Retrocessionaire Bears Traditional Burden of Establishing Applicability of “Exclusions” in Retrocessional Agreement


On July 17, 2012, the U.S. District Court for the District of New Jersey resolved competing motions in limine disputing which party bore the burden of proof to establishing the extent of Tower Ins. Co. (Tower)’s obligation to indemnify Munich Reinsurance America (Munich) for lead claims under a retrocessional insurance agreement.

Originally, the parties had entered into a retrocessional agreement where Tower would reinsure Munich for its role as a reinsurer for Legion Insurance Company (Legion). Legion was acting as a front company for Munich (i.e. Munich assumed 100 percent of the risk underlying the issued policies, and all losses under the issued Legion policies were payable by Munich), allowing Munich to operate as an out-of-state, unlicensed insurer.

Article II of the retrocessional agreement laid out: (a) which claims were covered by the agreement, and (b) the extent to which Tower would be forced to indemnify Munich for actual claims paid under Munich’s agreement with Legion. The present suit arose when the parties disputed the scope of the provision that specified the degree of coverage for certain lead claims. Both parties argued that it was the duty of the other to prove that the claim at issue was covered or excluded (alongwith the degree of coverage) under the retrocessional agreement.

Judge Wolfson began by stating that the “interpretation of an insurance contract or policy is a matter of law for the court,” and explained that these agreements should be construed in terms of their plain and ordinary meaning. Next, noting that the indemnification provisions would apply to the at-issue lead claims “unless” certain events occurred, Wolfson classified the at-issue contractual statements as policy exclusions. Accordingly, the Judge noted that “where the language behaves like ‘an exclusion of the coverage grant by the very operation of its terms,’ the reinsurer should bear the burden of proving the phrase’s application.” If this were not the case, reinsurers would be able to hide provisions limiting liability throughout a reinsurance or retrocessional agreement – rather than in a single section titled “exclusions” – in an attempt to avoid shouldering an insurer’s traditional burden of proof for policy exclusions.

Accordingly, Judge Wolfson granted Munich’s motion in limine, stating that Tower bore the burden of proof with regards to demonstrating whether or not the agreements exclusions applied to the at-issue lead claims.

IMPACT – REINSURANCE: This ruling confirms that reinsurers will not be able to avoid shouldering their burden of proof with regard to exclusions by simply omitting the “exclusion” label from an agreement, or by otherwise attempting to hide exclusions in various provisions throughout the agreement.