Sneak Preview from the upcoming New Appleman on Insurance Law Library Edition

Sneak Preview from the upcoming New Appleman on Insurance Law Library Edition

Section 2.09[4] is devoted to the multi-faceted issue of determining a reinsurance intermediary’s liability. It observes that there are similarities, but also crucial differences, between the duties of an insurance agent to a policyholder and insurer and the duties of a reinsurance intermediary to a cedent and a reinsurer. Section 2.09[4] opens by noting that reinsurance intermediaries, as agents, owe clients duties of loyalty and obedience.
 
However, while some courts and commentators suggest that a reinsurance intermediary owes a duty of utmost good faith and to both reinsurance contract parties, this position is “surely wrong in the absence of exceptional circumstances.” A reinsurance intermediary who negotiates for the cedent is the cedent’s agent and therefore does not owe the reinsurer a duty of good faith and fair dealing. This does not mean that the intermediary may lie to the reinsurer or carelessly represent facts; those misrepresentations may be imputed to the cedent. Indeed, in proper circumstances and on the right facts, an intermediary might be liable for fraud.
 
A reinsurance intermediary’s prime duty on behalf of the cedent is to place the desired coverage. An intermediary who fails to place the desired coverage may be liable for:
  • Negligence;
  • Fraudulent or negligent misrepresentation;
  • Breach of contract; or
  • Breach of fiduciary duty.
Section 2.09[4] also contains an incisive analysis of an illustrative case on point, Northwestern Nat’l Ins. v. Marsh & McLennan, Inc., 817 F. Supp. 1424 (E.D. Wis. 1993).
 
Section 2.09[4] points out that in contrast to the general rules governing insurance brokers, in many cases reinsurance intermediaries will have the duty to advise clients about reinsurance issues and to explain various issues. This is because intermediaries voluntarily assume these duties. Many reinsurance intermediaries sell their services by offering the rendering of expert advice and the provision of specialized services going “well beyond the mere procurement of coverage.” Intermediaries that assume such duties must perform them satisfactorily.
 
Insurance intermediaries may also have a duty to advise insureds about coverage issues if they have a special relationship with them. In the reinsurance arena, many reinsurance intermediaries seek to develop special relationships with their clients as this may be crucial to maintaining business and generating additional revenue.
 
Nevertheless there generally is no reinsurance intermediary liability for reinsurer intermediary liability for reinsurer insolvency after coverage has been placed. The general rule is that an intermediary’s conduct is judged at the time coverage is procured, not later when a reinsurer is unable to meet its financial obligations. The only exception to this rule is the situation where an intermediary knows or reasonably should know at the time coverage is procured that the reinsurer, while then solvent, presents an unreasonable risk of insolvency in the future. Section 2.09[4] then provides an in-depth analysis of the leading case on the issue of determining intermediaries’ duties with respect to placing coverage with insolvent reinsurers, Cherokee Ins. Co. v. E.W. Blanch Co., 66 F.3d 117 (6th Cir. 1995).
 
Section 2.09[4] draws the following principles from the Cherokee decision:
  • As to insolvency-related claims, intermediaries’ conduct is judged at the time they procure coverage;
  • Intermediaries are not guarantors of reinsurers solvency;
  • Intermediaries are justified in relying on the opinions of rating agencies and regulators when attempting to evaluate the financial security of the companies with which they place clients’ coverage.