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New reinsurance-related and arbitration developments from Carlton Fields

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REINSURED’S TRIAL COUNSEL INVOLVED IN UNDERLYING DISPUTE DISQUALIFIED FROM TRYING THE CASE

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In a dispute involving tortious interference and conspiracy claims brought by Ford Motor Company against a reinsurer of Ford’s stop-loss insurance policies, a federal court disqualified Ford’s lead trial attorney under the “witness-advocate” rule. The reinsurer argued that, notwithstanding Ford’s stipulation not to call trial counsel as a witness, trial counsel’s involvement in the emails and other underlying communications surrounding the reinsurer’s disputed conduct would result in trial counsel being “free to argue the meaning of his own correspondence and refute the trial and deposition testimony of those with whom he interacted.” The reinsurer further contended that trial counsel would “have the ability, through cross-examination and argument, to explain away his communications … just as if he were testifying as a witness,” and that the reinsurer would be forced to call trial counsel as a witness to support its defenses and to rebut Ford’s theory of the case and evidence. The court agreed with the reinsurer, finding that the testimony the reinsurer intended on seeking from trial counsel and the communications in which trial counsel was involved, were relevant and necessary to the reinsurer’s defenses, and were potentially prejudicial to Ford. The court further found that no exceptions to the witness-advocate rule applied, including the exception of substantial hardship to Ford. Ford Motor Co. v. National Indemnity Co., Case No. 3:12-cv-839 (USDC E.D. Va. Aug. 21, 2013).

This post written by Michael Wolgin.

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FEDERAL COURTS TACKLE STATUTE OF LIMITATIONS ISSUES IN RESPA CAPTIVE REINSURANCE CLASS ACTIONS

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We have reported on several putative class actions brought by purchasers of private mortgage insurance who allege that insurers, lenders, and captive reinsurers unlawfully entered into reinsurance arrangements in violation of the federal Real Estate Settlement Procedures Act (“RESPA”) and other laws. There have been some recent developments in such cases involving RESPA’s one-year statute of limitations.

In Munoz, as we reported in May, a federal magistrate judge in California recommended certification of a class of purchasers of private mortgage insurance whose insurance was included in defendants’ captive reinsurance arrangements. The magistrate judge recently granted a motion to intervene brought by a putative class member who was excluded from the recommended class because her claims were time-barred. The magistrate had not included such persons in the recommended class because their claims were atypical and class plaintiffs, whose claims were not similarly time-barred, had no interest in asserting tolling of the statute of limitations. In the order granting the motion to intervene the parties were instructed to conduct discovery on and brief the issue of whether certification of a tolling subclass is appropriate. Munoz v. PHH Corp., Case No. 1:08-cv-00759 (USDC E.D. Cal. July 29, 2013).

In Menichino, a Pennsylvania federal district court dismissed without prejudice plaintiff’s putative class action complaint alleging RESPA violations premised on alleged kickbacks relating to defendants’ private mortgage insurance and captive reinsurance arrangements. The court held that plaintiff’s complaint was time-barred by RESPA’s one-year statute of limitations and that plaintiff had failed to allege sufficient facts which, taken as true, would have established that RESPA’s limitations period should be tolled. Menichino v. Citibank, N.A., Case No. 12-0058 (USDC W.D. Pa. July 19, 2013).

The court reached the identical conclusion in Manners, a related case, and similarly dismissed the putative class plaintiff’s claims without prejudice. Manners v. Fifth Third Bank, Case No. 12-0442 (USDC W.D. Pa. July 19, 2013).

This post written by Ben Seessel.

