Brokers / Underwriters

BANKRUPTCY COURT DISMISSES FRAUD CLAIMS AGAINST ALPHASTAR’S FORMER SHAREHOLDERS, DIRECTORS AND OFFICERS

June 18, 2008 by Carlton Fields

AlphaStar Insurance Group Ltd. (“AlphaStar”) (f/k/a Stirling Cooke Brown Holdings Ltd) was a group of companies which provided, among other services, reinsurance brokerage and intermediary services through companies in London, Bermuda and the United States. The companies collapsed and eventually declared bankruptcy, largely as a result of their involvement in the personal accident reinsurance market. Richard E. O'Connell, the chapter 7 trustee (the “Trustee”), commenced this proceeding against AlphaStar's former officers and directors, Arthur Andersen LLP, and several entities affiliated with Goldman Sachs. Goldman Sachs essentially controlled AlphaStar prior to its 1997 initial public offering. By 1999, special investigations revealed that the activities of the companies “were run or had been run by or associated with unsavory, dishonest people who had engaged in questionable transactions,” and that the businesses “were rife with fraud; its subsidiaries had made material misrepresentations to counterparties, who were thus entitled to rescind their contractual obligations; most of AlphaStar’s assets were impaired; its businesses were no longer viable; it could not afford to defend against the recent onslaught of litigation claims and it ‘faced a probable loss of staggering proportions.’” Prior management was terminated, but the litigation exposure arising out of their activities matured into a series of lawsuits and arbitrations with disastrous results. The thrust of the allegations in the Trustee's Amended Complaint was that the defendants, in light of these problems, used fraudulent and other improper means to continue AlphaStar's corporate existence to advance their personal interests to the detriment of AlphaStar. Another words, the Amended Complaint contended that the defendants should have pulled the plug instead of attempting to clean up the companies. The defendants moved to dismiss the Amended Complaint with prejudice.

The court concluded that the efforts to shift the losses of the companies to third parties was unsupported by any evidence, and that the claims were based upon information that allegedly was concealed by the defendants, but which the public knew. “In the end, his conscious misbehavior claim is impermissibly based on 20/20 hindsight, as he candidly admitted.” Motions to dismiss were granted, except that the motions to dismiss the avoidance claims were denied, and the motion to dismiss the contract claim was granted, but with leave to replead. In dismissing the trustee’s fraud based claims, the Court concluded that the Amended Complaint did not allege facts that gave rise to a strong inference of fraudulent intent, and that the motives alleged by the Trustee were insufficient as a matter of law, and failed to identify specific information that would support the inference of conscious misbehavior. The Court also dismissed the breach of fiduciary duty cause of action concluding that, under Bermuda law, no fiduciary duty existed. In re AlphaStar Ins. Group Ltd., No. 03-17903 (Bankr. S.D.N.Y., Feb. 19, 2008).

This post written by Lynn Hawkins.

REINSURER PREVAILS ON IMPROPER PLACEMENT OF RISKS

June 9, 2008 by Carlton Fields

In two prior posts (February 28 and October 1, 2007), we reported on discovery disputes in a case in which a reinsurer contended that it was not liable on trucking risks due to the improper placement of the risks by a broker. The reinsurer has now prevailed on summary judgment, having established that trucking risks could not be ceded to its reinsurance without specific permission or special acceptance, and that the broker did not seek such permission or acceptance. Scottsdale Ins. Co. v. American Re-Insurance Co., Case No. 06-16 (USDC D. Neb. May 6, 2008).

This post written by Rollie Goss.

