Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Carlton Fields

Carlton Fields

BANKRUPTCY COURT VALUES CAPTIVE REINSURANCE SUBSIDIARY OF WASHINGTON MUTUAL

by

Recently, the US Bankruptcy Court for the District of Delaware denied the request of Washington Mutual and WMI Investment Corp. (collectively the Debtors) for confirmation of the Modified Sixth Amended Joint Plain of Affiliated Debtors. Among a number of issues, the Bankruptcy Court determined that the valuation of a captive reinsurance subsidiary (WM Mortgage Reinsurance Company – currently in run-off), which would serve as the most valuable asset of the proposed reorganized debtor was flawed. The Court valued the company at the high end of the range the debtors’ expert had concluded, assuming no new business would be generated or acquisitions made. The Court noted that the expert used an incorrect figure for the weighted average cost of capital, which had fallen by 5-10 percentage points, increasing the value of the company. Further, the expert gave little weight to the value of precedent transactions, accorded the most weight to discounted cash flow analysis, and failed to apply the proper historical (or current) returns on equity for similar businesses. For these and a number of other reasons, the Court denied confirmation of the plan, and directed the parties to mediation. In re: Washington Mutual, Inc., No. 08-12229 (D. Del. Bankr. Sept. 13, 2011).

This post written by John Black.

FIFTH CIRCUIT AFFIRMS ARBITRATION AWARD IN FAVOR OF FATHER AGAINST SON

by

After being fired by his father, losing the arbitration related to his termination, and having his motion to vacate the award denied, Charles Wanken appealed the motion to vacate to the Fifth Circuit Court of Appeals. Concluding Mr. Wanken’s total defeat, the Fifth Circuit affirmed the trial court’s denial of the motion to vacate and affirmed Mr. Wanken’s father’s motion to confirm. The Fifth Circuit ruled that (a) the award had not been procured by the father’s fraud, (b) there was no evidence to support Wanken’s claim that the arbitration panel failed to consider material evidence, (c) the panel was not improperly biased, (d) the panel did not exceed its powers, and (e) the district court properly considered the motion to vacate and gave proper notice to Mr. Wanken. Wanken v. Wanken, No. 11-10219 (5th Cir. Sept. 29, 2011).

This post written by John Black.

PROGRESS IN DODD-FRANK IMPLEMENTATION

by

A number of activities of potential significance have occurred in the implementation of the Dodd-Frank Act:

Surplus Lines Regulation:

  • The Kentucky Insurance Commissioner has proposed a compromise position which would result in the merger of the NAIC sponsored NIMA and the NCOIL sponsored SLIMPACT interstate compacts into a single agreement for the regulation of surplus lines insurance. Many questions remain, including whether such a compromise will be agreed to by the two competing groups, whether the new entity would regulate anything other than premium taxes, and whether the states with the greatest percentage of surplus lines premium tax collections will join such a compact and voluntarily give up a substantial part of their tax revenues.

Systemic Regulation of Companies:

  • The Financial Stability Oversight Council has a final rule exposed for comment addressing the factors and process for the designation of certain non-bank financial companies for supervision and prudential regulation by the Federal Reserve. It proposes a three step process, with all companies with total consolidated assets of more than $50 billion which satisfy one or more of five financial ratios or thresholds satisfying the first step of the process, with no exemption for any industry or type of company.

  • The Federal Reserve and the FDIC have approved a final rule requiring that bank and non-bank financial companies which will be subject to its prudential regulation under Dodd-Frank prepare and submit a “resolution plan,” i.e., liquidation plan, as required by Dodd-Frank.

Liquidation of Insurance Companies:

  • The NAIC is considering for final approval guidelines for state insurance departments designed to assist departments prepare for the implementation of the receivership provisions of Dodd-Frank as they may apply to insurance companies. Although insurance companies would be liquidated pursuant to applicable state law, the timing of the initiation of a liquidation and certain administrative aspects of a liquidation would occur pursuant to the provisions of Dodd-Frank, and would occur much faster than in liquidations conducted strictly under existing state laws.

Insurance Regulation Modernization:

  • Dodd-Frank requires that the Federal Insurance Office (“FIO”) submit a report to Congress on how to “modernize” and improve the regulation of insurance in the United States, and the FIO has issued a request for comments on that topic. Although the FIO’s Director has testified that his office is not an insurance “regulator” or “supervisor,” the prospect of such a report may cause unease among some advocates of the state regulation of insurance.

This post written by Rollie Goss.

STATE INSURANCE LAW THAT PRECLUDES ARBITRATION PREEMPTED IN FAVOR OF THE FAA UNDER THE LIABILITY RISK RETENTION ACT

by

A court recently compelled arbitration in a dispute between an insured and an insurer-risk retention group, concluding that the McCarren-Ferguson Act did not mandate the enforcement of a state anti-arbitration law over the FAA and broad arbitration agreements between the parties. The court held that while McCarran-Ferguson was met to the extent that (1) the federal law (the FAA) impaired the state insurance law, and that (2) the FAA does not clearly relate to the “business of insurance,” here the relationship between the parties was not a classic insurance relationship. The insurer was not a public offering insurance company, but rather a risk retention group, which necessitates the application of the federal Liability Risk Retention Act, a law that preempts state laws that impair the “formation or operation” of risk retention groups. The court concluded that such an impairment existed in this case because the state law prohibiting arbitration would significantly increase the costs of litigation, adversely affecting the risk retention group’s operations. Central Claims Service, Inc. v. Claim Professionals Liability Insurance Co., Case No. 10-04672 (USDC E.D. La. Sept. 2, 2011).

This post written by Michael Wolgin.

VACATUR OF AWARD BASED ON “MANIFEST DISREGARD” REVERSED IN SEVENTH CIRCUIT

by

The Seventh Circuit recently reversed a lower court’s decision to vacate a portion of an arbitration award in a patent dispute that the lower court found to be a “manifest disregard of the law.” The Seventh Circuit explained that “manifest disregard” is not an independent basis for vacatur, and can only support vacatur to the extent it reflects that arbitrators “exceeded their powers” under the applicable contract. Here, the underlying arbitration was authorized to determine the inventorship of certain patents, and the lower court failed to identify any manner in which the arbitrators exceeded that contractual authority. Noting that arbitrators are free to act without issuing written opinions, the Seventh Circuit held that the lower court committed a “logical error” by inferring “from silence” that the arbitrators relied on an extra-contractual ground. “Silence,” the Seventh Circuit explained, “is just silence.” Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., Case No. 11-2070 (7th Cir. Oct. 3, 2011).

This post written by Michael Wolgin.