Mariah Re cat bond litigation appeal thrown out by 2nd circuit

The 2nd Circuit of the U.S. Court of Appeals has thrown out an appeal related to the contested payout of the Mariah Re Ltd. catastrophe bond, affirming that American Family Mutual Insurance does not have to pay any of the $100m back to reinsurance vehicle Mariah Re.

This litigation had originally been filed against American Family Mutual Insurance, the sponsor of the Mariah Re catastrophe bonds (Mariah Re Ltd. (Series 2010-1) and Mariah Re Ltd. (Series 2010-2)) and beneficiary of the reinsurance protection, as well as risk modeller AIR Worldwide and Insurance Services Office, Inc. (ISO).

It all relates to the triggering of the Mariah Re cat bonds, after severe thunderstorms and tornadoes caused it to become a total loss.

The litigation related to the classification of severe thunderstorm events under the terms of the cat bond. Two qualifying events had their classification changed, from non-metro to metro events, denoting that they affected the most built-up parts of a city. This caused the amount of qualifying losses to jump significantly taking the aggregate losses towards the exhaustion levels for the cat bond and increasing the loss to investors.

Mariah Re Ltd. filed a case claiming that the non-metro to metro change (for the 2010-1 series of notes we believe) was not part of the documented calculation process they were aware of for the Mariah Re cat bonds and that as a result the increased payout should not have been made.

That litigation was denied when the judge ruled that the case had no standing, saying that Mariah Re had tried to convert its loss into a game revolving around the contract wording and that the transaction documentation was deemed unambiguous.

Therefore the judge found no basis for the relief sought by Mariah Re’s liquidator and the claim, which wanted to claw back the $100m of losses it had paid to American Family, was thrown out.

The case then went to the 2nd Circuit of the U.S. Court of Appeals, as an appeal was filed by Mariah Re as it claimed that the District court judgement had misinterpreted the documentation and contracts associated with the catastrophe bond.

On June 30th the appeals court sided with the original decision, backing the District court judge’s view on the case. Three appeal court judges agreed that American Family, AIR and ISO had not breached their contract in the calculation process followed.

“We affirm the judgment of the district court for substantially the reasons stated by Judge Sullivan in his opinion of September 30, 2014,” the appeals court judgement explains.

Now thrown out by the appeals court it is to be hoped that the case of Mariah Re can be put to rest. In order to avoid similar issues arising with future cat bond payouts, deal structurers and lawfirms have been making calculation process documentation clearer as a result.

Improving the documentation associated with cat bonds, in order to avoid litigation over payouts wherever possible, is an example of the cat bond, ILS and reinsurance market responding well to any perceived issues in deal terminology.

In the relatively short time that catastrophe bonds have existed in the reinsurance market, documentation has been constantly improved as and when any need to be even more explicit or explanatory has arisen.

As the ILS market learns and matures it adapts to threats in order to protect both investors and sponsors. It is to be hoped that through this process the need for future litigation can be minimised.