District Court Resolves Complex Retrocessional Debate Largely in Favor of the Insured

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Munich Reinsurance America, Inc. v. American National Ins. Co.
(No. 09-6435, September 28, 2012)

This United States District Court for the District of New Jersey case focuses on the complex retrocessional agreements between the plaintiff, Munich Reinsurance America Inc. (Munich), and the defendant, American National Insurance Company (ANICO).

For the period of January 1, 1998 through December 31, 2001, Munich entered into a reinsurance relationship with Everest National Insurance Company (Everest) to reinsure Everest’s workers compensation insurance program under an excess of loss agreement. Munich was only liable for a portion of a claim exceeding the initial $250,000 attachment point and up to a limit of $750,000.

Munich next purchased an excess of loss retrocessional cover. ANICO was one of the retrocessionaires, and agreed to attach at the $500,000 level. The parties entered into two agreements for 2000 and 2001. The agreements provided that ANICO would indemnifyMunich“for the amount of ultimate net loss … which may accrue to [Munich] as a result of loss or losses occurring during the term of [the] agreement[s] as a result of [Munich’s] participating in the [Munich-Everest] reinsurance agreement … .”  The agreements further provided that ANICO indemnified Munich for “each and every accident or occurrence or series of accidents or occurrences arising out of one event … .” It is this language which formed the basis for the underlying argument.

On December 22, 2009, Munich brought the underlying action against ANICO, alleging that ANICO owed Munich $4,330,578.01 under the retrocessional agreements that ANICO refused to pay. The district court examined Munich’s motion for partial summary judgment on its breach of contract, declaratory judgment, and ANICO’s recission claims as well as ANICO’s corss-motion for summary judgment.

First, the court determined that Munichwas not entitled to summary judgment on ANICO’s recission claim based on a theory of waiver because Munich failed to establish that ANICO did not pursue recission within a reasonable time of becoming aware of the facts supporting Munich’s alleged failure to disclose. The court also reasoned that competing expert reports and contradictory testimony as to the materiality of undisclosed information made summary judgment inappropriate for either party on the recission claim.

Second, the court examined ANICO’s untimely claims submissions defense and determined that ANICO failed to meet its burden to demonstrate prejudice and granted Munich’s motion for summary judgment on that claim. In its argument, ANICO pointed to the language of Article X of the retrocessional agreements, which stated, in pertinent part, “[t]he company [Munich] agrees to advise the reinsurer [ANICO] promptly of all claims coming under this agreement on being advised by the original ceding company, and to furnish the reinsurer with such particulars and estimates regarding the same as are in the possession of the company. An omission on the part of the company to advise the reinsurer of any loss shall not be held to prejudice the company’s rights here under.” ANICO argued that Munich’s failure to immediately notify it of these claims absolved the retrocessionaire from its responsibility to pay the claims.

The court then examined the following provision: “[t]he reinsurer agrees to pay the company on demand, the reinsurer’s proportion of all losses and/or loss expenses paid by the company arising from the underlying agreement, including any and all expenses incurred directly by the company in the litigation, defense and settlement of claims … .”  The court reasoned that the use of the terms “any” and “all” expressly covered each and every claim covered by the parties’ agreement, including the accidents that Munich contractually reserved at 50 percent of the reinsured attachment point. The court determined that under this language, Munich’s failure to timely advise ANICO of any claim was not a condition precedent impacting Munich’s right to receive payment.

Third, the court addressed the parties’ retention dispute. This argument hinged on the definition of the term “ultimate net loss” as set forth in the agreements. The agreements provided that ANICO would indemnify Munich “for the amount of ultimate net loss … which may accrue to [Munich] as a result of loss or losses occurring during the term of [the] agreement[s] as a result of [Munich’s] participating … .” Munich argued that it was only required to pay $250,000 before ANICO’s excess obligation came into effect, as Everest would have also paid $250,000, thereby raising the total to the $500,000 attachment point. ANICO argued that Munich alone was required to pay $500,000 before ANICO was obligated on the excess policy. Giving meaning to all provisions of the contract, the court reasoned that both Everest’s and Munich’s losses counted toward the ultimate net loss calculation and granted Munich’s summary judgment motion. Even if the court had determined that the contractual language was ambiguous, under New York law, the result would be the same. After examining the extrinsic deposition testimony of the policy underwriter, the court noted that even examining the evidence in the light most favorable to ANICO, there was no genuine issue of material fact as to the parties’ intent that Everest’s losses be included in the ultimate net loss determination.

Although this case involved a complex retrocessional problem, the court’s analysis ultimately came down to basic rules of contract interpretation.