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Brokers / Underwriters

SEVENTH CIRCUIT AFFIRMS GRANT OF SUMMARY JUDGMENT AGAINST REINSURANCE SERVICE COMPANY

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Reinsurance Results is a service company that reviews an insurance company’s claims against its reinsurers to make sure the insurance company receives the benefits to which its reinsurance contracts entitle it. Reinsurance Results entered into a service contract with Indiana Lumbermens Mutual Insurance Company. The fee for the service was 33% of the funds collected from the insurance company’s reinsurers as a result of the review. Reinsurance Results claimed that it obtained $2.2 million and thus was owed 33% of that amount. Indiana Lumbermens disagreed, contending that the $2.2 million was a disputed benefit arising out of a change in its accounting treatment for certain transactions, which affected the amount that Indiana Lumbermens could bill its reinsurers, and that a change in accounting practices did not allow Reinsurance Results to compensation under its contract. An Indiana district court granted summary judgment against Reinsurance Results and Reinsurance Results appealed.

The Seventh Circuit, in an opinion by Judge Posner, affirmed the lower court’s decision. The Seventh Circuit noted that the contract stated that Reinsurance Results was entitled to compensation based upon its reporting of any loss or premium overpayment claims “that have not been processed in accordance with the reinsurance contract terms and conditions” (emphasis in court's opinion). The claims that the insurance company submitted were correctly processed. Even if Reinsurance Results did confer a benefit on Indiana Lumbermens by encouraging them to alter their accounting methodology, “it was not a benefit for which the insurance company was contractually obligated to compensate the service company.” Indiana Lumbermens Mutual Ins. Co. v. Reinsurance Results, Inc., No. 07-1823 (7th Cir. Jan. 16, 2008).

This post written by Lynn Hawkins.

DAMAGES CALCULATION REVERSED – COMMISSION ADJUSTMENTS SHOULD HAVE BEEN BASED ON ‘INCURRED’ RATHER THAN ‘REASONABLE’ LOSSES

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Transatlantic Reinsurance Company (“TRC”), a reinsurer on non-standard automobile insurance policies, and Home State County Mutual Insurance Company (“Home State”) (the ceding and fronting carrier) sued Gamma Group, the agent responsible for binding and adjusting the policies, for breach of contract. The trial court concluded that Gamma breached its contract by failing to factor the run-off into its commission adjustment and instead retaining the premiums from which the adjusted commission payments were to be made.

Gamma appealed the trial court’s judgment arguing: (1) that the trial court erred in awarding damages under the contract because losses and loss adjustment expenses on run-off claims should not have been included in the commission adjustment; and (2) that the court erred in awarding statutory attorney’s fees. In a cross-appeal, TRC and Home State argued that the court erred when it construed the contract to imply that only “reasonable” run-off payments were to be included in the commission adjustment calculation.

The Texas Court of Appeals affirmed the trial court’s judgment on the right to recover damages for breach of contract and attorney’s fees, but reversed the trial court’s judgment with respect to the amount of damages reasoning that the trial court erred by reducing the damage award based on an implied term in the contract. The court stated that “[c]ourts do not rewrite contracts to insert provisions parties could have included or imply restraints for which they did not bargain,” and concluded that “[a]lthough the trial court refer[red] to its determination as a contract construction, it …, in effect, inserted an implied covenant requiring that loss payments be reasonable. Gamma Group, Inc. v. Transatlantic Reinsurance Co. & Home State County Mutual Ins. Co., No. 05-06-00156, (Tex. Ct. App., Dec. 3, 2007).

This post written by Lynn Hawkins.

CONNECTICUT ATTORNEY GENERAL FILES ANTITRUST ACTION AGAINST GUY CARPENTER CHALLENGING THE USE OF REINSURANCE FACILITIES WITH LEAD REINSURERS

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Opening a new front, Connecticut Attorney General Richard Blumenthal filed a 107 page Complaint in Connecticut state court against reinsurance broker Guy Carpenter & Company and Excess Reinsurance Company, alleging violations of the Connecticut antitrust and unfair trade practices statutes by fixing prices, creating closed reinsurance markets and allocating reinsurance markets. This action has potentially broad significance since one of the practices it challenges is the creation by reinsurance brokers of a reinsurance facility with a “lead” reinsurer, in which other reinsurers can participate only if the agree to the pricing and other terms set by the lead reinsurer. The Complaint alleges that such a facility is “totally insulated from competition or any competitive market forces.” The role of a “lead” reinsurer in setting market rates and terms is not an unusual concept in some lines of reinsurance and markets. State of Connecticut v. Guy Carpenter & Company and Excess Reinsurance Company, Superior Court, Judicial District of Hartford (October 4, 2007).

DEVELOPMENTS IN BROKERAGE ANTITRUST ACTIONS

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This past week saw significant developments in the antitrust brokerage MDL proceeding pending in the USDC for the District of New Jersey. The court entered a 73 page order on September 28 dismissing, with prejudice, the federal RICO claims asserted against the insurer and broker defendants. This was the third strike, the court having previously dismissed the RICO claims twice with leave to amend. See Reinsurance Focus posts dated October 16, 2006 and April 27, 2007. In re Insurance Brokerage Antitrust Litigation, Case No. 04-5184 (MDL Docket No. 1663) (USDC D. N.J.). As in the prior opinions, the court’s analysis concentrated on the enterprise element of a RICO claim. RICO claims generally have not fared well recently against reinsurers and brokers. In two opinions involving Gen Re, a court dismissed federal RICO claims relating to alleged “accommodation reinsurance” and undisclosed side agreements based upon inadequate allegations of causation and reliance. See Reinsurance Focus posts dated July 5, 2006 and November 13, 2006.

The MDL court entered a separate order on October 5 approving an award of attorneys’ fees, expenses and incentive award payments relating to a settlement entered into by three companies related to Arthur J. Gallagher & Co. The court awarded $8.85 million for fees and costs, which is 24% of the $28 million compensation fund created by the settlement. The award consisted on $6,221,480 in fees and $2,413,520 in expenses.

CONNECTICUT COURT HOLDS BROKERAGE BELONGS TO PLACING BROKER

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A Connecticut court has ruled in favor of reinsurance brokers Carvill America in their dispute with XL Specialty Insurance Company. In 1999, Carvill was appointed reinsurance broker for XL Specialty Insurance Company. This appointment was subsequently terminated. In 2004, XL sued Carvill alleging misconduct and Carvill counter-claimed alleging it was entitled to brokerage on all of the reinsurance contracts it had placed prior to XL terminating its role. The court determined that XL tortiously interfered with Carvill’s business relationships with the reinsurers when it instructed its new broker (Benfield) to withhold the amount of Carvill’s brokerage from premium payments to the reinsurers. The court concluded that termination of a reinsurance broker’s position as broker of record for an insurer does not terminate the reinsurers’ contractual obligation to pay the placing broker the brokerage as required by the slips. XL Specialty Ins. Co. v. Carvill America, Inc., No. X04cv044000148S, 2007 WL 1748157 (May 31, 2007), denying XL’s motion to amend, 2007 WL 2200560 (Super. Ct. Conn. July 9, 2007) (not available on court’s web site).