Compagnie De Reassurance D’Ile de France v. New England Reinsurance Corp.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Julie Goldman

Date Promulgated: June 19, 1995


Compagnie De Reassurance D’Ile de France v. New England Reinsurance Corp., 57 F.3d 56 (1st Cir. 1995), cert. denied 116 U.S. 1009 (1995)

Court:  United States Court of Appeals for the First Circuit

Date Decided:  June 19, 1995; Amended on Denial of Rehearing on July 12, 1995

Issue Decided:  What standard of proof must the plaintiffs meet to prove fraud?

Did the defendants owe plaintiffs a duty of utmost good faith?

What are the elements of plaintiffs’ fraud claim?

Did the defendants expressly misrepresent to plaintiffs
“that the business would be underwritten on a risk-by-risk
individual certificate basis?”

Were the defendants under an obligation, pursuant to their duty of utmost
good faith towards the plaintiffs, to disclose that they intended to use
streamlined facultative underwriting rather than standard facultative
underwriting, and did they therefore fraudulently withhold information?

Were knowing misrepresentations made in the Placement
Information, constituting fraud in the inducement?

Did the lower court correctly conclude that the plaintiffs relied upon the
defendants misrepresentations?

Is retroactive cancellation of a reinsurance contract an appropriate remedy when a reinsurer establishes that it was fraudulently induced to issue, join or continue to partake in a contract for reinsurance? (Note: issues other than fraud/rescission were decided in this case as well)

Key Holdings
Under Massachusetts law, fraud must be proved by a preponderance of the evidence. There is no “clear and convincing” standard in Massachusetts for fraud cases.

A reinsurer owes its retrocessionaire a duty of “utmost good faith in its dealings under the treaties.”

The District Court correctly “required the plaintiff to prove that ‘the defendant made a false representation of a material fact with knowledge of its falsity for the purpose of inducing the plaintiff to act thereon, and that the plaintiff relied upon the representation as true and acted upon it to his damage” (internal citations omitted).

The Court of Appeals held that the defendants did not implicitly or expressly misrepresent to plaintiffs how the business would be underwritten. The evidence does not support the Plaintiff’s argument, and the lower court’s finding, that the parties “understood the meaning of the term [facultative] in its standard and traditional sense, namely, underwriting on a risk-by-risk certificate basis, the classic meaning of the term.” The Court also rejected the lower court’s holding, that there was sufficient evidence that the defendants were aware that plaintiffs believed “facultative” to mean only “risk-by-risk certificate underwriting.”

The lower court correctly held that there were “material and knowing misrepresentations” in the Placement Information, but the Court of Appeals remanded to determine “the legal significance” of later information received by the plaintiffs and how it may have impacted the plaintiffs’ rights to “abandon their reinsurance obligations” under the Treaties and recoup monies for losses it paid.

Reliance is an element of a claim for fraud, and many plaintiffs provided neither direct nor circumstantial evidence of reliance in the lower court. The Court remanded on this issue, however, to determine which of the plaintiffs made a showing of reliance.

A court may, as a remedy for fraud, retroactively cancel a reinsurance contract if the reinsurer was induced by fraud to issue, join or renew a contract for reinsurance, “where otherwise appropriate.” The court may also “reimburse[e] [reinsurers] for their net losses, and absolve[e] them from their unfulfilled reinsurance obligations thereunder.” A reinsurance contract which has been retroceded, and is affected by fraud, may also be cancelled. However, cancellation is not a proper remedy for fraud premised upon the alleged misrepresentations of the word “facultative,” as the Court reversed the lower court’s holding on that issue. Even though cancellation of the contract may be an appropriate remedy, the First Circuit remanded to determine whether the plaintiffs’ claims are time-barred. whether there was evidence of ratification or waiver, and whether certain plaintiffs had failed to establish reliance.

Key Takeaways
The First Circuit considers rescission of a reinsurance contract to be a “customary form of relief” if “an insurer establishes that it was induced by fraud to issue policies of insurance” (internal citations omitted). This remedy is also available if reinsurer was “induced to join, and continued to participate in” a Reinsurance treaty because of the cedent’s fraud. Statutes of limitation and principles of ratification and waiver, however, may preclude a claim for rescission.