Third Circuit Affirms Denial of Reinsurance Contract Rescission

Munich Reinsurance America, Inc. (“Munich”) provided reinsurance coverage to Everest National Insurance Co. (“Everest”) on workers compensation claims.  Munich then sought reinsurance coverage for its own liability and did so from Continental Casualty Insurance Co. (“Continental”).  Eventually, the independent underwriter that represented Continental in the deal informed Munich that it no longer underwrote coverage for Continental.  At that time, the underwriter suggested replacing Continental with American National Insurance Company (“ANICO”).  Munich gave the underwriter the same files Munich received from Everest, but did not provide information about its own losses, its relationship with Everest, certain unreported but expected claims, the breakeven price, and more.

After the relationship between Munich and ANICO fell apart, Munich sued for breach of contract, and ANICO counterclaimed to rescind the agreement.  ANICO claimed that Munich breached the duty of utmost good faith by withholding material information.  The district court disagreed and ruled in Munich’s favor, entering a $5,621,669.66 judgment. It noted, although Munich withheld information, that information was not material to the reinsurance decision.

On appeal, the Third Circuit affirmed.  It stated, under New York law, a reinsured owes a duty of utmost good faith to its reinsurer and a violation of that duty is grounds to rescind a reinsurance contract.  That duty imposes a requirement to disclose material information.  That is, a reinsured must disclose information that an objectively reasonable reinsurer would consider material.

Working through each of the alleged withheld material facts, the Third Circuit found that the information was not material.  It based these findings on the fact that the withheld material would not have been considered in the underwriting process or did not affect the risk reinsured.  In fact, much of the decision was based on ANICO’s underwriter’s testimony because he conceded certain facts would not affect calculations.  Consequently, the Third Circuit upheld the district court’s finding that there was no breach of the duty of utmost good faith.

Munich Reinsurance America, Inc. v. American National Insurance Co., No. 14-2045, 2015 WL 428727, 2015 U.S. App. LEXIS 1652 (3d Cir. Feb. 3, 2015).