FIO ISSUES REPORT ON GLOBAL REINSURANCE MARKET AND ITS IMPORTANCE TO THE U.S. INSURANCE INDUSTRY

On December 31, 2014, the Federal Insurance Office (FIO) issued a report entitled “The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States.”  The report was prepared pursuant to the Dodd-Frank Act.  It provides an overview of the history, forms, and purposes of reinsurance, the U.S. regulatory framework governing reinsurance, and the global reinsurance market.  The report analyzes the important role that global reinsurers play to U.S. insurance industry generally.  It does not, however, purport “to analyze the extent to which reinsurance or any particular reinsurer could be systemically important.”

The report discussed two roles of the federal government in the reinsurance market.  First, it mentions that the Dodd-Frank Act contains several provisions relating to the oversight of reinsurance.  It is noted that the approach of those provisions is “to enhance uniformity in the state-based insolvency regulation of insurers and reinsurers by increasing deference to the state in which the reinsurer is domiciled or licensed.”

Second, it discusses some of the history of credit for reinsurance collateral reform, and mentions that efforts by the NAIC to achieve uniformity with respect to this area through a Model Act have not been successful.  The report states that the Treasury Department and the United States Trade Representative are considering exercising their authority to enter into an international agreement  concerning this issue, which would preempt inconsistent state laws.

This post written by Michael Wolgin.

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ILLINOIS COURT ISSUES CORRECTED OPINION ON EXPENSES BEING INCLUDED IN REINSURANCE LIMIT

As we previously reported, an Illinois appellate court recently concluded that the limit stated on certain reinsurance certificates applied to both indemnity expenses as well as defense expenses, relying on the often cited case from the Second Circuit, Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2nd Cir. 1990.) On December 16, 2014, the court issued a substituted opinion, making non-substantive changes to its prior opinion. Continental Cas. Co. v. MidStates Reinsurance Corp., No. 1-13-3090 (Ill. App. Ct. Dec. 16, 2014.)

This post written by Catherine Acree.

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CALIFORNIA’S “THIRD PARTY LITIGATION EXCEPTION” NOT PREEMPTED BY THE FAA

A California appellate court recently examined that state’s legislative response to the situation where a party moves to compel arbitration and some of the parties to the dispute are not parties to the arbitration agreement. In a situation including an arbitration provision of a reinsurance agreement, the court interpreted the so-called “third party litigation exception” to compelling arbitration, which according to the Court of Appeals addresses “the special practical problems that arise in multiparty contractual disputes when some or all of the contracts at issue include agreements to arbitrate.” Section 1281.2(c) of the California Code of Civil Procedure provides that a court need not order arbitration if it determines that: (1) a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party; (2) the dispute arises out of the same transaction or series of related transactions; and (3) there is a possibility of conflicting rulings on a common issue of law or fact.  The court concluded that the California statute was not preempted by the Federal Arbitration Act, relying on an opinion of the Untied States Supreme Court which held that the application of the third party litigation exception of section 1281.2(c) to stay the arbitration of a contract dispute involving interstate commerce did not undermine the goals and policies of the FAA, and was not preempted by the FAA.  Arrow Recycling Solutions, Inc. v. Applied Underwriters, Inc., No. B245379 (Cal. Ct. App. Jan. 8, 2015), modified (Cal. Ct. App. Jan. 12, 2015).

This post written by Catherine Acree.

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TERRORISM RISK INSURANCE PROGRAM REAUTHORIZED

On January 12, 2015, the Terrorism Risk Insurance Act Program (“TRIA” or “Program”), which was originally adopted in 2002 to provide a federal backstop to protect insurers from catastrophic claims arising from terrorist attacks on U.S. soil, was extended.

Specifically, the TRIA Reauthorization Act of 2015 (the “Reauthorization Act”), Public Law No: 114-114th-1, revises the Program as follows:

