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New reinsurance-related and arbitration developments from Carlton Fields

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COURT DENIES MOTION TO COMPEL PRODUCTION OF DOCUMENTS RELATING TO REINSURANCE COVERAGE

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A federal district court has denied that part of an insured’s motion seeking to compel the insurer to produce all documents relating to its reinsurance coverage. The court ordered the production of the reinsurance agreements themselves, but found the request for all other reinsurance information was “plainly too broad.” The court also recognized the possible application of the common interest doctrine to the communications between the insurer and its reinsurer to support the denial. As to the other documents sought, the court granted that part of the motion seeking documents relating to certain drafting history of the insurance policy at issue, but denied the remaining part of the motion to compel, which sought documents ranging from the insurer’s personnel files for all personnel involved in the claim to the insurer’s loss reserve information. Harleysville Lake States Ins. Co. v. Lancor Equities, Ltd., No. 13-CV-6391 (USDC N.D. Ill. Oct. 31, 2014).

This post written by Renee Schimkat.

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UNITED STATES TAX COURT RULES ON CAPTIVE INSURANCE ARRANGEMENT

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In 2003 and 2004, the Internal Revenue Service disallowed deductions taken by SHI Group, a subsidiary of the Swedish company Securitas AB, for insurance expenses related to a captive insurance arrangement established by Securitas AB. SHI Group, which maintained an office in California, petitioned the disallowance of these deductions in the United States Tax Court. The Internal Revenue Code permits deductions for insurance premiums as business expenses. Although the insurance premiums may be deductible, amounts placed in reserve as self-insurance are not and can only be deducted at the time the loss for which the reserve was established is actually incurred. While neither the Code nor the regulations define insurance, courts have looked primarily to four critieria in deciding whether an arrangement constitutes insurance for income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risk of loss to the insurer; and (4) the arrangement must be insurance in the commonly accepted sense. Based on the complicated facts before it, the Tax Court determined that the captive arrangement at issue constituted insurance, allowing deductions for the related expenses. Securitas Holding, Inc. v. Commissioner, No. 21206-10, T.C. Memo 2014-225 (U.S.T.C. Oct. 29, 2014).

This post written by Leonor Lagomasino.

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COURT DISMISSES ALL CLAIMS BROUGHT BY INSURED AGAINST REINSURANCE INTERMEDIARY AND AGENT IN CONNECTION WITH FRAUDULENT SCHEME AND ILLUSORY AGREEMENT

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A federal district court has dismissed all claims brought against American Special Risk (ASR), a reinsurance intermediary and agent for insurer Signet, by insured Car Sense. Car Sense sued Signet and ASR in connection with a Buy Back Guarantee program that Signet offered as a way to increase customer participation in certain incentive programs offered by Car Sense. Signet represented that the BBG program was 100% secured via a reinsurance agreement with Hannover Re. ASR acted as Signet’s reinsurance intermediary and agent in negotiating and procuring the reinsurance agreement. As alleged, though Signet represented that the BBG was a legitimate insurance product, the BBG was in fact a fraudulent scheme engineered to generate one-time fees. Moreover, the reinsurance agreement did not provide for 100% security of the BBG as Signet represented but was, in fact, illusory. Car Sense sued Signet and ASR for various claims ranging from breach of contract to fraud.

The court dismissed all claims against ASR finding, in large part, that ASR did not owe any duty, and had not made any misrepresentations, to Car Sense. The court also gave notice of its intention to dismiss all claims against Signet for Car Sense’s failure to serve Signet within the time required by the Federal Rules of Civil Procedure. Car Sense, Inc. v. American Special Risk, LLC, No. 13-CV-5661 (USDC E.D. Pa. Oct. 24, 2014).

This post written by Renee Schimkat.

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NEW YORK APPELLATE COURT DISMISSES CLAIMS AGAINST REINSURER AND ITS CLAIMS ADMINISTRATOR

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In what began as a dispute between OneBeacon America Insurance Company and its insured, Colgate, over OneBeacon’s asserted right to control the defense of claims against Colgate in connection with numerous personal injury suits, Colgate sued OneBeacon’s reinsurer, National Indemnity Company (“NICO), and its affiliated claims adjuster, Resolute Management. Colgate alleged that OneBeacon’s contractual relationship with NICO and Resolute created a conflict of interest because they served a dual role as both OneBeacon’s reinsurer and the claims adjuster under those policies. Colgate wanted to defend the actions against it, while NICO and Resolute wanted to settle the cases to minimize the legal expenses.

Colgate sued NICO and Resolute under several theories, including declaratory relief, breach of contract, tortious interference, breach of the implied covenant of fair dealing, and a statutory claim under Massachusetts law for unfair deceptive conduct. After the lower court only partially dismissed these claims, NICO and Resolute appealed. The appellate court dismissed all claims against NICO and Resolute. Central to the court’s ruling was the absence of a contract between Colgate and NICO or between Colgate and Resolute. Moreover, the agreement between NICO and Resolute provided that the agreement could not be assigned and that it did not confer any rights on third parties. Absent contractual privity or an assigment, Colgate could not assert any claims against NICO or Resolute despite their dual roles as OneBeacon’s reinsurer and Colgate’s claims administrator. OneBeacon America Insurance Co. v. Colgate-Palmolive, Index No. 651193/11 (N.Y. App. Div. Oct. 28, 2014).

This post written by Leonor Lagomasino.

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THE SEVENTH CIRCUIT REFERS ISSUE OF SCOPE OF ARBITRATION TO ARBITRATORS

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The Seventh Circuit Court of Appeals held that it lacked jurisdiction over an interlocutory appeal of an order that would direct the arbitrator to include year 2008 in a pending arbitration proceeding brought under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). Central States assessed liability against US foods in 2008 and 2009 because US foods withdrew in part from an underfunded multiemployer pension plan. US Foods requested arbitration pursuant to the MPPAA for the year 2009, but failed to do so for year 2008. In return, Central States sued US Foods to collect the 2008 assessment. US Foods requested that the district court order the arbitrator in the pending arbitration regarding the 2009 assessment to consider also the amount owed for 2008, but the district court refused.

While section 16(a)(1)(B) of the Federal Arbitration Act (FAA) allows interlocutory appeals from orders denying requests for arbitration under section 4 of the FAA, US Funds could not rely on the FAA to establish appellate jurisdiction to review the district court’s denial because section 4 pertains only to arbitration requests contained in written agreements. This arbitration did not concern any written agreement. Furthermore, the Seventh Circuit noted, because arbitration regarding year 2009 was ongoing, the issue as to whether year 2008 should be included in said arbitration must first be decided by the arbitrator, not the court. Central States, Southeast and Southwest Areas Pension Fund v. US Foods, Inc., No. 13-1566 (7th Cir. July 30, 2014).

This post written by Whitney Fore.

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