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New reinsurance-related and arbitration developments from Carlton Fields

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DISTRICT COURT DECIDES FLURRY OF DISCOVERY MOTIONS IN DISPUTE BETWEEN REINSURER AND INSURER OVER UNDERLYING ASBESTOS CLAIMS

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The Eastern District of Pennsylvania recently ruled on several discovery motions in a reinsurance dispute between R&Q Reinsurance Company (“R&Q”) and St. Paul Fire and Marine Insurance Company (“St. Paul”) over underlying asbestos claims. Both parties filed cross motions to compel, of which the Court granted R&Q’s motion and denied St. Paul’s, and St. Paul filed motions for protective orders that were also denied in an August 1, 2017 order .

R&Q’s motion to compel first sought unredacted versions of documents which St. Paul claimed contained proprietary information, which the Court granted because its previously issued discovery order sufficiently protected the information and rendered it discoverable. R&Q’s motion next sought to compel production of St Paul’s historical loss reserves, which St. Paul claimed were protected by the attorney-client privilege and work-product doctrines. The Court granted the motion, finding that the reserve information was relevant to when St. Paul had notice of potential losses and thus whether it gave sufficient notice to R&Q, as well as concluding that neither attorney-client nor work-product protection applied because the reserve information was created in the ordinary course of business. Finally, the Court granted the motion as to R&Q’s third request for unredacted information related to other reinsurance policies it maintained on the underlying claims. It found the information was relevant to R&Q’s late notice claim because St. Paul had begun defending against the underlying claims in the late 1980s but didn’t provide notice of loss to R&Q until 2013. The Court summarily dismissed St. Paul’s motions for protective orders because they addressed identical issues to those contained in R&Q’s motion to compel.

On the other hand, the Court rejected both grounds asserted in St. Paul’s motion to compel. First, St. Paul’s objections to insufficient interrogatory responses about whether R&Q suffered prejudice from St. Paul’s notice of loss were moot because R&Q had sufficiently addressed the issue in its response to St. Paul’s motion for protective order. Second, the Court denied St. Paul’s complaints over the minimal number of documents produced by R&Q because the characterization was misleading and because R&Q would naturally have fewer documents because of its relatively recent notice of loss in 2013.

After the Court issued the order deciding the various discovery motions, St. Paul moved on August 11, 2017 for clarification regarding the scope of the Court’s order on R&Q’s motion to compel. In particular, it sought to clarify whether the Court was merely ordering production of unredacted versions of documents previously produced based on its proprietary information and other reinsurers objections, or whether it was ordering a new collection and review of documents, including all other reinsurance information from other reinsurer files. St. Paul stated that it would conduct searches to locate and produce documents regarding the date St. Paul first provided notice of the underlying claims to other reinsurers. In its motion, St. Paul claims that in response to the Court’s order to designate relevant documents, R&Q designated hundreds of thousands of pages of documents without any attempt to narrow the designation to identify only potentially relevant documents.

In a short order issued on August 16, 2017, the Court ordered St. Paul to disclose all documents it previously redacted as “proprietary,” “reinsurance,” or “reserves,” and to provide responsive answers to R&Q’s interrogatories and search for documents relevant to the late notice issue.

R&Q Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., Case No. 16-1473 (USDC E.D. Pa.).

This post written by Thaddeus Ewald .
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FEDERAL COURT LOOKS TO PETITION TO COMPEL ARBITRATION, NOT THE FACTS OF THE UNDERLYING LITIGATION, TO DETERMINE WHETHER IT HAS DIVERSITY JURISDICTION OVER DISPUTE

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The Second Circuit has upheld an order granting a petition by Hermès of Paris to compel arbitration after Matthew Swain, a former employee, sued Hermès and a coworker in state court for alleged violations of state non-discrimination laws. The Second Circuit rejected Swain’s argument that there was no subject matter jurisdiction, finding that only parties to the petition to compel arbitration, not the parties in the underlying lawsuit, should be considered when evaluating diversity jurisdiction.

After Swain was fired by Hermès, he sued asserting claims under New Jersey law. Hermès filed a petition in federal court to compel arbitration, and the district court granted that petition. On appeal, Swain argued that the district court lacked subject matter jurisdiction, which the court had based on complete diversity of citizenship, because, even though Hermès and Swain were citizens of different states, Swain and the coworker defendant in the underlying action were both citizens of New Jersey.  Thus, Swain argued that the district court was required to “look through” the arbitration petition to the facts of the underlying state court litigation to determine the jurisdiction issue, citing the Supreme Court’s 2009 ruling in Vaden v. Discover Bank.

