On remand for further proceedings from the Connecticut Supreme Court, the Appellate Court of Connecticut recently agreed with plaintiffs Hartford Accident and Indemnity Company and thirteen of its affiliates’ statutory interpretation of Connecticut General Statutes § 38a-27, holding that the plaintiffs are entitled to prepleading security from defendants Ace American Reinsurance Company and various other foreign reinsurance companies.  The court also found that for constitutional reasons the defendant reinsurers are entitled to a hearing on the amount of security that the statute requires them to post.  See Hartford Accident and Indemnity Co., et al. v. ACE American Reinsurance Co., et al., No. AC 25661, 2007 Conn. App. LEXIS 340 (Conn. App. Ct. Aug. 14, 2007).

Plaintiffs paid more than a billion dollars to settle over 10,000 separate asbestos claims.  Thereafter, plaintiffs sought to recover a portion of the settlement payments from more than a hundred reinsurers under various reinsurance contracts.  When the reinsurers refused to pay, plaintiffs filed suit in Connecticut state court.  Certain defendant reinsurers filed an answer to plaintiffs’ complaint without obtaining authorization to do business in Connecticut or post-pleading security pursuant to § 38a-27(a).  Plaintiffs moved to compel security or, alternatively, to strike the defendant reinsurers’ answers and obtain a default judgment.  The trial court ruled in favor of the defendant reinsurers, finding that plaintiffs failed to meet the service requirements of § 38a-25, since plaintiffs served the defendant reinsurers’ contractually designated agents as opposed to the insurance commissioner or the secretary of state.

The Court noted that plaintiffs’ only affirmative claim was that the trial court improperly interpreted § 38a-27 as requiring that service be made on the commissioner of insurance, pursuant to the substituted service provisions of § 38a-25, in order to obtain prepleading security. Plaintiffs argued that the expansive nature of § 38a-25 (e), which provides that “[t]he right to effect service of process as provided under this section does not limit the right to serve legal process in any other manner provided by law,” permitted them to serve the defendants “in accordance with the provisions of § 38a-25,” as required by § 38a-27, by serving the defendants’ contractual agent for service of process.  The defendants, on the other hand, argued that, because they were not served by substituted service via the insurance commissioner, the plaintiffs could not obtain prepleading security pursuant to the provisions of § 38a-27. The appellate court concluded that plaintiffs properly served the defendants in this case by serving the defendants’ designated agents for process.  Accordingly, the appellate court reversed the decision of the trial court and remanded to the trial court for a determination of the appropriate amount of prepleading security to be posted.  Notably, the plaintiffs did not deny that the defendants have cognizable property rights with respect to the amount of prepleading security.  To avoid the constitutional jeopardy that would attach with a requirement that prepleading security be posted, the appellate court stated that the statute must be interpreted to afford the defendants the hearing to which they are constitutionally entitled.

As a secondary issue, defendants claimed that an issue of statutory construction excluded “industrial insureds” from the prepleading security provisions of § 38a-27.  The appellate court noted that it is undisputed that, pursuant to General Statutes § 38a-271(c), “[t]he provisions of § 38a-27 do not apply to. . . (5) transactions . . . involving contracts of insurance issued to . . . industrial insureds.”  Plaintiffs did not deny that they are “industrial insureds,” but maintained that they are entitled to the exemption from § 38a-271(c) that is contained in § 38a-271(b)(2), which states in relevant part that “[t]he provisions of sections 38a-271 to 38a-278, inclusive . . . do not apply to . . . (2) the lawful transaction of reinsurance by insurers . . . .”  The appellate court concluded that the provisions of § 38a-271(b)(2) prevent the application of the exemptions for industrial insureds from § 38a-27 otherwise provided by § 38a-271(c)(5), finding that the exemption was not applicable to reinsurance transactions.

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