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Brokers / Underwriters

AIG SETTLES FINITE REINSURANCE DISPUTE WITH PENNSYLVANIA DEPARTMENT OF INSURANCE

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AIG has settled issues with the Pennsylvania Department of Insurance arising out of finite reinsurance and bid-rigging allegations, agreeing to pay over $9 million in penalties and costs. This is the largest penalty ever levied upon an insurer by the department. The finite reinsurance issues arose out of one of the transactions included in the recent criminal conviction in Connecticut. New compliance measures are included to ensure accurate financial reporting and increased transparency of commission payments to agents and brokers. Details of the settlement are generally set out in a press release issued by the Department, and in a detailed settlement agreement.

This post written by Rollie Goss.

SECURITIES LAWSUIT ALLEGING REINSURANCE STEERING PRACTICES WILL PROCEED

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An insurance broker’s bid to dismiss a federal securities lawsuit failed when a federal district court in Illinois denied its motion to reconsider its earlier motion to dismiss. The lawsuit arose out of the New York Attorney General’s investigation into the insurance brokerage industry’s use of so-called “contingent commission” practices, wherein brokers would allegedly direct or steer business to insurers willing to use their services when buying reinsurance in order to generate revenues in the form of commission payments. The broker, Aon, originally sought dismissal of the case in 2005, which the district court denied in 2006, relying on the pleading requirements set forth in the Seventh Circuit’s decision in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006). After the United States Supreme Court vacated the Seventh Circuit’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), articulating the standard courts must apply in determining whether a securities plaintiff has pled a “strong inference of scienter” as required by the Private Securities Litigation Reform Act of 1995, the broker reasserted its argument that the plaintiffs had not adequately pled scienter.

The district court disagreed with the broker once again, however, and denied the motion to reconsider. The court found that, even under the new Tellabs decision, the complaint supported an inference of the defendants’ knowledge, awareness and involvement in the alleged steering scheme. It also found that the complaint adequately alleged that the defendants either knew, or would have realized under the circumstances, that a failure to reveal potentially material facts would likely mislead investors. Among other things, the court found a financial motive to conceal the contingent commission practices, that it had been alleged that defendants failed to comply with GAAP and substantially inflated their reported earnings, and that company executives had admitted violating the internal code of ethics. Thus, the court found that a “strong inference of scienter” had been pled. Roth v. Aon Corp., Case No. 04-C-6835 (USDC N.D. Ill. Mar. 7, 2008).

This post written by Brian Perryman.

COURT AFFIRMS SUMMARY JUDGMENT IN FAVOR OF BROKER ON STATUTE OF LIMITATION GROUND, REFUSING TO APPLY THE DISCOVERY RULE

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The US Court of Appeals for the Fifth Circuit has affirmed a summary judgment in favor of Aon, ruling that claims asserted against it by TIG arising out of the placement of reinsurance were barred by the statute of limitation. Aon acted as reinsurance intermediary and broker for TIG with respect to workers’ compensation risks that TIG ceded to U.S. Life. Aon failed to pass to U.S. Life historical loss information regarding the ceded risks that TIG had provided to Aon, and U.S. Life succeeded in rescinding that portion of the reinsurance in an arbitration due to the failure to provide known historical loss information. TIG then sued Aon for damages for breach of fiduciary duty. The district court held, and the Fifth Circuit affirmed, that the cause of action arose under Texas law when TIG and U.S. Life entered into an “impaired reinsurance agreement,” rather than when U.S. Life succeeded in rescinding the reinsurance (or even when U.S. Life first contended that it had the right to rescind). The courts refused to apply the discovery rule to delay the accrual of the cause of action because: (1) TIG only used Aon to solicit bids, dealing directly with bidders to negotiate reinsurance agreements and confirm the information that had been provided to the bidders; and (2) at the time that it received U.S. Life’s reinsurance proposal, TIG suspected that the loss information had not been passed to U.S. Life due to the fact that the proposal was much lower than other proposals it had received. The courts essentially imposed a duty to inquire upon TIG at that time, a duty which it had not satisfied. The Fifth Circuit concluded that “[i]nquiry could have been made to determine or confirm the facts and assumptions on which the bargain was to be based,” and that the “injury was not inherently undiscoverable” when the reinsurance agreement was executed. This seems like a harsh result, since neither party to the reinsurance agreement knew it was potentially voidable until the arbitration. There may have been a number of reasons why US Life's proposal was so low, some of which might not make the reinsurance agreement “impaired” from its inception. The effect of this decision, however, at least in the Fifth Circuit, is that cedents cannot rely upon brokers to do their jobs and pass on historical loss information that the cedent has provided to the broker if there is a reasonable doubt that the loss information may have been passed on to a prospective reinsurer. TIG Ins. Co. v. Aon Re Inc., No. 05-11450 (USCA 5th Cir. Mar. 13, 2008).

This post written by Rollie Goss.

UK COMMERCIAL COURT DENIES LIBYAN INSURER’S CLAIMS AGAINST LONDON BROKER

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In 2004, Aon (a London broker) placed reinsurance for risks that United Insurance Company (a Libyan insurance company) assumed in insuring assets of a Libyan state-owned oil company. Aon also obtained reinsurance for United in relation to a Libyan company in the chemicals industry. Aon placed the business in the London market. After renewing the business in 2005, United brought three claims against Aon. United sought to recover brokerage fees paid to Aon on the basis that Aon misrepresented the nature of cover, commissions, and fees. United was unsuccessful on all of its claims. The Commercial Court found that United’s evidence did not match the relevant contemporary documents and was contradicted by Aon’s evidence. United Insurance Co of Libya v. Aon Ltd., [2007] EWHC 1583 (Comm. July 5, 2007). This opinion is not on the UK Court site, but is available on WESTLAW at 2007 WL 1942745.

This post written by Lynn Hawkins.

DISTRICT COURT DISMISSES TORITOUS INTERFERENCE AND UNFAIR COMPETITION CLAIMS ALLEGED AGAINST REPLACEMENT REINSURANCE BROKER

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Benfield provided reinsurance brokerage services, but its services were terminated, and it was replaced by Aon. Benfield sued Aon, contending that Aon had wrongfully collected and retained commissions that should have been paid to it. Benfield alleged five claims: tortious interference with contract; tortious interference with prospective business relations; unjust enrichment; conversion; and unfair competition. On a motion to dismiss, the court dismissed all of the claims except those for unjust enrichment and conversion. Benfield, Inc. v. Aon Re, Inc., Case No. 07-2218 (USDC D. Minn. Jan. 8, 2008).

This post written by Rollie Goss.