Opinion ID: 697655
Heading Depth: 3
Heading Rank: 1

Heading: Semi-Automatic and Automatic Facilities

Text: 17 Another key issue in the present litigation stems from the fact that, during the annual periods covered by the Treaties, almost all of the non-system business that defendants produced, and shared with the plaintiffs, was underwritten using what are called semi-automatic facilities. (A facility is an agreement setting out, among other things, the rules under which a reinsurer will reinsure risks ceded by the other party.) Defendants insist that semi-automatic facilities were perfectly consistent with the representations in the slips and Treaties that the reinsurance to be ceded to plaintiffs would be business classified by the Reassured [NERCO] as Property and Casualty Facultative Assumed business. (Emphasis supplied.) Plaintiffs sharply dispute this. Calling facultative underwriting the fundamental material term in the SANS Treaties, the district court agreed with plaintiffs that the term facultative included only reinsurance that a reinsurer underwrites and negotiates with the primary insurer on a risk-by-risk individual certificate basis in advance, i.e., a certificate of reinsurance is issued for each risk after the reinsurer has first looked into and approved reinsuring that particular risk. 18 Under the semi-automatic method that defendants mostly used in underwriting non-system risks, defendants' underwriters did not evaluate risks one at a time in advance of the issuance of a policy of reinsurance on each risk. Instead, in contracts called Master Facultative Certificates (MFCs), NERCO agreed with an MGA, broker, or primary insurer that the latter entity could issue reinsurance upon risks of described types, and upon certain conditions and with certain limits, prior to defendants' underwriters' scrutiny and approval of the risk. After the reinsurance attached to each risk, however, the agent or ceding company would send to Graham Watson a risk bordereau--a document identifying and providing a summary of information as to that, and any other, risks reinsured within the reporting period. Graham Watson then had a brief period after receipt of the bordereau, for example 72 hours, within which to cancel the reinsurance on a particular risk if it so desired, cancellation to take effect within a specified period, say, 14 days. 19 Defendants contend, and presented evidence at trial, that the semi-automatic facility is commonly classified in the industry today as a form of facultative reinsurance. They concede that, in an earlier era, facultative was a term applied only to reinsurance individually underwritten on a risk-by-risk basis in advance of binding. But while accepting that the reinsurer's right to reject individual risks remains a general feature of facultative reinsurance, defendants contend that this feature is adequately preserved in the more economical and streamlined semi-automatic facility. 11 20 Defendants also used, in a few instances, a variation known as an automatic facility. Under this type of facility, rather than having the right to cancel an individual risk, the reinsurer has the right to cancel the entire facility on very short notice. Even without the right to cancel a particular risk, defendants argue that this was facultative, since the reinsured would, as a practical matter, agree to cancel individual risks rather than face cancellation of the entire facility. Moreover, the reinsured retained the freedom to cede or not to cede a particular risk, which is not the case in treaty reinsurance. Automatics comprised only a small portion of the non-system business, most of which was underwritten using semi-automatics.