Ronald S. Gass
Reinsurance and Insurance Arbitrator and Umpire
Reinsurance and Insurance Dispute Resolution Services Consultant

Retrocedent in Informal Fronting Deal Compelled to Arbitrate with Line Slip Pool Cedents

Applying traditional principles of agency law, the U.S. District Court for the Northern District of Texas compelled the retrocessionaire of a fronting reinsurer to arbitrate with the cedents of a line slip pool even though it was not a signatory to the underlying treaties and the pool manager had created this informal fronting arrangement without the retrocessionaire's authorization.

Two cedents, North River Insurance Co. and United States Fire Insurance Co., sought to compel a Zimmerman workers' compensation quota share reinsurance line slip pool participant, Transamerica Occidental Life Insurance Co., to arbitrate certain disputes arising under various treaties dating back the mid-1980s. Because Transamerica and several of the other pool participants were unauthorized reinsurers, they would have been required to post letters of credit if the cedents were to receive credit for reinsurance. To remedy this problem, the pool manager, apparently without Transamerica's authorization, created an informal fronting arrangement whereby one of two authorized reinsurers, who were also pool participants, fronted all of the unauthorized reinsurers' share of the cedents' risks. Although this arrangement was never memorialized by the manager, Transamerica and the other unauthorized pool members continued to receive their proportionate shares of the premiums and losses and paid claims under the treaties as if they had been direct subscribing reinsurers.

When disputes arose after the Zimmerman pool ceased functioning in 1995, the cedents commenced an arbitration against Transamerica. Transamerica refused to arbitrate and denied liability under the treaties because it had never signed them. Relying on traditional rules of agency law, the court held that the pool manager was clearly authorized to bind and accept reinsurance on Transamerica's behalf with the cedents. The fact that the fronting arrangement was never formalized and the manager created it without Transamerica's authority did not alter its principal/agent analysis.

Compelling arbitration, the court found conclusive and uncontroverted evidence that Transamerica had received and retained the benefits of its agent's unauthorized act and, therefore, had ratified the treaties, including their arbitration provisions.

North River Insurance Co. v. Transamerica Occidental Life Insurance Co., Civil Action No. 3:99-CV-0682-L, 2002 U.S. Dist. LEXIS 10637 (N.D. Tex. June 12, 2002).


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