MONTANA LAW REVISED TO ALLOW CAPTIVES TO ORGANIZE AS LIMITED LIABILITY COMPANIES

On April 28, 2015, Montana Governor Steve Bullock signed into law amendments to Montana’s law regarding captive insurers. Significantly, the amendments make it possible for public entities in Montana to set up captives. Additionally, the amendments allow captives in Montana to be organized as limited liability companies. Such LLCs must be established with a minimum of five members. John Jones, President of the Montana Captive Insurance Association (“MCIA”), called these amendments “meaningful improvements to what is already one of the country’s premier captive domiciles.” The amendments, spearheaded by the MCIA and the Montana Commissioner of Securities and Insurance, aim to make Montana a more attractive destination for companies looking to establish or re-domesticate captives.

This post written by Zach Ludens.

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FIO DIRECTOR TESTIFIES ON THE IMPACT OF INTERNATIONAL REGULATORY STANDARDS ON THE COMPETITIVENESS OF U.S. INSURERS

The Director of the Federal Insurance Office (FIO), Michael McRaith, recently testified before the House Financial Services Subcommittee on Housing and Insurance regarding the impact international regulatory standards have on the competitiveness of United States insurers. Citing to the FIO’s 2014 Annual Report, McRaith noted that, in the aggregate, insurers operating in the U.S. continue to show resilience in the aftermath of the 2008 financial crisis. At year-end 2013, the life and health sector reported $335 billion in capital and surplus, and the property and casualty sector reported approximately $665 billion in capital and surplus. McRaith testified that the pace of globalization in insurance markets has “increased exponentially and is expected to continue to grow in the coming years.” Due to this global economic growth, many jurisdictions, both developing and well-established, are modernizing insurance supervisory regimes. These jurisdictions include Mexico, Canada, Australia, China, and South Africa.

McRaith cited to a recent agreement among members of the International Association of Insurance Supervisors (IAIS), as publicly described in March 2015, where members agreed on the “ultimate goal” of a single insurance capital standard (ICS) that will include a common methodology by which ICS achieves comparable, i.e., substantially the same, outcomes across jurisdictions. That agreement followed the IAIS October 2014 annual meeting where IAIS adopted an approach to the Basic Capital Requirement (BCR) for globally systemically important insurers. McRaith also noted that the European Commission was recently given the mandate to pursue an agreement with the U.S. to “facilitate trade in reinsurance and related activities” and to “recognize each other’s prudential rules and help supervisors exchange information.” McRaith concluded his testimony by stating that “U.S. insurance authorities are positioned to provide U.S. leadership that complements the shared interest in a well-regulated insurance market that fosters competition, promotes financial stability, and protects consumers.” McRaith’s April 29, 2015, testimony can be found here.

This post written by Renee Schimkat.

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U.S. SUPREME COURT TO HEAR APPEAL ON ENFORCEABILITY OF ARBITRATION AGREEMENTS IN CALIFORNIA

The United States Supreme Court has granted DIRECTV’s petition for Writ of Certiorari and will hear the following question presented: Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

As reported here previously, DIRECTV had moved to dismiss or stay a class action litigation filed against it and to compel individual arbitration pursuant to the arbitration clause contained in DIRECTV’s customer agreements in California, which specifically prohibit class actions. The trial court denied the motion and the California Court of Appeal affirmed. The Court of Appeal focused on the arbitration clause’s non-severability provision and its reference to “state” law to hold that the class-action waiver in the arbitration clause was invalid under California law and the entire arbitration agreement was therefore unenforceable. In its petition, DIRECTV argued that the Court of Appeal did precisely what the Supreme Court’s Concepcion decision prohibits: “It applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver.” DIRECTV further argued that because the decision is in direct conflict with a recent Ninth Circuit decision, creates an acknowledged conflict between state and federal courts on a matter of federal law, and “evinces the very hostility to arbitration that led to the enactment of the FAA in the first place,” the Supreme Court’s review was warranted. Petitioner’s brief on the merits is to be filed with the Court by May 29, 2015, and Respondents’ brief is to be filed by July 17, 2015. The Court is scheduled to hear the case during its October 2015 term. DIRECTV, Inc. v. Imburgia, et al., Case No. 14-462.

