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Case Note: First Circuit Upholds Grant of Summary Judgment to Reinsurer on Issue of Treaty Duration

by ~ Jessica Park (Email) (Web Site)

In a recent decision, the U.S. Court of Appeals for the First Circuit affirmed a grant of summary judgment in favor of a reinsurer on the question of whether the reinsurance relationship with its cedent extended beyond the end of the express term stated in the reinsurer’s facultative certificate, which was the only written agreement between the parties. The decision is OneBeacon America Ins. Co. v. Commercial Union Ins. Co., 684 F.3d 237; 2012 WL 2821893 (1st Cir. 2012). The holding illustrates the importance of written contract terms—and in the absence thereof, circumstances consistent with a reinsurance relationship—when a cedent seeks to prove the scope of a reinsurance obligation.

The dispute involved a reinsurance arrangement created in 1980 between OneBeacon America Insurance Company (“OneBeacon) and Aviva Insurance Company of Canada, f/k/a Commercial Union Insurance Company of Canada (“Aviva), which at the time were affiliated entities. OneBeacon issued a policy, effective in March 1980, insuring two American companies (together, “Harrisons U.S.), which were subsidiaries of a Canadian parent. The OneBeacon policy contained an endorsement that provided that the policy or “any renewal thereof was 100% reinsured by a separate policy that was issued by Aviva to the Canadian parent company of Harrisons U.S. The Aviva policy, in turn, contained an endorsement stating that it was placed in conjunction with and reinsured the 1980 OneBeacon policy “or any renewal thereof with respect to Harrisons U.S. Though each policy thus contained reciprocal language regarding the parties reinsurance relationship, the only direct agreement that existed between OneBeacon and Aviva was a facultative reinsurance certificate, issued by Aviva, which stated that it reinsured the 1980 OneBeacon policy and had a “reinsurance term of March 28, 1980, to April 1, 1981.

In 1981, OneBeacon issued another policy to Harrisons U.S., effective April 1, 1981 to April 1, 1982. That policy, however, did not contain the reinsurance endorsement found in the 1980 policy; nor did it contain any other provision indicating that the 1981 policy was reinsured by any Aviva policy. The same was true for a renewal issued in 1982. Aviva issued endorsements to its 1980 policy in 1981 and again in 1982, extending the term of the 1980 Aviva policy issued to the Canadian parent, but those endorsements contained provisions that expressly excluded Harrisons U.S. from the policy’s coverage. Those endorsements also provided that the policy was not to inure to the benefit of Harrisons U.S. “in any way. The original term of the facultative certificate that Aviva had issued to OneBeacon was never extended beyond April 1, 1981, nor did Aviva issue any other certificates.

When OneBeacon subsequently sought reimbursement from Aviva for asbestos-related claims filed against Harrisons U.S., Aviva agreed to reimburse OneBeacon for only 1/3 of its defense costs and indemnity payments, taking the view that only the 1980 OneBeacon policy, but not the 1981 or 1982 policies, had been reinsured. OneBeacon filed suit, seeking a declaration that Aviva was obligated to reinsure all three policies. Both parties moved for summary judgment. The District Court ruled in favor of Aviva, relying, first and foremost, on the fact that the facultative certificate—the only contract that actually existed between the parties—unambiguously provided for a term ending April 1, 1981. Since there was no other reinsurance contract for any other policy period, the District Court found the only reasonable interpretation to be that Aviva had reinsured the 1980 OneBeacon policy alone. The District Court also found that the other evidence in the record—including the express exclusion of Harrisons U.S. from coverage under the 1981 and 1982 Aviva policies, and the lack of the reinsurance endorsement in the 1981 and 1982 OneBeacon policies—was “ample support for the view that Aviva had terminated its reinsurance relationship with OneBeacon after the 1980 policy year.

The First Circuit affirmed, agreeing that the facultative certificate “clearly indicated a reinsurance term ending in April 1981. The court stated: assuming arguendo that the reciprocal language in the 1980 OneBeacon and Aviva policies created a reinsurance relationship that existed apart from the certificate, the record made clear that the parties had changed this relationship in 1981 to terminate the reinsurance arrangement. The 1981 Aviva endorsement had expressly altered the scope of Aviva’s obligations by excluding Harrisons U.S. from the coverage of its policy. This endorsement changed the 1980 Aviva policy to exclude Harrisons U.S. as of March 28, 1981. Aviva was not a party to—and could not be bound by—the OneBeacon policy. In light of these facts, the court found it illogical to say that the two policies in combination created any ongoing obligation for Aviva to reinsure OneBeacon. This view was also supported by the omission of the reinsurance endorsement from the 1981 and 1982 OneBeacon policies, which was consistent with OneBeacon taking on the ultimate risk for Harrisons U.S. beginning in 1981.

Finally, the court discussed the extrinsic evidence in the record, and found that it, too, supported the view that the reinsurance relationship terminated after the first policy year. There had been significant changes in the manner and flow of premium payments following the end of the 1980 policy period. In the first policy period, Aviva received the premium payment and remitted a 10% fee to OneBeacon, but in the subsequent years OneBeacon received the full premium payments directly, and there was no evidence that it had shared any portion of the premium with Aviva. The court found that it would “defy economic sense to conclude that OneBeacon had kept all of the premium for the 1981 and 1982 policy years, but that it bore none of the risk. The court therefore found that OneBeacon could not meet its burden to show that Aviva had agreed to provide reinsurance beyond the term of the first policy year, and that summary judgment for Aviva was appropriate.

Jessica Park is an associate at Sugarman, Rogers, Barshak & Cohen, P.C., in Boston. She can be reached at park@srbc.com.

 2012 Sugarman, Rogers, Barshak & Cohen, P.C. All rights reserved.

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