District Court Orders Unauthorized Reinsurer to Post Pre-Pleading Security

Summary of Arrowood Surplus Lines Insurance Co. V. Gettysburg National Indemnity (Civil Action No. 09-972 April 6, 2010):

Arrowood Surplus Lines Insurance (“Arrowood”) requested the district court to require Gettysburg National Indemnity (“Gettysburg”) to post over six hundred thousand dollars in prepleading security regarding a reinsurance dispute. Arrowood relied on Connecticut General Statute Section 38a-27(a), which requires “unauthorized insurers” to post pre-pleading security.

This dispute arises out of a series of reinsurance agreements between Arrowood and Gettysburg which stated that each agreement reinsured approximately ten percent of the hundred percent quota share of the first million dollars of the cedent’s net liability up to an aggregate attachment point of ninety percent of the gross written premiums. Arrowood claimed Gettysburg is responsible for over a million dollars in obligations ranging from its gap collateral obligations together with loss adjustments. Gettysburg argued that it should not be responsible for submitting security in an amount exceeding their gap coverage obligations which are approximately four hundred thousand dollars. The district court disagreed claiming the security should consist of all of its obligations under the reinsurance agreements. The court concluded that if the reinsurer is “undercapitalized … Gettysburg has the recourse against the shareholders under the terms of the agreement.”

IMPACT (REINSURANCE): The issue of a reinsurer being undercapitized or insolvent is a persistent problem and the subject of several important court decisions. Practitioners should be cognizant of the state and federal laws which allow for pre-pleading security to ensure that certain funds are set aside to potentially satisfy (or partially satisfy) a judgment. In this issue Connecticut, like several other states, requires unauthorized insurers to post pre-pleading security to satisfy any financial obligation stemming from litigation over policies.