Treaty Tip: Is it an Insurance Policy or a Reinsurance Agreement?

Whether a risk shifting agreement is an insurance policy or a reinsurance agreement may have important consequences. For example, many states prohibit the mandatory arbitration of disputes arising out of insurance policies, while there is a history and industry custom of resolving many disputes arising out of reinsurance agreements through mandatory arbitration. If a reinsurance contract is interpreted to be an insurance policy disputes may not be subject to arbitration in some states, invalidating an important provision of the reinsurance agreement. A recent opinion found that a document titled a Facultative Reinsurance Agreement was in fact an insurance policy, and the court affirmed the denial of a motion to compel the arbitration of a dispute under the contract because applicable Missouri law prohibits the mandatory arbitration of disputes arising out of insurance policies. Leonberger v. Missouri United School Insurance Council , -- S.W.3d --, 2016 WL 2994332, No. ED103669 (Missouri Court of Appeals May 24, 2016).

The court’s analysis addressed the differences between a contract of insurance and a reinsurance contract, stating that an insurance contract provides indemnity against liability while a reinsurance contract provides indemnity against loss, with the reinsurer becoming liable only after the reinsured has paid the loss. The court found that certain provisions of the contract which permitted the “reinsurer” to participate in and exercise some control over the claims process and the accrual of liability to the underlying insurer transformed the reinsurance contract into a contract of insurance.