Members of Risk Purchasing Group Win Direct Access to Reinsurance
July 21, 2005
By: Terence P. Cummings

On July 19, 2005, the Pennsylvania Supreme Court ruled in favor of Psychiatrists' Purchasing Group, Inc. ("PPG"), affirming a June 23, 2003, opinion and order of Judge Mary Hannah Leavitt of the Pennsylvania Commonwealth Court in which Judge Leavitt held, following an evidentiary hearing, that PPG was entitled to direct access to reinsurance issued to defunct insurer Legion Insurance Company. Ohrenstein & Brown partner Terence Cummings represented PPG at the evidentiary hearing and argued the appeal before the Pennsylvania Supreme Court.

This much anticipated decision will affect the way in which insurers and their reinsurers enter into so-called fronting relationships in which the insurer transfers substantially all of its direct insurance risk to a reinsurer in connection with a specific book of business. Judge Leavitt found that the members of PPG were the intended beneficiaries of millions of dollars of proceeds under reinsurance policies issued to Legion by Transatlantic Reinsurance Company, noting that, through an intermediary, PPG negotiated the reinsurance directly for itself in connection with the fronting arrangement. As a result, Judge Leavitt ruled that the proceeds of the reinsurance were not assets belonging to Legion that could be reached by Legion's other creditors when Legion became bankrupt.

The Pennsylvania Supreme Court affirmed Judge Leavitt's decision by a five to two majority. "This decision will enable dozens of Legion's policyholders who were similarly situated through fronting arrangements to seek direct access to reinsurance proceeds, thereby avoiding the limitations and time delays of state insolvency funds," Cummings said. "It is also likely to affect the way fronting arrangements are structured going forward, both in terms of the contractual arrangements and the activities in which reinsurers engage vis a vis direct policyholders." he added.

PPG is a risk purchasing group that traces its history back to 1988. Approximately 7,000 psychiatrists and other mental health providers obtain professional liability insurance through the group. The case is a good example of one of the benefits of the federal Liability Risk Retention Act. "Had Congress not enacted this landmark legislation in 1986, these individuals would almost certainly not have had a vehicle through which to press their claims to direct access to reinsurance after Legion became insolvent," said Cummings. PPG was one of four policyholders that intervened in the Legion insolvency proceedings to seek direct access to reinsurance proceeds. American Airlines, Pulte Homes, Inc. and Rural Metro Corporation were the other three policyholders permitted to intervene. It is anticipated that other Legion policyholders will now follow suit.

The opinion of Judge Leavitt that was affirmed by the Pennsylvania Supreme Court is reported at Koken v. Legion Ins. Co., 831 A. 2d 1196. Mr. Cummings may be reached at (212) 682-4500 or at terry.cummings@oandb.com.