A Precedent-Setting Russian Case May Force Reinsurers to Pay Beyond the (Original) Reinsurance Term

In a precedent-setting case, Russian courts (including the Russian Federation Supreme Arbitrazh Court) ordered Infrassure, a Swiss reinsurer, to pay US$34.4 million to its reinsured, a Russian subsidiary of Allianz (formerly ROSNO).

In December 2008, ROSNO and RusHydro (the original insured) executed an insurance contract that required ROSNO to reinsure its risks. The contract was governed by Russian law. ROSNO obtained reinsurance from a pool of reinsurers that included Infrassure providing 17.2 percent of the original coverage. Under the relevant reinsurance slip, the term of reinsurance was from January 1 through December 31, 2009.

As a result of an accident at RusHydro's Sayano-Shushenskaya Electric Power Plant on August 17, 2009, three hydroelectric generators were destroyed and the remaining seven hydroelectric generators were damaged. ROSNO, which insured the equipment for up to US$200 million, recognized the incident as an insurable event in February 2010 and paid out the full amount of loss between February and July 2010.

Later in 2010, all reinsurers paid their share in the reinsurance coverage to ROSNO except for Infrassure. Infrassure paid only US$11.4 million in December 2010 and rejected ROSNO's claim for the remaining US$23 million.

When ROSNO sued Infrassure in court, the latter denied its obligation to pay the reinsurance claim and made a counterclaim seeking reimbursement of the previously paid US$11.4 million. Infrassure argued that under the reinsurance slip, the insured risk was defined as payment by ROSNO under the original insurance to RusHydro, which was made in 2010 beyond the expiry of the reinsurance term.

Russian trial and appellate courts ruled in favor of ROSNO, having concluded that the acceptance by Infrassure of all risks and liability terms, "as defined in the original insurance policy" in the reinsurance slip, amounted to incorporating the terms of the underlying insurance contract by reference. Since the insured event was acknowledged and insurance coverage paid by ROSNO in compliance with the terms of the underlying insurance contract, Infrassure had no grounds to claim that ROSNO's payment beyond the reinsurance term released Infrassure from payment to ROSNO of its full share of reinsurance coverage.

Earlier in 2013, Allianz applied to the Federal Supreme Court of Switzerland seeking enforcement of the Russian court order against Infrassure. Infrassure challenged Allianz's enforcement application, alleging inter alia bribery in the context of Russian court proceedings.

A decision of the Federal Supreme Court of Switzerland to enforce the Russian court's decision would set out an important precedent. In the absence of a bilateral legal assistance treaty between Russia and Switzerland, such a precedent would potentially "open the gates" for enforcement of Russian court decisions in Switzerland, and likewise the Swiss court decisions could potentially be enforced in Russia on the basis of reciprocity. Switzerland's position as one of the most significant global centers for insurance and reinsurance would amplify the impact of decisions. From a policyholder's perspective, if your coverage is in any way dependant on your insurer's ability to collect on its reinsurance, these are clearly developments to watch.

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