Patton Boggs Reinsurance Newsletter - March 2013: A Brief Review of Reinsurance Trends in 2012: Intermediaries

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In Olympus Ins. Co. v. AON Benfield, Inc., No. 11-cv-2607(PJS/AJB), 2012 WL 1072334 (D. Minn. Mar. 30, 2012), a Minnesota federal court granted a motion to dismiss in favor of a reinsurance intermediary against a cedent. The dispute centered on the intermediary's alleged failure to pay the cedent an annual fee, which was defined in the reinsurance brokerage agreement as a type of rebate due at the end of the fiscal year calculated as a percentage of the commissions that the intermediary received during the year from the cedent's reinsurers. The brokerage agreement also provided a "forfeiture provision," which eliminated the need of the intermediary to pay the annual fee "subsequent to any decision by [cedent] to terminate or replace [intermediary] as its reinsurance intermediary-broker . . . ." The cedent appointed a new intermediary on February 17, 2009, to take effect on June 1, 2009, which was the beginning of the new fiscal year. On March 25, 2009, the new intermediary advised the old intermediary that the cedent would not be renewing its contract with the old intermediary.

The cedent argued that it was owed the annual fee that was due at the end of the fiscal year. The intermediary asserted that no annual fee was owed because it was not payable before the cedent's decision to change intermediaries and because, under the terms of the forfeiture provision, it was not payable after the cedent's decision to change intermediaries.

In granting the intermediary's motion to dismiss, the court determined that the intermediary was not required to pay the annual fee. The terms of the agreement provided that if the cedent chose to discontinue the relationship between the cedent and the intermediary no subsequent annual fee would be due or owing. The court found that terms set forth in a contract, as delineated by quotations and parentheses, were not defined by the words that followed the terms, but by the words that preceded them. For those words or phrases not delineated by quotations and parentheses or otherwise explicitly defined, the words' "plain and ordinary meaning" must be applied. The court, in applying these principles, determined that because the cedent ended the relationship between itself and the intermediary prior to the date the annual fee would have become due and owing, no annual fee was due and payable to the cedent.