In 2012, courts again took up the relationship between reinsurers and managing agents and not always to the reinsurer's benefit. In 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. The complaint alleged that the underwriting agent improperly used funds and withheld and misappropriated nearly $18 million by manipulating the calculation of the contingent commission.
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.
The reinsurer fared better in New York federal court later that year. In Acumen Re Mgmt. Corp. v. Gen. Sec. Nat'l Ins. Co., No. 09 CV 01796(GBD), 2012 WL 3890128 (S.D.N.Y. Sept. 7, 2012), the court was faced with cross-motions for summary judgment on a dispute over commissions based on the profitability of reinsurance contracts written by a managing agent. The underwriting agency agreement provided for the calculation of underwriting commissions and contingency commissions based on the reinsurer's annual net profits. The parties agreed to terminate the relationship, but certain reporting requirements and contingent commission calculations were required as part of the termination agreement.
Subsequent to the termination of the underwriting agreement, the reinsurer commuted a series of underlying reinsurance contracts on programs that were performing poorly. The business written by the managing agent represented a fraction of the business commuted, but a substantial portion of the managing agent's income-deriving business with the reinsurer. The reinsurer did not consult with the managing agent on the commutations.
In calculating the contingency commission, it turned out that no commissions were due. The managing agent claimed that the reinsurer breached its contract by not providing certain reports, failing to properly calculate the commissions, failing to consult when establishing incurred but not reported losses ("IBNR"), and using commuted losses in the commission calculations and other defects. The question for the court was whether any of the reinsurer's actions resulted in a breach of either the termination agreement or the original underwriting agreement.
The court found that the failure to provide quarterly reports after the commutations was a breach, but that the breach was waived by the underwriting agent because it never inquired about the reports and accepted the periodic reporting it had been receiving. The court also found no contractual requirement that the reinsurer consult with the managing agent on establishing IBNR for the contingent commission calculation. The court also found no breach because the reinsurer included commuted losses in the calculations or in the way the calculations were performed.
Summary judgment was denied on the issue of data quality because enough of a factual issue was raised on whether the reinsurer properly maintained its records on the managing agent's business. The court ordered that the managing agent may proceed to trial on its data quality breach claim even though the claim may be limited to nominal damages.