District Court Reaffirms Unauthorized Reinsurer to Post Pre-Pleading Security

ARROWOOD SURPLUS LINES INSURANCE CO. V. GETTYSBURG NATIONAL INDEMNITY DISTRICT COURT OF CONNECTICUT (CIVIL ACTION NO. 09-972 May 10, 2010)

Arrowood Surplus Lines Insurance (“Arrowood”) requested the district court to issue an order requiring Gettysburg National Indemnity (“Gettysburg”) to post over six hundred thousand dollars in pre-pleading security regarding a reinsurance dispute. Arrowood relied on Connecticut General Statute Section 38a-27(a), which requires “unauthorized insurers” to post pre-pleading security.

This dispute arises out of a series of reinsurance agreements between Arrowood and Gettysburg which stated that each agreement reinsured approximately ten percent of the hundred percent quota share of the first million dollars of the cedent’s net liability up to an aggregate attachment point of ninety percent of the gross written premiums. Arrowood claimed Gettysburg is responsible for over a million dollars in obligations including its gap collateral obligations together with loss adjustments. Gettysburg argued that it should not be responsible for submitting security in an amount exceeding their gap coverage obligations which are approximately four hundred thousand dollars. The district court disagreed claiming the security should consist of all of the obligations under the reinsurance agreements. The court concluded that if the reinsurer is “undercapitalized … Gettysburg has the recourse against the shareholders under the terms of the agreement.”

On May 10, 2010, the District Court confirmed the Magistrate’s decision requiring the security over Gettysburg’ s objections on the grounds that it should not be required to pay any amount in excess of the funds remaining in the various accounts in question.

IMPACT (REINSURANCE): The issue of a reinsurer being undercapitized or insolvent is a persistent problem and the subject of several important court decisions. Practitioners should be cognizant of the state and federal laws which allow for pre-pleading security to ensure that certain funds are set aside to potentially satisfy (or partially satisfy) a judgment. In this issue Connecticut, like several other states, requires unauthorized insurers to post pre-pleading security to satisfy any financial obligation stemming from litigation over policies. Given the recent motion practice, we fully expect that Gettysburg will appeal this decision.