Audit, Compliance and Risk Blog

Insurance Law: Why Insurers Must Read Their Agreements

Posted by Barry Zalma on Wed, Oct 31, 2012

understanding insurance lawInsurance Law is often complex and the consequences for insurers, and reinsurers, of not fully understanding the agreements they enter into can be costly. As the following case illustrates, failure to read and understand a contract between two equal parties is no excuse.

The Case

The Connecticut Court of Appeal was asked to resolve a dispute between an insurance holding company and a reinsurer in Trenwick America Reinsurance Corporation v. W. R. Berkley, No. (AC 33388) (Conn.App. 10/23/2012). Trenwick is a reinsurance company and Berkley is an insurance holding company, both located in Connecticut. At various times prior to September 3, 2004, Trenwick entered into reinsurance agreements with the defendant and its subsidiary insurance companies. The reinsurance agreement obligated Trenwick to reinsure certain liabilities of Berkley’s insurance companies. More specifically, in exchange for premiums paid by Berkley, Trenwick agreed to pay a stated percentage of the defendant’s insurance companies’ losses, claims and other expenses.


Trenwick and Signet Star, a reinsurance subsidiary company of Berkley, entered into an agreement on June 10, 1999, referred to as Special Casualty and Accident Reinsurance Facility (SCARF II). The trial court noted that SCARF II obligated Trenwick:

“to accept a ten percent part of sixty percent of Signet Star’s overall losses under the program, in exchange for a corresponding quota share (ten percent) of the premiums that Signet Star collected." As part of SCARF II, the plaintiff also “agreed to accept a 20 [percent] participation of the employer’s liability [for the workers' compensation claims] part of the program.”

On or about September 3, 2004, Trenwick and Berkley entered into a commutation and release agreement (commutation agreement). By its terms, the commutation agreement referred to Trenwick as the “Reinsurer”, and Berkley, its subsidiaries and affiliates collectively were referred to as the “Company.” The commutation agreement’s stated purpose was to:

“fully and finally terminate, release, determine and fully and finally settle, commute and extinguish all [the parties'] respective past, present, and future obligations and liabilities, known and unknown, fixed and contingent, under, arising out of, and/or pursuant to the [r]einsurance [a]greements…”

The Commutation Agreement

The commutation agreement defined “reinsurance agreement” in the following paragraph:

“Whereas, the [p]arties have entered various reinsurance agreements pursuant to which the Reinsurer reinsured certain liabilities of the Company and/or the Company reinsured certain liabilities of the Reinsurer (such agreements and all other agreements entered into in connection or relating to such agreements are referred to herein collectively as the [r]einsurance [a]greements) . . . .” The commutation agreement required Trenwick to make a payment of $15,248,338 to Berkley “in full satisfaction of the Reinsurer’s past, present and future net liability under the [r]einsurance [a]greements...”

The commutation agreement provided that each party:

“represents to the other as follows: (a) it has had full opportunity to consult with its respective attorneys in connection with the negotiation and drafting of this [a]greement; (b) it has carefully read and understands the scope and effect of each provision contained in this [a]greement; (c) it has conducted all necessary due diligence, investigation and analysis of the transactions contemplated by this [a]greement; and (d) it is not relying upon any representations made by any other party, its attorneys or other representatives.”

Following the execution of the commutation agreement, from September 3, 2004 until approximately June, 2008, Trenwick continued to make payments pursuant to SCARF II. Likewise, during that time, Berkley continued to make premium payments to the plaintiff, totaling approximately $56,000. Between 2006 and 2008, however, Trenwick began falling behind on its SCARF II payments and the SCARF II administrator began pressing Trenwick for the past due payments.

