Photo by Ion Ceban @ionelceban on Pexels.com Reinsurance agreements with non-US off-shore reinsurers usually involve a reinsurance trust with a bank acting as trustee. These trust agreements typically absolve the trustee from nearly all liability because of their ministerial role in the reinsurance transaction. This is very common in off-shore life, annuity and long-term care…
Reinsurance agreements with non-US off-shore reinsurers usually involve a reinsurance trust with a bank acting as trustee. These trust agreements typically absolve the trustee from nearly all liability because of their ministerial role in the reinsurance transaction. This is very common in off-shore life, annuity and long-term care reinsurance agreements.
In the last several years, however, trustees have come under scrutiny because some off-shore reinsurers were not quite on the up-and-up and the a-sets placed in the trust accounts and managed by the reinsurers’ affiliated investment managers have been substandard. This, of course, has caused the reinsurance arrangement to collapse, regulatory issues and often the total loss of the a-sets meant to secure the cedent’s losses. Because these reinsurers typically do not have a-sets on shore, some of their cedents have gone after the trustees seeking damages.
In Bankers Conseco Life Insurance Co. v. Wilmington Trust, National A-sociation, No. 13185 (N.Y. App. Div. 1st Dep’t Apr. 20, 2021), a long-term care reinsurance deal resulted in serious problems for the cedent when the regulator declared that many of the a-sets in the trust account were not eligible a-sets. Not only were the a-sets not eligible, but they were non-negotiable. The cedent was forced to recapture the business and terminate the reinsurance agreements while taking a substantial loss. The reinsurer, which was not involved in this lawsuit, was the alter ego of a private equity fund that devised a scheme to defraud insurance companies.
While the trust agreement limited the trustee’s liability and responsibility–it was not responsible to determine whether the a-sets were eligible under state law to be placed into a reinsurance trust account–the agreement did have certain provisions that the court found important:
However, the agreements did provide that [the trustee] was not to accept into the trusts any “non-negotiable” a-sets, meaning a-sets that were not capable of being liquidated at a moment’s notice without the need to clear any administrative hurdles. Further, the agreements provided that [the trustee] would “only be liable for its own negligence, willful misconduct, or lack of good faith in connection with its performance” and that “in no event shall [the trustee] be liable under or in connection with this . . . Trust Agreement for indirect, special, incidental, punitive or consequential losses or damages of any kind whatsoever.”
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