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


From ambiguities in contractual provisions to waivers of rights, 2012 was a year rich with court decisions interpreting reinsurance contract provisions. At least four courts relied, in part, upon extrinsic evidence in construing contractual provisions, and each decision held the parties to the terms of the contract.

In the first extrinsic evidence case, OneBeacon Am. Ins. Co. v. Commercial Union Assurance Co. of Can., 684 F.3d 237 (1st Cir. 2012), the First Circuit affirmed a district court's denial of summary judgment to the cedent and award of summary judgment to the reinsurer. The dispute concerned the alleged obligation of the reinsurer to reinsure the cedent for certain policies issued by the cedent in the early 1980s. The cedent provided coverage to the insured for three years during three consecutive policy periods. The 1980 policy included an endorsement stating that the policy was reinsured by the reinsurer. A facultative certificate, expiring at the conclusion of the 1980 policy, confirmed the reinsurer's obligation to reinsure the cedent for the risk. The cedent did not issue the reinsurance endorsement on either the 1981 or the 1982 policy periods, nor was a facultative certificate issued for this time period. In finding for the reinsurer, the district court held that the facultative certificate was the only contract between the parties and because it stated that the reinsurance term ended at the expiration of the 1980 policy, the reinsurer did not reinsure the later policies. In affirming, the First Circuit held that the cedent, as the party seeking coverage, was unable to prove that the reinsurer agreed to reinsure the 1981 and 1982 policies, finding there was no evidence that the reinsurer agreed to provide reinsurance beyond the term of the 1980 policy. In making its decision, the court also examined evidence regarding the flow of premium payments during the three-year period in question and found support for the argument that the reinsurer terminated the relationship at the conclusion of the 1980 policy period.

The second case addressing extrinsic evidence in contract interpretation, Munich Reinsurance Am., Inc. v. Am. Nat'l Ins. Co., No. 09:6435, 2012 WL 4475589 (D.N.J. Sept. 28, 2012), was a complicated retrocessional dispute. The district court granted in part and denied in part the retrocedent's motion for summary judgment and preserved the retrocessionaire's rescission counterclaim for trial. The dispute centered on the alleged failure of the retrocessionaire to pay under two retrocessional agreements. The retrocessionaire alleged various counterclaims and sought rescission based on misrepresentations it uncovered during discovery. One issue the court ruled on was construction of the retention provision of the retrocessional contract. The retrocedent claimed that the retention provision triggered the retrocedent's obligation when both the retrocedent and the underlying ceded paid a cumulative total of $500,000 on each loss occurrence. The retrocessionaire claimed that the underlying cedent' payments did not count toward ultimate net loss. The court found that the contract language was only susceptible to one reasonable interpretation and that extrinsic evidence supported that same conclusion.

In the third case, a Florida state appellate court reversed a trial court's ruling on interpretation of a reinsurance contract and criticized the lower court for failing to consider extrinsic evidence in making its determination. In Kiln PLC v. Advantage Gen Ins. Co., 80 So. 3d 429 (Fla. Dist. Ct. App. 2012), a Florida state appellate court continued the trend of not construing a reinsurance contract against the drafting party. The appellate court reversed summary judgment issued in favor of the cedent and remanded the case to examine extrinsic evidence of whether coverage was available under an ambiguous provision of a reinsurance contract. The dispute was whether the reinsurance contract covered claims arising from non-employee airline passengers. The clause at issue stated that the reinsurance coverage was for claims paid by the cedent for the death or injury of an airline passenger up to $300,000 for any one person not exceeding 10 times their annual salary. In reversing the trial court, the appellate court held that the reinsurance contract was ambiguous as to whether non-employees were covered and that the trial court should have considered extrinsic evidence instead of construing the contract against the reinsurers as the drafter. Because of the unique and highly specialized nature of the reinsurance (the court actually said insurance), extrinsic evidence should be used to help resolve the ambiguity.

