The First District Appellate Court recently found an exception to the general rule that reinsurers owe no obligations to the direct insured, finding "special circumstances" based on the structure of the insurance program at issue in the case.
In Certain Underwriters at Lloyd's, London v. The Boeing Co., 2008 Ill.App. LEXIS 649 (1st Dist. June 30, 2008), the underlying dispute involved a telecommunications satellite, constructed by a company that was ultimately acquired by the Boeing Company, that was sold to a company in Saudi Arabia. The satellite experienced power anomalies and was determined to be a total loss. The insurers of the Saudi company paid almost $200,000,000 for the loss and then sought reimbursement from Boeing for the settlement.
Some of the Saudi company's insurers, called the Underlying Claimants in the opinion, thereafter filed a request for international arbitration of the claim for reimbursement of the loss from Boeing pursuant to the contract between Boeing and the Saudi company. The First District opinion has an interesting discussion of allegations in the arbitration proceeding of attempts by Boeing to cover-up problems with the line of telecommunication satellites prior to the sale of the satellite at issue. See 2008 Ill. App. LEXIS 649 at * 9-12. The Underlying Claimants also sought to have Boeing preserve certain documents for future production, including those regarding anomalies with the line of the satellites and the sale of the satellite at issue. Id.at *11-12.
The First District appeal arose out of a declaratory judgment action filed by various London Market companies, the reinsurers of some of Boeing's direct insurance coverage. Because insurance for the telecommunications industry is sold by a limited group of insurers, some of the London Reinsurers also insured certain of the Underlying Claimants.
Boeing had 80% of its direct insurance through a captive insurer, Astro Limited, which is a whollyowned subsidiary of Boeing. The other 20% of the direct insurance was issued by AAU, another insurer that was dismissed from the coverage action. The entire Astro coverage was reinsured by various London Market companies, and the reinsurance contract contained the following "Simultaneous Payments Clause," which stated as follows:
In the event of any claim against the original policy [of direct insurance between Astro and Boeing], [the London] Reinsurers hereon agree that any settlement or advance of funds by the letter of credit or otherwise shall take place at the same time as on the original in order that the Reinsured [Astro] shall not be required to advance funds on behalf of the reinsurer.
As the First District described the arrangement, this clause meant that Astro's own coverage under its reinsurance policy with the London Reinsurers was coextensive with Astro's coverage obligation to Boeing. Id.at *4.
Further, Astro and the leading London Reinsurer, Kiln Syndicate 510 at Lloyd's of London, on behalf of itself and some of the other London Reinsurers, entered into a claims handling agreement in connection with the liability coverage for Boeing, giving reinsurer Kiln and direct insurer AAU exclusive control over the investigation, settlement and defense of claims or suits against Boeing. Thus, the reinsurance arrangement with the London Reinsurers in the scheme of Boeing's insurance program went beyond the typical situation of a reinsurer's indemnity contract with a reinsured direct insurer.
The London Reinsurers reserved their rights under the reinsurance policy and Astro's direct insurance policy for the underlying action, acknowledged a potential conflict in controlling the defense of Boeing and agreed to fund an independent defense subject to the reservation of rights. The London Reinsurers also sought various documents from Boeing to investigate the claim and make a coverage determination, and offered to enter into a confidentiality agreement.
Boeing refused to turn over the documents based on the International Traffic in Arms Regulations ("ITAR") and the Arms Control Export Act. ("ACEA"), which govern the disclosure of certain satellite technology to non-American companies and individuals. The London Reinsurers acknowledged that they would need a Technical Assistance Agreement ("TAA") from the United States government to be permitted access to ITARprotected information, but the TAA that Boeing had applied for would not permit the London Reinsurers access to the information.
The London Reinsurers thereafter commenced a declaratory judgment action in the Circuit Court of Cook County, Illinois, seeking a declaration regarding their obligations under the contracts of insurance and reinsurance relating to the underlying claims against Boeing. The complaint alleged, among other things, that Boeing had not provided the London Reinsurers with the information relevant to their coverage investigation despite requests for same.
Boeing responded by moving to stay the declaratory judgment proceeding until: (1) the London Reinsurers obtained the necessary TAA such that discovery could proceed without violating ITAR and ACEA, and (2) the underlying arbitration against Boeing was concluded. Boeing asserted that, due to overlap of issues in the coverage action and in the underlying claims, it could be subject to collateral estoppel of issue preclusion by a finding against Boeing in the declaratory judgment action. Boeing further argued that discovery in the declaratory judgment action would allow the London Reinsurers involved in the arbitration to avoid various restrictions imposed on document discovery in the arbitration proceeding and those documents could fall into the hands of parties whose interests were adverse to Boeing's in the arbitration. 2008 Ill.App. LEXIS 649 at *20-21.
