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Note: Following the execution of a reinsurance agreement covering 20% of losses on health related insurance policies between Cologne Reinsurance (Barbados), Ltd. (Reinsurer/Applicant) and American Integrity Insurance Co. (Insurer/Beneficiary), Reinsurer/Applicant was required to post a letter of credit as security for "'Unearned Premium Reserves plus the sum of the Reinsurer's share of the Claims Reserves and the Active Life Reserves.'" Various amendments provided for an increase in reinsurance coverage and required Insurer/Beneficiary to place premium payments in a Trust Account as a share of loss reserves. They also provided that the LC could be in an amount "'less the amount of any funds held by'" Insurer/Beneficiary.

After Insurer/Beneficiary's liquidation, litigation arose to determine what Reinsurer/Applicant owed Insurer/Beneficiary's estate under the reinsurance agreement. Pursuant to the terms of the reinsurance agreement, the court ordered the parties to arbitrate the dispute. The arbitrators ruled that Liquidator should surrender the LC and that Reinsurer/Applicant should surrender its interest in the Trust Account. Reinsurer/Applicant moved to confirm the award, and Liquidator moved to vacate in part. The court vacated the award in part and ordered the parties to arbitrate the issues resulting from the decision before another arbitration panel.

During the second arbitration hearing, Liquidator argued that Reinsurer/Applicant was obligated to account for deficiencies between Reinsurer/ Applicant's liability under the reinsurance agreement and the amount in the Trust Account through the LC, under Amendments 3 and 5 of the reinsurance agreement. Liquidator further argued that Amendment 5 stated that Reinsurer/Applicant had the responsibility of making up the difference between Reinsurer/Applicant's share of the reserves in the Trust Account minus US $6,500,000 and Reinsurer/ Applicant's liability under the reinsurance agreement in the LC.

In its Award, the panel rejected the Liquidator's argument that the reinsurance agreement obligated Reinsurer/Applicant to pay the difference between Reinsurer/Applicant's liability as set forth under the reinsurance agreement and the amount in the Trust Account through contributions to the LC. The panel stated that, "'There was no intent that [Reinsurer/ Applicant] has the responsibility to fund the Trust Account.'"

Reinsurer/Applicant moved to confirm the final arbitral award, and the Liquidator moved to vacate in part. The United States District Court for the Middle District of Pennsylvania, Caldwell, J., confirmed the award.

[JEB/anf]

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