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Jennifer R. Devery, Esq.Crowell & Moring LLP

Washington, DC

Mealey’s Reinsurance Litigation &Arbitration Conference

Key Principles & Concepts

February 11, 2008

James D. Scrimgeour, Esq.The Travelers Companies, Inc.

Hartford, CT

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Ø Reinsurance as an Honorable Engagement

Key Principles & Concepts

Ø Duty of Utmost Good Faith

Ø Follow the Fortunes

Ø Notice Requirements

Ø Rescission

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What isUTMOST GOOD FAITH?

UTMOST GOOD FAITH

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UTMOST GOOD FAITH

The most abundant good faith; absolute and perfect candor or openness and honesty; the absence of any concealment or deception, however slight. A phrase used to express the perfect good faith, concealing nothing, with which a contract must be made . . . .

Ø Black’s Law Dictionary 1520 (6th ed. 1990).

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UTMOST GOOD FAITH

As used in reinsurance, utmost good faith means that the maxim of caveat emptorhas no application to either party in the relationship . . . . The duty exists with respect to any action necessary or desirable in order to place and maintain both parties within a fair and equitable bargain . . . .

ØHenry T. Kramer in Reinsurance 9 (Robert W. Strain ed., 1980).

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UTMOST GOOD FAITH

Utmost good faith is often said to be an unwritten requirement of contractual continuity. As such, it arguably is a basic requirement of central importance to the essential structure of reinsurance.

ØReinsurance 24 (Robert W. Strain ed., rev. ed. 1997).

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UTMOST GOOD FAITH

[I]t is not possible to put into language every nuance of basic intent and understanding. In a viable and growing relationship, there are many areas where judgmental considerations or errors by either side can be accommodated or overcome by compatible parties working together toward a common goal. Thus, utmost good faith, among other things, means a commitment to maintaining a good working relationship and open, candid communication.

ØLewis H. Paul in Reinsurance 501 (Robert W. Strain ed., rev. ed. 1997).

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UTMOST GOOD FAITH

The insured or reinsured is required to disclose all facts known to be material to the insurer or reinsurer and notify them of any material change in the subject matter being insured or reinsured . . . . Utmost good faith involves “bending over backwards” to disclose everything that a primary or reinsurance underwriter needs to know.

ØReinarz et al., 1 Reinsurance Practices 14-15 (1990) (emphasis added).

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UTMOST GOOD FAITH

Is Utmost Good Faith a Fiduciary Duty?

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§ Utmost Good Faith in the Courts– Fiduciary Duty

There are parallels between utmost good faith and fiduciary duties because each relationship is one of inherent vulnerability (i.e., the reinsurer relies on the cedent’s absolute discretion).

ØCompagnie de Reassurance d’Ile de France v. New England Reinsurance Corp., 944 F. Supp. 986, 995-96 (D. Mass. 1996).

UTMOST GOOD FAITH

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§ Utmost Good Faith in the Courts– Quasi-Fiduciary Duty

Although the relationship between reinsurer and cedent is one of utmost good faith requiring the cedent to disclose all facts that materially affect the risk of which it is aware and of which the reinsurer is not aware, “there is no reason to label the relationship as ‘fiduciary.’”

ØChristiania Gen. Ins. Corp. of N.Y. v. Great Am. Ins. Co.,979 F.2d 268, 280-81 (2d Cir. 1992).

UTMOST GOOD FAITH

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§ Utmost Good Faith in the Courts– Normal Contractual Duty of Good Faith

The reinsurance relationship “operates in all significant respects as does a standard consumer-insurance company relationship. As such, there is no domination by and no extraordinary confidence reposed in a single party.”

Ø Int’l Surplus Lines Ins. Co. v. Fireman’s Fund Ins. Co., 1989 U.S. Dist. LEXIS 15626, at *10 (N.D. Ill. Dec. 29, 1989).

UTMOST GOOD FAITH

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Cedent’s Duties versus Reinsurer’s Duties

UTMOST GOOD FAITH

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§ Cedent’s Duty to its Reinsurer:The reason why fairness and good faith are so very significant in reinsurance relations . . . lies in the fact that numerous business transactions conducted by the direct insurer are largely beyond the influence of the reinsurer. The reinsurer, therefore, must rely on his treaty partner and be sure he will carry at least approximately the retention stipulated, select and rate the risks ceded with due care, settle losses according to diligent business practices, and make up accounts properly and in line with accepted accounting procedures.

