Reinsurance Focus

The issue presented in this case relates to the nature and extent of the duty, if any, owed to the reinsurer by counsel retained by the ceding insurer to protect the interests of the insured under the underlying policy.

In this action for professional negligence, Zenith Insurance Company (“Zenith”) entered into a contract of reinsurance with Royal Insurance Company (“Royal”). Under the contract, Zenith agreed to reinsure 100% of Royal’s exposure under certain liability policies. After claims were asserted against Royal’s insured, Royal retained the law firm of Cozen O’Connor to provide legal services with respect to the defense of such claims. Ultimately, Zenith filed this action for professional negligence against Cozen alleging that an attorney-client relationship existed based on either: (1) an implied in fact contract; or (2) the theory that Zenith was an intended beneficiary of Cozen’s legal services.

The California Court of Appeals disagreed with Zenith for two reasons. First, under the “intended beneficiary” theory, both Cozen and Royal must have intended Zenith to be the beneficiary of legal services Cozen was to render. The Court held that the fact that Cozen’s representation could incidentally benefit Zenith did “not sufficiently satisfy this predicate.” Moreover, the fact that Zenith agreed to reimburse Royal for all legal fees did not change the conclusions. Second, there was no express agreement between Zenith and Cozen, and Zenith did not allege the predicate facts necessary to establish an implied contract between it and Cozen. Zenith Ins. Co. v. Cozen O’Connor, Case No. B184684 (Cal. Ct. App., March 21, 2007).