Reinsurance Litigants May Need to Avoid Putting Their Faith in the Tort of Bad Faith | White and Williams LLP

Reinsurance Litigants May Need to Avoid Putting Their Faith in the Tort of Bad Faith | White and Williams LLP

In a recent ruling by the Alabama Federal Court, Alabama Municipal Insurance Corporation was vested against Munich Reinsurance American, Inc.,[1] The reinsured plaintiff brought three cases of bad faith against the defendant reinsurer for failing to pay several claims totaling $ 1.9 million. The court granted the reinsurer’s motion to reject the counts in bad faith and concluded that Alabama did not recognize the bad faith related to reinsurance.

Since the Alabama Supreme Court had never acted against ill will with respect to reinsurance agreements, the district court was tasked with making an “educated guess” as to which rule the Alabama Supreme Court would make. In light of the Supreme Court’s record of consistently restricting the use of malicious intent to protect vulnerable consumers, the court predicted that the Supreme Court would not extend it to reinsurance.

The court stated that the tort was maliciously created to address the “inherently imbalanced” relationship between an insurance company and its policyholder. In short, the illicit tort should “restore balance” as consumers are unable to negotiate the terms of an average insurance policy, leaving the insurer in a “superior negotiating position”.

The court found that the same underlying policy considerations do not exist in the reinsurance context, as both reinsurers and reinsurers are sophisticated companies that generally enter into contract negotiations on an equal footing. Unlike a typical policyholder, both the reinsured and the reinsurer have bargaining power, access to legal assistance, and a deep understanding of the intricacies of reinsurance contracts. Based on these factors, the court concluded that the Alabama Supreme Court would not extend the scope of the illicit act to include reinsurance contracts.

Courts in other jurisdictions have also addressed this issue. The court of the Alabama Municipal Insurance Corporation borrowed largely from a California decision of 2008, California Joint Powers Insurance Authority v Munich Reinsurance America, Inc.[2] Similar to the Alabama Municipal Insurance Corporation, the California Supreme Court did not provide a regulatory agency over tort liability in reinsurance. However, the state’s earlier rulings in non-reinsurance cases led the federal court to take a narrow approach. The California courts traditionally held that an insurer’s breach of good faith and fair dealing was a breach of social policy and warranted tort damages. As an enterprising company, however, the elements of contractual liability and unequal bargaining power between a reinsurer and a reinsured do not play a role. Therefore, the court concluded that the grounds for public support in support of tort recovery in California were not present in the reinsurance situation.

A federal court in Pennsylvania has reached the same conclusion and has found that reinsurance claims are not subject to a legal requirement of bad faith. In relation to Gaffner Insurance Company v Discover Reinsurance Company,[3] The Middle District of Pennsylvania has specifically ruled that 42 Pa.CS § 8371 does not apply bad faith to reinsurance contracts. The court stated that the aforementioned law is intended to protect consumers from insurance companies, not “two sophisticated negotiating parties from each other”.

Other courts have come to the opposite conclusion. In Commercial Union Insurance Company v Seven Provinces Insurance Company,[4] The Massachusetts District took the view that reinsurer Seven Provinces for a Customized Claim. Gen Laws Ch. Is liable. 93 (a) – a law that “allows a company to sue another company for“ unfair ”conduct” even if the unfair acts were linked to a breach of contract violate Chapter 93A ”, a 93A claim can arise from a breach of contract,“ if the breach is “in disregard of known contractual agreements” and “intended for security” benefits the infringing party. “The court, finding that the Commercial Union had established a 93A lawsuit against seven provinces, found that the seven provinces were“ those under the [reinsurance] Contract to renegotiate trade between the parties. “

While there is not much case law dealing with the viability of a bad will claim in the reinsurance context, the majority of courts that have dealt with the issue have focused on the public order concerns underlying the tort namely, the unequal bargaining power between insurers and policyholders. In the absence of the same public policy concerns regarding reinsurance contracts negotiated between sophisticated corporations, these courts have refused to recognize the illicit act in the reinsurance context. Courts that have achieved the opposite result, as in Massachusetts, have focused not on political concerns such as unequal bargaining power, but on the general “injustice” of the company’s actions and whether those actions have risen to such a level as to warrant liability justify in bad faith. Of course, many reinsurance disputes are resolved in arbitration, and a group of reinsurance industry experts may have their own views as to whether the wrongful act of bad faith (as opposed to a breach of the inherent duty of good faith and fairness) is viable Reinsurance.

[1] 2021 US Dist. LEXIS 49112 (MD Ala. 2021)

[2] 2008 US Dist. LEXIS 56654 (CD Cal. 2008)

[3] 2007 US Dist. LEXIS 75259 (MD Pa. 2007)

[4] 9 F. Supp. 2d 49 (D. Mass. 1998)

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