Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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IRS RULES THAT CAPITIVE REINSURANCE IS INSURANCE FOR TAX PURPOSES

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Using the definition of insurance for tax purposes promulgated by the Supreme Court in 1941 in Helvering v. LeGierse, 312 U.S. 531 (1941), as explained and implemented by later opinions and IRS Revenue Rulings, the IRS has issued a private letter ruling stating that on the facts presented to it, the reinsurance of various workers’ compensation, property and crime risks by a captive constituted insurance for tax purposes, and that the reinsurer was an insurer for tax purposes. The criteria for this determination have been well established: (1) the arrangement must involve both risk shifting and risk distribution; (2) the risk must contemplate the fortuitous occurrence of a stated contingency; (3) the arrangement must not be merely an investment or business risk; and (4) the arrangement must constitute insurance in the commonly accepted sense. IRS No. 200950017 (12/11/2009).

This post written by Rollie Goss.

SECOND CIRCUIT AFFIRMS DISMISSAL OF SHAREHOLDER DERIVATIVE CLASS ACTION AGAINST REINSURER

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The Second Circuit Court of Appeals recently affirmed a district court decision (reported on this blog March 10, 2009), which dismissed a putative shareholder derivative class action against PXRE Group, Ltd., a publicly traded Bermuda reinsurer, and certain of its directors and officers. The plaintiff shareholders alleged that PXRE intentionally or recklessly understated loss projections in the immediate aftermath of Hurricanes Katrina, Rita and Wilma in 2005, in order to preserve its credit rating. Specifically, the plaintiffs claimed that PXRE failed to take river flooding into account in its loss modeling, and that its loss modeling software was inadequate for much-larger-than-typical hurricane loss modeling, and was based only on typical hurricane loss modeling. The plaintiffs alleged specific misleading statements in press releases that it argued were intended to deceive in advance of public offerings. In an effort to establish scienter, the plaintiffs’ Complaint included allegations purportedly obtained from “confidential informants” from PXRE, including actuaries, a Vice President in charge of loss modeling, and the Chief Actuary of a “peer company.” Citing heightened pleading requirements for securities/fraud type claims, the district court dismissed the case, as plaintiffs had failed to sufficiently allege the bases for its allegations. The Second Circuit court affirmed by short summary order, citing the district court’s “thorough, well-reasoned opinion.” In re PXRE Group, Ltd., No. 09-1370 (2d Cir. Dec. 21, 2009).

This post written by John Pitblado.

THIRD CIRCUIT RULES ARBITRATORS NOT CORRUPT

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Following the New Jersey District Court’s confirmation of an arbitrator’s award in favor of the defendant/appellees, the appellants filed an appeal to the Third Circuit challenging the final judgment. The challenge was based on appellant’s assertion that the arbitrator demonstrated bias by failing to ensure that certain documentary evidence was disclosed in a timely manner.

The Third Circuit affirmed, holding that the arbitrators’ conduct revealed no partiality or corruption and that the arbitrators were not guilty of misconduct in refusing to postpone the hearing or in refusing to hear pertinent evidence. Further, the Court ruled that the arbitrators did not impose an improper burden on appellants such that vacatur or modification of the award was required. Andorra Services v. Venfleet, Ltd., Case No. 08-4902 (3d Cir. Dec. 10, 2009).

This post written by John Black.

COURT REFUSES CONFIRMATION OF ARBITRATION AWARD TO AVOID MAKING SUBSTANTIVE RULINGS ON CONTRACT ISSUES

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A motion to compel arbitration and to stay a case was granted to prevent the court from having to intepret certain reinsurance contracts that contain the arbitration agreements. Petitioner Sun Life Assurance Company of Canada sought the confirmation of an arbitration award. The respondents opposed, arguing that in seeking confirmation of the award, Sun Life also sought substantive rulings regarding the rights and liabilities of the parties that the arbitration panel did not address, namely, whether Sun Life owed interest on the award and whether the parties’ relationship should be terminated. The court agreed with the respondents, finding that to grant the relief Sun Life sought, the court would have to review the contracts and determine substantive rights and liabilities of the parties, thereby improperly usurping the arbitrators’ role. Sun Life Assurance Co. of Canada v. Liberty Mutual Insurance Co., Case No. 09 CV 2133 (USDC S.D. Cal. Dec. 9, 2009).

This post written by Brian Perryman.

DISTRICT COURT CONFIRMS FOREIGN ARBITRATION AWARD DESPITE PENDING PETITION IN CHINA; DEFENDANT APPEALS

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The Southern District of New York recently confirmed an arbitration award made by the China Maritime Arbitration Commission, over objections that enforcement of the award was inappropriate because the award was being challenged before the proper authority in China. This is a particularly noteworthy opinion because of the court’s willingness to confirm the arbitration award despite the fact that the defendant had filed a petition with a foreign jurisdiction to set aside the award, which means that the arbitral award was not final.

The Court confirmed the award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Federal Arbitration Act (“the Convention”). Under the Convention, a court “shall confirm the award” unless one of seven enumerated exceptions applies. Applying those, in connection with the Second Circuit’s non-exhaustive list of six “competing concerns”, the court concluded that confirmation of the award was appropriate. The District Court, however, refused to award attorneys’ fees finding that the defendant had not delayed payment in bad faith.

Defendants have appealed this decision to the Second Circuit. China National Chartering Group Corp. v. Pactrans Air & Sea, Inc., Case No. 06-13107 (S.D. N.Y. Nov. 13, 2009).

This post written by John Black.