Aioi Nissay Dowa Ins. Co. v. Prosight Specialty Mgmt. Co., 11 Civ. 1330 (JPO), 2013 U.S. Dist. LEXIS 87050, 2013 WL 3111349 (S.D.N.Y. Jun. 20, 2013).
A New York federal court sided with a reinsurer in a dispute with a cedent over a series of excess-of-loss loss and reinstatement premium payment reinsurance agreements. This case arose out of the infamous Fortress Re aviation pool. The cedent participated on property and liability insurance policies to airlines, which unfortunately were involved in the September 11, 2001 attacks. The reinsurer participated in four excess-of-loss reinsurance contracts through the Fortress Re pool. The excess-of-loss contracts had reinstatement of premium provisions should the limit of liability be exhausted by the payment of loss. The cedent also entered into a series of premium protection contracts with the Fortress Re pool, which protected the cedent from its obligation to pay reinstatement premium under the excess-of-loss contracts.
Following the massive aviation losses from September 11, 2001 and other aviation losses during the relevant period, the cedent commuted its liabilities with certain members of the Fortress Re pool, which had become insolvent. The reinsurer here declined to enter into a commutation agreement. Apparently, the reinsurer did not know about the cedent’s commutation with the other Fortress Re pool members. The cedent billed the reinsurer under the premium protection contracts as if it had not commuted with the other members of the Fortress Re pool.
The reinsurer filed suit against the cedent, arguing that it was only obligated to reimburse for its percentage of reinstatement premiums actually paid. After a bench trial, the court rejected the cedent’s counter-argument that the parties intended that the reinsurer’s payments under the premium protection contracts would match dollar-for-dollar the excess of loss reinstatement premiums that the cedent owed to the reinsurer. Under New York law, the court held that the parties likely had no intent regarding what would result if commutations were made with the other Fortress Re pool members at the time the contracts were executed, the language of the premium protection contracts was controlling and, while ambiguous, the language was clear that the reinsurer was only liable for a percentage of reinstatement premiums actually paid.
The court found that the reinsurer’s liability was limited to its assumed percentage of the percentage of reinstatement premium the cedent actually paid to the reinsurer under the excess-of-loss contracts following the commutations. The court ruled that to hold the reinsurer liable for more would violate the ultimate net loss clauses in the contracts and was consistent with the several liability clauses limiting the reinsurer’s liability to its share of the total cost of reinstatement regardless of whether the other pool members could pay.
The cedent argued that both types of contracts had to be read together as a package. The court rejected this argument, finding that the contracts, while purchased from the same reinsurers, had no textual connection and were purposely kept separate for competitive reasons. The court held that extrinsic evidence failed to show that the parties had any particular intent as to what should happen if members of the Fortress Re pool disappeared. The court also rejected the cedent’s statute of limitations defense based on an open account theory, along with other defenses.