Reinsurance Collateral, Captive Reinsurance And Rescission

What happens when a captive deal is put in place with a captive reinsurer set up off shore and the captive reinsurer does not provide the collateral for security promised? A New York federal court had to address that issue recently.

In AmTrust North America, Inc. v. Signify Insurance Ltd., No. 18-cv-3779(ER), 2019 U.S. Dist. LEXIS 115576 (S.D.N.Y. Jul. 11, 2019), a captive arrangement was negotiated between an entity that provided outsourced HR services to its clients, including workers' compensation insurance, and a ceding company and its affiliates to issue the workers' compensation policies. In turn, the ceding company would reinsure those policies with the off-shore reinsurer created by the HR entity. The reinsurance agreement required the reinsurer to post a collateral to secure the reinsurance obligations, including loss fund collateral. After issuing some policies, the cedent stopped and demanded that the reinsurer post the required collateral. The cedent's letter said that unless the reinsurer posted the collateral within 30-days, the cedent terminated the captive agreement from inception. The reinsurer posted a significant portion of the required security two days later and 30-days later wrote to the cedent accepting the termination to inception. On its part, the cedent withdrew its notice of intent to terminate, but demanded the rest of the security.

Subsequently, the cedent and its affiliates commenced a breach of contract action, which also sought a declaration that the reinsurer was required and shall remain required to maintain the security obligations. The reinsurer counterclaimed that the reinsurance agreement had been terminated from inception by the...