Davis Polk Successfully Represents AIR Worldwide Corporation and ISO Services, Inc. in a Breach of Contract Lawsuit Regarding $100 Million in Reinsurance “Catastrophe Bonds”

On October 1, 2014, the U.S. District Court for the Southern District of New York granted a motion to dismiss all of the claims brought by plaintiff Mariah Re Ltd. (“Mariah”) against two subsidiaries of our client Verisk Analytics, Inc.: ISO Services, Inc. (d/b/a Property Claim Service, or “PCS”) and AIR Worldwide Corporation (“AIR”).  Mariah is a special purpose vehicle established for the sole purpose of providing reinsurance (i.e., insurance on insurance), to American Family Mutual Insurance Co. (“American Family”), covering certain losses that might be suffered by American Family’s policyholders resulting from defined types of severe weather events—up to $100 million, if certain loss thresholds were met.  This reinsurance was funded by the sale to investors of a financial instrument known as a “catastrophe bond,” the profitability of which depended on the occurrence or non-occurrence of the severe weather events, and the way those events were reported. 

PCS was retained to provide access to proprietary information it regularly published regarding catastrophic insurance claims, here specifically relating to losses caused by severe weather, which went by the name of Catastrophe Bulletins.  AIR was retained to calculate the amounts owed by Mariah to American Family in reinsurance proceeds under the bonds in the event that severe weather losses exceeded certain specified thresholds.  Notably, the formula defined in the agreements for this calculation provided that the amount of payout would primarily depend on whether PCS’s Catastrophe Bulletins reported claims in rural or “metro” areas.  As it turned out, the catastrophic insurance claims exceeded the thresholds, mainly as a result of one particular storm (identified by PCS as “Catastrophe 42”), and American Family received all the proceeds of the bonds.  Mariah brought suit, claiming that PCS and AIR had breached their agreements in identifying and calculating the relevant insurance claims and reinsurance proceeds relating to this storm, and that American Family was unjustly enriched when it received the reinsurance payout.

It is undisputed that Catastrophe 42, which took place from April 3 to April 5, 2011, caused severe weather-related damage in several states, including Kansas, a state covered by the reinsurance agreement.  Mariah disputed, however, the way the damage was reported by PCS, including particularly the addition, after publication of its “final” damage estimates, of information identifying specific metro counties where damage occurred.  Mariah also disputed AIR’s reliance on this additional geographic information to categorize the storm in Kansas as a “metro event” under the contracts qualifying for the higher “metro” payout factor.  Mariah alleged, generally, that these decisions had been taken as part of an ill-defined conspiracy with American Family to “wipe out” Mariah by ensuring the full $100 million in the vehicle would be paid out as reinsurance proceeds to American Family. 

Davis Polk argued that, under the relevant contracts, PCS was afforded significant discretion in determining how to report severe weather events, and that AIR was entitled to rely on PCS’s reporting.  Moreover, nothing in the contracts prevented PCS from amending a Catastrophe Bulletin after its initial publication, particularly given that the added information was undisputedly accurate.  The court endorsed these arguments, finding in our clients’ favor on every point:

At bottom, the Reinsurance Scheme formulated by the parties was a highly sophisticated and integrated set of agreements whereby investors and insurers gambled on the likelihood and severity of catastrophic weather events. . . .  Having gambled and lost on the weather – and there appears to be no dispute that Catastrophe 42 was a “severe” weather event that “ranks as one of the top [weather] outbreaks of all-time” – Mariah now attempts to convert its unsuccessful risk venture into a game of “gotcha” on the contracts.  Unfortunately for Mariah, the documents themselves are unambiguous and provide no basis for the relief sought in the Amended Complaint.

The Davis Polk litigation team included partner Joel M. Cohen, associate Matthew B. Rowland, and former associates Richard R. Barker and Caroline Ferris White.  Members of the Davis Polk team were based in the New York and Washington DC offices. 

American Family was represented by Choate Hall & Stewart LLP.  Plaintiff Mariah was represented by Kobre & Kim.