Missouri Court Of Appeals Finds Facultative Reinsurance Agreement Between Parties Was Truly A Liability Insurance Contract Which Rendered Its Arbitration Clause Unenforceable

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Although the parties had entered into what they called a Facultative Reinsurance Agreement (“FRA”), the Missouri Court of Appeals determined the agreement was a contact of indemnity against liability, and thus, pursuant to Section 435.350 of the Missouri Arbitration Act which renders arbitration clauses in insurance contracts unenforceable by law, the parties would not be compelled to arbitrate.

The Court addressed the differences between a contract of indemnity against loss (reinsurance) and a contract of indemnity against liability (insurance): in a contract of indemnity against loss, “the insurance company does not become liable until loss has actually been suffered and the amount of the insurance does not become available until the assured has paid the loss.” The Court determined the FRA, by its own terms, did not become liable upon loss, but upon liability as it was “subject in all respects to the terms, conditions, exclusions and limits of liability” of the policy which it followed.

Furthermore, the FRA detailed the manner in which the Appellant – the supposed “reinsurer” – would control and participate in the claims and underlying litigation, which goes beyond the mere insurance of a loss. Lastly, public policy dictates reinsurance contracts are to be negotiated by insurers who have a sophistication regarding insurance contracts, and thus require less protection under the law than an insured under a general liability policy.

Although it was not necessary to do so, the Court also found the third-party beneficiary claims at issue did not fall within the arbitration clause, as the plain language of the arbitration clause limited such disputes to those between the reinsurer and the reinsured, and basic principles of contract law prohibited the Court from reading language into the arbitration clause which the parties did not intend.

Willie Leonberger v. Missouri United School Insurance Counsel, et al., No. ED103669 (Mo. Ct. App. May 24 2016).

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. Attorney Advertising.

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