Direct Action Allowed to Proceed Against Reinsurer

Felman Production, Inc. v. Industrial Risk Insurers

(S.D. W. Va. October 19, 2009)

After a power failure at plaintiff’s metals plant resulted in physical damage and business interruption loss, plaintiff sued its direct insurers and their reinsurer, Swiss Reinsurance.Swiss Reinsurance moved to dismiss plaintiff’s complaint arguing that no claim could be asserted against it because an insured party cannot maintain a direct action against a reinsurer.

The court noted that there are two exceptions to this rule.A reinsurer may become directly liable to the insured based on the terms of the reinsurance contract.Additionally, a reinsurer may become directly liable to the insured via conduct, generally by directly handling an insured’s claim. The court ruled that the terms of the original insurance contract were ambiguous as to Swiss Reinsurance’s role under the policy.The court noted that Swiss Reinsurance pointed to pages entitled “Syndicate Policy” where another insurer was identified as plaintiff’s insurer and Swiss Reinsurance was identified as the reinsurer.However, plaintiff pointed out: (1) each of the additional signature lines provided in the policy were signed by the “Attorney-In-Fact and Chief Underwriting Officer” of “The Member Companies of Industrial Risk Insurers”; (2) that the insurer was referred to as “the Companies” throughout the policy; (3) that “the Companies” was defined as “[t]he members of Industrial Risk Insurers . . . as hereby applicable to this policy”; and (4) that the “Insurer” was identified as “Industrial Risk Insurers” in the body of the policy.

Because Swiss Reinsurance is a member company in the “Industrial Risk Insurers” association, the court held that the policy was ambiguous as to Swiss Reinsurance’s role under the policy and it was reasonable for plaintiff to expect Swiss Reinsurance to act as a direct insurer. The court held that plaintiff’s complaint provided sufficient facts to state a plausible claim that Swiss Reinsurance was directly liable to plaintiff under the policy, and denied Swiss Reinsurance’s motion to dismiss.

A copy of the decision can be found here

Toni Frain and Dan Gerber