September 22, 2019

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SDNY Dismisses Captive Reinsurer’s Counterclaims, Finding Reinsurance Agreement Never Rescinded and Cedent’s Duty to Cede Premiums Never Arose

The Southern District of New York granted a ceding insurer’s motion to dismiss certain counterclaims by a defendant-reinsurer, finding their reinsurance agreement was never rescinded and that the cedent adequately performed. The decision arose from a captive reinsurance agreement between Employers HR, an entity that provides outsourced insurance to the employees of temporary staffing agencies, and AmTrust North America, the ceding insurer that issued that insurance. As part of the agreement, AmTrust would reinsure the policies it issued with the defendant, Signify Insurance Ltd., a captive reinsurer created by Employers HR. The agreement required Signify to post collateral securing its reinsurance obligations, while AmTrust was required to cede certain premiums to Signify. Upon learning that Signify had not posted the required collateral, AmTrust wrote to Signify demanding that it do so in full within 30 days, otherwise it would terminate the agreement from inception. Signify posted a substantial portion of the security two days later and then wrote to AmTrust advising that it was “accepting” its termination of the agreement. The next day, however, AmTrust withdrew its intention to terminate and demanded that Signify provide all remaining collateral.

AmTrust subsequently filed this action alleging breach of contract and seeking a declaration that Signify is required to maintain its security obligations. In its counterclaims, Signify argued, among other things, that AmTrust terminated the agreement from inception or, in the alternative, that the court should rescind the agreement. AmTrust moved to dismiss Signify’s first two counterclaims, while Signify moved to dismiss the complaint in its entirety. The court granted AmTrust’s motion and denied Signify’s.

As an initial matter, the court rejected Signify’s argument that AmTrust unilaterally rescinded the agreement by demanding that Signify post all collateral within 30 days, finding a reasonable person would have understood the letter to be no more than a request to cure. The court held that AmTrust’s letter was insufficient to rescind the reinsurance agreement by itself. Signify’s “mutual rescission” theory was also rejected. Although Signify argued it had “accepted” AmTrust’s “offer” to rescind, the court found no such offer was ever made. The court observed that AmTrust merely threatened to rescind in the event Signify failed to cure its breach and that AmTrust had maintained total discretion to rescind regardless of Signify’s consent. Finally, the court rejected Signify’s claim that AmTrust failed to perform under the agreement by, among other things, failing to cede required premiums. While acknowledging AmTrust’s obligation to cede “gross ceded premium” and to remit “net ceded premium,” the court found that these duties were only triggered by a series of events, including AmTrust’s receipt of bank confirmation that Signify increased its collateral to required levels. Because Signify did not allege that it ever posted that collateral, the court held that AmTrust’s duty to cede premiums to Signify never arose.

AmTrust N. Am., Inc. ex rel. Tech. Ins. Co. & Sec. Nat’l Ins. Co. v. Signify Ins. Ltd., No. 1:18-cv-03779, 2019 WL 3034891 (S.D.N.Y. July 11, 2019).

©2011-2019 Carlton Fields, P.A.

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About this Author

Alex Silverman, Insurance lawyer, Carlton Fields
Associate

Alex Silverman represents U.S. and international insurers and reinsurers in complex commercial litigation and arbitration, including complex insurance coverage disputes and reinsurance matters. He regularly litigates and counsels insurers in connection with multimillion-dollar first-party and third-party claims in state and federal courts across the country, and has also litigated large-scale commercial health care and insurance fraud actions on behalf of insurers, including False Claims Act and RICO actions. 

In addition, Alex has experience representing corporations in shareholder...

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