Rob DiUbaldo

Insurance Broker Must, at Its Own Expense, Produce Documents Requested by Subpoena Issued in Dispute Between Workers’ Compensation Insurer and Its Insureds

August 30, 2018 by Rob DiUbaldo

A district judge in the Eastern District of California has ordered a third-party insurance broker to comply with a subpoena from defendants seeking documents related to that broker’s sale of defendant’s insurance policies to plaintiffs.

The order was entered in two lawsuits against Applied Underwriters, Inc. that have been consolidated for pre-trial purposes. In these lawsuits, Shasta Linen Supply Inc. and Pet Food Express Ltd. allege that Applied Underwriters used “an unfiled, void and illegal collateral agreement in the collection of excessive fees and expenses” in connection with workers’ compensation insurance. Applied Underwriters issued a subpoena to Relation Insurance Services, Inc., which was the insurance broker that sold the policies at issue. Relation objected to the subpoena on the basis that (1) it sought irrelevant information, (2) this information was available from plaintiffs, (3) the requested documents contained confidential, proprietary information, and (4) Applied Underwriters should be required to pay the costs of the production. The court rejected all four objections.

First, the court agreed with Applied Underwriters that information regarding the insurance brokerage work that Relation did for the plaintiffs was relevant to the question of plaintiffs’ reliance on Applied Underwriters’ allegedly fraudulent statements, as it could show what plaintiffs already knew about the market for insurance and competitive products. Second, the court found that Applied Discovery had already sought discovery from plaintiffs, and that the subpoena was meant to fill in gaps in plaintiffs’ productions. The court also emphasized that no rule required that party discovery be final before third-party discovery is issued. Third, the court found that a protective order entered in the matter would address Relation’s concerns regarding its confidential, proprietary information. Finally, the court found that $15,000—the amount that Relation estimated compliance with the subpoena would cost—was not a “significant expense” as is required for the cost shifting provision of Fed. R. Civ. P. 45(d)(2)(B)(ii) to apply, as Relation was a large company that had received approximately $400,000 in commissions from sales to the plaintiffs. Thus, the court ordered Relation to produce the requested documents and information at its own expense.

Shasta Linen Supply Inc. v. Applied Underwriters, Inc., No. 2:16-cv-00158 WBS AC, and Pet Food Express Ltd. v. Applied Underwriters, Inc., No. 2:16-cv-01211 WBS AC (June 14, 2018)

This post written by Jason Brost.

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Reinsurer Obtains Summary Judgment in Suit by Annuity Issuer

August 29, 2018 by Rob DiUbaldo

Capitol Life Insurance Co. partially prevailed, and partially failed, its effort to overturn unfavorable grants of summary judgment in a recent dispute regarding an annuity policy written by Capitol. The present opinion arose from Capitol’s appeal of the trial court’s decision granting summary judgment in favor of the policyholder (“Newman”), third-party administrator MetLife, and summary judgment on behalf of Capitol’s reinsurer, AGL. On appeal, the Texas Court of Appeals reversed and remanded regarding summary judgment on Newman’s breach of contract claim, but affirmed summary judgment in favor of AGL and MetLife.

The court reversed summary judgment regarding Newman’s breach of contract claim and Capitol’s statute of limitations defense, remanding the case for further proceedings on that claim. The court affirmed the trial court’s grant of a “no-evidence summary judgment” as to Capitol’s breach of contract claim against AGL because Capitol did not provide “more than a scintilla of probative evidence” to show that Capitol had performed its obligations under the reinsurance agreement, an element of a breach of contract claim as to which Capitol bore the burden of proof. Likewise, the court upheld the grant of no-evidence summary judgment as to Capitol’s contract claim against MetLife. Capitol Life Ins. Co. v. Newman, Case No. 05-16-1476 (Tex. Civ. App. June 21, 2018).

This post written by Thaddeus Ewald .

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Third Circuit Vacates and Remands Order Quashing Subpoena of Documents for Use in Litigation in Germany

August 28, 2018 by Rob DiUbaldo

The Third Circuit has vacated and remanded a district court’s decision quashing a subpoena issued pursuant to 28 U.S.C. § 1782, which allows a party to procure discovery for us in a foreign proceeding, finding that the district court had misunderstood certain facts and not given adequate consideration to others.

