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Trenwick America Reinsurance Corp. v. IRC, Inc.

Issue Discussed: Follow the Fortunes / Settlements

Submitted by Cecilia Froelich Moss, Karen C. Baswell

Date Promulgated: February 16, 2011

Trenwick America Reinsurance Corp. v. IRC, Inc., 764 F. Supp. 2d 274 (D. Mass. 2011)

Court: United States District Court for the District of Massachusetts

Issues Decided: Whether the follow the fortunes doctrine applied as a matter of law, or could be implied, to a retrocession agreement when no written contract existed between the parties.

(Note, this case addresses other issues in addition to follow the fortunes, including waiver of the right to arbitrate, piercing the corporate veil, and fraudulent/negligent misrepresentation.  The issue of fraudulent/negligent misrepresentation is discussed in a separate summary of this case under the “Rescission / Reformation” heading of the ARIAS Law Committee Reports)

Factual Background:

Plaintiffs (“Trenwick”) reinsured a workers’ compensation insurance program managed by IRC, Inc., the first of three defendants.  The second defendant, IRC Re, was a retrocessionaire to whom Trenwick allegedly retroceded 19% of the risk.  The last defendant, Malcolm Swasey, managed the underlying program, and was the founder and majority stockholder of IRC, Inc. and IRC Re.

A dispute arose when Trenwick sought to collect unpaid amounts from IRC Re.  For months, IRC Re, through Swasey, discussed the outstanding amounts with Trenwick as if a retrocessional contract existed.  Swasey then refused to continue the discussion unless Trenwick produced a written contract.  Litigation followed.

Key Holdings:

As a threshold matter, notwithstanding the absence of a formal written agreement, the court found “overwhelming” evidence of an enforceable contract.  Supporting the court’s conclusion were, among other things, testimony from Swasey that he “intended” for IRC Re to provide retrocessional coverage, numerous other documents reflecting IRC Re’s 19% participation in the workers’ compensation program, and the conduct of the parties.  764 F.Supp.2d 274, 286, 289 (D. Mass. 2011)

Follow the Fortunes.  Part of the unpaid amounts Trenwick sought from IRC Re resulted from Trenwick’s settlement of an arbitration with its underlying cedant.  IRC Re claimed it was entitled to raise in its defense (i.e. re-litigate) the defenses that Trenwick had asserted (and then allegedly abandoned) in that arbitration.  Trenwick argued that the follow the fortunes doctrine should be implied to the retrocessional agreement as a matter of Massachusetts law, and that it precluded re-litigation of the underlying coverage defenses.

The court found that Massachusetts law was unclear as to whether the doctrine was inherent in every reinsurance relationship as a matter of law, and so permitted expert testimony on custom and practice in the industry to determine whether the doctrine should be implied to the retrocessional agreement at issue.  Based on that testimony, and the fact that all other written contracts relevant to the underlying workers’ compensation insurance program had follow the settlements language, the court held the doctrine applicable to IRC Re’s contract, even in the absence of an express written contract.

Key Takeaways:

The question of whether the duty to follow loss settlements is an industry custom is a question of fact determined under state law.  Under Massachusetts law, the court will look at expert testimony on the industry custom and usage to determine if the follow the fortunes doctrine should be implied in an agreement in the absence of an express clause.

 

* Cecilia Froelich Moss is a founding partner of Chaffetz Lindsey LLP, where her practice focuses on representing major insurance companies in reinsurance disputes and in coverage litigation.  Ms. Moss also handles large scale commercial disputes in court and in international arbitration.

* Karen C. Baswell is an associate of Chaffetz Lindsey LLP, focusing on insurance and reinsurance dispute resolution.  Ms. Baswell also has experience representing clients in commercial litigations and international arbitrations.