Nichols v. American Risk Management, Inc.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Michael Fernandez

Date Promulgated: November 18, 2002

Nichols v. American Risk Management, Inc., 2002 WL 31556384 (S.D.N.Y. Nov. 18, 2002)

Court:  United States District Court for the Southern District of New York

Issue Decided:  Whether a cedent’s insolvency has sufficient impact on the reinsurers’ risk to trigger the uberrimae fidei obligation to disclose?

Key Holdings
This decade’s long dispute was commenced by a Liquidator seeking to obtain payment of amounts due under retrocession agreements from the insolvent’s retrocessionaire which claimed that it was entitled to rescind the contracts because the retrocedent had failed to disclose its insolvency at the time it solicited the retrocessionaire’s participation. The court concluded that the retrocedent had sufficient reason to know it was insolvent based on, inter alia, calculations of its combined loss and expense ratio, including its INBR, by its own officials, and the audit results from an insurance regulator. Having concluded that the retrocedent failed to provide its retrocessionaire with material information concerning its financial condition (and, in fact, painted a bright financial picture), the court granted rescission. However, the court ordered the retrocessionaire to return the premiums it had received from the retrocedent, plus interest.

Key Takeaways
The failure of a cedent (or retrocedent) to disclose its insolvency may support a claim for rescission, because insolvency is a material fact which must be disclosed.