This post written by Renee Schimkat.

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SUMMARY JUDGMENT OVERTURNED IN COVERAGE DISPUTE

In late April, the Indiana Supreme Court held that Continental Casualty Company (“CNA”) must provide insurable relief for Anthem Insurance Companies, Inc. (“Anthem”), reversing a lower court decision. Anthem’s expenditures were covered under their excess reinsurance policy.

Anthem, which later merged with co-defendant WellPoint Inc., was originally subject to multiple lawsuits in Florida and Connecticut for failing to pay claims in a timely manner, breach of state and federal statutes, breach of good faith and fair dealing, unjust enrichment, negligent misrepresentation, and violations of Racketeer Influenced and Corrupt Organizations Act. Anthem later settled, without admitting wrongdoing or liability, a multi-district litigation that consolidated the various state actions. Anthem then sought indemnification from their reinsurers.

Anthem self-insured E&O liability coverage and also purchased additional reinsurance coverage. CNA and other implicated excess reinsurers denied coverage for Anthem’s underlying litigation expenses. The trial court granted summary judgment in favor of CNA. Twin City Fire Insurance Company (“Twin City”) later joined that verdict. A court of appeals affirmed that decision.

CNA argued that (1) Anthem’s alleged conduct was not solely in performance of “Professional Services,” a requirement under their reinsurance agreement; (2) that Anthem’s coverage relief was barred under Indiana public policy; and (3) Anthem’s alleged conduct was barred under the reinsurance agreements “dishonest or fraudulent act or omission” exception. The court found that Anthem’s coverage extended to “loss of the insured resulting from any claim or claims…for any Wrongful Act of the Insured…but only if such Wrongful Act…occurs solely in the rendering of or failure to render Professional services.” The court found that Anthem’s alleged conduct fit under this guidance, as the conduct was a part of Anthems handling of health claims. The court also noted a strong presumption for the enforceability of contracts, especially between CNA and Anthem, both sophisticated parties. For these and other reasons, the court reversed the trial court and granted in large part, summary judgment for Anthem.

WellPoint, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 49S05-1404-PL-244 (Ind. Apr. 22, 2015).

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

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INCORPORATION OF AAA RULES “CLEARLY AND UNMISTAKABLY” DELEGATES QUESTIONS OF ARBITRABILITY TO ARBITRATOR

In a putative class action for denial of employment benefits brought by security contractors against their hiring firm, Blackwater Security Consulting, the court found that the governing agreements delegated the issue of arbitrability to an arbitrator and compelled arbitration. The contractors contended that the agreements contained no such delegation, but the court disagreed, finding that that the agreements’ incorporation of the AAA rules was sufficient to “clearly and unmistakably” submit arbitrability to an arbitrator. The court also found that the contractors’ challenge to the validity of the AAA clause based on fraud and duress failed “because it does not specifically address the delegation agreement itself as required by” the Supreme Court’s 2010 Rent-A-Center decision. The court further found that the contractors’ challenge based on mistake and unconsionability, “fails on the merits as a matter of law.” The contractors contended that they mistakenly believed that the agreements they signed did not contain arbitration provisions. This type of mistake, however, “about the nature of the contract and its contents—is not a mistake about an ‘existing or past fact’ that could satisfy” the law. As to unconscionability, the contractors argued that the shifting of attorneys’ fees and expenses from the firm to them was unfair, but the court rejected this argument as defective under Concepcion and other precedent. Mercadante v. XE Services, LLC, Case No. 1:11-cv-01044 (USDC D.D.C. Jan. 15, 2015).

This post written by Michael Wolgin.

