Missing or Lost Reinsurance Contracts

Why Would a Reinsurance Contract Be Missing?

In the traditional reinsurance context, it is pretty rare that a reinsurance contract is lost or missing. First, many reinsurance arrangements are formulated by reinsurance brokers on behalf of ceding insurers. Where the reinsurance contract is negotiated and placed by a reinsurance broker, it is likely that even if the parties cannot find the contract down the road, the broker will be able to produce the contract from its files.

But where the reinsurance arrangement is made directly (i.e., between the parties)—that is without a reinsurance broker—then the only way to find the reinsurance contract is by looking in the parties' files. Today, with electronically produced contracts and imaging of older paper contracts, it is unusual for a reinsurance contract to go missing.

Second, most reinsurance claims are made within a reasonable time of the inception of the reinsurance contract. Monthly or quarterly claims and financial reporting is typically required, and claims are usually reported to the ceding insurer within or shortly after the term of the reinsured underlying insurance contract. Thus, with claims being ceded regularly to an active reinsurance contract, it is difficult to lose track of the actual contract.

However, there are at least four circumstances where a missing reinsurance contract might arise besides sloppy recordkeeping.

• Long-tail claims
• Facultative certificates of reinsurance
• Insolvencies and bankruptcies
• Mergers and acquisitions

Long-Tail Claims

Since the rise of long-tail claims, lost policies and lost reinsurance contracts have become an issue. In reinsurance, the delay in determining liability for environmental damage to property and people (toxic torts), asbestos claims, and other long-tail claims that take years or decades to arise (mold, lead, nanomaterials, sexual abuse, etc.) is especially pronounced because of the length of time it takes for a ceding insurer to receive and resolve a claim and then bill its reinsurers. Reviver statutes ¹ have only added to this problem.

Often with long-tail claims there is a perfect storm between latent claims, mergers and acquisitions, and insolvencies or bankruptcies. Many of the original insureds, insurance companies, and reinsurers are no longer around, having gone into bankruptcy or insolvency or have been acquired and merged out of existence. This makes finding the reinsurance contract difficult if the records were not kept correctly.

When claims are reported decades later to reinsurers (or their successors), it is often difficult to locate the original reinsurance contract. This is especially so with facultative certificates.

Facultative Certificates of Reinsurance

As discussed in an earlier Expert Commentary article, "Sorting Out the Reinsurance Contract Morass," reinsurance of an individual risk or an individual insurance policy is typically provided through a reinsurance contract called a facultative certificate of reinsurance. A facultative certificate ("fac cert") back in the day was on a single, double-sided page with preprinted terms on the back. Fac certs typically were direct reinsurance and were purchased by ceding insurers relatively quickly and often by the thousands on specific property risks. This is why lost fac certs arise in the context of environmental or asbestos claims.

It is common for a ceding insurer to bill for settled long-tail claims against its treaty reinsurers, only to discover years later that it may have purchased facultative reinsurance for the same risk at a different attachment point. Finding fac certs from the 1960s and 1970s has proven problematic, especially where insolvencies and acquisitions have also taken place.

Even more confusing is the circumstance where insurance companies acted as facultative reinsurers through defunct risk-assuming entities like the former New York Insurance Exchange. Determining whether the insurer's Exchange entity actually participated on a particular risk is daunting with the collapse of the Exchange and the lack of Exchange documentation.

Insolvencies and Bankruptcies

Insolvencies of insurance and reinsurance companies that wrote business in the 1960s through the 1980s and bankruptcies of policyholders that manufactured and disposed of toxic waste, asbestos, and failed to investigate allegations of sexual abuse have led to situations where proving the existence of a reinsurance contract has been difficult.

Having worked on insurance insolvencies, I can tell you that recordkeeping is not the hallmark of most insurance and reinsurance companies that have gone insolvent. It often takes a year or more to find all the relevant insurance and reinsurance contracts, with facultative certificates being the most difficult to locate and organize.

While reinsurance is typically the largest asset of an insolvent reinsurer, collecting that reinsurance is always difficult, especially on older reinsurance contracts with reinsurers who have also gone insolvent. Locating those contracts when corporate records are in disarray is always daunting.