ØGerathewohl, 1 Reinsurance Principles & Practice 413 (1980).

UTMOST GOOD FAITH

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§ Cedent’s Duty to its Reinsurer:

“[I]f a ceding insurer has implemented routine practices and controls to ensure notification to reinsurers but inadvertence causes a lapse, the insurer has not acted in bad faith. But if a ceding insurer does not implement such practices and controls, then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence.”

ØUnigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1069 (2d Cir. 1993).

UTMOST GOOD FAITH

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§ Cedent’s Duty to its Reinsurer– Provide accurate & complete info re: the risk.– Accurate & complete information/facts are

those that are likely to influence the decisions of underwriters (i.e., do they affect whether the insurer or reinsurer would issue the contract or affect the amount of premium charged?).

– Continuing duty throughout the reinsurance relationship.

UTMOST GOOD FAITH

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UTMOST GOOD FAITH

§ Reinsurer’s Duty to its Cedent“Utmost good faith . . . requires a reinsurer to indemnify its cedent for losses that are even arguably within the scope of the coverage reinsured, and not to refuse to pay merely because there may be another reasonable interpretation of the parties’ obligations under which the reinsurer could avoid payment.”

ØUnited Fire Cas. Co. v. Arkwright Mut. Ins. Co.,53 F. Supp. 2d 632, 642 (S.D.N.Y. 1999).

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UTMOST GOOD FAITH

§ Reinsurer’s Duty to its Cedent– Inform cedent of reinsurer’s intentions &

practices, and provide timely notice if claim is not covered or may not be covered.

– Linked to follow the fortunes.– Improper to raise series of constantly shifting

defenses solely to delay paying cedent’s claims.

ØCommercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49 (D. Mass. 1998), aff’d, 217 F.3d 33 (1st Cir. 2000), cert. denied., 531 U.S. 1146 (2001).

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Treaty versus Facultative Reinsurance

UTMOST GOOD FAITH

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In a treaty reinsurance relationship, there is 1) no individual risk scrutiny by the reinsurer, 2) obligatory acceptance by the reinsurer of covered business, and 3) a long-term relationship in which the reinsurer’s profitability is expected, but measured and adjusted over an extended period of time.

Ø In Re Liquidation of Union Indem. Ins. Co. of N.Y.,89 N.Y.2d 94, 106 (N.Y. 1996).

UTMOST GOOD FAITH

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“Here, however, [reinsurer] assumed a portion of the risk on a facultative policy. Because the reinsurance related to a single policy, [reinsurer] was more likely to gather its own information or at a minimum more closely monitor [cedent’s] administration of that policy. Thus, [reinsurer] was less likely to rely on the defendant’s information. Here, moreover, the reinsurer retained the “faculty” to accept or reject each specific risk offered. Thus, [reinsurer] had the incentive to gather information and assess risk on its own. Furthermore, [reinsurer] had the option of rejection and was thus able to protect itself.”

Ø Int’l Surplus Lines v. Fireman’s Fund, 1989 U.S. Dist. LEXIS 15626, at *15.

UTMOST GOOD FAITH

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The Future of Utmost Good Faith

UTMOST GOOD FAITH

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UTMOST GOOD FAITH

§ PXRE Reinsurance Co. v. Lumbermens Mut. Cas. Co., 330 F. Supp. 2d 981 and 342 F. Supp. 2d 752 (N.D. Ill. 2004): No duty of utmost good faith under Illinois law, because not supported by agreement’s express terms & contrary to integration clause

§ AXA Corp. Solutions v. Underwriters Reinsurance Co., 2004 U.S. Dist. LEXIS 22609 (N.D. Ill. Nov. 9, 2004): Duty of utmost goodfaith exists under Texas law, applicable at contract formation &during performance of contract

§ Fireman’s Fund Ins. Co. v. General Reinsurance Corp., 2005 U.S. Dist. LEXIS 43650, at *33-34 (N.D. Cal. Aug. 5, 2005): Reinsurer’s obligation to indemnify cedent for DJ expenses consistent with duty of utmost good faith