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IRS PROPOSES REGULATIONS DIRECTED TO “PASSIVE” HEDGE FUND FOREIGN INSURANCE ENTITIES

On April 24, 2015, the Internal Revenue Service proposed regulations directed to “situations in which a hedge fund establishes a purported foreign reinsurance company in order to defer and reduce the tax that otherwise would be due with respect to investment income.” The IRS proposed regulations designed to clarify its applicable tax rules, by attempting to define exceptions to “passive income” from foreign insurance companies. Such income (earned from investments) is taxed at higher rates than income from insurance business, which is taxed only when it is realized, and at lower capital gains rates. The proposed regulations seek to clarify when investment income earned by a foreign insurance company is derived in the “active conduct” of an “insurance business,” and thus whether it qualifies for the passive income exception.

The proposal provides that “insurance business” means “the business activity of issuing insurance and annuity contracts and the reinsuring of risks underwritten by insurance companies, together with those investment activities and administrative services that are required to support or are substantially related to insurance and annuity contracts issued or reinsured by the foreign insurance company.” The proposed regulations “do not set forth a method to determine the portion of assets held to meet obligations under insurance and annuity contracts.” The IRS requests comments by July 23, 2015, “on appropriate methodologies for determining the extent to which assets are held to meet obligations under insurance and annuity contracts.”

This post written by Michael Wolgin.

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VOLUNTARY-INVOLUNTARY RULE IMPLICATED IN REMOVAL PROCEEDING

In late April, a district court in New York granted plaintiff Utica Mutual Insurance Company’s (“Utica”) motion to remand, implicating the voluntary-involuntary removal rule. Utica originally filed a breach of contract lawsuit against defendant American Re-Insurance Company (“American”). The lawsuit also named as co-defendant, Transatlantic Reinsurance Company (“Transatlantic”), a corporation domiciled and with a principal place of business in New York. American was initially unable to remove the case to federal court due to lack of diversity among the co-defendants.

A New York state court severed the claims against American and Transatlantic, thereby eliminating the diversity impediment for removal. Utica argued that “removability can only be created by Utica’s voluntary conduct,” and not by the court’s involuntary severance order. American argued that the voluntary-involuntary rule’s fraudulent misjoinder exception applied, as Transatlantic was improperly joined. The court found—citing second circuit precedent—that an action was not removable when non-diverse parties were made diverse by a court’s involuntary severance order. The voluntary-involuntary rule was designed to “protect against the possibility that a party might secure a reversal on appeal in state court of the non-diverse party’s dismissal, producing renewed lack of complete diversity in the state court action….in order to be removable, be one which could have been brought in federal court in the first instance.” The case turned on whether the order was final, and not simply voluntary.

As Utica’s severance order appeal was not yet final, a requirement under the voluntary-involuntary rule, the district court remanded the case back to the New York State Supreme Court. The court noted that American’s fraudulent misjoinder claim was “time barred” as defendants failed to file within thirty days after receipt. The court also noted that American understood “Utica’s motivation for joining Transatlantic and [American] as defendants in the same action,” an admission that went against their claim for fraudulent misjoinder.

Utica Mutual Ins. Co. v. American Re-Ins. Co., No. 6:14-CV-1558 (USDC N.D.N.Y. Apr. 27, 2015).

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

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OHIO PROPOSED RULE REGARDING ALTERNATIVE RESERVE METHODOLOGY FOR SPECIAL PURPOSE CAPTIVES

The Ohio Department of Insurance has proposed a new rule, Rule 3901-11-05 (the “Proposed Rule”), to establish a process and method that allow a special purpose financial insurance company captive (a “SPFIC Captive”) to request the use of an alternative reserve methodology other than that found in the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual.