The Second Circuit, applying its 1995 decision in Doctor’s Associates v. Distajo, held that the court could only consider the citizenship of the parties to that petition—Hermès and Swain—in evaluating whether diversity jurisdiction existed.  The court further held that Vaden, in which the Supreme Court found that the allegations of the underlying lawsuit were relevant to jurisdiction over the arbitration petition, did not apply because it dealt with federal question jurisdiction, not diversity. Diversity jurisdiction raises different concerns, the Second Circuit found, including the possibility that a plaintiff could try to defeat diversity by adding a party from the same state as a defendant.

The court also rejected Swain’s argument that the coworker, as a third-party beneficiary of the contract containing the arbitration clause, was an indispensable party to the federal litigation. In fact, the court held that whether the coworker was a third party beneficiary did not matter, as the district court could afford full relief to Hermès in the form of an order compelling arbitration without the coworker’s presence in the lawsuit, such that the coworker was not an indispensable party.

Hermès of Paris, Inc. v. Swain, Docket No. 16-3182-cv (2d Cir. Aug. 14, 2017)

This post written by Jason Brost.
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SOUTH CAROLINA FEDERAL COURT ORDERS SEPARATE TRIALS OF PRIMARY AND THIRD-PARTY CLAIMS IN REINSURANCE TRUST INVESTMENT DISPUTE

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A federal district court in South Carolina recently granted motions to bifurcate a trial involving various claims, crossclaims, and counterclaims between an insured, reinsurers, and a reinsurance agreement trustee.  Companion Property and Casualty Insurance Co. (“Companion”) was the beneficiary of a reinsurance collateral trust for which U.S. Bank served as a trustee. Under the trust agreement, the reinsurers could direct U.S. Bank to substitute assets according to certain specifications with appropriate notification to Companion. Alexander Burns founded a number of corporate entities (“Southport”) which acquired the relevant reinsurance companies and therefore managed the trust’s asset allocation strategies through appropriate direction to U.S. Bank.

The lawsuit filed by Companion against U.S. Bank alleges certain trust investments violated the terms of the trust agreement. U.S. Bank subsequently asserted counterclaims against Companion as well as claimed that Burns and Southport (“third-party defendants”) were the cause of any alleged injuries. Companion and Burns filed separate motions requesting the Court bifurcate the trial: one proceeding to adjudicate the claims between Companion and U.S. Bank and a second proceeding to adjudicate the third-party claims if Companion were to prevail in the first proceeding.

Ultimately, the Court granted both motions for separate trials after finding that bifurcation would serve the “objectives of promoting convenience and achieving an expeditious and economical resolution” to the various claims asserted by the parties. It noted that cases involving third-party claims are particularly suitable for bifurcation given that resolution of the primary claims may obviate the need for trial of third-party claims, such as contribution or indemnification, and also reduce the amount of discovery needed overall.

Because the adjudication of U.S. Bank’s third-party claims is contingent upon Companion prevailing in its primary claims, trying the primary claims first would either eliminate the need for trial of the third-party claims, or alternatively, encourage settlement negotiations between U.S. Bank and the third-party defendants. Additionally, bifurcation in complicated cases such as this one involving multiple claims, crossclaims, and counterclaims, can avoid prejudice stemming from jury confusion from being presented contingent and contradictory claims simultaneously. The Court acknowledged the slight risk of inefficiency should U.S. Bank be required to litigate two separate trials which might include some overlapping evidence, but concluded that the efficiency gains outweighed that risk and granted the motions.

Companion Prop. and Cas. Ins. Co. v. U.S. Bank National Assn., Case No. 15-1300 (USDC D.S.C. Aug. 23, 2017).

This post written by Thaddeus Ewald .
See our disclaimer.

