In a recent case, a New York federal court in one of the September 11, 2001 lawsuits against Al Qaeda granted plaintiff insurance carriers’ motion for an award of damages on a default judgment against the terrorist organization. The damages requested included both insurance payments made to insureds as a result of the September 11th terrorist attacks and reinsurance payments made to cedents. The decision is interesting because of the potential conflict between the traditional concept of privity in reinsurance and the scope of equitable subrogation.
In Continental Casualty Co. v. Al Qaeda Islamic Army, No. 03 MDL 1570, 04 Civ. 5970, 2018 U.S. Dist. LEXIS 108722 (S.D.N.Y. Jun. 25, 2018), the court was asked to address the calculation of damages to the plaintiff-insurers after entering a default judgment against the defendant terrorist organization. The issue was referred to a Magistrate Judge who issued a report and recommendations on the amount of damages awarded. The Magistrate Judge found that the insurers could not recover for their reinsurance claims under principles of subrogation because there was no contractual privity between the reinsurer and the original insured.
As many of you know, the concept of contractual privity is essential to preclude non-parties to the reinsurance agreement from making claims against the reinsurer. Without contractual privity, such as an express cut-through clause, there is no contractual relationship between the underlying insured and the reinsurer. This, in most jurisdictions, precludes an insured or its assignee from claiming directly against the reinsurer should the direct-writing company become insolvent or otherwise refuse to pay a claim under the insurance policy ultimately reinsured.
In rejecting the Magistrate Judge’s determination on this issue, the district court held that the insurer-plaintiffs “can recover for the payments made on their reinsurance contracts under general principles of equitable subrogation, regardless of whether they are in privity with the insureds.” The court held that its finding was consistent with prior cases and its prior orders within the MDL case itself. See, e.g., Lloyd’s London v. great Socialist People’s Arab Jamahiriya, 822 F. Supp. 2d 74-75 (D.D. C. 2011).
As to the doctrine of equitable subrogation, the court found that under New York law, the doctrine allows insurers to stand in the shoes of their insured to seek indemnification by pursuing claims that the insured may have had against third parties legally responsible for the loss. Because equitable subrogation is an equitable doctrine, and not a doctrine founded on contract, under New York law it is established that privity is not required.
So what we find here is an exception to the contractual privity rule in reinsurance because of equitable subrogation. Reinsurers are entitled to recover damages from third parties based on payments they made on the loss through their reinsurance contracts.