Court Allows Damages For Reinsurance Payments Under Equitable Subrogation

In a recent case, a New York federal court in one of the September 11, 2001 lawsuits against Al Qaeda granted plaintiff insurance carriers' motion for an award of damages on a default judgment against the terrorist organization. The damages requested included both insurance payments made to insureds as a result of the September 11th terrorist attacks and reinsurance payments made to cedents. The decision is interesting because of the potential conflict between the traditional concept of privity in reinsurance and the scope of equitable subrogation.

In Continental Casualty Co. v. Al Qaeda Islamic Army, No. 03 MDL 1570, 04 Civ. 5970, 2018 U.S. Dist. LEXIS 108722 (S.D.N.Y. Jun. 25, 2018), the court was asked to address the calculation of damages to the plaintiff-insurers after entering a default judgment against the defendant terrorist organization. The issue was referred to a Magistrate Judge who issued a report and recommendations on the amount of damages awarded. The Magistrate Judge found that the insurers could not recover for their reinsurance claims under principles of subrogation because there was no contractual privity between the reinsurer and the original insured.

As many of you know, the concept of contractual privity is essential to preclude non-parties to the reinsurance agreement from making claims against the reinsurer. Without contractual privity, such as an express cut-through clause, there is no contractual relationship between the underlying insured and the reinsurer. This, in most jurisdictions, precludes an insured or its assignee from claiming directly against the reinsurer should the direct-writing company become insolvent or otherwise refuse to pay a claim under the insurance policy...