Opening a new front, Connecticut Attorney General Richard Blumenthal filed a 107 page Complaint in Connecticut state court against reinsurance broker Guy Carpenter & Company and Excess Reinsurance Company, alleging violations of the Connecticut antitrust and unfair trade practices statutes by fixing prices, creating closed reinsurance markets and allocating reinsurance markets. This action has potentially broad significance since one of the practices it challenges is the creation by reinsurance brokers of a reinsurance facility with a “lead” reinsurer, in which other reinsurers can participate only if the agree to the pricing and other terms set by the lead reinsurer. The Complaint alleges that such a facility is “totally insulated from competition or any competitive market forces.” The role of a “lead” reinsurer in setting market rates and terms is not an unusual concept in some lines of reinsurance and markets. State of Connecticut v. Guy Carpenter & Company and Excess Reinsurance Company, Superior Court, Judicial District of Hartford (October 4, 2007).
ARBITRATION AWARD CONFIRMATION DECISIONS
There are three recent decisions regarding arbitration awards, two of which have some unique interest:
- In Comedy Club, Inc. v. Improv West Associates, No. 05-55739 (USCA 9th Cir. Sept. 7, 2007), the court partially confirmed and partially vacated an arbitration award, finding that the arbitrator properly arbitrated equitable claims, properly issued injunctions except to the extent that they sought to bind non-parties to the arbitration agreement who were not in privy with parties, did not act irrationally, but acted in manifest disregard of law in the imposition of an overbroad covenant not to compete.
- In Ward v. Phantom Screens Manufacturing, Ltd., Case No. 04-3916 (USDC D. N.J. April 13, 2007), the court confirmed a Canadian arbitration award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards with minimal analysis, noting that the Convention clearly stated the bases upon which an award could be vacated, and that none of those grounds were present. The bases for the Order are set out in a Memorandum.
- In Louis J. Kennedy Trucking Co. v. Teamsters Local Union No. 701, Case No. 05-6005 (USDC D. N.J. Sept. 17, 2007), the court refused to vacate an arbitration award based upon claims that the arbitrator exceeded her authority, manifestly disregarded the law and acted in violation of public policy. The basis for the argument to vacate was basically that the arbitrator had erred, which is insufficient under the FAA.
DEVELOPMENTS IN BROKERAGE ANTITRUST ACTIONS
This past week saw significant developments in the antitrust brokerage MDL proceeding pending in the USDC for the District of New Jersey. The court entered a 73 page order on September 28 dismissing, with prejudice, the federal RICO claims asserted against the insurer and broker defendants. This was the third strike, the court having previously dismissed the RICO claims twice with leave to amend. See Reinsurance Focus posts dated October 16, 2006 and April 27, 2007. In re Insurance Brokerage Antitrust Litigation, Case No. 04-5184 (MDL Docket No. 1663) (USDC D. N.J.). As in the prior opinions, the court’s analysis concentrated on the enterprise element of a RICO claim. RICO claims generally have not fared well recently against reinsurers and brokers. In two opinions involving Gen Re, a court dismissed federal RICO claims relating to alleged “accommodation reinsurance” and undisclosed side agreements based upon inadequate allegations of causation and reliance. See Reinsurance Focus posts dated July 5, 2006 and November 13, 2006.
The MDL court entered a separate order on October 5 approving an award of attorneys’ fees, expenses and incentive award payments relating to a settlement entered into by three companies related to Arthur J. Gallagher & Co. The court awarded $8.85 million for fees and costs, which is 24% of the $28 million compensation fund created by the settlement. The award consisted on $6,221,480 in fees and $2,413,520 in expenses.
CASE UPDATE: DUTY TO ARBITRATE ARISING FROM RETROCESSION AGREEMENT EXTINGUISHED BY COMMUTATION AGREEMENT
As described in a recent posting to this blog (dated Sept. 10, 2007), Continental Casualty Company (“CCC”) and LaSalle Re are currently engaged in a dispute regarding an Excess of Loss Retrocession agreement and a subsequently executed Commutation and Release Agreement. Last month an Illinois federal court ruled that LaSalle Re’s removal of the case to federal court was proper. Quickly reaching the merits of the dispute, on September 21, the same court granted CCC’s motion to stay arbitration proceedings commenced by LaSalle Re. CCC argued that the arbitration clause contained in the Excess of Loss agreement was extinguished, along with all other obligations, by the subsequent Commutation Agreement.
Applying Illinois contract law and looking to the plain language of the Commutation Agreement, the Court concluded that “it would be difficult to envision a more clear statement of the parties’ intent to extinguish their obligations under the Retrocession Agreement.” Recognizing that the parties could have included an arbitration clause in the Commutation Agreement, but did not choose to do so, the Court concluded that the parties intended to extinguish their duty to arbitrate. Continental Casualty Co. v. LaSalle Re Ltd., Case No. 07-C 4228 (USDC N.D. Ill. Sept. 27, 2007).
CASE UPDATE: REINSURER LIABLE FOR COMPENSATORY AND PUNITIVE DAMAGES
The Oklahoma Insurance Commissioner, in her capacity as the court-appointed receiver of Hospital Casualty Company (“HCC”), brought this action against Employers Reinsurance Corporation (“ERC”) contending that HCC was entitled to recover from ERC for certain claims under reinsurance policies issued by ERC in HCC’s favor. The court recently ruled upon cross motions for summary judgment.
The Mulberry Claim: HCC issued a $1 million primary policy and a $5 million excess policy to Amity Care Corp., a nursing home company. ERC reinsured the excess policy. Amity was sued by the estate of Bonnie Mulberry, a nursing home resident. The case settled for over $1 million dollars. HCC sought indemnity from ERC, but ERC denied the claim asserting that public policy prohibited insurance coverage for punitive damages. The court ruled that the ERC was liable for the excess insurer’s entire share of the settlement because it was unclear which claims the jury relied upon in its determination that punitive damages should be awarded.
The Hepatitis Claim: HCC issued primary and excess general liability policies to Norman Regional Hospital over several years. HCC reinsured the excess policies with ERC. A number of lawsuits including a class action were filed against the hospital by patients exposed to or infected by hepatitis between 1999 and 2002. To settle the claims, NRH agreed to pay $11 million dollars, with HCC providing $8 million. The issue raised in this case was the proper allocation of the $8 million between the relevant policy years. ERC argued that the parties intended to allocate $3 million to the 2000-2001 policy year and $5 million to the 2001-2002 policy years, thereby exhausting both the primary and excess coverage in the 2001-2002 year. The judge agreed, pointing to the undisputed fact that this is what HCC intended.
Claims Expenses: The court further ruled that the reinsurer, ERC, was not obligated to pay additional costs because the excess insurer did not pay or incur any claim expenses in its capacity as the excess insurer. State of Oklahoma ex rel. Kim Holland v. Employers Reinsurance Corp., No. Civ-06-0426-HE (W.D. Okla. Sept. 13, 2007). A prior post dealing with the relationship between this case and the liquidation proceeding appear in this blog on September 20, 2006.