Two recent decisions from federal courts addressed an important issue for many reinsurers: whether a non-party to a reinsurance agreement (such as a cedent’s insured) can proceed directly against the reinsurer for amounts owed to the non-party by the ceding company. In both cases, the courts reinforced the general rule that, absent express contract language, or the existence of some type of direct relationship between the reinsurer and non-party (such as where the cedent acts as a mere “front” in the transaction and its insured has a special relationship with the reinsurer, or the reinsurer agrees to assume an insured’s liabilities), a non-party to a reinsurance agreement cannot proceed directly against the reinsurer to recover amounts owed to it.

In Callon Petroleum Co. v. National Indemnity Co., No. 06-CV-0573 (E.D.N.Y. 2011), the plaintiff obtained a judgment against Frontier Insurance Company, and then sought to collect the amounts owed from Frontier’s reinsurer, National Indemnity Company (“NICO”). The court held that the plaintiff was precluded from recovering against NICO, because the reinsurance agreement at issue did not contain any “cut through” language that permitted the creditor to proceed against NICO directly. In so holding, the court found that a provision that required NICO to “pay all amounts due insured” did not constitute a “cut through” clause that permitted plaintiff to recover directly from NICO, as the clause was not specific enough in identifying the entity that was to receive amounts owed under the agreement.

Similarly, in Canal Ins. Co. v. Montello, Inc., No. 10-cv-411 (N.D. Okla. Sept. 26, 2011) a cedent’s policyholder (Montello) brought suit alleging that the cedent’s reinsurer — again, NICO — was directly liable to Montello for defense costs incurred in certain underlying asbestos-related personal injury lawsuits. Montello argued that NICO had assumed all of the cedent’s asbestos-related liabilities pursuant to a retroactive reinsurance agreement entered into between those parties, and that the agreement contained a “cut through” provision that allowed Montello to proceed directly against NICO.

The court found in NICO’s favor, rejecting both arguments asserted by Montello. First, the court noted that the reinsurance agreement did not contain any express “cut through” language, and, to the contrary, provided that NICO would not be directly liable to any third party, including Montello. The fact that NICO agreed to perform “all administrative services” related to the reinsured policies was not sufficient to establish an implied cut through provision in Montello’s favor, or trump clear language that precluded third parties from receiving benefits under the reinsurance agreement.

With respect to the reinsurance transaction itself, the court found that while NICO assumed some of the cedent’s asbestos-related liabilities under the reinsurance agreement, it did not assume all such liabilities. Accordingly, NICO was not directly liable to Montello under the theory that NICO had effectively “stepped into the shoes” of the cedent and assumed all of its obligations to policyholders.

To review a copy of these decisions, click here and here.