§ Employer Reinsurance Corp. v. Laurier Indem. Co., 2006 U.S. Dist. LEXIS 40451 (M.D. Fla. June 19, 2006): Per magistrate’s report, reinsurers do not duplicate cedents’ functions of evaluating risks & processing claims; instead rely on common interest with cedent and on industry custom of utmost good faith

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UTMOST GOOD FAITH

§ AXA Versicherung AG v. New Hampshire Ins. Co. et al,[the] duty to disclose is sometimes referred to as the duty of “utmost good faith,” but what it really comes down to is the continuing duty of an insurer in these circumstances and under these conditions to disclose these material facts to the reinsurer even if the reinsurer has not asked for them.

Ø Jury Instruction - No. 05 Civ. 10180 [JSR] (S.D.N.Y., Jan. 30, 2008)

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UTMOST GOOD FAITH

§ AXA Versicherung AG v. New Hampshire Ins. Co. et al,Since treaty reinsurance typically involves a class of risks and a pool of policies, the scope of the required disclosure is necessarily broader than in the case of pure facultative reinsurance; and since, in the case of facultative obligatory reinsurance, the insurer gets to pick which particular risks the reinsurer must cover but the reinsurer must accept those risks if they are within the reinsured class, the scope of the required disclosure must necessarily take account of those special circumstances. But in all these situations, the basic requirement is the same: The primary insurer, whether or not asked, must disclose to the reinsurer every fact, known to the insurer but unlikely to be known to the reinsurer, that a reasonable insurer understands that a reasonable reinsurer would need to know to assess the risks of the reinsurance.

Ø Jury Instruction - No. 05 Civ. 10180 [JSR], S.D.N.Y., January 30, 2008

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HONORABLE ENGAGEMENTS

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HONORABLE ENGAGEMENTS

§ Reinsurance as an Honorable Engagement

§ Treatment of Honorable Engagement Clause by Courts

§ How Clause May Impact a Reinsurance Arbitration

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HONORABLE ENGAGEMENTS

§ A reinsurance agreement is more than a “mere legal obligation”- but an honorable engagement between the parties.

§ “[D]ifferences [were] often . . . settled by handshakes and umpires . . . .”

Ø Sumitomo Marine & Fire Ins. Co. v. Cologne Reinsurance Co. of Am., 75 N.Y.2d 295, 298, 552 N.E. 2d 139, 140 (N.Y. 1990).

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HONORABLE ENGAGEMENTS

§ Example:“The arbitrators shall interpret this Agreement as an honorable engagement and not as merely a legal obligation. They are relieved of all judicial formalities and may abstain from following the strict rules of law. They shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language.”– Reinsurance Contract Wording at 91 (Robert W. Strain ed., 1992).

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HONORABLE ENGAGEMENTS

§ Federal courts, in the context of motions to vacate arbitration awards under the Federal Arbitration Act, have repeatedly interpreted honorable engagement clauses to confer broad powers on arbitrators over:

– Issues of choice of law;– Discovery;– Interim awards;– Preclusive effect of prior awards; and– Permissible types of remedies.

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HONORABLE ENGAGEMENTS

§ United States Life Ins. Co. v. Insurance Commissioner of the State of California, 2005 U.S. App. LEXIS 25763, at *6 (9th Cir. Nov. 28, 2005):

– U.S. Life requested recission, but the panel denied recission and instead reformed the treaty, reducing U.S. Life’s reinsurance liabilities by 10 percent.

– U.S. Life appealed – “manifest disregard of the law”and “completely irrational.”

– 9th Cir – cited “wide latitude” and that the arbitrators “acted well within the powers granted to them.”

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HONORABLE ENGAGEMENTS

§ How Might the Honorable Engagement Clause Affect a Reinsurance Arbitration?– Flexibility on evidence and procedure.– More likely to ignore legal rules regarding

technical issues (e.g. Notice, Statute of Limitations, etc.).

– May support argument for punitive damages or attorney’s fees award.

– May lead to more compromise results.

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HONORABLE ENGAGEMENTS

§ Differences in England

– Broad grounds for appeal and reasoned decisions in England have traditionally hemmed in the application of the honorable engagements clause.

– The 1996 English Arbitration Act (section 46(1)(b)) addresses honorable engagement clause.

