Reinsurance Coverage Agreement
Dispute Over Coverage Under Reinsurance Agreement not Subject to Claim for Unjust Enrichment
October 5, 2011
LEXINGTON INS. CO. V. TOKIO MARINE & NICHIDO FIRE INS. CO. LTD.
(11 Civ. 391 (DAB); September 7, 2011)
Lexington Insurance Co. (Lexington) issued parts of two layers of excess property coverage to Port Authority. Lexington’s First-Layer Coverage provided a per-occurrence limit equal to an $11.5 million part of a $40 million insurance layer that covered property damage in excess of $10 million. Lexington’s Second-Layer Coverage provided a per-occurrence limit equal to $9.5 million part of a $50 million insurance layer for property damage in excess of $50 million. Lexington’s coverage was a “fronting” policy for Tokio Marine, which agreed to reinsure 100 percent of Lexington’s risk under a reinsurance agreement.
As a result of the September 11, 2001 attacks, Port Authority sustained damage in excess of $1 billion, which was more than twice the value of the Port Authority’s per-occurrence insurance tower. A jury deemed the September 11 attacks to be two separate occurrences and thus the tenants of the World Trade Center Tower, as well as the Port Authority, were entitled to two times their property insurers’ limits. The Second Circuit affirmed the judgment that the attacks constituted two occurrences. Lexington paid one per-occurrence limit to Port Authority and submitted a reinsurance claim to Tokio Marine, for which it was completely reimbursed.
Port Authority engaged in coverage litigation with its primary insurer (American Home) and Lexington as to the occurrence issue. Ultimately, the parties settled the dispute and allocated the $11 million settlement pro rata by limits between the American Home policy and Lexington’s First and Second Layer Coverage. Port Authority forever released all claims against Lexington and Lexington then submitted a reinsurance claim to Tokio Marine for its portion of the settlement, claiming $4 million under the First Layer and $3 million under the Second Layer. Disputing Lexington’s allocation of the $11 million settlement to its policies, Tokio Marine rejected the claim maintaining that $10 million of the settlement should have been allocated to the American Home policy.
Lexington brought a four-count action on against Tokio Marine, including claims for breach of the reinsurance agreement and, in the alternative, unjust enrichment. Tokio Marine moved to dismiss the unjust enrichment claim under FRCP 12(b)(6), arguing that Lexington could not recover under unjust enrichment because this was a straightforward breach of contract case.
The court granted the motion, following the well-established rule that unjust enrichment is only applicable in quasi-contract situations, that is, in the absence of a contract. The court noted that when a “valid and enforceable written contract governs the subject matter in dispute, a plaintiff may not recover under a theory of unjust enrichment.” As the parties’ relationship was governed by a valid, written reinsurance agreement, Lexington’s claim for unjust enrichment is not viable.
IMPACT – REINSURANCE: Reinsurance agreements are often the subject of declaratory judgment and breach of contract claims. In such disputes, recovery is properly grounded in theories of contract, not equitable claims such as unjust enrichment.
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