Reinsurance Agreement Between Insurer And Reinsurer Did Not Provide A Direct Cause Of Action Against Reinsurer For Underlying Environmental Claims

Canal Ins. Co. v. Montello, Inc. et. al. (United States District Court, Northern District of Oklahoma, September 26, 2011)

This environmental reinsurance action stems from the use of asbestos containing materials in the drilling mud distributed by Montello.  Specifically, Montello was the distributor of products used in the drilling industry.  One of its products was a drilling mud that contained asbestos.  Defendant Montello was sued by numerous individuals who were allegedly exposed to asbestos through Montello’s products.  Thereafter, Montello sought coverage from the group of insurers alleged to have insured defendant during the time period it distributed the asbestos containing product.  In addition, Montello brought claims against the reinsurer National Indemnity Ins. Co. (NICO) alleging NICO is liable based on a recent reinsurance agreement the reinsurer made with CNA, who was a direct insurer of defendant Montello during the relevant time periods.

Specifically, Montello alleged that the reinsurance agreement required CNA’s asbestos and environmental pollution liabilities would be transferred to NICO, thus shifting responsibility for a portion of Montello’s asbestos litigation to NICO, and thereby making NICO directly liable to Montello for any covered loss.   Montello further alleged that CNA ceded or will cede approximately $1.6 billion of net asbestos and environmental liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. 

The issue before the court was whether the reinsurance agreement between NICO and CNA provided a direct cause of action to CNA’s insureds, and specifically to Montello.  In ruling against Montello, the court noted that a basic law of insurance is that the existence of a reinsurance contract does not allow an insured to proceed directly against the reinsurer absent two exceptions. 

The first exception argued by Montello was that the reinsurance contract between NICO and CNA contained a “cut through" clause.  However, in denying the applicability of this exception the court noted that while the existence of a cut through clause in the contract would provide a direct cause of action against NICO, the Agreement and other incorporated agreements did not contain such a clause, either express or implied.  Thus, while NICO agreed to undertake extensive administrative services under the reinsured polices issued by CNA, the agreement was insufficient to establish an implied cut through provision in favor of Montello for two reasons.  First, the agreements contained “express negation clauses” in which NICO disavowed undertaking any direct liability to a third party by virtue of the agreement.  The court held that under New York law, the existence of a “negating clause” is dispositive on the issue of whether the contract creates third-party beneficiaries.  Second, the court held that under the Second Circuit precedent in Jurupa Valley Spectrum v. National Indemnity Co. 555 F3d 87 (2d Cir 2009), the agreements that authorized NICO to administer claims for the benefit of the reinsured cannot be read to create a direct link to the original insured. 

Likewise, the court denied the second exception argued by Montello that the nature of the agreement created “assumption reinsurance” wherein the reinsurer steps into the shoes of the ceding company with respect to the reinsured policy, assuming all its liabilities.  Again under Jurupa, supra, the court held that because NICO has not assumed all of CNA’s liabilities under the agreement, the reinsurance contract did not create assumption reinsurance and NICO was not directly liable to Montello under that theory, as well. 

For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

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