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HONORABLE ENGAGEMENTS

The 1996 English Arbitration Act (section 46(1)(b)) provides:

(1) The arbitral tribunal shall decide the dispute…

(b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal.

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FOLLOW THE FORTUNES

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FOLLOW THE FORTUNES

“The concept is that an Insurer and a reinsurer should have a shared destiny; the reinsurer must live with the calamities and fortuities that give rise to claims under the original risk insured.”

ØOstrager and Vyskocil, Modern Reinsurance Law and Practice, at 9.01 (2d. Ed. 2000)

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FOLLOW THE FORTUNES

§ Supports purpose of reinsurance§ Based on trust between Cedent and

Reinsurer§ Closely aligned to follow the settlements

doctrine (which expressly applies to claim settlements)§ Promotes public policy of avoiding costly

litigation

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FOLLOW THE FORTUNES

§ The principle is often expressly stated in the reinsurance agreement:

“The Reinsurer shall be subject to the same conditions as the original policies and shall follow, subject to the terms of thisAgreement, the fortunes of the Company in respect of all business ceded hereunder.”

ØReinsurance Contract Wording (Robert W. Strain ed., rev. ed. 1998)

§ Some courts have found principle implied in all reinsurance contracts.

Ø See International Surplus Lines Ins. Co. v. Certain Underwriters et. al., 868 F. Supp. 917, 920 (S.D. Ohio 1994)

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FOLLOW THE FORTUNES

The power of the 2nd Circuit

§ North River Ins. Co. v. ACE American Reinsurance Co., 361 F.3d 134 (2d Cir. 2004)

§ Travelers Casualty v. Gerling Reinsurance Corp. of Am., 419 F.3d 181 (2d. Cir 2005)

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FOLLOW THE FORTUNES

§ Follow the fortunes binds a reinsurer to accept the cedent’s good faith decisions on all things concerning the underlying insurance terms and claim against the underlying insured: coverage, tactics, lawsuits, compromise, resistance or capitulation.

Ø See North River Ins. Co. v. ACE American Reinsurance Co., 361 F.3d 134, 139 (2d Cir. 2004).

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FOLLOW THE FORTUNES

§ A Cedent choosing between reasonable allocation methodologies is not required to choose the allocation methodology that minimizes reinsurance recovery.

§ “We decline to authorize any inquiry into the propriety of a cedent’s method of allocating a settlement if the settlement itself was in good faith, reasonable, and within the terms of the policies”

Ø Travelers Casualty v. Gerling Reinsurance Corp. of Am.,419 F.3d 181 (2d. Cir 2005)

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FOLLOW THE FORTUNES

§ Exceptions to Follow the Fortunes / Follow the Settlements Doctrine:

– Fraud, Collusion, Bad Faith;

– Settlement/claim not covered by underlying policy; or

– Settlement/loss not covered by reinsurance contract.

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FOLLOW THE FORTUNES

§ A follow the fortunes clause will not override other terms of the reinsurance contract.

Ø E.g., Affiliated F.M. Ins. Co. v. Employers Reins. Corp., 369 F. Supp. 2d 217, 227 (D. R.I. 2005).

§ Follow the fortunes “does not give reinsureds carte blanche to impose whatever settlement decisions they make on their reinsurers.”

Ø Id.

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FOLLOW THE FORTUNES

“[Cedent] does argue that regardless of what the settlement embodies, a cedent’s unilateral post-settlement decision as to allocation among reinsurance policies is binding under a follow-the-settlements clause . . . . We think there are objections to this course and we are not presently prepared to adopt it.”

Ø American Employers’ Ins. Co. v. Swiss Reinsurance Am. Corp., 413 F.3d 129, 136 n.8 (1st Cir. 2005)

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FOLLOW THE FORTUNES

§ Must there be a nexus between a cedent’s pre-settlement evaluation of risk and post settlement allocation?– Courts since North River have gone both ways;

for example:üAllstate Ins. Co. v. American Home Assur. Co., 837 N.Y.S.2d

138 (N.Y. App. Div. 1st Dep’t 2007) – The reinsurer did not have to follow the ceding company’s allocation, as that allocation had directly contradicted the ceding company’s pre-settlement positions on number of occurrences.üNational Union Fire Ins. Co. of Pittsburgh, Pa. v. American

Re-insurance Co., 441 F. Supp. 2d 646 (S.D.N.Y. 2006) –The reinsurer was required to follow the ceding company’s allocation of payments to a specific policy making the determination that the cedent’s allocation was at least, “arguably correct.”

