Reinsurer And Corporate Officer Held Liable Under Chapter 93A For Disavowing Reinsurance Agreement And 'Stringing Along' The Cedent

In an important decision with implications for cedents and reinsurers alike, the District Court for the District of Massachusetts, after a two-week bench trial, has held a reinsurer and its controlling officer liable under Chapter 93A (Massachusetts Unfair and Deceptive Trade Practices Act) for their bad-faith disavowal of a reinsurance agreement.1 Trenwick Am. Reins. Corp. v. IRC, Inc. reaffirms the court's prior holding in Seven Provinces2 that, where a "moving target" strategy is employed to coerce a favorable compromise of reinsurance obligations, it may constitute a violation of Chapter 93A. Judge Nancy Gertner's decision, which found that the defendants here "turned what should have been a routine claim against a reinsurer into a tortuous marathon,"3also includes noteworthy discussion of the status of the Follow the Fortunes doctrine in Massachusetts.

The Compcare Program

The facts involve a complex set of insurance and reinsurance agreements put in place by Malcolm Swasey and corporations controlled by him, including IRC, Inc. and IRC Re, Limited (the Defendants). In 1994, through these companies, Swasey administered and underwrote a workers' compensation insurance and employers' liability insurance program known as Compcare. Swasey procured insurance for this program in 1996 from Reliance National Insurance Company (Reliance). Trenwick America Reinsurance Corporation (the Plantiff) reinsured 54% of Reliance's risk. The parties disagreed as to whether a portion of the risk was then retroceded by Trenwick to IRC Re.4

The Reinsurance Claim

In the ensuing years, IRC Re received in excess of $1 million in net premiums from Trenwick.5 A dispute arose when Trenwick's reinsurance intermediary attempted to collect IRC Re's outstanding balances in 2004 and into 2005. After making no progress with IRC Re for more than a year, the intermediary reached out to Swasey directly. Swasey requested various information, which was provided, and, after two months of negotiations, the parties were approximately $300,000 apart.

Swasey's own calculations, however, acknowledged that at least $2.4 million was owed by IRC Re to Trenwick. The intermediary continued to press for payment until Swasey abruptly refused to speak with her, indicating that he would be sending her a fax shortly. The fax contested—for the first time—the very existence of the reinsurance agreement and "conditioned further discussions with [Trenwick's intermediary] on her producing a...