Munich Reinsurance America, Inc. v. American National Insurance Co.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Michael Fernandez

Date Promulgated: February 3, 2015

Munich Reinsurance America, Inc. v. American National Insurance Co., 601 Fed. Appx. 122 (3d Cir. 2015)

Court:  United States Court of Appeals for the Third Circuit

Issue Decided:  Whether a retrocedent’s failure to disclose information about its losses,
relationship with its cedent, unreported but expected claims, the break-even price for coverage, and the results of an audit support rescission?

Key Holdings
After a breakdown in their relationship, retrocedent sued its retrocessionaire for breach of contract. In turn, the retrocessionaire counterclaimed to rescind the reinsurance contracts on the ground that the retrocedent had not disclosed all material information about the risk it was insuring. Specifically, the retrocessionaire claimed that the retrocedent had not provided the independent underwriter with information about its losses, relationship with its cedent, the break-even price, the audit of new claims and the rate charged. Following a bench trial, the District Court held that while the retrocedent had withheld information from the retrocessionaire, the information was not material to the retrocessionaire’s decision to reinsure the risk, and that, therefore, the information was not required to be disclosed. The Court of Appeals affirmed, holding that a fact is material if, had it been disclosed, an objectively reasonable insurer or reinsurer would either have declined to write the policy or would only have done so at a higher premium. Additionally, material information only needs to be disclosed if a reasonable reinsured would know that it was material. The Court of Appeals affirmed the district court’s holding that none of the non-disclosed information met the standard for materiality. Even where the retrocessionaire asked for particular information, that information is only material if it “substantially thwarts” the retrocessionaire’s purpose in requesting that information. Since the requested, but not disclosed, information did not “substantially thwart” the retrocessionaire’s purposed in asking, it was not material.

Key Takeaways
The standard for materiality is quite high under New York law. Unless a reinsurer demonstrates that the nondisclosure of information would have affected a reasonable reinsurer’s decision to provide reinsurance coverage or that a failure to disclose information upon inquiry substantially thwarted a reinsurer’s purpose in requesting that information, a claim for rescission will not be successful.