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FOLLOW THE FORTUNES

“Stonewall’s decision to divide the settlement payment amongst the six policies in accordance with its internal models instead of the [experts hired by the defense group’s] models used in the settlement negotiations is not a binding ‘follow the settlement’ decision.”

Ø Stonewall Ins. Co. v. Argonaut Ins. Co., No. 05-12305. at 6 (D. Mass Nov. 19, 2007)

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NOTICE REQUIREMENTS

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NOTICE REQUIREMENTS

§ Purpose of notice requirements:

– Notice enables reinsurers to set reserves.– Notice enables reinsurers to take potential

and/or actual losses into account when determining whether to renew its reinsurance contracts, and how much premium to charge.

– Notice enables reinsurers to invoke other contract rights, such as the right to associate.

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NOTICE REQUIREMENTS

§ Sample notice provisions (1 of 2):

– “The Company shall advise the Reinsurer promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurer.”

ØBrokers & Reinsurance Markets Association Contract Wording, Loss Notice Clause 26B.

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NOTICE REQUIREMENTS

§ Sample notice provisions (2 of 2):– “The Company shall notify the Reinsurer promptly of any

occurrence which in the Company’s estimate of the value of injuries or damages sought, without regard to liability, might result in a judgment in an amount sufficient to involve this certificate of reinsurance. The Company shall also notify the Reinsurer promptly of any occurrence in respect of which the Company has created a loss reserve equal to or greater than fifty (50) percent of the Company’s retention specified in item 3 of the Declarations; or, if this reinsurance applies on a contributing excess basis, when notice of claim is received by the Company….”

Ø Travelers Indem. Co. v. Scor Reins. Co., 62 F.3d 74, 77 (2d Cir. 1995)

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NOTICE REQUIREMENTS

§ What constitutes adequate notice?

– Constitution Reins. Corp. v. Stonewall Ins. Co., 980 F. Supp. 124 (S.D.N.Y. 1997) has addressed what constitutes inadequate notice: where the underlying claim involved the death of both parents of an infant, a two sentence “initial notice” which did not refer to the deaths or the amount of the underlying settlement was not adequate, as it did not provide “basic facts” of the loss.

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NOTICE REQUIREMENTS

§ What if the ceding company does not provide timely or adequate notice?

– The reinsurer may assert a “late notice”defense to paying the claim.

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NOTICE REQUIREMENTS

§ Whether a reinsurer will prevail on a late notice defense may depend on the following:– Did the ceding company comply with the

relevant notice requirement?– Was notice a condition precedent to

coverage?– Is a showing of prejudice of the reinsurer

required?– If so, what constitutes prejudice?

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NOTICE REQUIREMENTS

§ The reinsurer may not be required to prove that it was prejudiced by the late notice if notice was a “condition precedent” to recovery, such as in the following clause:– “As a condition precedent, the Company shall promptly

provide the Reinsurer with a definitive statement of loss on any claim or occurrence reported to the Company and brought under this Certificate which involves a death, serious injury or lawsuit.”

ØConstitution Reins. Corp. v. Stonewall Ins. Co., 980 F. Supp. 124, 127 (S.D.N.Y. 1997).

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NOTICE REQUIREMENTS

§ In Constitution Reins Corp. v. Stonewall Ins. Co., 980 F. Supp. at 130-31, the court stated that in failing to provide prompt “definitive statement of loss,” the ceding company could not recover on that loss:– “In the instant case, however, the prompt notice provision

clearly indicates that it is intended to serve as a condition precedent. . . . It follows that Unigard does not require a showing of prejudice in order for Constitution to enforce this express condition precedent. . . . Since the court finds that there exists no genuine issue of material fact that Stonewall violated the ‘prompt notice’ condition in the reinsurance agreement, the condition operates as a complete bar against Stonewall’s recovering under the reinsurance policy.”

