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Case Note:
Jurupa Valley v. National Indemnity

by ~ Rachel M. Davison (Email) (Web Site)

A cut-through provision in a reinsurance agreement grants a policyholder a direct right of action against its insurer's reinsurer even though the policyholder is not a party to the agreement and lacks privity of contract with the reinsurer. By including a cut-through provision in its reinsurance agreement, the reinsurer agrees that the policyholder may pursue its claim directly against the reinsurer when the ceding insurer becomes insolvent. In light of the financial peril that many insurers now face, policyholders have increasingly sought to by-pass liquidation proceedings by pursuing "cut through" claims, real or imagined, against reinsurers. The difficulties that they face in pursuing such claims were made evident by a recent opinion of the Second Circuit in Jurupa Valley Spectrum, LLC v. National Indemnity Co., 555 F.3d 87 (2d Cir. 2009).

Direct Payment Clause Isn't A "Cut Through" Term

Jurupa, the beneficiary of surety bonds issued by Frontier Insurance Company ("Frontier") and reinsured by National Indemnity Company ("NICO"), sued NICO when it failed to recover directly from the insolvent Frontier. The District Court dismissed Jurupa's claim, holding that the reinsurance agreement explicitly precluded third-party claims and lacked any "cut-through" provision that would have permitted such claims. Jurupa appealed.

The Second Circuit examined the agreement between Frontier and NICO, looking for a cut-through provision that would permit Jurupa to pursue its claim directly against NICO. Article 12 of the Agreement stated that in the event of Frontier's insolvency, NICO's obligation was to pay Frontier's rehabilitator unless NICO agreed to pay the insureds directly or unless direct payment was required under 8 of the New York Insurance Law. Article 14 of the Agreement further stated that it was not to be construed as conferring upon non-parties any rights or remedies.

Nevertheless, Jurupa argued that another provision-providing for payments to be made "directly" -- was a "cut-through" provision that would permit it to pursue NICO for payment of the reinsured bond. Jurupa relied on Article I of the Agreement, which stated that "the parties to the Reinsurance intend that Reinsurer...shall pay all amounts...due Insureds and other persons as and when due directly on behalf of the Reinsured."

The Second Circuit did not agree. It declined to recognize Article I as authorizing a cut-through because Article 14 of the explicitly provided that no one other than the reinsured would have rights against the reinsurer. Also, Article I did not specify to whom NICO would make payment. Accordingly, the Second Circuit held that under the clear and unambiguous terms of the Agreement, Jurupa had no right to assert a cut-through claim to NICO.

"Cut Through" Rights Not Mandated by Statute

Jurupa also argued that New York Insurance Law  4118 gave it a direct right of action against its insolvent insurer's reinsurer. Under Section 4118, an insurer is prohibited from issuing a surety bond for an amount greater than 10% of its surplus, unless the bond insurer secures reinsurance that allows bond holders to cut-through and sue the reinsurer directly. However, despite its subsequent insolvency, Frontier was solvent when it issued the bonds in the aggregate amount of $12,570,000, and the amount of the bonds did not exceed 10% of Frontier's most recently reported surplus of $251,800,000. Accordingly, the Second Circuit determined that 8 of the New York Insurance Law did not provide Jurupa with a cut-through to a direct claim against NICO.

Not "Assumption Insurance"

The Second Circuit also affirmed the district court's holding that the reinsurance agreement between Frontier and NICO was not "assumption reinsurance," that would have required NICO to step into Frontier's shoes and assume all of its liabilities. Endorsement 1 of the Agreement limited the amount of Frontier's liability that NICO assumed to Frontier's "net" liabilities. The Second Circuit stated that "it is clear NICO did not assume all of Frontier's liabilities." Therefore, the Agreement was not assumption insurance which would permit Jurupa to pursue a direct claim against NICO.

Despite the attention that "cut-through" claims have received in the wake of the Koken v. Legion litigation in Pennsylvania (831 A.2d 1196 [Pa. Cmwlth. 2003]), Jurupa illustrates the substantial difficulties that policyholders face in seeking to imply the existence or effectiveness of such claimed rights.We are proud of bringing you the very best that the fashion world has to offer miu miu bags uk,replica breitling watches,replica chopard watches and gucci replica watches at very affordable prices without compromising on quality and style.

Rachel Davison is an associate in Morrison Mahoney's reinsurance claims group. She may be reached at rdavison@morrisonmahoney.com.

 2009 Morrison Mahoney LLP. All Rights Reserved.

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