In TIG Insurance Co. v. Aon Re, Inc., Case No. 05-11450 (March 13, 2008), the Fifth Circuit Court of Appeals, applying Texas law, held that the discovery rule did not toll the statute of limitations applicable to a cedant’s claim against its reinsurance broker. Ruling that the broker’s alleged failure to provide full information to a potential reinsurer should have been known by the cedant, the Fifth Circuit affirmed the trial court’s grant of summary judgment in favor of the broker. Id. at 8.
The dispute arose from TIG’s desire to reinsure some workers’ compensation policies written by TIG and to retrocede some workers’ compensation risks written by Virginia Surety Company and reinsured with TIG. Id. Generally, TIG would retain liability for workers’ compensation claims up to $1 million with the reinsurer/retrocessionaire to provide excess cover for losses over $1 million. Id.
TIG retained Aon Re, Inc. to solicit and negotiate proposals for reinsurance. Id. TIG provided Aon Re with information about TIG’s workers’ compensation business, including historical loss data for the Virginia Surety business. Id. Using the information provided, Aon Re put together a package of underwriting information to provide to prospective reinsurers. Id. In May of 1998, Aon Re sent information to WEB Management LLC, which was acting as an agent for United States Life Insurance Co. (“U.S. Life”). Id. According to Aon Re, this information included a “Claims Diskette” containing historical loss data for Virginia Surety dating back to 1994. Id.
TIG met with Aon Re in June of 1998 to discuss the quotes received. Id. TIG was interested in the quote from U.S. Life, although TIG personnel were concerned that the quote was too low compared to others. Id. Some at TIG believed that Aon Re may not have provided complete loss information to U.S. Life. Id. In fact, TIG’s actuary criticized Aon Re’s submission, believing that it may have been incomplete. Id. Despite these concerns, TIG accepted U.S. Life’s offer on June 29, 1998, binding coverage effective April 1, 1998. Id. The parties executed a reinsurance treaty, signed by TIG on October 6, 1998, and by U.S. Life’s agent on its behalf on November 12, 1998. Id. The treaty covered losses for three years beginning April 1, 1998, subject to cancellation at any time by TIG. Id.
On January 1, 1999, TIG cancelled its treaty with U.S. Life prospectively, allowing it to continue in force to cover claims arising out of losses occurring between April 1, 1998 and January 1, 1999. Id. Despite the treaty’s continuing effect for such losses, U.S. Life stopped paying claims in the summer of 2001. Id. at 2. TIG demanded arbitration under the treaty, demanding payments of nearly $9 million. Id. In the arbitration, U.S. Life claimed that it had the right to rescind the treaty because Aon Re, as TIG’s agent, had provided U.S. Life with materially incomplete information. Id. The arbitration panel found in favor of U.S. Life, specifically finding that Aon Re had omitted information regarding the Virginia Surety historical loss data. Id.
Following the arbitration decision, TIG filed suit against Aon Re, claiming negligence, negligent misrepresentation, breach of fiduciary duty, and seeking common law indemnity. Id. Aon Re moved for summary judgment, arguing that: (1) the negligence, negligent misrepresentation, and breach of fiduciary duty claims were barred by the statute of limitations; (2) the discovery rule does not apply to defer accrual of these causes of action; and (3) TIG’s common law indemnity claims failed as a matter of law. Id. The trial court agreed with Aon Re, granting its motion for summary judgment on all three issues. Id. TIG then appealed these decisions to the Fifth Circuit Court of Appeals. Id.
The Fifth Circuit began by analyzing Aon Re’s statute of limitations defense. Id. at 3. Applying Texas law, negligence and negligent misrepresentation claims must be brought not later than two years after the cause of action accrues. Id. Breach of fiduciary duty claims must be brought not later than four years after the cause of action accrues. Id. TIG claimed that it did not suffer any legal injury until the arbitration panel’s decision rescinding the treaty on May 5, 2004. Id. Aon Re, however, contended that TIG’s causes of action accrued in June of 1998 when the parties agreed to the reinsurance treaty. Id.
The Fifth Circuit agreed with Aon Re, finding that a legal injury to TIG occurred when TIG entered into the treaty, because the treaty was defective from its inception as a result of Aon Re’s misrepresentations. Id. Despite TIG’s belief that it could not have sued Aon Re prior to the arbitration, because it had not yet suffered any damages, the Fifth Circuit noted that Texas law provided an avenue for TIG to seek relief: it could have filed a negligence suit, and then abated that suit until any proceedings against third parties are commenced and resolved. Id. at 4. No matter how slight, the legal injury suffered by TIG entering into the reinsurance treaty provided the basis for its causes of action against Aon Re to accrue. Id. Accordingly, the Fifth Circuit affirmed the trial court’s finding that TIG’s causes of action accrued in June of 1998. Id.
The Fifth Circuit also rejected TIG’s contention that the “discovery rule” tolled the statute of limitations for TIG’s claims. Id. at 5. Under the discovery rule, a cause of action does not accrue, and the statute of limitations does not begin to run, until a plaintiff knows, or through exercising reasonable diligence should have known, of the facts giving rise to a cause of action. For the discovery rule to apply, the nature of the injury must be inherently undiscoverable and the injury itself must be objectively verifiable. Id. This rule is applied categorically. That is, although a particular injury may not have been discovered, if it is of the type of injury that could be discovered, the discovery rule will not apply under Texas law. Id. at 6.
In the present case, the Fifth Circuit found that the injury suffered by TIG was not inherently undiscoverable. Id. at 7. As the injury was the consummation of the reinsurance treaty with U.S. Life, TIG could have discovered the misrepresentation by Aon Re had it exercised reasonable diligence. Id. at 6. Although the discovery rule has been applied in cases where one party is relying on another for expertise it does not possess, such as with an accountant or attorney, TIG did not rely on any superior expertise or superior knowledge from Aon Re to obtain reinsurance coverage. Instead, TIG used Aon Re as an intermediary. Id. at 7. Because the injury to TIG was not inherently undiscoverable, the Fifth Circuit affirmed the trial court’s decision not to apply the discovery rule to toll the statute of limitations. Id.
Lastly, TIG claimed that the trial court erred in finding that its common law indemnity claim against Aon Re failed as a matter of law. Id. TIG sought to recover from Aon Re those unreinsured liabilities attributable to the Virginia Surety portion of its business and to recover the costs and expenses of its arbitration with U.S. Life. Id. Under Texas law, “only a vestige of common law indemnity remains,” and this vestige includes only purely vicarious liability. Id. However, any vicarious liability TIG may have had from the tortious misrepresentation by Aon Re was extinguished when U.S. Life chose in the arbitration to forego any claim for damages and seek only the equitable remedy of rescission. Id. With no vicarious liability for the wrongs of Aon Re, TIG could not prevail on a claim for common law indemnity. Id. at 8. No Texas court has applied common law indemnity to a claim for damages sustained from a rescission, and the Fifth Circuit chose not to “expand state law beyond its presently existing boundaries.” Id.
Benjamin T. Erwin is an associate in the firm’s insurance/reinsurance dispute resolution group. Mr. Erwin received his bachelor’s degree from University of Georgia and his law degree from Duke University School of Law.