Direct actions against reinsurers have been on the rise for some time. To bring a direct action, a policyholder must get over the contractual privity hurdle and find some basis to show a direct relationship or third-party beneficiary relationship. Many policyholders try to bring these actions, but they more often than not fail at the motion to dismiss level. Sure, there are circumstances
where the reinsurer is truly the real party in interest and has the direct responsibility and liability to the policyholder. In those cases a direct action makes sense, but those cases are few and far between. Allowing a direct action against a reinsurer where there is no contractual privity or other basis to succeed would disrupt the manner in which risks are spread through the insurance and reinsurance industry. A recent case, highlighted below, shows how the courts address some of these issues.
In Three Rivers Hydroponics, LLC v. Florists’ Mutual Ins. Co., No. 2:15-cv-00809, 2018 U.S. Dist. LEXIS 20699 (W.D. Pa. Feb. 8, 2018), a hydroponics farm suffered damages and brought a coverage action against its insurer. The policyholder later amended its complaint to bring breach of contract, bad faith and civil conspiracy claims against its insurance company’s reinsurer. The reinsurer moved to dismiss the three claims and the court granted the motion dismissing the reinsurer from the case.
The policyholder argued that its claims should withstand the motion to dismiss because the reinsurer took on claims investigation and settlement responsibilities from its cedent and that the policyholder was an intended third-party beneficiary of the reinsurance agreement. This first issue is one that occasionally rears its head because of certain expertise or relationships between ceding company and reinsurer. For example, we have seen reinsurance contracts that obligate the cedent to consult with the reinsurer before responding to certain claims. Policyholders try to use these claims control clauses to argue for a direct right of action against the reinsurer.
In this case, the court found that there was no contractual privity and no allegation of any contract between the policyholder and the reinsurer. The court concluded that nothing in the reinsurance agreement relieved the cedent from its obligations to the policyholder and that the reinsurer did not directly assume any of the cedent’s obligations to the policyholder. The court held that the cedent retained its obligations to the policyholder, including its duty to pay claims and settlements. Moreover, said the court, the cedent continued to bear risk because its liability to the policyholder was greater than the reinsurer’s liability to the cedent. Notably, the court stated that the reinsurance agreement had been entered into more than 12 years before the cedent issued its policy to the policyholder, which made it extremely difficult to argue that the reinsurance agreement was expressly intended to benefit the policyholder.
In rejecting the claims control clause argument, the court stated that the policyholder failed “to convincingly explain why [the reinsurer] filling both the reinsurer and claims investigator roles is different than an insurer obtaining a reinsurer and a separate claims adjuster . . . .” The court held that the claims control responsibilities were not a compelling reason to grant third-party beneficiary status to the policyholder.
These cases are all very fact intensive. It is fair to say, however, that the more involvement and control a reinsurer expresses in its reinsurance agreement the more likely a court will find that the reinsurer has some direct responsibility to the policyholder. These are business decisions made based on the specific cedent and facts surrounding the insurance and reinsurance structure for the policyholder. But in the normal course, a simple claims control clause that cedes no real responsibility from the cedent to the reinsurer should not result in a court permitting a direct action against a reinsurer.