(Article from Insurance Law Alert, June 2024)
For more information, please visit the Insurance Law Alert Resource Center.
Holding
An Alabama district court ruled that a cedent was required to pay two retentions under reinsurance treaties, finding that the conduct giving rise to the underlying insured’s liability was not a single “Wrongful Act” subject to a single retention. Ala. Mun. Ins. Corp. v. Munich Reinsurance America, Inc., 2024 U.S. Dist. LEXIS 9247 (M.D. Ala. May 23, 2024).
Background
Alabama Municipal Insurance Corporation (“AMIC”) insured cities, towns and subsidiary corporate entities in Alabama. Between 2005 and 2015, AMIC entered into a series of excess of loss reinsurance treaties with Munich Reinsurance under which Munich Reinsurance accepted a portion of AMIC’s risk in exchange for a portion of the premiums AMIC received from its insureds. During this time frame, AMIC issued two identical public official liability policies to the City of Fairhope. Under the treaties, Munich Reinsurance was obligated to cover AMIC’s ultimate net loss in excess of $350,000.
AMIC submitted a claim to Munich Reinsurance for expenses it incurred (above the $350,000 retention) in defending Fairhope in a 2008 suit. The suit alleged that the city and mayor breached a prior settlement agreement relating to the claimant’s development of certain property. The suit alleged that Fairhope breached the settlement agreement in 2006 by approving a zoning proposal to develop nearby property into a competing village center and again in 2008 by approving measures to change the flow of traffic around the property.
Munich Reinsurance argued that AMIC was required to pay two $350,000 retentions because the events giving rise to the underlying lawsuit occurred in two different policy periods, a 2006 policy period and a 2008 policy period. Munich Reinsurance noted that each policy was reinsured by a separate treaty, each requiring a $350,000 retention. In ensuing litigation, the court granted Munich Reinsurance’s summary judgment motion.
Decision
AMIC’s liability policies to Fairhope covered damages because of “Wrongful Acts” and stated that “All Claims and Damages arising out of the same or substantially same or continuous or repeated Wrongful Acts will be considered as arising out of one Wrongful Act.” Thus, the central issue in dispute was whether the 2006 zoning decision and the 2008 traffic flow decision constituted substantially the same or continuous Wrongful Acts, or conversely, two distinct acts. As the court explained, if the actions were part of the same course of conduct, AMIC was entitled to cede all of its losses to the 2008 policy, in which case, only one reinsurance treaty would be triggered and only one retention would apply.
AMIC argued that the underlying suit alleged a single wrongful act, namely, Fairhope’s policy and practice of discriminating against the claimant to prevent development of his property. Rejecting this assertion, the court reasoned that the 2008 conduct was not the same or substantially the same as the 2006 conduct, nor continuous to it. The court explained that two actions were not substantially the same simply because they have “the same downstream consequences,” particularly where, as here, the actions themselves were “profoundly different.” The court deemed an alleged “common motive” with respect to the two different actions to be irrelevant, stating: “The bare allegation of a shared objective does not transform otherwise disparate acts into the same, substantially the same, continuous, or repeated acts. That is especially true here, where the 2006 rezoning decision and 2008 alterations in traffic flow were separated by two years.”
Finally, the court rejected AMIC’s contention that even if both policies were triggered, nothing in the reinsurance treaties prohibited AMIC from allocating all losses to the 2008 policy. As the court noted, allowing such allocation runs counter to the purpose of retention provisions in multiple distinct policies.
Comments
The decision illustrates the importance of policy language in the context of determining the number of acts or occurrences. AMIC’s argument in support of a single course of conduct was premised on the notion that the 2006 conduct and 2008 conduct were “related” or “interrelated.” However, as the court emphasized, the Wrongful Act provision did not include the word “related” or any other verbiage permitting the collapsing of multiple wrongful acts into a single act based on relatedness. Rather, that provision required “same or substantially the same or continuous or repeated” acts. While the world “related” appeared in a separate provision concerning the combined limits of coverage, that provision did not modify or replace the Wrongful Act definition.