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New reinsurance-related and arbitration developments from Carlton Fields

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COURT CONFIRMS ARBITRATION AWARD ADDING PREPAYMENT PROVISION TO REINSURANCE TREATY

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Citing the treaty’s honorable engagement clause, a federal district court denied a group of reinsurers’ motion to vacate an arbitration award in which the arbitrators had fashioned a remedy requiring prompt payment of all disputed and undisputed claims. Certain London market reinsurers had entered into a reinsurance treaty with Century Indemnity Company that indemnified Century for certain liabilities arising out of asbestos litigation. The agreement did not contain a “Reports and Remittances” clause dictating when claims should be paid, but provided that the “liability of the Reinsurers shall follow that of the Company in every case.” The treaty also included an “honorable engagement” clause, directing the arbitrators to interpret the agreement to effect its general purpose.

Facing significant losses due to a flood of asbestos litigation, the reinsurers imposed a program in which Century would have to meet documentation requirements before claims were paid. When payments became delayed, Century initiated arbitration. The arbitrators issued an interim order requiring the reinsurers to promptly pay 100% of all undisputed claims and 75% of any disputed claims, finding that arrangement would effectuate the general purpose of the parties’ agreement. After several years of paying claims pursuant to this arrangement, the reinsurers moved to vacate the award when the arbitrators, who had retained jurisdiction over the matter, made the award final. Citing the “honorable engagement” clause, the court denied the motion to vacate and confirmed the award, holding that the arbitrators had the power to fashion the remedy even though it included obligations not explicitly bargained for by the parties. Harper Insurance Ltd. v. Century Indemnity Co., Case No. 10 Civ. 7866 (USDC S.D.N.Y. July 28, 2011).

This post written by Ben Seessel.

NEW YORK CLARIFIES NEWLY EFFECTIVE DODD-FRANK REINSURANCE PROVISIONS

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The New York Insurance Department issued Circular Letter No. 9 on July 22, 2011, which provides “guidance and clarification” on the impact of the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”) (passed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act) on surplus line placements in the state. The letter cites to and discusses the various New York state insurance and tax laws which were amended to conform to the NRRA. New York is one of the states which has declined to enter into a surplus insurance premium tax compact, keeping 100% of the tax it collects. The letter clarifies eligibility requirements for non-admitted insurers under NAIC’s Nonadmitted Insurance Model Act, which was codified under New York law; it clarifies exemptions for “exempt commercial purchasers” from satisfying due diligence requirements concerning placement with admitted insurers; and it discusses the “home state” law governing the exclusive regulation of non-admitted insurers by the insurer’s “home state” only. The letter also addresses licensing and taxation issues. Certain of the New York laws, and the NRRA, became effective on July 21, 2011.

This post written by John Pitblado.

REINSURANCE HELD NOT EXCLUDED FROM COVERAGE BASED ON LIABILITY LIMIT AND CLAIM REPORTING PROVISIONS

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In a dispute arising between Anthem Insurance (now known as Wellpoint) and what the court described as one of its excess reinsurers, Twin City Fire Insurers, Anthem sought defense and indemnification for several state and federal lawsuits alleging improper denial of reimbursement. Twin City denied coverage, arguing that those suits “related back” to the claim preceding its policy period and were accordingly excluded from coverage. An Indiana trial court agreed with Twin City, and Anthem subsequently appealed to the state appeals court. The Indiana Court of Appeals reversed and remanded, holding that none of the subject policy provisions operated to exclude such coverage. The court held specifically that the reinsurance agreement covered “claims made” and found no basis to read the agreement as excluding coverage retrospectively based on notice of claims preceding the inception of coverage. The court additionally found inapplicable Twin City’s attempt to superimpose the “prior notice exclusion” onto the agreement. Wellpoint, Inc. v. National Union Fire Ins. Co., No. 05-2011 (Ind. Ct. App. July 20, 2011).

This post written by John Black.

NEW YORK DEPARTMENT APPROVES REINSURERS FOR REDUCED COLLATERAL WRITING

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Effective January 1, 2011, New York’s Tenth Amendment to 11 NYCRR 125 (Regulation 20) effected a ratings-based framework allowing ceding insurers to take full statutory financial statement credit for reinsurance ceded to certain unauthorized reinsurers without the reinsurers posting full collateral. (See our previous Special Focus article on the amended Regulation 20) New York maintains a list of “Certified Reinsurers” that have met the regulation’s requirements for reduced collateral. The published list (available at http://www.ins.state.ny.us/insurers/certified-reinsurer.pdf) included nine Certified Reinsurers as of August 1, 2011. Recent press accounts, however, have reported that three companies, Tokio Millennium Re Ltd., Alterra Capital Holdings Ltd. and Lloyd’s, were added in July, bringing the number of New York Certified Reinsurers to at least 12. Of these 12, three achieved a Secure-2 rating, meaning they would be required to post collateral at a 10% level to allow the ceding company to take full reserve credit. The other twelve Certified Reinsurers achieved a Secure-3 rating, which puts the collateral requirement at 20%. The collateral requirements prescribe the minimum levels allowed; parties to a transaction are free to negotiate for higher collateral requirements in their contracts.

This post written by Anthony Cicchetti.

COURT OF APPEALS HOLDS THAT DISTRICT COURT CORRECTLY CONFIRMED AN ARBITRATION AWARD NOTWITHSTANDING PARTY FRAUD

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A federal court of appeals affirmed the confirmation of an arbitration award in favor of an employee who had committed fraud in connection with an arbitration, because, as the district court had held, the fraud was not material to the outcome of the proceeding. Michael Mickens, an employee of trucking company CBF, was terminated for allegedly failing to complete an assigned run. At meetings with CBF and union members that Mickens surreptitiously recorded, Mickens insisted that he had completed the run. After Mickens was terminated, the union demanded arbitration during which Mickens explained for the first time that he had not completed his assignment because a guard had purportedly relayed instructions from CBF not to complete the run. CBF introduced the minutes of the meetings which showed Mickens’s initial and false story, but the arbitrator concluded that Mickens was wrongfully terminated and ordered reinstatement with full back pay.

Mickens’s tapes of the meetings, which had been the subject of discovery requests during the arbitration but had not been disclosed or produced, were produced to CBF in subsequent litigation. When the union filed an action in district court to confirm the award, CBF moved to vacate on the grounds that the award had been procured by fraud. The district court confirmed the award, holding that the employee had lied and secretly withheld the tapes, thereby committing fraud, but that the fraud was not material to the outcome of the arbitration because the arbitrator was already aware of the essential facts on the tapes—that the employee had lied about completing the trucking run—because the minutes of the meetings had been introduced. The court of appeals agreed and affirmed. Int’l Brotherhood of Teamsters v. CBF Trucking, Inc., No. 10-3044 (3d Cir. July 28, 2011).

This post written by Ben Seessel.