CJPIA is a self-insured retention pool composed of California public agencies organized under the California Government Code, which provides general liability and special liability coverage to its member agencies. The complaint alleges that CJPIA entered into two Casualty Excess of Loss Reinsurance Agreements with Munich Re America (the “Reinsurance Agreements”), in which Munich Re America agreed to reimburse CJPIA on an excess of loss basis for amounts CJPIA paid under a “Memorandum Stating the Protection Provided.”
The second count of CJPIA’s complaint alleges that Munich Re America tortiously breached the implied covenant of good faith and fair dealing by “unreasonably withholding benefits” owed to CJPIA under the Reinsurance Agreements. Munich Re America argues that because the relationship between a reinsurer and a reinsured is a commercial one that is not akin to the insured/insurer relationship, the rules applicable to direct insurance contracts should not apply and CJPIA cannot recover tort damages under a breach of contract theory. Although no reported California case addresses the issue presented, Munich Re America cites Stonewall Ins. Co. v. Argonaut Ins. Co., 75 F. Supp.2d (N.D. Ill. 1999), in which an Illinois federal court examined California law and expressly rejected the effort to impose tort liability for breach of the implied covenant of good faith and fair dealing in the reinsurance context. Munich Re America also cites a more recent California cases that recognize the distinction between reinsurance and direct insurance, most notably that reinsurance agreements are the result of arms-length negotiations by knowledgeable, sophisticated business entities with equal bargaining power. Munich Re America states that there are no compelling public policy reasons for the court to find an exception to the general rule under California law prohibiting tort recovery in breach of contract actions and, likewise, any claim for punitive damages is improper. We will report on the court’s decision on the motion to dismiss when it becomes available. Click here to review a copy of Munich Re America’s motion to dismiss.
