Opinion ID: 697655
Heading Depth: 3
Heading Rank: 4

Heading: Renewal of the Treaties

Text: 26 The SANS Treaties were continuous contracts subject to cancellation upon 120 days prior written notice at December 31, 1980 or any subsequent December 31st. This allowed any desired adjustments to be made in the terms of the Treaties on a yearly basis. In practice, all of the retrocessionaires cancelled during the 120-day period preceding December 31, 1980 and then initialled new slips for the next calendar year. In order to induce renewal, Graham Watson, again through Hodson and the European sub-brokers, disseminated a document referred to as the 1981 Anniversary Information. In addition to listing losses in excess of $50,000 reported through September 30, 1980, and providing a summary of the business ceded thus far, the Anniversary Information included the following statements: 27 To date, the preponderance of the business has been assumed from First State Insurance Company and written on a pro rata basis. Non-System business represents a relatively small proportion of the total and what has been written is limited to Casualty business on an excess of loss basis emanating from Baccala and Shoop Insurance Services. 28 Because of the competitive climate in the United States, Non-System business will develop more slowly than originally anticipated. It continues to be the posture of Graham-Watson not to seek business on a wholesale basis but rather to develop close working relationship [sic] with selected primary sources. 29 On March 23, 1981, a meeting was held in Boston to discuss the performance of the SANS Treaties. In attendance were Ralph Bailey and several employees of Hodson and Graham Watson. One major topic of conversation was the inclusion of MGA business. Bailey asked the Graham Watson underwriters for their opinion of Baccala & Shoop, and was told by Bob Wright, the property underwriter, that Wright knew most of Baccala & Shoop's home office people and was comfortable with them. Later in the meeting, however, Bailey stated that he would not consider any new MGA business for the facility. He did not, however, make this a contractual requirement by inserting an exclusion for MGA business in the slip at the next renewal. 30 At the close of the second year, a 1982 Anniversary Information was disseminated, which again provided a list of losses and a summary of the business. This document also included figures as to overall loss experience through September 30, 1981, which disclosed that the SANS Treaties were losing money. Indeed, the loss ratio for the 1980 Treaties was an alarming 248.65 percent. 13 In addition, the 1982 Anniversary Information included the following statements: 31 The rating basis of these treaties is being amended with effect from 1st January 1982 to more accurately reflect the basis used by Graham-Watson. All business other than that assumed from the First State which is a system company is being written on a net rated basis in that Graham-Watson is quoting their price and if a ceding commission is required by the original company, this is then added to the premium required by Graham-Watson 32 ...The current sources of business is [sic] as follows:-- 33 FIRST STATE INS. CO. 34 TWIN CITY per Baccala and Shoop Insurance Services ST. PAUL FIRE & MARINE NORTHBROOK CRUM & FORSTER CNA 35 ROYAL INS. CO. CHUBB AND SON AETNA CASUALTY & SURETY 36 Plaintiffs point out defendants' failure to mention, other than in the case of Twin City, that certain of the listed primary insurers acted through Baccala & Shoop or other intermediary. 37 It appears that no formal anniversary information was prepared for 1983, the last year of the SANS Treaties, although letters were sent to the retrocessionaires containing a list of losses, a summary of the business, and notification of various changes that had been made over the past year, none of which are material here. However, the retrocessionaires were told that the treaties were continuing for 1983 basically as before. 38 Following the placing of the SANS Treaties, the plaintiffs at first accepted their shares of the premiums and paid their shares of corresponding losses incurred by NERCO. The losses were considerable, as they were throughout the insurance industry at this time. Beginning as early as the fourth quarter of 1982, however, certain of the plaintiffs ceased paying losses. 14 There was evidence that some of the plaintiffs (in addition to Terra Nova, through Bailey, as related above) began to inquire as early as 1982 about the use of MGAs to obtain business (rather than through the formation of direct relationships with primary insurers), and about the underwriting methods used by the defendants.