The Proposed Rule requires a request to use an alternative principle-based valuation method to be accompanied by a written actuarial opinion that is signed by the appointed actuary for the SPFIC Captive and the ceding insurer. The Proposed Rule prescribes certain criteria for the alternative reserve methodology being requested:

  • Must be a principle-based valuation method that uses one or more methods or one or more assumptions proposed by the SPFIC Captive.
  • Must address all material risks associated with the contracts being valued and their supporting assets and determined capable of materially affecting the valuation of its obligations with respect to the risks assumed. Examples of risks to be included in the principle-based valuation method include but are not limited to risks associated with policyholder behavior, such as lapse and utilization risk, mortality risk, interest rate risk, asset default risk, separate account fund performance, and the risk related to the performance of indices for contractual guarantees.
  • Must be consistent with current actuarial standards of practice.
  • Must consider the risk factors, risk analysis methods, and models that are incorporated in the SPFIC Captive’s overall risk assessment process. The overall risk assessment process may include, but is not limited to, asset adequacy testing, GAAP analysis, internal capital evaluation process and internal risk management and solvency assessments.
  • Must incorporate appropriate margins for uncertainty and/or adverse deviation for any assumptions not stochastically modeled.

The SPFIC Captive is required to provide any information the superintendent may require to assess the proposed alternative methodology. If an alternative methodology is approved by the superintendent, then the SPFIC Captive must use the alternative methodology until, and unless, the superintendent approves an another alternative method. Finally, upon the superintendent’s request, the SPFIC Captive is required to secure the affirmation of an independent qualified actuary that the alternative methodology complies with the criteria set forth in the Proposed Rule. The independent qualified actuary must be approved by the department and provide a written actuarial opinion detailing their affirmation and a report supporting that opinion to the superintendent. The independent qualified actuary report must comply with division (E)(3) of section 3964.03 of the Ohio Revised Code.

This post written by Kelly A. Cruz-Brown.
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DISTRICT COURT DISMISSES BREACH OF CONTRACT CLAIM, ALLOWS BREACH OF DUTY OF UTMOST GOOD FAITH CLAIM IN REINSURANCE DISPUTE

The District Court for the Middle District of Florida recently held that defendant First American Title Insurance Company (“First American”) could maintain its breach of the utmost duty of good faith counterclaim against plaintiff Old Republic National Title Insurance Company (“Old Republic”), but that it could not countersue Old Republic for breach of contract. First American alleged that Old Republic breached the Reinsurance Agreement (“Agreement”) the parties shared by 1) paying First American under a reservation of rights to assert claims against First American, 2) disputing Old Republic’s obligation to pay First American, and 3) improperly trying to claw back the $3.8 million payment. The court held that First American’s claims were insufficient because the Agreement did not explicitly prohibit Old Republic’s actions, a necessary basis for a breach of contract claim. The court did, however, find sufficient First American’s claim that Old Republic breached the utmost duty of good faith. As the court noted, “generously construing First American’s allegations under this count in conjunction with its claim that Old Republic breached the Reinsurance Agreement by failing to pay its share of defense costs,” the pleaded facts for First American’s “utmost good faith” claim were sufficient to survive the motion to dismiss stage.

Old Republic Nat. Title Ins. Co. v. First American Title Ins. Co., No. 8:15-cv-126-T-30EAJ, 2015 WL 1530611 (USDC M.D. Fla. Apr. 6, 2015)

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

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COUNCIL OF THE EUROPEAN UNION AGREES TO NEGOTIATIONS ON REINSURANCE

On April 21, 2015, the Council of the European Union (“Council”) issued a mandate to the European Commission (“Commission”) to negotiate an agreement with the United States on reinsurance. The mandate consists of a decision authorizing the opening of talks and directives for the negotiation of the agreement. The Commission will negotiate on the EU’s behalf, in consultation with a Council committee. The agreement will be concluded by the Council with the consent of the European Parliament.

These negotiations would be initial steps towards possible removal of collateral requirements in both jurisdictions in order to ensure a risk-based determination for all reinsurers in relation to credit for reinsurance. The Commission likely will negotiate with the Federal Insurance Office (“FIO”), which has authority under the Dodd-Frank Act to negotiate international agreements on behalf of the United States. Any such agreement reached by the FIO would pre-empt state laws, in this case the Model Credit for Reinsurance Act. It will be interesting to see how the NAIC reacts to this development.

This post written by Kelly A. Cruz-Brown.

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