UK COURT DETERMINES THAT UNDERWRITING AGENCY DOES NOT HAVE AN ENTITLEMENT TO CONDUCT RUN-OFF

June 5, 2008 by Carlton Fields

Following the termination of an underwriting agency agreement, Temple Legal Protection sought to continue managing the run-off of the business originated under the agreement. The other party to the agreement contested the right of Temple to manage the run-off. An arbitrator found that Temple was not entitled to manage the run-off. On appeal, the Commercial Court found that the agreement did not provide a clear answer to the issue, but considering the agreement, custom and practice and other factors, the court concluded that while the arbitrator's analysis was faulty, the correct result had been reached. Temple Legal Protection Limited v. QBE Insurance (Europe) Limited [2008] EWHC 843 (Comm. Apr. 23, 2008).

This post written by Rollie Goss.

REINSURANCE BROKER MAY NOT PROCEED TO INTERLOCUTORY APPEAL AFTER DISAPPOINTMENT ON MOTION FOR SUMMARY JUDGMENT

April 24, 2008 by Carlton Fields

A reinsurance broker unsuccessfully sought an interlocutory appeal from a federal district court’s denial of its motion for summary judgment. The cause of action in the case was the Pennsylvania tort of negligent misrepresentation. It was alleged that the broker presented material misinformation to an Italian reinsurer that induced the reinsurer to reinsure various property and casualty risks in the United States. The broker argued on summary judgment that, under Pennsylvania law, this tort could not apply to it, since it was not a “professional information provider.” The court denied the summary judgment motion, and the broker subsequently moved to certify the question for immediate appeal to the United States Court of Appeals for the Third Circuit pursuant to 28 U.S.C. § 1292(b). The district court denied this motion, too. After noting that interlocutory appeals are generally disfavored, the district court found that there was no controlling question of law as to which there was a substantial ground for difference of opinion (a requisite of a § 1292(b) certification). Although the broker contended that Pennsylvania law does not impose liability for negligent misrepresentation on a reinsurance broker who negligently provides information to a potential reinsurer, the district court essentially determined that this was not a per se rule, especially given that part of the service of acting as a reinsurance broker is to provide information about the risk on which a reinsurer expects to be able to rely. The court found, therefore, that it was not clear that the broker’s proposed question was “controlling.” The district court also determined that an immediate appeal would not materially advance the ultimate termination of the litigation (another requisite of certification), observing that the case was already “on the eve of trial.” For these reasons, the motion for leave to appeal was denied. United National Insurance Co. v. Aon, Ltd., Case No. 04-539 (USDC E.D. Pa. Apr. 7, 2008).

This post written by Brian Perryman.

ENGLISH COURT DENIES AGGREGATION OF CLAIMS; PERMITS INSURER TO SEEK RECOVERY FROM BROKER

April 16, 2008 by Carlton Fields

The English Commercial Court has ruled that Standard Life Assurance Ltd can not recover damages from its underwriters arising out of the improper sales of mortgage endowment policies, but could claim against its insurance broker, Aon. Standard Life subscribed to a policy with a liability cover of £75 million in excess of £25 million. The policy contained a provision permitting the aggregation of claims arising from an originating cause or source. The insured aggregated 97,000 small claims and sought to recover the full £75 million excess of £25 million. The underwriters claimed that even if the claims did arise from a single originating cause, the claims could not be aggregated because the policy schedule and slip contained the wording “excess: £25million each and every claim and/or claimant.”

The court agreed with the underwriters, finding that the policy did not allow for the claims to be aggregated together, meaning the excess limit could not be reached. Specifically, the court found no “plausible purpose for the inclusion of the words ‘and/or claimant’ in the excess provision in the slip other than the attempted achievement of a per claimant excess.”

Prior to the court’s ruling, Aon brought its own negligence claim against Reynolds Porter Chamberlain (“RPC”) as a third party to the proceedings. Aon’s claim against RPC argues that the firm did not recognize that the wording of the policy meant the claims could not be grouped together. Standard Life Assurance Ltd. – and – Oak Dedicated Ltd. – and – Aon Ltd., Reynolds Porter Chamberlain, [2008] EWHC 222 (Comm. Feb. 13, 2008).

This post written by Lynn Hawkins.