Contract Interpretation

UK COURT: EXCESS POINT IN REINSURANCE AGREEMENT “SCALED” TO REFLECT INSURED’S INTEREST IN LOST ASSETS

July 12, 2011 by Carlton Fields

The UK Commercial Court recently ruled on the interpretation of a reinsurance agreement related to wind storm risks for a large independent oil exploration and production venture in the Gulf of Mexico. The dispute concerns the interpretation of the coverage limit provision of a facultative reinsurance policy applied to claims from Hurricane Rita. The provision provided “to pay up to Original Package Policy limits/amounts/sums insured excess of USD250 million (100%) any one occurrence of losses to the original placement.” The cedent calculated the reinsurance claim on the basis that the US $250 million excess point was referable to 100% values of the property, and that since Devon Energy (the insured) had less than a 100% interest, the excess point had to be “scaled” to reflect its lower interest. The Court agreed, finding that the evidence was “overwhelming” that the notation “100%” in the reinsurance agreement “has a recognized and established meaning in the market … [meaning] that the limit or excess scales to reflect the assured’s interest in the relevant assets.” A claim of misrepresentation was also rejected by the court. Gard Marine & Energy Limited v. Tunnicliffe, Case No. 2007 Folio 351, 2011 EWHC 1658 (Comm. Ct. June 30, 2011).

This post written by John Black.

WHETHER ARBITRATIONS SHOULD BE CONSOLIDATED IS A PROCEDURAL MATTER FOR AN ARBITRATION PANEL TO DECIDE

June 9, 2011 by Carlton Fields

A federal district court denied reinsurer Allstate’s motion to compel two separate arbitrations and granted insurer Liberty Mutual’s cross-motion to compel Allstate to select an umpire to complete an arbitration panel that, in turn, could decide how many arbitration proceedings should be held. Allstate had filed two arbitration demands based on distinct issues and argued that the parties’ reinsurance treaties permitted each dispute to be arbitrated separately. Allstate further argued that the Federal Arbitration Act required that two arbitrations be held. The court denied Allstate’s request, however, reasoning that its job was to determine the validity and scope of the arbitration provision. The arbitrators should decide procedural questions related to the arbitration, including whether to consolidate the separately requested arbitration proceedings. Allstate Insurance Co. v. Liberty Mutual Insurance Co., Case No. 11-10415 (USDC D. Mass. May 19, 2011).

This post written by Ben Seessel.

NO MANIFEST DISREGARD IN ATTORNEYS’ FEES AWARD

June 8, 2011 by Carlton Fields

General Security and AequiCap were parties to a contingent commission agreement, by which AequiCap reinsured certain of General Security’s losses under a specified formula. The parties disputed whether AequiCap owed General Security approximately $400,000 under the agreement. General Security demanded arbitration. A three-arbitrator panel ruled in its favor, and also granted it an additional $200,000 for costs and attorneys fees. AequiCap petitioned for vacatur to the district court, arguing that the award of attorneys fees was in “manifest disregard” of the law. The district court found for General Security, noting that the arbitration agreement allowed the panel to order such remedies as it deems appropriate. The court therefore denied the petition to vacate, and granted General Security’s cross-motion to confirm the award. In re General Security National Insurance Co., Case No. 10-CV-8682 (USDC S.D.N.Y. Apr. 29, 2011).

This post written by John Pitblado.

REINSURER CANNOT DENY COVERAGE BASED ON LATE NOTICE WITHOUT SHOWING PREJUDICE

June 7, 2011 by Carlton Fields

A federal district court held that, under Pennsylvania law, a reinsurer must show prejudice to deny coverage based on an insurer’s failure to provide prompt notice of loss, even where timely notice is a condition precedent to coverage. Global Reinsurance Corporation of America claimed that Pacific Employers Insurance Company was not entitled to benefits under the parties’ facultative reinsurance contract because Pacific Employers failed to provide prompt notice of loss arising from underlying asbestos litigation. Under the contract, prompt notice was a condition precedent to coverage. New York law, which Global argued should apply, provides that a reinsurer is not required to show prejudice to avoid coverage if the insurer fails to provide prompt notice and timely notice is a condition precedent. The court concluded, however, that Pennsylvania law should apply and denied Global’s attempt to avoid paying benefits for what it called the insurer’s “technical breach” of providing late notice. Pacific Employers Insurance Co. v. Global Reinsurance Corp. of America, Case No. 09-6055 (USDC E.D. Pa. May 23, 2011).

This post written by Ben Seessel.

IN ABSENCE OF A PRESCRIBED METHOD, A PARTY CAN CHOOSE ITS OWN REPLACEMENT ARBITRATOR

May 25, 2011 by Carlton Fields

The manner in which a replacement arbitrator is selected where the agreement is silent was resolved in a recent case. Northwestern National Insurance Company petitioned the court to appoint an ARIAS-certified replacement arbitrator for its reinsurer Insco, Ltd. Insco’s arbitrator had resigned three days before argument on Northwestern’s summary judgment motion amid allegations from both sides that the other’s arbitrator was improperly partial. The arbitration agreement provided that each party would select its own arbitrator and that a neutral umpire would be appointed; the agreement, however, did not supply a method for replacing an arbitrator. Shortly after Northwestern filed its petition, Insco appointed an ARIAS-certified arbitrator of its own choosing. The court denied Northwestern’s request. Although the court had the power to appoint an arbitrator under Section 5 of the FAA, allowing Insco to appoint a replacement was consistent with the terms of the reinsurance agreement and the underlying goals of arbitration. Northwestern National Insurance Co. v. INSCO, Ltd., Case No. 11 Civ. 1124 (USDC S.D.N.Y. May 12, 2011).

This post written by Ben Seessel.