because the claims fell within the terms of the contracts and the economic loss rule limited the claim to breach of contract and not the tort of conversion.  The court found that nothing  in the agreements preserved common law remedies and the reinsurer did not show how there could be damages other than economic loss.  The court denied the reinsurer’s summary judgment motion for breach of contract because the contracts did not unambiguously establish each party’s obligations in case of termination.

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