Even for P&C professionals who deal with insurance contracts daily, risk management is often a complex game of contractual chess. A recent federal court case, SPARTA Insurance Company v. Pennsylvania General Insurance Company, serves as a cautionary tale about what happens when one side tries to change the rules mid-game. At the heart of this $75 million contract dispute is a crucial lesson: you cannot escape a written liability through silence and assumption, especially when the paper trail is crystal clear.
This dispute shows what can happen when a complex corporate restructuring and the collapse of a reinsurer put legacy contractual promises to a legal test.
The Setup: A Layered, Ironclad Promise
The story begins with two key agreements that created a multi-layered shield for SPARTA Insurance Company (SPARTA).
The 2005 T&A (Direct Liability): Pennsylvania General Insurance Company (PGIC) entered into a Transfer and Assumption Agreement with American Employers’ Insurance Company (AEIC), which SPARTA later acquired. In this agreement, PGIC explicitly assumed direct liability to administer and pay claims for AEIC policies issued before mid-2005. This wasn’t just a promise to reimburse; it was a direct assumption of the duty itself, making PGIC directly liable for the liabilities.
The 2007 SPA (Indemnity & Guarantee): Two years later, PGIC sold AEIC to SPARTA’s predecessor. The Stock Purchase Agreement for that sale didn’t erase the 2005 deal; it reinforced it, stating that the 2005 T&A remained in “full force and effect.” It added two more layers of protection: an indemnity clause requiring PGIC to cover SPARTA’s losses from those legacy AEIC claims, and an “absolute and unconditional” guarantee from PGIC’s parent company, OneBeacon Insurance Group (OBIG), backing all of PGIC’s obligations under both agreements.
This created a “belt-and-suspenders” situation for SPARTA: PGIC was directly liable for the claims, was contractually obligated to indemnify SPARTA for them, and a major guarantor backstopped the whole arrangement.
The Corporate Shell Game: An Attempt to Escape Liability
For years, things ran smoothly as the guarantor, OBIG, administered the old claims. But behind the scenes, the chess pieces were moving. In 2012, OBIG decided to sell PGIC to another company. To make the sale attractive, they wanted to turn PGIC into a “clean shell”—an insurer with valuable state licenses but no outstanding liabilities.
To achieve this, PGIC transferred all its liabilities, including its obligations to SPARTA, to its parent company, OBIG, via a new Transfer and Assumption Agreement. PGIC argued that this internal shuffle, combined with SPARTA’s subsequent conduct, resulted in an implied novation—effectively substituting OBIG for PGIC and releasing PGIC from the original promise forever.
Crucially, SPARTA was not a party to these 2012 agreements and never provided written consent to release PGIC from its massive obligations. PGIC never even asked for it.
The situation came to a head in March 2021 when the guarantor, OBIG (by then renamed Bedivere Insurance Company), was ordered into liquidation and stopped paying. SPARTA was forced to step in and began paying the AEIC claims, which quickly ballooned to over $75 million. When SPARTA turned to PGIC to fulfill its original promises, PGIC refused, claiming it had been a “clean shell” for nearly a decade.
The Court’s Ruling: Silence is Not Consent
PGIC’s defense rested on the idea that SPARTA was aware of the 2012 “clean shell” sale and, by not objecting and continuing to deal with OBIG, had implicitly agreed to release PGIC.
The court rejected this argument completely. The judge’s logic was blunt and served as a critical lesson in contract law.
You Can’t “Imply” Your Way Out of a Major Obligation: The court stated that releasing a party from a contract requires a “clear and definite intent”. PGIC couldn’t point to a single document or statement where SPARTA agreed to the change. The court found that SPARTA’s “mere acquiescence” to OBIG handling the claims was not the same as formally releasing PGIC from its underlying legal duty.
If You Want Assent, You Have to Ask: In a powerful rebuke, the court noted: “If PGIC wanted SPARTA’s assent to a novation, it could have simply asked for it. It elected not to ask… Instead, PGIC remained silent. And it now claims… that SPARTA’s silence is dispositive”.
The court granted summary judgment to SPARTA, affirming that PGIC’s obligations under both the 2005 and 2007 agreements remain valid and enforceable.
Two Paths to Victory, but One Procedural Pitfall
While the court confirmed PGIC’s liability, it also highlighted a critical distinction that provided SPARTA with two separate avenues for its claim.
The Direct Breach (2005 T&A): The court found that the 2005 agreement created a direct duty for PGIC to administer and pay claims. PGIC’s refusal was a straightforward breach of contract. SPARTA, as the successor to AEIC, could enforce this duty directly, independent of any procedures in the latter 2007 agreement.
The Indemnity Claim (2007 SPA): The 2007 agreement gave SPARTA a separate right to be indemnified for its losses. However, this right was tied to specific procedural requirements. SPARTA was required to provide notice of a claim via certified mail or overnight courier, giving PGIC the option to assume the defense. The court viewed this notice as a condition precedent—a mandatory step to unlock the right to indemnification.
This is where SPARTA hit a snag. The 2007 SPA also required that demands for payment include “reasonable detail” explaining the calculation. The court found this phrase to be ambiguous. What one insurance professional considers “reasonable,” another might not. This ambiguity created a question of fact that prevents a judge from awarding the full damages on summary judgment, meaning the exact amount PGIC owes under the SPA will have to be decided at trial.
Key Takeaways on Contract Drafting 📝
This $75 million legal saga offers four valuable lessons for anyone dealing with contractual risk transfer.
1. Get Explicit, Written Consent—Period: Never rely on implied novation, waiver, or a party’s silence to extinguish a significant liability. As PGIC learned the hard way, if you want to be released from an obligation, you must get the other party’s clear, unambiguous, written consent.
2. Structure Dual-Layered Protection: SPARTA’s position was immensely strengthened by having two distinct contractual rights: PGIC’s direct duty to pay (from the 2005 T&A) and its separate duty to indemnify (from the 2007 SPA). This dual structure proved essential when the guarantor collapsed.
3. Procedural Compliance is Not Optional: When an indemnity agreement specifies notice procedures (like method of delivery or the right to control the defense), treat them as gospel. Courts often interpret these as conditions precedent, and failure to follow them precisely can jeopardize your right to reimbursement.
4. Define “Reasonable” or a Jury Will Do It for You: The term “reasonable detail” created a factual dispute that is now holding up millions in damages. When drafting contracts, avoid ambiguous terms. Specify exactly what data, documentation, and formatting are required to substantiate a claim for reimbursement to avoid leaving it to a court to decide.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Throughout my legal career, I have argued numerous cases in the Massachusetts Supreme Judicial Court and assisted agents, insurance companies, and lawmakers with the complexities and nuances of insurance law in the Commonwealth.
Interested in contacting me? Call me directly at 617-598-3801.