The London Reinsurers argued, inter alia, that the issues in the declaratory judgment action were separate from the underlying dispute, and that there was no reason to believe that the insurance coverage issues would be dealt with in the underlying arbitration. Id. at *21-22. The trial court granted Boeing's motion to stay the declaratory judgment action based on the overlapping issues and the discovery complications. Id.at *24-25.
On interlocutory appeal, the London Reinsurers argued that Boeing had not established that rulings in the coverage case would have a collateral estoppel effect, a prerequisite to staying the coverage action. They argued that the arbitration was proceeding under the law of the United Arab Emirates, a civil law system that does not follow stare decisis. 2008 Ill. App. LEXIS 649 at *25-26. Boeing argued that there were substantially similar issues in the declaratory judgment action and the underlying action, which could prejudice its defense in the underlying action. Id.at *27.
To begin the analysis of whether the stay was properly granted, the First District looked at whether the London Reinsurers should be considered reinsurers, insurers or both. The court noted that Illinois courts had never addressed a scenario where a reinsurer pursued a declaratory judgment action to determine obligations under both reinsurance and direct insurance contracts. 2008 Ill. App. LEXIS 649 at *29-30. The court stated that ordinary reinsurance contracts operate solely between the reinsurer and the insurer, creating no privity of contract between the reinsurer and the direct insured, and except under "special circumstances," the reinsurer does not have any liability to the original insured, citing People ex rel. Baylor v. Highway Ins. Co., 57 Ill.2d 590, 594-95 (1974).
The First District in the Lloyd's case described "special circumstances" as follows:
[I]n any case where the contract of reinsurance is more than a mere contract of indemnity, and is made for the benefit of the policyholders of the reinsured, and by it the reinsurer assumes the liability of the latter on its policies, the liability of the reinsurer may be directly enforced by the insured, or by his privies.
2008 Ill.App. LEXIS 649 at *31, quoting First Nat'l. Bank of Kansas City v. Higgins, 357 S.W.2d 139, 143 ( Mo. 1967). The First District noted that the Higgins case found that the reinsurance contract may be so formulated as to create liability from the reinsurer directly to the original insured based on the theory that the original insured is a third-party beneficiary of the reinsurance contract. Id. at *31- 32.
Applying that theory to the case at bar, the court in Lloyd's noted that the London Reinsurers requested a coverage determination as to both the reinsurance and the insurance contracts, that the reinsurance contract had a simultaneous payments clause making the Astro direct coverage coextensive with the reinsurance coverage, and that some of the London Reinsurers had entered into a claims handling agreement with Boeing as to the underlying dispute. The court therefore found that there were special circumstances so as to consider the London Reinsurers as both reinsurers and insurers for purposes of the appeal. Id. at *32-33.
The court found that as reinsurers, the London Reinsurers had only a duty to indemnify. 2008 Ill. App. LEXIS 649 at *33-34. The court then examined the London Reinsurers' duties as insurers, and concluded that they had a current duty to defend Boeing in the underlying action, as well as a potential duty to indemnify. Id.at *39-40. The court then looked at whether the declaratory judgment action was ripe, noting that while neither party had raised the issue, it was dispositive regarding the trial court's granting of Boeing's motion to stay the coverage action. The court stated that having found there was a duty to defend, the only issue left was the duty to indemnify, and that duty could not be defined until the adjudication of the underlying dispute. Id. at *45-46.
The court noted that the London Reinsurers' allegations regarding an actual controversy were devoid of any details and found that, "the gist of [the London Reinsurers'] complaint consisted of an effort to obtain information relevant to their coverage investigation" and "amounted to a request for discovery" which did not qualify as an actual controversy. Id. at *46. The court found that the trial court properly granted the motion to stay from a procedural standpoint. Id.at *47. The court also found that undue prejudice to Boeing warranted a stay. In a harsh tone, the court accused the London Reinsurers of gamesmanship in seeking the declaratory judgment, "not to settle and fix rights, but instead to use as a sword to obtain the discovery that Underlying Claimants, including certain [London Reinsurers, who also insured the claimants against Boeing], were precluded from obtaining in the underlying action." Id. at *50.
This case reaffirms that in the typical situation, a reinsurance contract requires only that the reinsurer indemnify the insurer, and that the reinsurer owes no obligation to the original insured. However, in more complex insurance programs, reinsurers may be creating the "special circumstances" that create rights in favor of the original insured as a thirdparty beneficiary of the reinsurance contract.
* * *
Michele Oshman, an associate in our Chicago office, is a member of the firm's Appellate and Insurance Coverage practice groups. She concentrates her practice in the areas of insurance coverage and complex defense litigation. She has represented the interests of insurance companies in state and federal courts throughout the country, including disputes over coverage for underlying mass tort, professional liability, environmental, asbestos, construction defects, product liability, medical, municipal liability and other claims. She has also defended manufacturers in product liability cases, including nationwide class action matters, and has done reinsurance related work.
If you have any questions regarding this article, or Querrey & Harrow's insurance and reinsurance practices, please contact Michele via moshman@querrey.com, or via 312-540-7590.