THE UNCERTAINTIES OF PROGNOSTICATIONS OF THE IMPACT OF HURRICANES HARVEY AND IRMA ON CATASTROPHE BONDS

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We have rarely provided our opinions or market commentaries in our Reinsurance Focus posts, preferring instead to provide our readers hopefully balanced analyses of court opinions, legislation, and regulations affecting the reinsurance market. Recent events, however, have caused us to make an exception to that practice. Much is being written about the extent to which catastrophe bonds (or traditional reinsurance) are “exposed” to or may be called upon to pay losses from Hurricanes Harvey and Irma, and the impact that those storms may have on the ILS market. Some reinsurance agreements use a parametric trigger, and the possible impact of a particular storm on such reinsurance facilities may be reasonably ascertainable in the relatively short term. For example, the Caribbean Catastrophe Risk Insurance Facility, which has developed parametric trigger policies covering wind risks to be backed by traditional reinsurance and capital markets, insuring member countries in the Caribbean, has already determined the amount of payouts on its parametric policies for Harvey and Irma, and has published a report on that issue. However, many of the catastrophe bonds covering wind risks have indemnity triggers, including those to which the Texas Windstorm Insurance Association (the Alamo series) and Florida’s Citizens Property Insurance Corporation (the Everglades series) ceded risks. Moreover, many catastrophe bonds are part of a reinsurance program or tower composed of different types of risk transfer, with different layers, some overlapping or parallel, different attachment points, and different limits.

With the exception of flood losses under the National Flood Insurance Program’s traditional reinsurance program, which does not include catastrophe bonds, few of the “analyses” in the press to date appear to have even attempted to take into account the specific factors that will determine whether, and the extent to which, a particular catastrophe bond or traditional reinsurance agreement is likely to respond to losses, including the trigger of the reinsurance coverage, the attachment point of the reinsurance, the limit of the reinsurance, the percentage of cover for a particular layer, the actual level of losses in the reinsurance program, other inuring reinsurance in the reinsurance program, whether the reinsurance is aggregate or occurrence based, and the extent to which the retention leading up to the attachment point of the reinsurance has been or will be eroded by losses. While one may say that all reinsurance in a tower is “exposed” to losses by any covered event, that is not meaningful without a factually informed analysis of the extent to which a particular catastrophe bond or reinsurance agreement is likely to be called upon to pay losses, given the damage caused by the event and the terms of the applicable reinsurance agreement.

The modeled level of losses from these storms suggested by various brokers and modeling companies are only estimates, and the fact that the modeled losses suggested by different sources conflict with each other and have changed over time is itself good evidence that such numbers are only preliminary estimates, based upon limited reliable data. Many catastrophe bonds frequently attach fairly high in a reinsurance tower, and if few cat bonds actually sustain losses from these two major storms, the impact upon the ILS market may be limited, or even positive. In addition, there has been a great influx of capital into the markets for traditional reinsurance for wind risks and catastrophe bonds over the past several years, and historically major hurricanes have frequently prompted the influx of additional capital.

The bottom line? Only time and accompanying loss development will permit a reasoned evaluation of the impact of Harvey and Irma on the reinsurance and cat bond markets or individual reinsurance agreements or catastrophe bonds.

This post written by Rollie Goss.
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LENDER-AFFILIATED CAPTIVE REINSURER OBTAINS DISMISSAL OF MORTGAGE INSURANCE LAWSUIT BROUGHT BY ILLINOIS DIRECTOR OF INSURANCE

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The suit arose out of an arrangement where lenders would refer borrowers to (now-defunct) Triad Guaranty Insurance Company (Triad) to obtain private mortgage insurance. The lender-affiliated captive insurance company would then reinsure the policies issued by Triad.  The Illinois Director of Insurance, who brought the suit on behalf of Triad, alleged that the captive insurer had (1) breached the reinsurance contract by failing to provide certain disclosures required by law, (2) breached the covenant of good faith and fair dealing by referring only the mortgages with the highest risk of default to Triad, (3) violated the Real Estate Settlement Procedures Act (RESPA) by accepting “kickbacks” in connection with the referral of business incident to a real estate settlement service, and (4) was unjustly enriched because the reinsurance premiums grossly exceeded the value of the reinsurance provided.

The court disagreed on all counts. The breach of contract claim failed because the reinsurance contract did not require that the disclosures at issue be provided; and even if the contract did require the disclosures, the Director failed to specify the damages that resulted from the alleged lack of disclosure.  Regarding the good faith and fair dealing count, the captive insurer did not breach the covenant because the contract did not contain any express provisions relating to the discretion the captive insurer allegedly failed to exercise in good faith.  Regarding the RESPA count, the  claim was time barred because it accrued years earlier at the time each underlying mortgage was executed, and not at the time each allegedly illegal “kickback” was made.  Finally, regarding the unjust enrichment count, the claim was precluded because a contract (the reinsurance agreement) governed the relationship between the parties.  Illinois ex rel Hammer v. Twin Rivers Ins. Co., Case No. 16-C-7371 (USDC N.D. Ill. July 5, 2017).

This post written by Benjamin E. Stearns.
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