Mergers and Acquisitions

While not a new phenomenon, the changes in the insurance and reinsurance industry because of mergers and acquisitions of companies and the transfer of books of business has often made locating a reinsurance contract from the 1960s through the 1980s difficult. As managers leave and as new personnel take over the business, the legacy company's knowledge of where things are and how to find them is often washed away. This includes inoperable legacy computer systems and the profound loss of institutional memory.

In a recent case, a lost reinsurance contract issue arose where an intracompany reinsurance arrangement was no longer in effect because one of the parties was acquired out of the original corporate group. While intragroup reinsurance deals are real reinsurance contracts, when the deal is with affiliates, recordkeeping is less of a priority because the deal is within the family. However, when one of the affiliates is spun out or acquired by another company, then collecting under the former intragroup reinsurance arrangement can be problematic.

In First Ins. Co. of Hawaii, Ltd. v. Continental Ins. Co., No. 23-00198 JMS-RT (D. Haw. Oct. 31, 2023), an intracompany fronting deal resulted in a dispute over reinsurance coverage after the alleged reinsurer was no longer a member of the same corporate group. The alleged reinsurer brought an action to declare that it did not owe any reinsurance obligation to the ceding insurer's successor. The ceding insurer's successor brought a counterclaim for breach of the alleged reinsurance contract. The rub was that neither party could find the intragroup reinsurance contract.

The dispute was significant because it involved insurance and reinsurance coverage for revived sexual abuse claims from the late 1970s to the early 1980s against the underlying insured church.

In denying the motion to dismiss the counterclaim at the pleadings stage, the court held that the ceding insurer's successor adequately pled the existence of the reinsurance contract. The decision outlines the evidence describing the manner in which these companies, when they were all part of the same corporate family, entered into fronting arrangements when the alleged reinsurer could not write business directly in a particular jurisdiction.

The court held that "these allegations—again, taken as true for purposes of the Motion to Dismiss—are enough to constitute a 'meeting of the minds' or 'mutual assent' on the basic terms of a type of reinsurance agreement."

The court also noted that the ceding insurer's successor was essentially pleading a lost policy or lost contract issue and was not claiming that the parties only entered into an oral agreement. As the court stated, "Lost policy questions are matters of proof not pleading." The court concluded as follows:

At this motion-to-dismiss stage, the Counterclaim's allegations are sufficient to state a plausible claim for breach of an enforceable reinsurance agreement. Whether [the ceding company's successor] can prove its allegations is not a question before the court at this juncture.

This leads to the final topic: how do you prove a lost contract?

Proving a Lost Reinsurance Contract

The case discussed above goes through a detailed analysis of things to consider in proving a lost contract (keeping in mind that the case involved a sufficiency of the pleadings issue and not a determination of whether a contract existed). For example, the ceding insurer's successor explained how the two companies and other affiliates often involve fronting arrangements and that the original ceding insurer's policy was found in the alleged reinsurer's files. The court was satisfied with the secondary evidence presented to get past the pleading sufficiency issue.

Proving a lost contract on a substantive basis is fact-specific to each case. The nature and the scope of the secondary evidence considered by the court will vary. For example, if the reinsurer has paid on similar claims under similar contracts in the past, that secondary evidence may be considered helpful.

Secondary evidence may come from the ceding insurer's underwriting file and printouts from various corporate systems used by it as business records to show evidence of the reinsurance contract. Reinsurance layoff sheets, coding sheets, and actuarial, premium, and claims system printouts are all potential secondary evidence to help prove that a reinsurance contract existed.

Conclusion

Long-tail and legacy claims are often reported decades after an insurance policy has been issued and reinsured. The delay in seeking a reinsurance recovery may be more pronounced. Because of this, reinsurance contracts, especially fac certs, may not be located and the ceding insurer will have to use secondary evidence to prove the existence of the reinsurance contract should the reinsurer (or its successor) reject the billing. Whether secondary evidence will be satisfactory to prove the existence of a missing reinsurance contract is a case-by-case fact-specific determination.