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AMERICAN SPECIAL RISK INS. CO. v. DELTA AMERICA

November 11, 1993

AMERICAN SPECIAL RISK INSURANCE COMPANY, Plaintiff,
v.
DELTA AMERICA RE INSURANCE CO., DR INSURANCE COMPANY, and NATIONAL DISTILLERS AND CHEMICAL CORPORATION, Defendants. DR INSURANCE COMPANY, Counterclaim Plaintiff, v. AMERICAN SPECIAL RISK INSURANCE COMPANY, ALEXANDER & ALEXANDER SERVICES INC., ALEXANDER & ALEXANDER OF NEW YORK, INC., ALEXANDER HOWDEN INSURANCE BROKERS, LTD., and ATLANTA INTERNATIONAL INSURANCE COMPANY, Counterclaim Defendants.


Leval


The opinion of the court was delivered by: PIERRE N. LEVAL

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

 Defendants DR Insurance Company ("DR") and National Distillers and Chemical Corporation ("National Distillers") move for summary judgment, contending that English law should govern this action and that, under English law, the contracts on which plaintiff American Special Risk Insurance Company ("ASRIC") sues are illegal and therefore unenforceable.

 Background

 Unless otherwise noted, the following facts are not in dispute.

 A. The Underlying Insurance and Reinsurance Contracts

 Plaintiff ASRIC is an insurance company organized under Delaware law and having its principal place of business in Atlanta, Georgia. During 1979 and 1980, ASRIC issued product liability insurance policies for hundreds of companies throughout the United States and Canada that were members of eleven different trade associations in various businesses. These policies were part of the "Associations Program," an approach to insuring the product liability risks of trade association members that was designed by counterclaim defendant Alexander & Alexander Inc. ("A&A"), an insurance broker incorporated in Maryland with its principal place of business in New York.

 ASRIC sought to "cede" its risk under these policies to a reinsurer. "Reinsurance occurs when one insurer (the 'ceding insurer' or 'reinsured') 'cedes' all or part of the risk it underwrites, pursuant to a policy or group of policies, to another insurer. The reinsurer agrees to indemnify the ceding insurer on the risk transferred." Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993), slip op. at 8357-58 (citations omitted). "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." American Special Risk Insurance Co. v. Delta American Re Insurance Co., 634 F. Supp. 112, 114 (S.D.N.Y. 1986) (Leval, J.).

 ASRIC retained counterclaim defendant Alexander Howden Insurance Brokers Ltd., an English company headquartered in London, to arrange reinsurance; *fn1" Howden in turn used the services of a specialized reinsurance broker, Charman Mauduit Insurance Brokers Ltd., another English company headquartered in London. Alexander Howden and Charman Mauduit arranged for ASRIC to reinsure most of the 1979-80 Associations Program risk with defendant Elkhorn Insurance Co., now known as Delta American Re Insurance Co. ("Elkhorn/Delta" or "Delta"). Elkhorn/Delta was and is a company organized under Kentucky law. From 1979 until approximately 1985, it had its principal place of business in New York; it is now in liquidation. *fn2" Until 1983, Elkhorn was owned by defendant National Distillers (now known as Quantum Chemical Corporation), a Virginia corporation with its principal place of business in New York.

 Elkhorn/Delta was a member of a reinsurance syndicate in London managed by Stetzel Thomson & Co. Ltd. ("Stetzel"), an English company headquartered in London. "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." American Special Risk Insurance Co. v. Delta American Re Insurance Co., 634 F. Supp. at 114. *fn3"

 During 1979-80, Stetzel, acting as agent for this nonmarine reinsurance syndicate, accepted reinsurance coverage of ASRIC. Elkhorn/Delta was one of twenty-two members of this syndicate and the only member incorporated in the United States. The other members were located primarily in Europe, Latin America, and Bermuda. The agreement between Stetzel and the syndicate members allowed Stetzel to reserve particular risks for the syndicate members generally, or to reserve reinsurance business for the syndicate in the name of a single syndicate member. According to ASRIC, because Elkhorn/Delta was the only member incorporated in the United States, Stetzel designated Elkhorn/Delta as the "fronting" company for the syndicate. This meant that Elkhorn/Delta would be liable for 100% of the syndicate's total liability, with a right of indemnification against the other syndicate members for their designated shares of the syndicate's total liability.

 Under the law 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 with comparable standards of insolvency 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." American Special Risk Insurance Co. v. Delta American Re Insurance Co., 634 F. Supp. at 114. Because most states have comparable standards, the fronting arrangement allowed ASRIC to obtain a reinsurance credit for all the risks ceded to Elkhorn/Delta, without the other members of the syndicate having to post security in the United States.

 Elkhorn/Delta was never licensed to engage in the business of insurance or reinsurance in London. *fn4"

 In arranging this reinsurance, ASRIC did not deal directly with Elkhorn/Delta or any other members of the syndicate. Following consultations with ASRIC in Georgia and A&A in New York, Charman Mauduit would submit to Stetzel in London a "slip," which was a written proposal summarizing the terms and conditions of each proposed reinsurance of ASRIC by Elkhorn/Delta. A Stetzel employee would approve the reinsurance, indicating his agreement with a rubber stamp on the slip that indicated it had been reserved for the syndicate fronted by Elkhorn/Delta. *fn5" In at least some cases, Charman Mauduit would then draft a formal reinsurance policy and submit it to Stetzel for approval by syndicate members. Stetzel would then seek acceptance of the reinsurance by the members, including Elkhorn/Delta in New York. The members would each initial or sign the acknowledgment forms and return them to Stetzel in London. Once Stetzel had received acknowledgment forms pertaining to a risk from all syndicate members, it would deliver a copy ...


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