22 June 2015Law & regulation

Montana case becomes leading authority on PCC: Hassans

A recent decision by the Montana Federal Court is now the leading global judicial authority on the subject of protected cell companies (PCC).

This is according to Nigel Feetham, a partner at Hassans, whose reference book, ‘Protected Cell Companies: A Guide to Their Implementation and Use’, was cited in the case. The Montana Federal Court analysed the legal status of PCC’s in Pac Re 5-AT v AmTrust North America.

“Surprisingly, there have been less than a handful of reported court cases on the subject anywhere in the world and until recently none where a court has considered in detail the legal status of a protected cell company,” said Feetham.

Essentially the question before the court was who was the proper party to a contractual dispute concerning a PCC.

He added: “In a declaratory judgment action arising out of a demand for arbitration by one party to another under a captive reinsurance agreement, the court held that the protected cell under the applicable local legislation was not a separate legal person from the protected cell company, did not have capacity to sue or be sued in its own name, and that since the protected cell had acted on behalf of the cell on a captive reinsurance agreement, accordingly the protected cell company was a proper party to the dispute. As Judge Ostby pointed out, although the underlying issues in the arbitration was complex, the issue before the court was relatively simple.”

According to Feetham, the court had no difficulty in reaching its decision: it analysed the legal status of a protected cell company in detail and held that a protected cell did not have a separate legal identity. In addition, absent a statutory grant to the contrary, a protected cell did not have the capacity to sue and be sued independent of the PCC.

“Consequently, the motion for summary judgment was granted to the cedant and the captive reinsurer was held to be the proper party to the arbitration,” he explained.

Feetham said: “Based on the clear words of the relevant statute and reasoned analysis of the concept of the 'protected cell', the argument that the proper party to the arbitration could be anyone other than the protected cell company itself was doomed to failure from the outset.

“For years, however, the industry has been concerned that a court might view the cellular structure as a complex Gordian knot and use its judicial sword to cut through it without proper legal consideration of the situation presented. Instead in this case, it is gratifying to see that Judge Ostby (unlike Alexander the Great) patiently and intelligently untangled the knot by hand, in accord with long-standing insurance industry practice whilst leaving the cellular structure intact.”