Judge rejects ‘back to back’ presumption

A NSW Supreme Court judge has ruled insurer-reinsurer treaties should not automatically be considered “back to back” with policies.

Justice Robert McDougall made the ruling in a complex dispute between MetLife and RGA Re over RGA’s refusal to cover about 250 total & permanent disablement (TPD) claims paid to NSW police.

Two police officers whose claims were used as tests in the hearing had been declared TPD after being diagnosed with post traumatic stress disorder (PTSD).

The police were insured under a ‘blue ribbon’ group policy. On 23 June 2003, MetLife and RGA made a reinsurance treaty, effective from 5 February 2003, in which RGA agreed to reinsure MetLife’s liabilities under group life policies issued in a prescribed form set out in appendix A to the treaty. The treaty provided also that MetLife could seek, and RGA could offer, reinsurance for group life policies in other forms.

In December 2005, MetLife and FSS Trustee Corporation entered into the blue ribbon policy, which was not in the form of appendix A and thus not automatically reinsured under the treaty. The policy’s start date was 1 July 2005.

In December 2006, MetLife and RGA made an agreement, described as addendum four, to the treaty under which, effective from 1 July 2005, RGA agreed to reinsure MetLife’s liabilities to FSS under the blue ribbon policy.

When MetLife sought coverage for the 250 claims, RGA denied liability under the addendum’s “initial event” sentence, which stipulated claims were not automatically covered if the initial event that sparked the TPD claim occurred before 1 July 2005.

RGA also argued it was entitled to “consider its position” on TPD claims that exceeded an agreed $250,000 limit.

(The parties had separate arguments about whether there were one or two reinsurance contracts and whether the effective date was the start of the treaty or the addendum, but Justice McDougall was not deciding those matters.)

MetLife argued reinsurance agreements were presumed “back to back” and reinsurers should meet all approved claims paid by insurers. Its counsel argued that to do otherwise would “effectively [redefine] the entire nature and extent of reinsurance and create a massive schism in [how] reinsurance provides any measure of back-to-back coverage”.

MetLife argued the initial event sentence referred to the automatic limits, not a cover restriction. If it had intended to exclude some claims, it would have been more specifically worded.

But Justice McDougall supported RGA’s interpretation, saying: “The presumption that a contract of reinsurance should be back to back with the underlying contract of insurance is a presumption, or rule, of construction, but not a rule of law. If it were clear, on the proper construction of the reinsurance contract, that it was not back to back with the underlying contract, then the presumption could not dictate otherwise.
“The language of the contract should not be distorted or disregarded so as to give effect to the presumption.”

Justice McDougall said the addendum was not back to back with the underlying policy. The initial event sentence meant RGA was not obliged to consider any claim where the incident that triggered the TPD occurred before the contract took effect.

RGA “has no obligation” to follow MetLife’s settlement decisions without review, Justice McDougall said.

He agreed the drafting of addendum four “appears to be informal and lacking in rigour”, but that “could not warrant the excision or reading down of the words the parties used”.

Clause 12 of the treaty presupposed the reinsurance would be back to back with the underlying insurance. “But, where an amendment to the treaty breaks that nexus (as addendum four does), the force of clause 12 is diminished.”

Justice McDougall said MetLife’s counsel argued that adopting RGA’s interpretation meant a “profoundly uncommercial” result, but he rejected that view.
“The only evidence of the extent of any carve-out is that about 250 claims are affected. Whether the number or value of those claims is significant, compared to the total number of TPD claims based on mental illness-related causes, is unilluminated by any evidence.”

Justice McDougall said if the initial event sentence did no more than require RGA to “consider” claims falling above the claims handling limits, it would be entirely superfluous.

“I do not understand why the ‘consideration’ of which the initial event sentence speaks should be bifurcated. The immediately preceding sentence makes it clear that, for claims in excess of the claims handling limit, RGA is required to pre-approve any payments made. That must mean RGA is required to consider the claims – no doubt, in good faith – to decide whether they fall within the terms of the policy.

“However, since RGA can only be obliged to do so where the causal conditions stipulated in the initial event sentence are satisfied, the argument seems to me to go nowhere.”

(MetLife Insurance Ltd v RGA Reinsurance Co of Australia Ltd [2016], NSWSC 980, judgement 15/07/2016)