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AMERICAN SPECIAL RISK INS. CO. v. DELTA AMERICA

March 31, 1986

AMERICAN SPECIAL RISK INSURANCE COMPANY, Plaintiff,
v.
DELTA AMERICA RE INSURANCE CO., DR INSURANCE COMPANY, and NATIONAL DISTILLER & CHEMICAL CORPORATION, Defendants



The opinion of the court was delivered by: LEVAL

OPINION AND ORDER

PIERRE N. LEVAL, U.S.D.J.

This a breach of contract action arising out of various reinsurance contracts between plaintiff American Special Risk Insurance Corp. ("ASRIC") and defendant Delta American Re Insurance Company ("Delta"). ASRIC is a Delaware corporation with its principal place of business in Georgia. Delta is a Kentucky corporation with its principal place of business in New York. Additional defendants DR Insurance Co. ("DR"), and its parent corporation, National Distillers and Chemical Corp. ("National"), both Virginia corporations with their principal places of business in New York, were added by plaintiff's amended complaint.

 Defendants move to dismiss on the basis of forum non conveniens arguing that England is a more convenient forum. They also move for an order disqualifying plaintiff's counsel, LeBoeuf, Lamb, Leiby & MacRae ("LeBoeuf").

 I. Background

 A. 1979-81 Events: The Underlying Insurance and Reinsurance Contracts

 This action involves an elaborate arrangement of products liability insurance and reinsurance for various trade associations. The complaint alleges breaches of different reinsurance contracts entered into in 1979-80 between ASRIC and Delta, a member of a non-marine reinsurance syndicate.

 Alexander & Alexander, Inc. ("A & A"), an American insurance broker, designed a program to market products liability insurance to various trade associations. After A & A gathered data regarding each trade association, it established insurance rates based on a maximum volume of business activity.

 A & A approached Alexander Howden Insurance Brokers Ltd. ("AHIB"), an English insurance broker, to secure coverage for the trade association members. In 1979, AHIB arranged for its American subsidiary, ASRIC (then Cranford Insurance Co.), and a related company, Drake Insurance Co., to cover the first layer of insurance for the products liability program. *fn1"

 AHIB then sought reinsurance for ASRIC and Drake. Under American insurance law, an insurer can write insurance only up to a certain amount determined by its assets. However, if the insurer obtains reinsurance whereby its risk in the direct insurance is insured by another company, the direct insurer may be able to obtain reinsurance credit permitting the insurer to take on additional risk coverage. AHIB contacted Charman Mauduit, a London reinsurance intermediary, to locate reinsurance for ASRIC and Drake. In the fall of 1979, Charman Mauduit approached Stetzel Thomson ("Stetzel"), an English company with its principal place of business in London, to secure reinsurance for ASRIC and Drake.

 In 1979, Stetzel managed various reinsurance syndicates. Each member of the syndicate signed an Agency Agreement under which Stetzel had authority to reserve reinsurance business, collect premiums and distribute accounts for each syndicate member. Each member would ordinarily be liable for a percentage of the total risk of the syndicate.

 During 1979-80, Stetzel, acting as agent for its non-marine reinsurance syndicate, accepted reinsurance coverage of ASRIC and Drake. Delta (then named Elkhorn Re Insurance Co.) was one of 22 members of this non-marine reinsurance syndicate. Delta was the only member incorporated in the United States and licensed to do business in New York. The other syndicate members were located primarily in Europe, Latin America and Bermuda.

 During 1979 and 1980, Delta's share of the syndicate's total liability was 4.88% and 2.85% respectively. However, ASRIC contends that Stetzel designated Delta as the "fronting" company in accepting reinsurance coverage of ASRIC and Drake, *fn2" and therefore Delta is liable for 100% of the syndicate's total liability. Under the Agency Agreement between Stetzel and the syndicate members, Stetzel had the authority to reserve reinsurance business for the syndicate in the name of a single syndicate member. That member would be 100% liable to the reinsured and would have a right of indemnification against the other syndicate members for their designated share of the syndicate's total liability.

 ASRIC claims Delta was chosen to front the syndicate because it was the only American insurer in the syndicate. Under the Insurance Code of Delaware, ASRIC's state of incorporation, an insurer will receive reinsurance credit only if the reinsurer is licensed to transact insurance in Delaware or in another state that conforms to the same standards of solvency for insurance companies. If the reinsurer is an unincorporated alien insurer, the reinsured can obtain reinsurance credit only if the reinsurer establishes a trust fund here for the benefit of the reinsured. According to ASRIC, the rule is the same in New York and virtually every other state. Thus, by having Delta front the syndicate, the other syndicate members avoided having to post security in the United States.

 Stetzel handled the negotiation and execution of the ASRIC reinsurance contracts for the whole syndicate. ASRIC and AHIB, ASRIC's English parent, dealt with Stetzel through Charman Mauduit, ASRIC's English agent. Generally, neither ASRIC nor AHIB dealt directly with Delta in securing reinsurance coverage for ASRIC and Drake. However, ASRIC claims that neither AHIB nor Charman Mauduit had authority to bind ASRIC to any contract without ASRIC's, or subsequently A & A's, approval. *fn3"

 According to ASRIC, there was a consistent pattern of negotiations between it and Delta via their London agents concerning the rate structures of each association for which ASRIC sought reinsurance coverage. Stetzel, on behalf of Delta and the syndicate members, had to agree to the rate structures for the direct insurance before it accepted the reinsurance coverage. *fn4" It appears from both Delta's and ASRIC's papers that Delta did not participate directly in any of these negotiations.

 The reinsurance contracts were ultimately perfected in the following manner. Charman Mauduit presented Stetzel with a "slip", a summary of the terms and conditions of the reinsurance. Stetzel then reserved each item of reinsurance on behalf of the non-marine syndicate by placing an appropriate stamp on the slip. This reservation was usually subject to later confirmation by the syndicate members. In some instances, however, Stetzel simply initialed certain "declarations" presented to it by Charman Mauduit. According to Delta, Stetzel never confirmed any of these declarations with the syndicate members.

 Stetzel also endorsed the slips with the stamp "Sub R/I." According to an affidavit submitted by Delta's English counsel, this legend means that the reinsurance described in the slip will not become effective until further reinsurance is secured for the reinsured. This re-reinsurance is called "retrocession." Whenever Stetzel endorsed the slip "Sub R/I," Charman Mauduit in England arranged for the retrocession for the non-marine syndicate. Six companies agreed to act as retrocessionaires for the syndicate. Three of these companies are American, but only one company is licensed to do business in New York.

 Once Stetzel received notice of the retrocession coverage, it usually confirmed the items of reinsurance with each syndicate member. Stetzel apparently sent each member summaries of the items of reinsurance and a description of the member's share of the total risk. The member then initialed the summaries and returned them to Stetzel. Once each syndicate member agreed to the item of reinsurance, Stetzel sent Charman Mauduit a broker's confirmation.

 The insurance and reinsurance appear to have been performed in the following manner. The original insureds reported their claims and paid their premiums to A & A who referred all the claims to its New York law firm which kept the files on the claims. Stetzel collected all the premiums for the reinsurance ...


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