Munich Reinsurance Am., Inc. v. Am. Nat'l Ins. Co.

• Decision Date: 27 February 2014
• Docket Number: Civil No. 09–6435 FLW.
• Citation: 999 F.Supp.2d 690
• Court: U.S. District Court — District of New Jersey
• Parties: MUNICH REINSURANCE AMERICA, INC., Plaintiff, v. AMERICAN NATIONAL INSURANCE COMPANY, Defendant.

999 F.Supp.2d 690

MUNICH REINSURANCE AMERICA, INC., Plaintiff

v.AMERICAN NATIONAL INSURANCE COMPANY, Defendant.

Civil No. 09–6435 FLW.

United States District Court, D. New Jersey.

Feb. 27, 2014.

Amy S. Kline and Sean Tracy O'Neill, Saul Ewing LLP, Philadelphia, PA, for Plaintiff.

Joel Max Eads, Trenk DiPasquale Webster Della Fera & Sodono, P.C., Ardmore, PA, for Defendant.

OPINION

WOLFSON, District Judge:

This case involves complex retrocessional agreements between Plaintiff Munich Reinsurance America Inc. (“Munich”) and Defendant American National Insurance Company (“ANICO”). Munich filed a Complaint alleging breach of contract for ANICO's refusal to pay certain claims submitted for payment by Munich under the parties' agreements, and in response, ANICO filed a counterclaim for rescission of the agreements. Following motion practice, the Court conducted a nine-day bench trial with numerous experts and witnesses testifying as to each party's obligations under the agreements as well as their respective business practices.

In light of the evidence presented at trial, the Court concludes that ANICO is not entitled to rescission of the agreements. The Court further finds that Munich satisfied its reporting obligations under the agreements in part, and thus ANICO breached its respective payment obligations for those claims that were properly ceded and reported. To wit, those claims to which Munich is entitled to payment include all claims that were properly ceded to ANICO via IOA Re before the expiration of the Sunset Provision deadlines, including claims that arise from underlying primary policies of workers' compensation written by either Everest or Everest Re, but they do not include claims arising from injuries sustained by a roofing contractor or subcontractor. Further, Munich is not entitled to payment on those claims that were only first noticed on a spreadsheet Munich provided to IOA Re in August 2008, as that document did not satisfy the reporting requirements of Article XVI of the parties' agreements.

I. OVERVIEW

A. Reinsurance

Before proceeding to the specifics of this case, the Court sets forth a brief overview of the reinsurance industry. As I noted in my previous opinion resolving the parties' summary judgment motions, this overview of an issue as complex as reinsurance must be taken with a grain of salt; I merely seek to provide a basic primer to help orient the reader.

In Pacific Employers Ins. Co. v. Global Reins. Corp. of America, 693 F.3d 417 (3d Cir.2012), the Third Circuit described reinsurance as

insurance for insurance companies. A reinsurer agrees to indemnify a reinsured for certain payments the latter makes under one or more of its issued policies. In return, the reinsurer receives a share of the underlying premiums. Ceding a portion of an insured risk prevents a single catastrophic loss from hurling the reinsured into insolvency. It also allows the reinsured to invest more capital or to insure more risks.

Id. at 421. Reinsurance is comparable to “a contract of indemnity.” Christiania Gen. Ins. Corp. of N.Y. v. Great Am. Ins. Co., 979 F.2d 268, 271 (2d Cir.1992).

“The reinsurance of reinsurance is called a retrocession, and the reinsurers of reinsurers—that is, reinsurers who assume retrocession risk through retrocessional agreements—are called retrocessionaires.” Century Indem. Co. v. Certain Underwriters at Lloyd's, London, subscribing to Retrocessional Agreement Nos. 950548, 950549, 950646, 584 F.3d 513, 519 (3d Cir.2009). Such retrocession agreements present considerably more complex legal and factual scenarios because “there is another layer of coverage created and another party thrown into the mix.” Plitt, et al., 1A COUCH ON INSURANCE § 9:3.

There are two overarching categories of reinsurance and retrocession—treaty and facultative; the agreements here are the former. Through treaty reinsurance,

the reinsurer [or retrocessionaire] agrees to accept an entire block of business from the reinsured. Once a treaty is written, a reinsurer is bound to accept all of the policies under the block of business, including those as yet unwritten. Because a treaty reinsurer accepts an entire block of business, it does not assess the individual risks being reinsured; rather, it evaluates the overall risk pool.

Pac. Employers, 693 F.3d at 421. As with primary insurance, reinsurance comes in several basic types, including proportion and “excess of loss” policies. The instant agreements are excess of loss policies, which obligate the retrocessionaire to pay up to its “retention” amount, i.e., the amount of “cover” the retrocessionaire agreed to provide the reinsurer, once the total claim amount has surpassed a set monetary limit or “layer” that the reinsurer must first pay. See Hartford Acc. and Indem. Co. v. Ace Am. Reins. Co., 284 Conn. 744, 750 n. 5, 936 A.2d 224 (2007). Excess of loss policies come in three forms: “per risk,” “annual aggregate,” or “per occurrence.” See Orpett, et al., 3 LAW AND PRAC. OF INS. COVERAGE LITIG. § 41:10 (2012). These three methods differ in the manner in which risks “attach” to the reinsurance agreement. Under a per occurrence policy, like those at issue here, the retrocessionaire's obligation is triggered by a particular incident, such as a personal injury. Id.

