A recent court decision has highlighted the presence of multiple sources of credit risk in protected cell structures, according to a Fitch Ratings report.
The report focuses on a recent decision in the federal court case, Pac Re 5-AT v. AmTrust North America.
Pacific Re is a protected cell company (PCC) domiciled in Montana. Its cell, Pac Re 5-AT, was the subject of a captive reinsurance agreement with AmTrust North America.
According to Fitch, disputes arising from the reinsurance agreement were supposed to be settled by arbitration.
When AmTrust sent a demand for arbitration, it named Pacific Re and the cell as parties. They subsequently filed for declaratory judgement in US district court demanding that Pac Re 5-AT’s name be dropped from the dispute.
The US district court ruled that Pac Re 5-AT is not a separate legal entity from Pacific Re and so could not be sued individually. Pacific Re was to remain the sole party in the arbitration.
According to Fitch, the failure of a protected cell’s PCC could cause disruption or financial pressure for the protected cells in the PCC. If this is the case, the prospective cell sponsors should consider the creditworthiness of the PCC when forming a protected cell.
