Munich Reinsurance Am., Inc. v. Tower Ins. Co.
Issue Discussed: Contract Interpretation
Submitted by Daniel J. Neppl, Christopher M. Assise
Date Promulgated: July 17, 2012
Issues Decided: Whether language in a reinsurance contract is exclusionary in nature and which party bears the burden of proof when that language is not contained in the exclusion section of the contract.
Whether language in a reinsurance contract is exclusionary in nature depends on the “effect or character of [the] phrase” at issue, and if that language has an “exclusionary effect,” the reinsurer bears the burden of proving that the loss cession is excluded. Background Munich Reinsurance America, Inc. (“Munich Re”) reinsured Legion Insurance Company (“Legion”) for exposures arising out of property/casualty policies Legion had issued to policyholders. Munich Re, in turn, purchased retrocessional protection from Tower Insurance Company of New York (“Tower”). After Munich Re made payments pursuant to its reinsurance relationship with Legion, it sought indemnification from Tower for Tower’s share of those payments.
The reinsuring clause in the retrocessional agreement between Munich Re and Tower provided, among other things, that Tower would indemnify Munich Re for 100% of the loss cession “unless” the underlying claims arose in one of two defined situations (in which case Tower had to indemnify Munich Re for less than 100%). Munich Re contended that these two defined situations were exclusionary in nature, and thus Tower had the burden of demonstrating that either criterion applied. Tower took the opposite position, contending, among other things, that Munich Re had the burden of proving the propriety of the reinsurance presentation because the definitional language at issue was part of the coverage grant.
In evaluating the respective positions advanced by the parties, the court rejected the suggestion that the placement of the definitional criterion at issue in either the coverage grant or list of exclusions is dispositive. “Exclusions do not shed their essential character when they are moved from one section of a policy and are crafted as part of that policy’s grant of coverage.” Munich Re, 2012 U.S. Dist. LEXIS at *11-12 (quoting Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 332 (1998)). When trying to determine the nature of the definitional criterion at issue, the court stated that the “focus [is] on ‘the effect or character of [a] phrase,’ and where the language behaves like ‘an exclusion of the coverage grant by the very operation of its terms,’ the insurer should bear the burden of proving that phrase’s application.” Id. at *12 (quoting Carter-Wallace, 154 N.J. at 331). According to the court, allowing an insurer (or, in this case, a retrocessionaire) “to distribute provisions limiting liability throughout a policy, with the expectation that its shouldering of the burden of proof would be limited to the single section entitled ‘Exclusions’ … would create considerable incentive to obfuscation and subterfuge.” Id. (quoting Andover Newton Theological Sch., Inc. v. Continental Cas. Co., 964 F.2d 1237 (1st Cir. 1992)).
The court concluded that the definitional criteria at issue were clear and unambiguous and that they had “an exclusionary effect.” Accordingly, the court held that Tower, as the retrocessionaire, had the burden of proving that either criterion applied to the reinsurance presentation made by Munich Re.