B. The Parties and the Agreements

For the purposes of the present case, Munich¹ was the ceding reinsurer and ANICO was the retrocessionaire for two excess of loss retrocessional agreements of workers' compensation reinsurance, on a per-occurrence, or per-claim, basis, which cover the periods of November 1, 2000 through December 31, 2000 (referred to by the parties as the “2000 Year Agreement,” and also as the “Stub Year Agreement,” due to its short, two-month duration), and January 1, 2001 through December 31, 2001 (the “2001 Agreement”) (collectively, the “Retrocession Agreements”). The terms of the two agreements are identical except for the following differences: (1) their duration; (2) the relevant provision of Article X (Claims) is reflected in Endorsement No. 1 in the Stub Year Agreement, while the identical corresponding provision for the 2001 Year is in the body of that agreement; and (3) under the Stub Year Agreement, ANICO only took a 75% share of the retrocession. Pl.'s 1 at MRAM–01–0304 to –0305 (Stub Year Agreement); Pl.'s 2 at MRAM–01–0034, –0040 (2001 Agreement).²

As detailed more fully infra, the Retrocession Agreements provide that ANICO shall not be liable for any single loss until Munich's loss exceeds $500,000, that ANICO is not liable for more than $500,000 per loss occurrence, and that for the 2001 Agreement ANICO is not liable beyond $20,000, 000. Pl.'s 1–2 (Art. IV). A “loss occurrence” is each and every accident or occurrence, or series of accidents or occurrences, arising out of one event. Pl.'s 1–2 (Art. V II).

The story behind the Retrocession Agreements, however, is considerably more complex. Underlying the Retrocession Agreements is a reinsurance agreement Munich entered into with Everest National Insurance Company (“Everest”) and Everest Reinsurance Company (“Everest Re”), whereby Munich agreed to reinsure Everest and Everest Re's workers' compensation insurance program for the period of January 1, 1998 through December 31, 2001 under an excess of loss reinsurance agreement entitled “Workers' Compensation Excess of Loss Reinsurance Agreement between Everest National Insurance Company, Everest Reinsurance Company and American Re–Insurance Company” (the “Everest Agreement”) for the period November 1, 1997 to December 31, 2001. The Everest Agreement was governed by limits of $750,000 excess of $250,000. This means that under the Everest Agreement, Munich had no liability for any claim of less than $250,000—the layer from $0 to $250,000 was Everest's responsibility.

During the periods covered by the Everest Agreement, Munich purchased retrocessional “carve-out” coverage. Another entity, IOA Re, underwrote retrocession contracts for every year in which Munich purchased retrocessional cover for the Everest Agreement. Specifically, Munich obtained carve-out retrocessional coverage for its 1998 and 1999 treaty years through other retrocessionaires, including Continental Casualty Insurance Company (“Continental Casualty”). 6/20/13 Tr. at 93 (Dorosz). For the periods January 1, 1998 to October 31, 1998, November 1, 1998 to October 31, 1999 and November 1, 1999 to October 31, 2000, IOA Re underwrote the retrocession on behalf of Continental Casualty. Pl.'s 50 at AAHRU–00129 to –00189 (period Jan. 1, 1998 to Oct. 31, 1998), AAHRU–00103 to –00127 (period Nov. 1, 1998 to Oct. 31, 1999); Def.'s 248 at ANICO–IOA–5836 to –5870 (period Nov. 1, 1999 to Oct. 31, 2000).

In 2000, Munich Re and Everest agreed to extend the Everest Agreement for two months, from November 1, 2000 to December 31, 2000, to enable them to have more time to discuss the terms on which Munich would reinsure the Everest Program for 2001. Munich asked IOA Re whether IOA Re, on behalf of Continental Casualty, would agree to extend the retrocessional agreement for the same two-month period. Def.'s 248 at ANICO–IOA–5790. IOA Re determined that it was interested in continuing to participate in the retrocession; however, at that time IOA Re had lost its authority to write on behalf of Continental Casualty. Id. at ANICO–IOA–5789. Instead, IOA Re proposed, and Munich agreed, that ANICO replace Continental Casualty as the retrocessionaire on the program for the two-month extension and for the calendar year 2001—the Retrocession Agreements.³ 6/25/13 Tr. at 112:17–113:13 (Hoekstra).

To summarize, Munich purchased a carve-out for the Everest Agreement for the period November 1, 2000 and December 31, 2000, through ANICO and another retrocessionaire; ANICO accepted only a 75% share of the Stub Year Agreement with the other retrocessionaire accepting the other 25%. Munich also purchased retrocessional carve-out for the Everest Agreement for January 1, 2001 throug...