Reinsurance Focus

The US Court of Appeals for the Fifth Circuit has affirmed a summary judgment in favor of Aon, ruling that claims asserted against it by TIG arising out of the placement of reinsurance were barred by the statute of limitation. Aon acted as reinsurance intermediary and broker for TIG with respect to workers’ compensation risks that TIG ceded to U.S. Life. Aon failed to pass to U.S. Life historical loss information regarding the ceded risks that TIG had provided to Aon, and U.S. Life succeeded in rescinding that portion of the reinsurance in an arbitration due to the failure to provide known historical loss information. TIG then sued Aon for damages for breach of fiduciary duty. The district court held, and the Fifth Circuit affirmed, that the cause of action arose under Texas law when TIG and U.S. Life entered into an “impaired reinsurance agreement,” rather than when U.S. Life succeeded in rescinding the reinsurance (or even when U.S. Life first contended that it had the right to rescind). The courts refused to apply the discovery rule to delay the accrual of the cause of action because: (1) TIG only used Aon to solicit bids, dealing directly with bidders to negotiate reinsurance agreements and confirm the information that had been provided to the bidders; and (2) at the time that it received U.S. Life’s reinsurance proposal, TIG suspected that the loss information had not been passed to U.S. Life due to the fact that the proposal was much lower than other proposals it had received. The courts essentially imposed a duty to inquire upon TIG at that time, a duty which it had not satisfied. The Fifth Circuit concluded that “[i]nquiry could have been made to determine or confirm the facts and assumptions on which the bargain was to be based,” and that the “injury was not inherently undiscoverable” when the reinsurance agreement was executed. This seems like a harsh result, since neither party to the reinsurance agreement knew it was potentially voidable until the arbitration. There may have been a number of reasons why US Life's proposal was so low, some of which might not make the reinsurance agreement “impaired” from its inception. The effect of this decision, however, at least in the Fifth Circuit, is that cedents cannot rely upon brokers to do their jobs and pass on historical loss information that the cedent has provided to the broker if there is a reasonable doubt that the loss information may have been passed on to a prospective reinsurer. TIG Ins. Co. v. Aon Re Inc., No. 05-11450 (USCA 5th Cir. Mar. 13, 2008).

This post written by Rollie Goss.