In a fourth case, Trenwick Am. Reinsurance Corp. v. W.R. Berkley Corp., 54 A.3d 209 (Conn. App. Ct. 2012), the Connecticut Court of Appeals affirmed a trial court judgment holding that an agreement between the reinsurer and the cedent commuted their prior reinsurance contract. The commutation agreement terminated all prior "reinsurance agreements" between the parties. Despite the commutation agreement, the parties continued exchanging reinsurance payments for premiums under the commuted reinsurance contract for four years. Then, the reinsurer terminated payments 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 court, however, 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.

Courts in 2012 also addressed issues of contractual interpretation apart from extrinsic evidence. For example, in Women's Hosp. Found. v. Nat'l Pub. Fin. Guar. Corp., No. 11-cv-00014, 2012 WL 956622 (M. D. La. Mar. 20, 2012), a Louisiana federal court upheld the right of a reinsurer to approve a new issuance of debt by the insured. In Women's Hospital, the cedent bond insurer wrote insurance for a public hospital's issuance of bonds to facilitate building renovations. The reinsurer stepped into the shoes of the cedent for purposes of enforcing the insurance contract with the insured hospital under a reinsurance contract. Thereafter, the insured sought to obtain additional financing in order to build a new facility. Because the new debt issuance would require an amendment to the insurance agreement, the insured was required to obtain written consent from the reinsurer prior to issuing the debt. After some negotiation, the reinsurer withheld its consent to the new issue, and the insured then sued both the cedent and the reinsurer alleging breach of the insurance agreement. The insured pointed to a "debt test" provision in the insurance agreement whereby the insured could incur additional debt liabilities without violating certain covenants and without modification to the agreement. The insured argued that, so long as the additional liabilities did not violate these covenants, the reinsurer was obliged to provide its consent. In essence, the insured argued that the "debt test" provision of the agreement qualified the separate provision requiring the insurer's consent to any modification of the agreement. In granting the cedent and the reinsurer's motion to dismiss the insured's lawsuit, the court found the consent provisions plain and unqualified: the insurer was free to withhold its consent to any modifications to the insurance agreement even though the proposed debt issuance would not violate the "debt test," which concerned certain transactions that would not require modification to the insurance agreement, and which was not the case for the new debt at issue. Importantly, the court observed that consent provisions of this kind are designed to provide the insurer with some degree of control over the relationship between the parties, and the reinsurer rightfully exercised that control in this case. This control provides some mechanism by which the insurer can limit the ability of the insured to take on additional debt, thereby increasing the risk of default on the prior insured bonds.

Finally, one court held that terms that were not defined in the reinsurance contract would take their meaning from the underlying insurance policies. In Ace Prop. & Cas. Ins. Co. v. R&Q Reinsurance Co., No. 02290, 2012 Phila. Ct. Com. Pl. LEXIS 128 (May 15, 2012), a Pennsylvania state court granted a cedent's motion for summary judgment against its reinsurer and predecessor companies, and decided the contract interpretation issue in the cedent's favor. The dispute focused on the meaning of the terms "loss" and "expense" in multiple facultative reinsurance certificates issued by the reinsurer. The court accepted the cedent's position that the definitions should be taken from the definition of "ultimate net loss" in the underlying insurance policies. The facultative certificates provided that the liability of the reinsurer followed that of the cedent, being subject in all respects to the terms and conditions of the cedent's policies, except as otherwise provided. The cedent purchased facultative reinsurance on four underlying insurance policies in which the insured was sued by claimants alleging asbestos bodily injuries. When the claims settled, the cedent submitted proofs of loss, but the reinsurer did not pay them, claiming instead that the cedent miscalculated its attachment point by combining indemnity and expenses. The court noted that the parties checked the "excess of loss" box on the facultative certificates, and not "contributing excess" or "non-concurrent," and ruled that, because loss was not defined in the facultative certificates, the definition carried over from the underlying policies. The court agreed with the reinsurer's position, however, that the terms "loss," "expense," and "damage" would be determined by the facultative certificates and not the underlying policies if the facultative certificates were "non-concurrent" instead of "excess of loss." Accordingly, the court ruled that the broad "ultimate net loss" definition in the underlying insurance policies should prevail, and that the term "loss" included defense and expenses in addition to indemnity. The court held the cedent was correct in combining indemnity and defense costs to reach its attachment point.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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