In January, 2008, Stephen Eisenmann became an executive vice president and officer of Trenwick. Eisenman reviewed the agreement and concluded that it commuted SCARF II and therefore Trenwick had no obligation to make payments to the defendant, pursuant to SCARF II, after the commutation agreement went into effect on September 3, 2004. Eisenmann determined that the agreement was global, thereby commuting all reinsurance agreements between Trenwick and Berkley, including SCARF II, as of the effective date of the commutation agreement. Trenwick stopped making further payments under SCARF II and sought a return of the sum of $451,006.72, an amount it believed it had unnecessarily paid to the defendant pursuant to SCARF II. Berkley disagreed with Eisenmann’s conclusion that the commutation agreement commuted SCARF II and that the money paid following the execution of the commutation agreement should be returned.

Trenwick then instituted an action seeking a declaration that the commutation agreement commuted SCARF II.  Following a bench trial, the court held as to count one that the commutation agreement did, in fact, commute SCARF II. As to count two, the court held that the restitution sought by the plaintiff was barred pursuant to the voluntary payment doctrine.

A Mutual Mistake

If a contract is entered into as a result of a mutual mistake it can be reformed to fulfill the intent of the parties. Berkley sought such reformation. However, reformation of a contract in Connecticut rests on the equitable theory that the instrument sought to be reformed does not conform to the real contract agreed upon and does not express the intention of the parties and that it was executed as the result of a mutual mistake. Before a court can reform a contract for a mutual mistake it must be established that both parties agreed to something different from what is expressed in writing, and the proof on this point should be clear so as to leave no room for doubt.

The contract was drafted and signed by an officer of Berkley who was experienced in such matters. In fact, in the commutation agreement itself Berkley affirmatively represented that it had read and understood the commutation agreement and that it was not relying on any representations outside of the contract. In addition, the commutation agreement states in multiple places that it fully and finally terminates all of the parties’ reinsurance relationships.

It is clear from the provisions of SCARF II that it falls squarely within the definition of reinsurance. Finding the commutation agreement not ambiguous the court of appeal concluded there was no basis to reform the agreement.

When the parties stand on an equal footing—each having access to his own copy of the written contract upon the true interpretation of which the existence of a debatable legal obligation depended—they cannot claim they were deceived.  When the parties to a written contract stand on an equal footing as to means of knowledge of their contract obligations, any money paid by one to the other in part performance of the contract, in response to a claim made in good faith and based upon a permissible but erroneous construction of the contract, cannot be recovered back as money paid under a mistake of law.

The trial court found that, prior to Trenwick’s realization that its obligations under SCARF II were relieved by the commutation agreement, it had accepted premium payments from Berkley. In like manner, Trenwick paid policy claims to the administrator of SCARF II, which were then remitted to Berkley’s subsidiary, Signet Star. Thus, both parties were carrying out their obligations pursuant to the agreement as they understood them and the benefits bargained for by one party were in direct proportion to the benefit conferred on the other, as contemplated in SCARF II. For four years Trenwick and Berkley, erroneously, but in good faith, believed that the obligations of SCARF II remained in effect notwithstanding the commutation agreement, and, during that time period, both parties performed their respective obligations and conferred anticipated benefits on each other, as they believed them to be.

Accordingly, the court of appeal found that there was no evidentiary foundation for the court to have determined that one party had been unjustly enriched at the expense of the other. On that basis, it agreed with the trial court’s conclusion that restitution was not appropriate.


Although contracts dealing with insurance are often construed against the drafter, because of the unequal bargaining power of the parties, when two insurers deal with each other the court will treat them as equals and will not weigh one against the other.

These two insurers both had the knowledge and power to understand the terms and conditions of the commutation agreement. Trenwick found it erred in believing it needed to honor SCARF II and, when it then insisted that the commutation agreement must be enforced, it was correct. Berkley, who had no excuse for not understanding the contract it drafted, could not have it changed to keep SCARF II in force.

The lesson: failure to read and understand a contract between two equal parties is no excuse.

About the Author

Barry ZalmaBarry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and is the author of Insurance Claims: A Comprehensive GuideMold: A Comprehensive Claims Guide, and Construction Defects: Litigation and Claims.

Barry Zalma can be reached at any time at 310-390-4455 or by e-mail at You can also visit his website or his blog.