September 29, 2009

Written By Attorneys: Kenneth T. Levine and Michael J. Kurtis

This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

In a recent unpublished decision, the U.S. Court of Appeals for the Third Circuit determined that a warranty in a reinsurance agreement purporting to limit the reinsurer's exposure as to claims arising under Employer Liability policies was ambiguous and reversed the District Court's order granting summary judgment in favor of the cedant.

In Princeton Ins. Co. v. Converium Reinsurance (North America) Inc., No. 08-2136, 2009 WL 2915092 (3d Cir., September 14, 2009), the Third Circuit reversed the ruling of the U.S. District Court for the District of New Jersey which granted summary judgment in favor of the cedant, Princeton Insurance Co. ("Princeton") and against the reinsurer, Converium Reinsurance (North America), Inc ("Converium"), holding that a warranty in the reinsurance agreement purporting to limit Converium's exposure from Employer Liability claims was ambiguous, where the policy appeared to comply with the warranty provision on its face, but the limitation that it imposed was prohibited under New York's Insurance Law. This decision should prompt insurers and reinsurers alike to closely consider the intent of such limiting provisions both at the time of drafting their reinsurance agreements and as losses potentially implicating such provisions are reported.

Casualty reinsurance agreements that include Workers' Compensation ("WC") and Employer Liability ("EL") as covered business will often include a limitation on the reinsurers' exposure to such claims. In the EL context, this is typically accomplished by placing a restriction or cap on the policy limits of EL policies issued by the reinsured party, usually via a warranty provision in the reinsurance agreement that states that the maximum per-occurrence policy limits in policies providing EL coverage will not exceed a specific amount.

The reinsurance agreement (the "Treaty") between Princeton and Converium included a warranty that provided that the maximum EL limits for Bodily Injury were $100,000 "each accident." This limit was later increased to $500,000. When it incepted, the Treaty covered only policies written in New Jersey, but it was later expanded to include other states, including New York, where the subject loss occurred. Additionally, under the Treaty Converium agreed to provide reinsurance to Princeton on Princeton's WC and EL insurance policies on an excess loss basis. If a claim exceeded $1 million, Converium would reimburse Princeton's additional costs, up to a maximum liability of $1.5 million

Princeton issued an insurance policy to 1^st Choice Metal & Steel Co., Inc. ("1^st Choice"), that included a $100,000 limit for EL claims which was, in fact, unenforceable under New York law. In September, 1998, an employee of 1^st Choice suffered a catastrophic injury in New York. The employee filed a claim for workers' compensation under the Princeton policy. The state court ruled that the employee was permitted to sue the employer under New York law (under an exception to New York's WC bar) because the employee may have been "gravely injured" while working on a multifamily dwelling. Because the suit was outside the workers' compensation system, Princeton was liable under its EL policy, and because the policy was written in New York, the $100,000 limit on coverage was unenforceable. Princeton settled the case for $4.4 million and billed Converium under the Treaty.

Citing the warranty provision of the Treaty, Converium argued that it was responsible for only $500,000 in EL coverage. In addition, at the time the billing was presented to Converium, the employee had recovered less than $300,000 in workers' compensation benefits and because Converium was liable only for claims in excess of $1 million under the Treaty, it claimed that it did not owe Princeton anything under the treaty. Princeton filed suit in New Jersey state court and Converium removed the case to federal court. After both parties moved for summary judgment, the district court granted Princeton's motion and Converium appealed.

The central issue was whether the warranty provision in the Treaty limited Converium's liability for EL claims. The District Court held that the contract was unambiguous and contained no such limitation. The warranty at issue stated that "...the maximum Employers' Liability limits are as follows, or so deemed: i. Bodily Injury by Accident-$100,000 each accident..." The District Court interpreted the warranty section to mean only that Princeton promised that it would issue EL insurance subject to the limits described in the warranties, and concluded that Princeton had complied with the warranties by offering a policy to 1^st Choice with EL coverage limited to $100,000. Therefore, the District Court held, the contract unambiguously did not limit EL coverage, and Converium was liable for the full $1.5 million in coverage, plus interest.

On appeal, the Third Circuit observed that the District Court's analysis failed to account for the phrase "or so deemed" in the warranty provision. Converium proposed that the phrase, which was included in the Treaty at Converium's insistence, meant that if Princeton failed to include an enforceable limit on liability pursuant to the Treaty, the limit would nevertheless be deemed to have been included, and the policy would be covered under the Treaty as if the limits were in place. Conversely, Princeton argued that if the parties had intended to place a blanket limit on Converium's EL liability, an explicit limit would have been included in the portion of the Treaty dealing with liability limits, rather than in the warranty section. In dicta, the court opined that the agreement could have been structured to require Princeton to establish a limit on its EL liability while providing explicit language regarding instances where the promised limitation was invalidated by operation of law.

After weighing the parties' arguments, the Third Circuit concluded that the language of the Treaty was susceptible to more than one interpretation, and was therefore ambiguous, and the District Court should not have granted summary judgment in favor of either party.

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