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Reliastar Life Insurance Company v. Roger Smith and Aon Re

March 1, 2011


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-3916-03.

Per curiam.


Argued January 20, 2011 - Decided

Before Judges R. B. Coleman, Lihotz, and

J. N. Harris.

In this complex commercial litigation involving the business of reinsurance and retrocessional insurance, we are asked to set aside a jury verdict on grounds that, as a result of a handful of determinations out of the hundreds made by the trial judge in the course of a twenty-three day trial, plaintiff did not receive a fair trial. Our appraisal of the record reveals that even if plaintiff did not get a perfect trial -- no party is entitled to such a faultless process -- it received all that it was due to resolve its multi-million dollar dispute with defendants. Having full confidence in the jury verdict that engendered this appeal, largely the result of the careful management by the trial judge, we affirm.



In the mid-1990s, Unicover Managers, Inc. (Unicover) gathered together a small group of insurance companies and assembled them into a pool (the Pool) for the purpose of selling reinsurance to insurance companies selling workers' compensation insurance. The rights, duties, and obligations of the members of the Pool, and of its manager, Unicover, were governed by theterms of their Occupational Accdent Reinsurance Pool Management Agreement (the management agreement). John E. Pallat, III, was Unicover's chairman and chief executive officer, with oversight of the Pool's operations.

Reinsurance is an arrangement in which a company, the reinsurer (here, the Pool), agrees to indemnify an insurance company against all or a portion of the primary insurance risks that it has underwritten. Reinsurance companies themselves also purchase reinsurance, a practice known as a retrocession. They purchase this reinsurance (sometimes called retrocessional insurance) from other reinsurance companies. A reinsurance company that sells reinsurance to a reinsurer is a retrocessionaire.

The Pool operated on an annual basis, and members executed management agreements reflecting each year-long period with Unicover. An individual member, acting alone, could not contractually terminate a management agreement until it had given ninety days' notice of its intent to terminate its participation and then such termination was not effective until the next anniversary date. Acting unanimously, however, all of the members could contractually terminate the management agreement before the year expired if Unicover "engage[d] infraud, willful misconduct, the commission of a crime, or a material breach."

Pursuant to the management agreement, Unicover was delegated as the administrator of the members' cooperative arrangement and "authorized to market, administer, service, and underwrite the reinsurance business written by the [members] through the Pool, and otherwise act in the best interests of the Pool as a whole." Although there were certain limitations on the type and location of business Unicover could accept on behalf of the Pool, there were no express caps or limits on the amount. Any reinsurance contracts signed by Unicover automatically bound the Pool and its members, and Unicover was entitled to a management fee equal to 7.5% of certain premiums received by the Pool. The management agreement was governed by Illinois law. Unicover was also responsible for procuring retrocessional insurance for the Pool to backstop the members' underwriting obligations.

Although the management agreement did not permit Unicover to delegate "the entirety of its duties and obligations" to a third party, it was allowed to employ third parties that were "specifically approved in writing by [the members], such approval not to be unreasonably withheld." Unicover "ha[d] authority to agree to any and all terms and conditions of its use or cooperation with such third parties . . . [, and] Unicover [was] responsible for the payment and adjustment of any commissions to such third parties."

In 1997, Unicover hired defendant Aon Re, Inc. (Aon) to serve as a co-broker with Rattner Mackenzie, Ltd. (Rattner) for the Pool. Defendant Roger Smith was Aon's representative who dealt with Unicover. By the beginning of 1999, only Aon was conducting brokering operations on behalf of the Pool.

In 1997, Rattner and Aon secured retrocessional insurance for the Pool. They negotiated a three-year non-cancelable retrocession contract -- the Occupational Accident Excess of Loss Whole Account Retrocession Agreement (the Whole Account Retrocession) -- with a pool of retrocessionaires (the retrocessionaires or the Centaur Pool) that was managed by Centaur Underwriting Management Limited and its President, John

R. Cackett.

The Whole Account Retrocession ran from December 1, 1997,

to December 1, 2000. It provided that the retrocessionaires were required to automatically cover all risks associated with the Pool's inventory of business during those three years, with certain listed exceptions. It contained no restrictions on the amount of business that Unicover could sell and thereby obligate the Centaur Pool to indemnify. Instead, it contained a writtenrepresentation that the Pool's so-called "Estimated Gross Subject Annual Premium Income" to be covered by the retrocessionaires would be $150 million in the first year, $200 million in the second year, and $250 million in the third year.

In addition, the Whole Account Retrocession declared that all communications about the arrangement would be transmitted to the Pool through Rattner and Aon. Also, "[a]ny dispute arising out of the interpretation, performance or breach of [the Whole Account Retrocession] . . . will be submitted for a decision of a panel of three arbitrators." The Whole Account Retrocession provided that it was governed by Illinois law.

After this framework was already in place, sometime in 1998, Smith approached plaintiff Reliastar Life Insurance Company (Reliastar) to become a member of the Pool. Paul Kersten, Reliastar's in-house workers' compensation underwriting expert, conducted a due diligence analysis of the proposal. The Pool's retrocessional insurance was critical to Reliastar's decision to participate in the Pool as a member. Notwithstanding any misgivings that it harbored, which were unearthed as part of its due diligence, Reliastar joined the Pool as a five percent member effective on March 1, 1998.

By mid-1998, the Pool experienced dramatic growth, having placed $400 million in reinsurance, which was well in excess of the estimated amount disclosed to the retrocessionaires in the Whole Account Retrocession. Cackett expressed concerns to Smith that the rapidly increasing volume posed a significant risk to the Centaur Pool and its coverage. By August 1998, he threatened that the retrocessionaires would take legal action to have the Whole Account Retrocession voided.

Smith downplayed some of Cackett's complaints, but forwarded others to Pallat. However, he never sent any written communication to the Pool's members about the potential problem, and he did not tell Pallat or anyone at Unicover to do so. Continuing its wild success at underwriting, by the end of 1998 the Pool had sold more than $1 billion of reinsurance.

In early 1999, two members of the Centaur Pool separately wrote Unicover to advise that they considered the Whole Account Retrocession terminated. When Reliastar received these letters, it did not instruct Unicover to stop writing business, audit Unicover, or formally notify Unicover that it would not be renewing its own membership in the Pool for the next year.

In due course, the retrocessionaires initiated an arbitration proceeding, ultimately completed in October 2002, alleging that the Whole Account Retrocession should be rescinded due to "misrepresentations and nondisclosures prior to, during, and after the underwriting of [the Whole Account Retrocession]," and claiming that the Pool incurred a much greater risk than the parties had originally intended. Rejecting much of the retrocessionaires' claims, the arbitral panel nevertheless tersely determined that any reinsurance that the Pool had sold after August 31, 1998, was not covered by the Whole Account Retrocession, and required the retrocessionaires to return premiums to Pool members:

[Pool members'] request that the [arbitral] panel declare that the [Whole Account Retrocession is] valid is granted to the extent of business bound or renewed to such [Whole Account Retrocession] on or before August 31, 1998. The [retrocessionaires] will not be liable for any losses arising from business bound or renewed to such [Whole Account Retrocession] ...

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