The discovery in question was sought in connection with a trade-secret dispute being litigated in a German court between Biomet, Inc. and Heraeus Kulzer GmbH. Biomet initiated a section 1782 action in the Eastern District of Pennsylvania to subpoena the production of all documents produced in a prior, related matter that were in the possession of two law firms (neither representing Biomet or Heraeus) in Philadelphia. Section 1782 provides in part that “[t]he district court of the district in which a person resides or is found may order him to . . . to produce a document or other thing for us in a proceeding in a foreign or intentional tribunal, including criminal investigations conducted before formal accusation.” Heraeus objected to the discovery request, arguing that the subpoena did not comply with section 1782, as interpreted by the Supreme Court in Intel Corp. v. Advanced Micro Devices. The district court quashed the subpoena.

On appeal, the Third Circuit found that the subpoena did comply with the statute, rejecting an argument that section 1782 did not apply to these documents because they were held by law firms rather than Heraeus, which was the real party in interest, as the plain language of the statute did not require the court “to consider a principal-agent relationship, or whether the documents being held by the subpoenaed party belong to a foreign party.” The court then looked at the Intel factors and found that the district court’s consideration of these factors was “cursory and conclusory” and “relied upon an incomplete understanding of the pertinent facts surrounding the German proceeding.” Specifically, the Third Circuit found that the district court erred in finding that Biomet had delayed in requesting the documents, incorrectly placed the burden on Biomet to show that the German court would be receptive to this discovery, and erred by flatly rejecting the discovery based on concerns regarding the disclosure of proprietary information without requiring the parties to negotiate regarding the scope of the discovery or the entry of an appropriate protective order. The Third Circuit thus remanded the matter to the district court for reconsideration, while particularly stating that “it will be within the District Court’s discretion to grant or deny the motion to quash the subpoena.

In re Biomet Orthopaedics Switzerland GmbH Under 28 U.S.C. § 1782 for Order to Take Discovery for Use in Foreign Proceeding, No. 17-3787 (3d Cir. Aug. 6, 2018).

This post written by Jason Brost.

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An Update on the Implementation of the US-EU Covered Agreement

August 27, 2018 by Rob DiUbaldo

We have previously reported on the NAIC’s strategy of assisting the states in the implementation of the Covered Agreement through revisions to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (“the Models”). The Reinsurance Task Force of the Financial (E) Committee exposed drafts of proposed revisions to the Models on June 21. By the NAIC’s Summer National Meeting in Boston early this month, the Reinsurance Task Force had received eighteen comment letters on the exposure drafts from regulators, trade associations, insurance/reinsurance companies, and other interested parties. The meeting package for the Task Force’s August meeting included pertinent written materials. The Task Force heard limited oral statements at its meeting and proceeded to move the Model exposure drafts to the next step. According to the summary of this meeting, revised exposure drafts are anticipated in mid-September, with another comment period, followed by possible final consideration at the NAIC’s Fall National Meeting in November of this year.

The written comments did not contain significant opposition to the Model revisions, but did contain some constructive suggestions for changes to the exposure drafts at both conceptual and detailed wording levels. The major themes of the written comments include:

