Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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CASE UPDATE: ENGLISH COURT OF APPEAL REVERSES DECISION DENYING REINSURANCE COVERAGE, MARKING DEPARTURE FROM TRADITIONAL FOLLOW THE SETTLEMENTS RULINGS

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In a May 23, 2007 post, we reported on a UK decision denying reinsurance coverage despite a follow the fortunes provision based on a finding that the damages occurred outside the coverage period of the reinsurance, despite the conclusion of a US court on the underlying claim finding liability for damage occurring outside the coverage period of the underlying policy. The UK Court of Appeals has allowed an appeal, finding that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance.

The English appellate court agreed that the insurance and reinsurance contracts were not entirely “back to back” in terms of the coverage periods, but concluded that although there were some differences in the contracts, the parties intended that they should have the same effect and therefore, the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract. Despite the fact that the reinsurance appeared only to cover damage that occurred during the period of the reinsurance, and the trigger of coverage used by the US court permitted a broader recovery from the insurer, the Court of Appeals accepted the proposition that “the same or equivalent [coverage] wordings should be given the same meaning in the reinsurance contract as in the insurance contract.”

Explaining that the UK reinsurer had taken certain known risks in reinsuring a US insurer, the Court concluded that although the judgment against the insured was not one which the reinsurers expected, nevertheless it was one which was a possibility that they agreed to cover. This decision marks a departure from previous ‘follow the settlement’ cases involving differences in the insurance and reinsurance contracts, which have typically been resolved in favor of the reinsurers. Wasa International Ins. Co. v. Lexington Ins. Co., [2008] EWCA Civ 150 (Feb. 29, 2008).

This post written by Lynn Hawkins.

COURT INTERPRETS REINSURANCE AGREEMENT LIABILITY LIMIT IN SUMMARY JUDGMENT SETTING

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A district court has interpreted the liability limit of a reinsurance agreement in a summary judgment setting, finding the language to be unambiguous, and finding in favor of the position advanced by the reinsured. The opinion contains a good discussion of the rules for interpreting reinsurance agreements. Princeton Ins. Co. v. Converium Reinsurance (North America) Inc., Case No. 06-599 (USDC D. N.J. Mar. 27, 2008).

This post written by Rollie Goss.

NAIC REINSURANCE TASK FORCE WORK PROCEEDS SLOWLY

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The NAIC's Reinsurance Task Force of the E Committee met on March 29, 2008, and had further discussion of the proposal to revamp the regulation of the reinsurance industry in the United States. The Task Force is projecting further meetings through the end of 2008 on this subject. The materials indicate that representatives from the Florida and New York departments made presentations to the task force at its March 11-12, 2008 meeting regarding their proposals to change the collateral requirements for reinsurance to a financial strength based framework. The minutes of this meeting, as well as materials distributed for the meeting, have been published.

This post written by Rollie Goss.

COURT CONFIRMS ARBITRATION AWARD

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A district court has confirmed an arbitration award, finding that a pro se challenge to the award merely questioned the correctness of the award, and that there was no evidence to sustain a challenge to the award on the bases permitted by the Federal Arbitration Act. The challenges to the award included the failure of the arbitrators to allow a late amendment to the claims, the exclusion of unlawfully intercepted audiotapes (where questioning about the subject matter of the intercepted discussion was permitted) and the suggestion that a witness committed perjury because he disagreed with the movant. Martin v. Scott & Stringfellow, Inc., Case No. 06-207 (USDC E.D. Va. Mar. 13, 2008).

This post written by Rollie Goss.

SECURITIES LAWSUIT ALLEGING REINSURANCE STEERING PRACTICES WILL PROCEED

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An insurance broker’s bid to dismiss a federal securities lawsuit failed when a federal district court in Illinois denied its motion to reconsider its earlier motion to dismiss. The lawsuit arose out of the New York Attorney General’s investigation into the insurance brokerage industry’s use of so-called “contingent commission” practices, wherein brokers would allegedly direct or steer business to insurers willing to use their services when buying reinsurance in order to generate revenues in the form of commission payments. The broker, Aon, originally sought dismissal of the case in 2005, which the district court denied in 2006, relying on the pleading requirements set forth in the Seventh Circuit’s decision in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006). After the United States Supreme Court vacated the Seventh Circuit’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), articulating the standard courts must apply in determining whether a securities plaintiff has pled a “strong inference of scienter” as required by the Private Securities Litigation Reform Act of 1995, the broker reasserted its argument that the plaintiffs had not adequately pled scienter.

The district court disagreed with the broker once again, however, and denied the motion to reconsider. The court found that, even under the new Tellabs decision, the complaint supported an inference of the defendants’ knowledge, awareness and involvement in the alleged steering scheme. It also found that the complaint adequately alleged that the defendants either knew, or would have realized under the circumstances, that a failure to reveal potentially material facts would likely mislead investors. Among other things, the court found a financial motive to conceal the contingent commission practices, that it had been alleged that defendants failed to comply with GAAP and substantially inflated their reported earnings, and that company executives had admitted violating the internal code of ethics. Thus, the court found that a “strong inference of scienter” had been pled. Roth v. Aon Corp., Case No. 04-C-6835 (USDC N.D. Ill. Mar. 7, 2008).

This post written by Brian Perryman.