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New reinsurance-related and arbitration developments from Carlton Fields

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John Pitblado

Federal Court in Puerto Rico Voids Marine Insurance Policy Based Upon Misrepresentation in Insurance Application

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QBE Seguros brought a successful action declaring a marine insurance policy was void ab initio under the doctrine of uberrimae fidei and the breach of the warranty of truthfulness in the application for insurance.

In Morales’ application for insurance, he did not include the fact that he had previously grounded a 40’ yacht and listed only two of the seven vessels that he had owned and operated when asked. Following an endorsement, Morales held hull insurance for a vessel named Making Waves, which sustained damage as a result of a fire. Thereafter, QBE rescinded the policy.

The Court first looked at uberrimae fidei, or the duty of utmost good faith, which requires the insurer to show that the insured misrepresented a material fact. Having determined Morales misrepresented his prior boating history and prior loss history on his application, the Court looked at whether such misrepresentation was material. “A fact is material if it can possibly influence the mind of a prudent and intelligent insurer in determining whether it will accept the risk.” QBE testified that prior loss history is an important factor to take into consideration when evaluating the risk posed by issuing a particular policy. The Court determined this information was material: “it is entirely logical that an insured’s loss history would affect their premiums and whether an insurance company would want to accept the risk of issuing them a policy.”

The Court then looked at whether the contract between the parties included a warranty of truthfulness, and if so, the insured’s misrepresentation of fact in that contract will also excuse the insurer from the policy contract. The insurance application stated the information provided therein is warranted by the applicant “to be true and correct in all respects.” The Court found the “warranty of truthfulness was material to the risk assumed by QBE in issuing the policy.” The Court rejected Morales’ affirmative defenses, finding that “Morales breached the warranty of truthfulness in the QBE Application and policy by failing to disclose his prior loss history and his prior boating experiences. His breach gives QBE the right to void the policy.”

The Court denied Morales’ counterclaims for breach of contract and consequential damages due to QBE’s bad-faith adjustment.

QBE Seguros v. Morales-Vázquez, No. 15-2091 (USDC D.P.R. Aug 7, 2018)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

Special Focus: Follow the Fortunes Doctrine

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The follow the fortunes (or follow the settlements) doctrine has been an important part of many reinsurance relationships. This Special Focus article focuses on divergent case law as to whether the doctrine is purely a matter of contract, or whether it should be implied into every reinsurance contract, whether or not the contract refers to the doctrine.

This post written by Rollie Goss.
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New York Federal Court Confirms Arbitration Award

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The background and full procedural history of this case can be found here. In sum, the dispute stems from a 2011 agreement by KT Corporation and KTSAT Corporation (“KT”), a Korean satellite communications provider, to sell the KOREASAT-3 satellite for $500,000 to Asia Broadcast Satellite Global Ltd. and Asia Broadcast Satellite Holdings, Ltd. (“ABS”), a Bermuda satellite communications provider based in Hong Kong. It was also agreed that KT would operate the satellite for ABS for an $800,000 fee and additional technical engineering fees. The parties entered into a Purchase Agreement and Operating Agreement, both of which had arbitration clauses. In 2013, however, the Korean government declared the sale “null and void” because KT had failed to obtain a permit necessary to comply with the Foreign Trade Act. The parties then submitted issues relating to the Purchase Agreement and Operating Agreement to an International Chamber of Commerce (“ICC”) arbitration panel. The ICC panel first issued a partial award, which held that ABS has the title to the satellite and that no Korean mandatory law was violated when title passed. KT then moved to vacate the partial award in New York federal court and sought remand of the case to the ICC. ABS cross-moved to confirm the partial award. In April 2018, the New York federal court confirmed the partial award, finding that the ICC panel had not exceeded its authority and had not manifestly disregarded the law. In the meantime, in March 2018, the ICC panel issued its final award, which held that ABS had properly terminated the Purchase and Operating Agreements in response to KT’s breaches and was owed approximately $1 million in damages. ABS then moved to confirm the final award in New York federal court, and KT cross-moved to vacate the final award.

KT’s petition to vacate was based on two grounds: 1) the ICC panel acted in manifest disregard of New York law by failing to award KT the purchase price or other compensation after awarding ABS the title to the satellite; and 2) the ICC panel exceeded its authority by resting its holding on the invalidity of the Korean government’s order. The New York federal court denied KT’s motion to vacate, finding that the ICC panel did not exceed its authority because it found that KT had breached the Purchase and Operating Agreements. Thus, regardless of whether the ICC panel was correct or not in interpreting the Korean government’s order, the court held that the ICC panel had sufficient basis to find that KT had breached the Agreements, which was “squarely in its authority.” The court also held that the ICC panel did not act in manifest disregard of the law.

The New York federal court also granted ABS’ motion to confirm the final award. In so doing, the court noted that KT’s claim that the final award violated public policy is the same argument it made previously, which was rejected by the court in its previous opinion confirming the partial award. For the same reasons, the court again rejected the argument.

KT Corporation, et al. v. ABS Holdings, Ltd., et al., Case No. 17-Civ-7859 (USDC S.D.N.Y. July 12, 2018).

This post written by Jeanne Kohler.
See our disclaimer.

Tax Court Rejects Captive Insurance Company Status Under 501(c)(15)

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Petitioner, a captive insurer domiciled in Anguilla, applied to be a tax-exempt small insurance company under IRC section 501(c)(15), and filed returns on this basis, making an election under IRC section 953(d). The Tax Court concluded this characterization was not appropriate, that Petitioner was not a bona fide insurance company, and that Petitioner should instead be treated as a foreign corporation.

The Tax Court found the reinsurance agreements did not allow Petitioner to effectively distribute risk, and in the absence of risk distribution, “a necessary component of insurance” Petitioner’s transactions were not insurance transactions.

Reserve Mechanical Corp. v. Commissioner of Internal Revenue, Docket No. 14545-16 (U.S. Tax Court June 18, 2018)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

Florida Federal Court Dismisses Reinsurer’s Agent From Breach of Contract Lawsuit

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In this case, the ceding company, VIP Universal Medical Insurance Group Ltd. (“VIP”), brought an action in Florida federal court against its reinsurer, BF&M Life Insurance Company Ltd. (“BF&M”), and International Reinsurance Managers LLC (“IRM”), BF&M’s agent, alleging breach of a reinsurance contract, in which BF&M reinsured VIP for medical claims in excess of $200,000. It was alleged that BF&M refused to pay a claim for $139,000 and that IRM had “directed the non-payment” of such claim. IRM moved to dismiss, arguing that it cannot be held liable for breach of contract, where it is not party to a contract.

The Florida federal court agreed with IRM, noting that under Florida law, “an agent for a disclosed insurer is not liable to the insured on the insurance contract.” The court noted that even taking the allegations — that IRM acted as agent and “directed” the non-payment of the claim — as true, they do not state a claim for breach of contract against IRM. The court then held that IRM, as agent to the reinsurer, was not a proper party in VIP’s breach of contract claim because IRM was not a party to the reinsurance contract at issue. Thus, IRM’s motion to dismiss was granted.

VIP Universal Medical Insurance Group Ltd. v. BF&M Life Insurance Company Ltd., et al., No. 17-24633 (USDC S.D. Fla. July 18, 2018).

This post written by Jeanne Kohler.

See our disclaimer.