Judgment Creditor May Not Collect Out of Proceeds Due From Reinsurer

Callon Petroleum Co. v. National Indemnity Co. (06-CV-0573, Oct. 11, 2011)

On October 11, 2011, the United States District Court for the Eastern District of New York denied plaintiff Callon Petroleum Company’s Federal Rule of Civil Procedure 59(e) motion to reconsider an order issued by the court in December 2010. The plaintiff commenced the suit to collect on a Louisiana judgment obtained against Frontier Insurance Company from Frontier’s reinsurer, defendant National Indemnity Company (NICO). In the December order, the court granted the defendant’s motion for judgment on the pleadings, applying Jurupa Valley Spectrum v. National Indemnity Company, 555 F.3d 87 (2d Cir. 2009), which foreclosed the argument that the reinsurance agreement between Frontier and NICO had “cut-through” rights that permitted the plaintiff to sue NICO directly.

The court rejected plaintiff’s argument that the reinsurance agreement contained an implied “cut-through rights” clause simply because the contract could be read to require NICO to pay funds directly to Frontier’s insureds. In Jurupa, the Second Circuit rejected the same theory, holding that a reinsurance agreement that provided that the reinsurer “shall pay all amounts due insured,” but failed to specify to whom payments shall be made, could not be reasonably read to provide a “cut through.”

IMPACT—REINSURANCE: This case reaffirms that general understanding that a creditor of a cedent cannot seek proceeds due from the cedent directly from the cedent’s reinsurer absent cut through rights set forth in the applicable reinsurance agreement.