  • Extends the Program until December 31, 2020.
  • Decreases the federal share of the compensation for the insured losses of an insurer during each Program year by 1% until it equals 80% of the portion of the amount exceeding the annual insurer deductible.
  • Increases the insurance marketplace aggregate retention amount under the Program (currently $27.5 billion) by $2 billion per calendar year until such amount equals $37.5 billion.
  • Directs the Secretary of the Department of Treasury (the “Secretary”) to conduct a study within nine months after the enactment of the Reauthorization Act regarding the process used by the Secretary to certify an act as an act of terrorism under the Program.
  • Directs a biennial study by the GAO regarding the impact on the Federal government of assessing and collecting upfront premiums on insurers that participate in the Program and the creation of a capital reserve fund under the Program.
  • Authorizes the Secretary to establish and appoint the Advisory Committee on Risk-Sharing Mechanisms (the “Advisory Committee”) to provide advice, recommendations, and encouragement with respect to the creation and development of the nongovernmental risk-sharing for the protection against losses arising from acts of terrorism. The Advisory Committee must consist of nine members who are directors, officers, or other employees of insurers, reinsurers, or capital market participants that are participating or that desire to participate in the nongovernmental risk-sharing mechanisms and who are representative of the affected sectors of the insurance industry, including commercial property insurance, commercial casualty insurance, reinsurance, and alternative risk transfer industries.
  • Requires insurers participating in the Program to submit to the Secretary beginning January 1, 2016, and each calendar year thereafter, information regarding insurance coverage for terrorism losses to analyze the effectiveness of the Program. The information to be reported shall include information regarding lines of insurance with exposure to such losses; premiums earned on such coverage; geographical location of exposures; pricing of such coverage; the take-up rate for such coverage; the amount of private reinsurance for acts of terrorism purchased; and such other matters as the Secretary considers appropriate.
  • Authorizes the Secretary to conduct a study (commencing June 30, 2017, and every other June 30 thereafter) of small insurers participating in the Program, and identify any competitive challenges small insurers face in the terrorism risk insurance marketplace.

Furthermore, the Reauthorization Act includes several other amendments, unrelated to the Program. It amends the Gramm-Leach-Bliley Act to establish the National Association of Registered Agents and Brokers as an independent nonprofit corporation to prescribe licensing and insurance producer qualification requirements and conditions on a multi-state basis, while retaining essential state regulatory authority. It also removes Dodd-Frank Act margin requirements for certain end-users, like utilities and manufacturers, involved in derivatives trading to hedge risk. Finally, it requires the Federal Reserve to have at least one governor with community banking or supervision experience.

This post written by Kelly A. Cruz-Brown.

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TREATY TIP: CLARITY IN REINSURANCE CONTRACTS

It is important that all contracts accurately and clearly set forth the agreements of the parties to the contract. One of the most critical parts of any reinsurance agreement is specifying the scope of the risks transferred pursuant to the agreement. In a Treaty Tip, Rollie Goss discusses a recent case which was filed due to perceived uncertainty with respect to the contractual loss limit of facultative reinsurance certificates. Treaty Tip: The Mutual Benefits of Clear Reinsurance Limits.

This post written by Rollie Goss.

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CALIFORNIA COURT ISSUES MIXED RULING ON CROSS-MOTIONS IN SUIT SEEKING POLICY RESCISSION

A California federal district court granted in part and denied in part various motions involving Star Insurance’s action seeking to rescind an insurance policy based upon certain alleged material misrepresentations concerning the nature of the insured’s business. The insured, Sunwest Metals, Inc., incurred substantial damage to its property following an arson fire. After Star advanced certain benefits to Sunwest, Star sued to rescind the policy based upon certain alleged misrepresentations which Sunwest, through its agent, made on the insurance application which underreported the percentage of income from Sunwest’s recycling business. The parties did not dispute that the misrepresentations were false. In defense, Sunwest argued the misrepresentations were unintentional and not material. Sunwest counterclaimed against Star and cross-claimed against its agent as well as against Star’s surplus lines broker, G. J. Sullivan. The parties cross-moved for judgment.

First, the court denied Sunwest’s motion for judgment on the pleadings, rejecting Sunwest’s argument that Star was required to plead and prove that Sunwest’s intentionally mispresented the income from its recycling operations on the aapplication. As a matter of law, California law allows an insurer to rescind a policy based upon an insured’s negligent or intentional concealment or misrepresentation of a material fact.

Next, the court denied in part Star’s motion for summary judgment. Sunwest raised genuine issues of material fact as to whether Star had inquiry notice of the misrepresentations. Specifically, Star’s underwriters had seen Sunwest’s website which prominently displayed Sunwest’s recycling business and reviewed a report which should have put it on notice to further investigate Sunwest’s annual revenue breakdown. Moreover, because a genuine issue of material fact existed as to when Star should have been on notice of Sunwest’s actual income, the court determined that genuine issues of material fact also existed as to whether or not Star waived the misrepresentation by allegedly unduly delaying its rescission. While it agreed with Sunwest that genuine issues of material fact existed as to inquiry notice and waiver, the court found as a matter of law that the misrepresentations were indeed material.

Finally, the Court granted Sullivan’s motion for summary judgment. The parties did not dispute Sullivan acted as Star’s agent. The issue became whether Sullivan acted in a capacity as a dual agent which could have given rise to a cause of action by Sunwest against Sullivan. The court rejected Sunwest’s argument, finding that a reasonable jury could only conclude that Sullivan was not a dual agent. Star Insurance Co. v. Sunwest Metals, Inc., Case No. SACV 13-1930 DOC(DFMx) (C.D. Cal. Dec. 29, 2014).

This post written by Leonor Lagomasino.

