Reinsurance Focus

In a suit between a life insurer, Security Life Insurance Company of America, and producer-owned reinsurance companies (PORCs) and their organizer/administrator, Southwest Reinsure, Inc. (SRI), Security Life’s complaint that SRI and the PORCs (SRI Defendants) failed to maintain a trust account containing Security Life’s required reserves largely survived dismissal. The parties had entered into a number of agreements, including various reinsurance agreements between Security Life and the PORCs, and an agreement between Security Life and SRI whereby the latter would administer the insurance covered by the reinsurance agreements. Under the reinsurance agreements, if Security Life’s reserves account was deficient, the PORCs would pay Security Life a fee equal to an amount needed to satisfy the deficiency. When a deficiency arose, SRI arranged for a letter of credit in lieu of the fee, and subsequently, the creation of a trust account. The trust agreement gave Security Life control over disposition of the trust and required the trustee to keep Security Life informed about trust activity. Without Security Life’s knowledge, SRI allegedly transferred the trust to another bank, and ultimately depleted the account. Security Life alleged that it consequently could not use the account to meet its statutory capital requirements, prompting the instant suit against the SRI Defendants for breach of contract, breach of fiduciary duties, fraud and conversion, among other counts.

Security Life’s breach of contract claim survived dismissal in the face of the SRI Defendants’ argument that Security Life did not either “charge a fee” or “terminate the agreement,” which were the only two actions contemplated by the relevant reinsurance agreement. The court found that factual questions arose regarding whether the agreement was modified pursuant to the parties’ course of dealing, namely, that in lieu of charging fees, the parties would use letters of credit and a trust account. Security Life’s alleged damages based on risk of “adverse regulatory action” or downgraded rating were not too speculative to defeat the contract claim. As to the fiduciary duty count, the court found it also survived dismissal, as “the complex relationships between and among Security Life, SRI, and the reinsurers call into [] question the arm’s length nature of the various agreements between the parties.” Security Life’s fraud claims also survived dismissal. Security Life’s claim for conversion failed, however, because Security Life did not allege that it had an immediate right to possess the funds in the trust account. Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., Case No. 11-1358 (USDC D. Minn. Dec. 20, 2011).

This post written by Michael Wolgin.

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