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etrocession agreement did not entitle the receiver of UBL to the reinsurance
proceeds.
McFarling v. Mayfield, 510 S.W. 2d 108 (Tex. Civ. App. 1974), writ ref. n.r.e. The
court held that in absence of language in reinsurance contract creating privity
between the original insured and the reinsurer, proceeds due on reinsurance
contracts become part of the general estate of the insolvent insurer for pro
rata payment of claims.
Wisconsin
Master Plumbers Limited Mutual Liability Co. v. Company & Bird, Inc., 79 Wis.
2d 308, 255 N.E. 2d 533 (1977). As a general rule, an agent or broker which
provides a reinsurance policy in a company which is solvent at the time the
policy is procured is not personally liable for a loss which occurs when the
company subsequently becomes insolvent. Any allegations of negligence must
be considered in light of the facts and circumstances at the time the policy was
issued and not at the time of the loss and failure to pay. Under the facts of this
case, the insurer was solvent at the time the reinsurance treaty was arranged.
Cut‐Through Agreements
Second Circuit In re Bennett Funding Group Inc. Sec. Litig., 270 B.R. 126 (Bankr. S.D.N.Y. 2001),
aff’d, 60 Fed. Appx. 863, 2003 WL 1191171 (2d Cir. 2003). Investors in a bankrupt
funding company had no rights under a reinsurance policy issued to the
company’s insurer, particularly where the company and its insurer considered
and rejected inclusion of a cut‐through provision in the reinsurance contract and
the investors were not named as loss payees in the policy; only the bankrupt
company’s trustee, rather than investors, could pursue an action for reinsurance
policy proceeds.
New York
In re Rehab. Frontier Ins. Co., No. 97‐06 (N.Y. Sup. Ct. Feb. 5, 2008), reported in
19‐11 Mealey’s Litig. Rep. Ins. Insolv. 2 (Mar. 2008). The court approved a
settlement between the rehabilitator and reinsurer of the insurer in
rehabilitation in a case involving cut‐through endorsements issued by the
reinsurer to policyholders, where the rehabilitator alleged that the reinsurer
wrongfully appropriated trust assets provided by the insurer in rehabilitation.
Premiums Owed and Unearned Commissions
Jurupa Valley Spectrum, LLC v. Nat’l Indem. Co., No. 06 CIV. 4023 (DLC), 2007
WL 1862162 (S.D.N.Y. June 29, 2007). The beneficiary of surety bonds issued by
an insolvent insurer in rehabilitation had no direct right of action against the
insolvent insurer’s reinsurer where the reinsurance contract did not contain
express language creating a cut‐through, the contract explicitly excluded thirdparty
beneficiary rights, and there was no relationship or conduct between the
parties permitting assertion of direct liability against the reinsurer.
Fifth Circuit
Crist v. Sharp Electric, Inc., 876 F.2d 379 (5th Cir. 1989). Receiver sued insured
for payment of premiums earned by insurer prior to insolvency. Insured
defended on the grounds that the subsequent failure to provide a defense
pursuant to coverage under the policy was a breach of the insurance contract,
thereby relieving the insured of its contractual obligation to pay premiums.
The court held that the "interlocking web of statutes" governing insurance
insolvency prevails over general principles of basic contract law, and rejected
an argument that because the insurer failed to defend after its insolvency, the
premium was not "earned." The court found that no event occurring after
insolvency could control whether premiums were or were not "earned,"
because the rights and liabilities of the insurer and its creditors are fixed as of
the date of the entry of the liquidation order and because a decree of
dissolution cancels outstanding policies as of that date by operation of law. A