Desire for uniformity – Perhaps the most widely voiced comment was a desire for uniformity in the implementation of the Covered Agreement. This principle found expression in three topics:
- Primacy of the Model Law – Several commentators suggested that significant substantive requirements be contained in the Model Law rather than in the Model Regulation, in order to foster a greater likelihood that the overall requirements would remain uniform, with minimal substantive variation from state to state.
- Regulatory discretion – Several commentators suggested that although it is customary to reserve discretion to individual state insurance commissioners to make customizations or other changes to a model, that such individual discretion is not desirable in situations, such as this, in which uniformity of treatment is an important goal. In particular, comments called out the discretion of individual state commissioners to impose additional requirements for states to qualify as Reciprocal Jurisdictions, and discretion in determining certain requirements for non-EU reinsurers.
- Certified Reinsurers – One commentator implicitly questioned the future utility of the Certified Reinsurer status, and the potential interplay between that concept and the new Reciprocal Jurisdiction concept. If there is a lack of uniformity in this area, such differences might have a significant impact on the broader reinsurance market.
Equal treatment – Concern was voiced that there should be equal treatment for EU and non-EU domiciled reinsurers, including US domiciled reinsurers. Some commenters suggested that the current exposure drafts would permit different treatment for reinsurers with different domiciles. One commentator suggested recognizing as a Reciprocal Jurisdiction U.S. states that meet certain NAIC accreditation requirements.
Solvency – The exposure drafts provide authority for state commissioners to deal with additional collateral issues with respect to reinsurers subject to rehabilitation or liquidation proceedings. A number of comments suggested that, when applicable, such considerations should be exercised by the appropriate rehabilitation or insolvency proceeding court instead of a state commissioner.
Effective date – Several commentators noted ambiguity in the effective date provisions of the revised Models and a desire to coordinate the effective date of the Model revisions with the effective date of the Covered Agreement’s reinsurance collateral provisions.

Perhaps the most interesting issue in discussion is whether and the extent to which to permit individual state insurance commissioners discretion in the implementation of the revised Models, in particular in determining the requirements for finding a particular jurisdiction to be a Reciprocal Jurisdiction. While it is customary, given the state-based system of insurance regulation, to afford individual state commissioners discretion in the implementation of Model Laws and Model Regulations, there appears to be a strong desire, if not a need, for more strict uniformity in the implementation of the Covered Agreement, and in the regulation of reinsurance activity throughout the broader market. It will be interesting to see how these somewhat competing interests are resolved.

Overall, it appears that this process is “on track” compared to the expectations of the NAIC stated earlier this year, with very good consensus emerging as to not only the broad lines of the amendments to the Models, but also of the wording of such amendments.

This post written by Rollie Goss.
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New Jersey Tax Court Finds That Companies for Which New Jersey is the Home State Must Pay Taxes on All Premiums Paid to Captive Insurers for U.S. Based Risks.

August 9, 2018 by Rob DiUbaldo

A tax court judge in New Jersey has handed Johnson & Johnson (J&J), and likely other New Jersey-based businesses that operate captive insurers, a significant loss in an opinion interpreting the federal Nonadmitted and Reinsurance Reform Act (NRRA) and related changes to New Jersey law regarding taxes on insurance premiums.

For the last 10 years, New Jersey has imposed what the court called a self-procurement tax on insurance premiums paid to captive insurers, and J&J, which has its headquarters in New Jersey and pays significant premiums to a captive insurer, pays such taxes. Initially, those taxes were based only on the premiums paid for risks located in New Jersey. After the passage of the NRRA and certain related changes to New Jersey law, the New Jersey Department of Banking and Insurance took the position that J&J must pay taxes to New Jersey on all the premiums it paid its captive insurer for U.S. risks. J&J filed a claim challenging this interpretation and seeking a refund of almost $56 million, alleging that both the NRRA and the changes to New Jersey law applied only to surplus lines business, and not to self-procured insurance.

The court disagreed. The NRRA provides that “no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance.” This meant that New Jersey, which was previously able to tax premiums paid by out of state companies to nonadmitted insurers for risks located in New Jersey, could now only tax such premiums paid by businesses which New Jersey was their home state. The court rejected J&J’s argument, which was largely based on legislative history, that “nonadmitted insurance” as used in the NRRA does not include captive insurers. The court agreed with J&J, however, that the language of the changes to New Jersey law made it appear that only surplus lines insurance was covered by New Jersey’s adoption of the home state rule. And yet, after balancing what it called “the precise language” of the statute “against its true legislative intent,” the court found itself “convinced that the New Jersey Legislature intended to include self-procured insurance in the adoption of the Home State Rule because it intended to include all nonadmitted insurers, and not to limit it to only surplus lines.” This legislative intent thus trumped the “precise language,” and the court found that J&J must pay the tax on all premiums for risks located in the United States.

Johnson & Johnson v. Dir., Div. of Taxation & Comm’r, Docket No. 13502-2016 (June 15, 2018)

This post written by Jason Brost.

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