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NYDFS REQUESTS INFORMATION FROM REINSURERS REGARDING COMPLIANCE WITH IRAN FREEDOM AND COUNTER-PROLIFERATION ACT OF 2012

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The New York Department of Financial Services issued a circular letter to all accredited reinsurers writing business in New York regarding compliance with the Iran Freedom and Counter-Proliferation Act of 2012. The July 24, 2013 circular expresses the Department’s concern with “recent news reports of a pattern of trades made by Glencore Xstrata and Trafigura with Iranian entities” and notes that while those transactions may not have violated the Act’s sanctions regime, similar such transactions might now result in sanctions. The Department asks reinsurers to respond to a number of questions posed by the Department by which it seeks to assess compliance, including whether any reinsurer insured the Glencore Xstrata and Trafigura trades with Iranian entities. NYDFS Insurance Circular Letter No. 6 (July 24, 2013).

This post written by John Pitblado.

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NEW YORK COURT PREDICTS THAT CALIFORNIA COURTS WOULD RECOGNIZE BAD FAITH EXCEPTION TO NOTICE-PREJUDICE RULE IN REINSURANCE CONTEXT

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The Insurance Company of the State of Pennsylvania sued its reinsurer Argonaut for liability arising from underlying asbestos litigation. ICSOP issued excess umbrella coverage to its insured, Kaiser, which manufactured products containing asbestos and faced underlying liability from lawsuits alleging asbestos-related injury. ICSOP obtained facultative reinsurance from Argonaut covering a percentage of the Kaiser excess policy. ICSOP received notice in 2001 that Kaiser had exhausted primary coverage, implicating the umbrella coverage. Kaiser ultimately brought ICSOP into a coverage lawsuit in California in 2002, which was litigated extensively until a 2009 mediation. However, ICSOP did not notify Argonaut until 2009 of the potential exposure under the facultative reinsurance, long after the court had made a number of rulings adverse to ICSOP. Argonaut denied ICSOP’s claim citing, among other things, untimely notice. ICSOP filed suit and the parties cross-moved for summary judgment on the late notice issue.

The Southern District of New York, applying California law, held that notice had been untimely, but that in order to be excused from paying claims Argonaut had to prove that it had been prejudiced by the late notice. Although it found that Argonaut had submitted sufficient evidence to raise a genuine issue of fact as to whether it had been prejudiced by the untimely notice, in anticipating evidentiary burdens at trial, the court considered whether Argonaut might be excused from showing prejudice if it demonstrated that ICSOP had acted in bad faith in providing untimely notice. The bad faith exception to the prejudice requirement has been adopted in New York and some other states. Acknowledging that California courts had not addressed whether to recognize the bad faith exception, the court predicted that California courts would recognize the exception. The court permitted Argonaut to take discovery on ICSOP’s alleged bad faith before proceeding to trial. Insurance Co. of the State of Pennsylvania v. Argonaut Insurance Co., No. 12 Civ. 6494 (USDC S.D.N.Y. Aug. 6, 2013).

This post written by John Pitblado.

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COURT DECLINES TO STAY LITIGATION OF CLAIMS UNDER GUARANTEE DESPITE COMMON ISSUES WITH PENDING REINSURANCE ARBITRATION

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This case concerns overlapping reinsurance agreements, retrocession agreements related to the rinsured risks, and guarantees of the retrocession agreements. The reinsurance and retrocession agreements all contain arbitration provisions, but the guarantees do not. Disputes arose, an arbitration commenced concerning the retrocession agreements and a lawsuit was filed on the related guarantees. On a motion to dismiss, the court held that the claimant did not have to “exhaust” efforts to collect under the reinsurance or retrocession agreements before bringing suit under the guarantees. The court denied a request to stay the claims based on the guarantees pending the arbitration of disputes under the retrocession agreements, because the party seeking the stay had failed to establish that there were issues common to the arbitration and the court action which would be finally determined by the arbitration. While liabiity under the reinsurane and retrocession agreements might be considered an issue common to the arbitration and court action, the court found this factor overcome by evidence that the defendants had delayed and abused the arbitration process. Finally, the court rejected arguments that the guarantee claims failed to state a claim. Greenlight Reinsurance, Ltd. v. Appalachian Underwriters, Inc., Case No. 12-8544 (USDC S.D. N.Y.July 25, 2013).

This post written by Rollie Goss.

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