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NOTICE REQUIREMENTS

§ Regardless of whether there is “condition precedent” language in the clause, some courts require a showing of prejudice:– E.g., British Ins. Co. of Cayman v. Surety Nat’l Cas.,

335 F.3d 205, 214-15 (3d Cir. 2003) (court concluded that the New Jersey Supreme Court would require a reinsurer to show “the likelihood of appreciable prejudice in order to prevail on a late notice defense asserted against its reinsured”);

– Unigard Sec. Ins. Co. v. North River Ins. Co., (79 N.Y.2d 576, 584 (N.Y. 1992) (reinsurer must prove that it was prejudiced by a ceding company’s late notice).

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NOTICE REQUIREMENTS

§ What constitutes prejudice?– According to the 2nd Circuit, the reinsurer must

show “that it suffered tangible economic injury.”Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1069 (2nd Cir. 1993).

– According to the 4th Circuit, the reinsurer must demonstrate that it would have exercised its right to associate in the handling of the claim, that that the reinsurer would have obtained a better result by doing so. Fortress Re, Inc. v. Central Nat’l Ins. Co., 766 F.2d 163, 166-67 (4th Cir. 1985).

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NOTICE REQUIREMENTS

§ Some courts do not require prejudice where the insurer acted with gross negligence or bad faith:– E.g., Certain Underwriters at Lloyd’s, London v. Home

Ins. Co., 146 N.H. 740 (2001) (the ceding company had acted with gross negligence – i.e., bad faith –because it “did not have any formal guidelines for determining what claims were to be reported to its reinsurers . . . And ‘didn’t track its reinsurance’”; the ceding company did not notify its reinsurers of the claim at issue for eleven years after it first received notice of that claim).

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NOTICE REQUIREMENTS

§ Some ceding companies invoke “errors and omissions” clauses as a defense to late notice defenses; the strength of such arguments will depend on the E&O clause and the facts of the case.

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RESCISSION

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RESCISSION

§ Rescission is viewed as a draconian remedy, typically reserved for extreme cases of fraud, non-disclosure, or misrepresentation.

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RESCISSION

§ Rescission Undoes the Transaction– Contract is void ab initio (as if contract never

existed)

– The objective is to place the parties in the position they were in prior to the execution of the contract

– Reinsurer must refund premiums and pay applicable interest

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RESCISSION

“[R]escission is not designed to relieve a party from the consequences of making a bad bargain.”

Ø American Re-Insurance Co. v. MGIC Inv. Corp., No. 77 CH 1457 (Ill. Cir. Ct., Cook County, Ch. Div. Oct. 20, 1987)

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RESCISSION

§ Wide Variety of Situations:– Failure to disclose insolvency of cedent;– Misrepresentation re: who was writing the

risk and premium volume;– Misrepresentation re: percentage of

business being ceded (100% vs. 60%);– Non-disclosure of past losses; or– Misrepresentation/non-disclosure of terms

of reinsured policy.

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RESCISSION

§ Basic Issues in a Rescission Action:– Existence of non-disclosure or

misrepresentation;

– Materiality of non-disclosed or misrepresented fact;

– Justifiable reliance; and

– Waiver.

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RESCISSION

§ Non-Disclosure or Misrepresentation:– Fraud

– Negligent Misrepresentation

– Innocent Misrepresentation

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RESCISSION

§ Fraud– Requires proof that other party knowingly

misrepresented or concealed a material fact with the intent to deceive or induce the party to act

– Court released retrocessionaire from liability under a reinsurance contract, where jury found that material misrepresentations were made with the intent to deceive and defraud.

Ø Security Mut. Cas. Co. v. Affiliated FM Ins. Co., 471 F.2d 238 (8th Cir. 1972)

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RESCISSION

§ Negligent Misrepresentation– Failure to use such care as a reasonably careful

and prudent person would use under the same circumstances.

– Reinsurer may demonstrate the cedent’s bad faith in refusing to ascertain material facts in lieu of proving intentional concealment.

ØGeneral Reinsurance Corp. v. Southern Surety Co. of Des Moines, Iowa, 27 F.2d 265, 273 (8th Cir. 1928)

– Statement made without knowledge of its truth or falsity may support rescission claim.

ØCalvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F. Supp. 623, 637 (D. Neb. 1980)

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RESCISSION

§ Innocent Misrepresentation– No intent to deceive and no failure to adhere

to a reasonable standard of care.

