Pennsylvania Supreme Court Issues Ruling with International Implications Granting Policyholders of Defunct Insurer Direct Access to Reinsurance

In a decision that has been eagerly anticipated by policyholders, insurers and reinsurers, on July 19, the Pennsylvania Supreme Court issued a per curiam order affirming the June 23, 2003, 89-page opinion and order of Judge Mary Hannah Leavitt of the Pennsylvania Commonwealth Court in which Judge Leavitt held, following trial, that Morgan Lewis client American Airlines, Inc. had proven a contractual right to direct access to reinsurance that had been issued to Legion Insurance Company (in liquidation) for the benefit of American. The decision means that American Airlines has direct access to up to $225 million of reinsurance.

Judge Leavitt ruled that American proved that reinsurance issued by certain Underwriters at Lloyd’s of London was intended to benefit American, and that the relevant agreements between American, Legion and the Lloyd’s syndicates provided for direct payment of claims to American in the event Legion became insolvent. Judge Leavitt further ruled that a policyholder’s right to direct access to reinsurance must be determined on a case-by-case basis, taking into account the nature of the agreements between the parties and their performance under the contracts. In affirming the Commonwealth Court’s ruling in favor of American and other policyholders, the Supreme Court rejected claims by the liquidator, and many insurers and reinsurers, that Judge Leavitt’s decision was inconsistent with established reinsurance law and that it would overturn 300 years of precedent.

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