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FIFTH CIRCUIT DISMISSES FOR LACK OF APPELLATE JURISDICTION APPEAL OF ORDER COMPELLING ARBITRATION

The Fifth Circuit Court of Appeals has dismissed, for lack of appellate jurisdiction, a district court order granting a motion to compel arbitration filed by Certain Underwriters of Lloyds of London and several other insurance companies. The Fifth Circuit held that the district court’s order was not a final, appealable order within the meaning of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the Federal Arbitration Act. The district court had granted the motion after finding the insurance contract at issue contained a clear and unambiguous arbitration clause, and had then stayed the case and closed it for administrative purposes. The Fifth Circuit found the district court’s order and administrative closure lacked the finality necessary for appellate jurisdiction, noting a “clear distinction” between final orders dismissing cases after compelling arbitration and interlocutory orders staying and administratively closing cases pending arbitration. The district court’s order was deemed to be the latter and the appeal was therefore dismissed. Southwestern Electric Power Co. v. Certain Underwriters at Lloyds of London, No. 13-31130 (5th Cir. Nov. 24, 2014).

This post written by Renee Schimkat.

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COURT APPROVES $7 MILLION SETTLEMENT AGREEMENT WITH REINSURER IN RELIANCE INSURANCE COMPANY’S LIQUIDATION

A Pennsylvania court overseeing Reliance Insurance Company’s liquidation proceedings approved the settlement agreement between Reliance and XL Reinsurance Company. The agreement allowed the liquidator to terminate and commute the obligations between Reliance and XL under the parties’ reinsurance agreement, such that the estate would receive a $7,248,830 economic benefit. In re Reliance Insurance Company in Liquidation, 1 REL 2001 (Pa. Commw. Ct. Oct. 2, 2014).

This post written by Leonor Lagomasino.

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U.K. COURT APPROVES INSURANCE BUSINESS TRANSFER SCHEME

A court in the United Kingdom has approved the transfer of the entire long-term insurance business of Prudential Annuities Limited (PAL) to The Prudential Assurance Company Limited (PAC). The transfer’s purpose was to simplify the corporate structure of Prudential UK’s business, improve the flexibility and efficiency of capital management, and facilitate Prudential’s response to regulatory developments. The transfer affected approximately 134,000 contracts of long-term insurance business, all non-profit pension policies, and approximately 90,000 policyholders. Regulators did not object to the transfer and an independent expert and three actuaries all supported it.

PAL was already an asset of the PAC fund to which its business was transferred and, since 2012, the vast majority of PAL’s business had been reinsured by that fund. The court found that the reinsurance arrangements for the transfer significantly restricted the ability of the PAC fund to “walk away” from PAL and agreed with the independent expert that there would be no adverse change to either PAL or PAC policyholders from the transfer. Finding that all requirements of the Financial Services and Markets Act 2000 had been met, the court sanctioned the transfer of business. In the Matter of Prudential Annuities Ltd., [2014] EWHC 4770 (Ch.) (High Courts of Justice (Chancery Division) Cos. Ct.) Nov. 13, 2014).

This post written by Renee Schimkat.

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IN BATTLE OF APPAREL COMPANIES, COURT COMPELS ARBITRATION

In early September, a New York district court granted defendants United States Polo Association, Inc. (“USPA”) and Arvind Ltd.’s (“Arvind”) motion to compel arbitration. It further dismissed Ralph Lauren Corporation and its subsidiaries’ (collectively “Ralph Lauren”) complaint alleging breach of contract, fraudulent inducement, and unjust enrichment.

This action was the latest in a longstanding battle between Ralph Lauren and the USPA, who have been actively involved in trademark litigation since 1984. A 2003 settlement resolved disputes concerning USPA’s use of logos and trademarks with their sale of apparel. The settlement further contained an arbitration provision that would govern any dispute between the parties arising from the settlement agreement.

Ralph Lauren alleged that USPA/Arvind breached this settlement agreement by selling products that infringed upon their protected trademarks without language that indicated that the two companies were not affiliated. It also alleged that the defendants waived arbitration by filing to enforce arbitration in India instead of New York. The court rejected Ralph Lauren’s argument that the defendants waived their right to arbitration because Ralph Lauren showed neither substantive prejudice nor prejudice due to excessive cost and time delay. The court found that USPA/Arvind were not attempting to re-litigate any issue in arbitration. It further noted that “[i]t was the Polo plaintiffs, not USPA/Arvind, that filed the present action in the Southern District of New York and that postponed the arbitration proceedings in India,” negating a claim for excessive cost and delay. Finally, the court found that Ralph Lauren’s fraudulent inducement and remaining claims should be handled through arbitration. Ralph Lauren Corp. v. United States Polo Ass’n, No. 13 Civ. 7147 (S.D.N.Y. Sept. 4, 2014).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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