– “Whether the nondisclosure of a known fact material to a marine risk was intended or not is beside the point; such nondisclosure voids the policy.”

Ø A/S Ivarans Rederei v. Puerto Rico Ports Auth., 617 F.2d 903, 905 (1st Cir. 1980)

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RESCISSION

§ Materiality– “Material facts are those likely to influence

the decisions of underwriters . . . .ӯ In re Liquidation of Union Indem., 89 N.Y.2d at 106

– “A fact is material so as to void ab initio an insurance contract if, had it been revealed, the insurer or reinsurer would either not have issued the policy or would have only at a higher premium.”

ØChristiania, 979 F.2d at 278

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RESCISSION

§ Justifiable Reliance– Whether the reinsurer considered the information

provided by the cedent and relied on the cedent’s representations to the reinsurer’s detriment.

– “Reasonable reliance on the representations of the opposing party depends on a number of factors, including the parties’ past dealings, their relative sophistication, and the avenues available to them for discovering the truth. Ideally, the court must be convinced that the injured party had justifiably relied on defendant’s words or silence.”

Ø American Re-Insurance Co. v. MGIC Inv. Corp.

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RESCISSION

§ Waiver

– “[W]aiver is a voluntary relinquishment of a known right.”

Ø Security Mut., 471 F.2d at 246.

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RESCISSION

§ Waiver– Reinsurers that renew their participation in treaties, or

that accept & retain premiums, after becoming aware of misrepresentations could waive their right to rescission.

ØCompagnie, 57 F.3d 56, 73 (1st Cir. 1995); Associated Int’l Ins. Co. v. Odyssey Reinsurance Corp., 1997 U.S. App. LEXIS 6386, at *16 (9th Cir. April 2, 1997).

– “Routine preliminary activity” after loss may be insufficient evidence to find waiver.

Ø Security Mut., 471 F.2d at 246-47.

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RESCISSION§ Recent Cases

– Nichols v. American Risk Mgmt., Inc., 2002 U.S. Dist. LEXIS 22221 (S.D.N.Y. Nov. 18, 2002): Entitled to rescission based on allegation that retrocedent knew it was insolvent but failed to disclose that information.

– Continental Cas. Co. v. Certain Underwriters at Lloyd’s London, 2004 U.S. Dist. LEXIS 4060 (S.D.N.Y. March 15, 2004): Compelling arbitration where the principal issue will be whether contract can be rescinded based on allegations of fraudulent misrepresentation.

– Gerling-Konzern Gen. Ins. Co. v. Noble Assurance Co., 2006 U.S. Dist. LEXIS 85027 (D. Vt. Nov. 1, 2006): Reinsurer’s summary judgment motion for rescission (based, in part, on negligent misrepresentation and material non-disclosures) denied because disputed issues of material fact existed.

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§ AXA Versicherung AG v. New Hampshire Ins. Co. et al,– According to AXAV, AIG's broker informed it that the risks were property risks

written by American International Underwriters Energy Division and that the facility was limited to “AIG offices of the Southern Pacific Rim.”

– In 1997, the facility was expanded to include associated third-party liabilities and operating risks for oil and petrochemical, chemical, utilities, boiler and machinery and power generation. The expanded facility included all risks submitted by AIG's energy department offices worldwide.

– AXAV alleged that the participating reinsurers were hit with enormous losses, far in excess of the historical performance represented by AIG at the time of placement.

– Jury concluded that AIG defrauded AXAV by hiding the true nature of the reinsured risks and awarded the reinsurer $5.75 million in punitive damages.

– Judge Rakoff held that the reinsurance contracts would be rescinded and thatthe reinsurer is entitled to approximately $20 million, plus interest, representing the losses that it incurred in excess of the premiums received.

Ø Jury Verdict Sheet - No. 05 Civ. 10180 [JSR] (S.D.N.Y. Jan. 30, 2008)

RESCISSION

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QUESTIONS?

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CONTACT INFORMATION

Jennifer R. DeveryCrowell & Moring LLP

1001 Pennsylvania Ave., N.W.Washington, D.C. 20004

(202) 624-2534jdevery@crowell.com

James D. ScrimgeourThe Travelers Companies, Inc.

One Tower Sq.Hartford, CT860-277-1724

jscrimge@travelers.com