Interim or Preliminary Relief

COURT DENIES PRE-PLEADING SECURITY AND DISMISSES SURETY CASE BASED ON STAY IN REHABILITATION PROCEEDING

October 24, 2011 by Carlton Fields

General Security National Insurance Company brought an action in New York federal court against Aequicap Insurance Company, in connection with Aequicap’s alleged failure to perform under a surety bond it issued to General Security. After Aequicap filed an answer in the case, General Security filed a motion seeking to compel Aequicap to post security pursuant to New York’s pre-pleading security statute. Aequicap objected on various bases, including the fact that, after the filing of General Security’s motion, a stay had been entered in Aequicap’s Florida rehabilitation proceeding. The New York court denied General Security’s motion, citing the Florida court’s stay Order, and dismissed the case without prejudice to re-filing, pending the outcome of the Florida proceeding. General Security Nat’l Ins. Co. v. Aequicap Ins. Co., No. 10-9685 (USDC S.D.N.Y. April 29, 2011).

This post written by John Pitblado.

COURT ORDERS PARTIES TO SELECT ARBITRATORS WITH RELEVANT REINSURANCE EXPERIENCE

August 30, 2011 by Carlton Fields

Parties have been ordered to pick proper arbitrators in a reinsurance dispute. Safety National sued Lloyd’s over a dispute pertaining to the parties’ reinsurance agreements covering certain of Safety National’s underlying workers compensation liabilities. A stay was entered to allow the parties to arbitrate. After six months of wrangling over the naming of arbitrators, Lloyd’s moved to lift the stay for the limited purpose of having the court issue an order requiring that the parties select only arbitrators with workers compensation reinsurance experience, as Lloyd’s contended the contracts required – a position which Safety National contested. Citing the policy embodied in the FAA’s provisions authorizing court involvement in the selection of arbitrators to facilitate efficient arbitration, the court ruled for Lloyd’s. It lifted the stay and ordered that the parties select arbitrators with requisite workers compensation reinsurance experience. Safety National Cas. Corp. v. Certain Underwriters at Lloyd’s, London, NO. 02-cv-1146 (USDC M.D. La. Aug. 16, 2011).

This post written by John Pitblado.

INJUNCTION ISSUED TO PREVENT WRITING OR AMENDING REINSURANCE RISKS PURSUANT TO BINDING AUTHORITY PENDING ARBITRATION

May 31, 2011 by Carlton Fields

The US District Court for the Eastern District of New York recently adopted the US Magistrate’s Report and Recommendation, granting United Insurance Company’s Motion in Aid of Arbitration for a Preliminary Injunction. The dispute arose out of a Binding Authority Agreement (“BAA”) authorizing World Wide Re (formerly World Wide Management Consultants) to underwrite and bind reinsurance risks on UIC’s behalf subject to the underwriting guidelines. The BAA allows both parties to terminate the agreement immediately upon notice for cause, in the event that either party breaches the agreement. The BAA also provides for mandatory arbitration of all disputes. On February 28, 2001, UIC sent a Notice of Termination to World Wide asserting that it breached the agreement when it disregarded UIC’s specific instructions not to bind the risk related to Arcelor Mittal’s reinsurance. By letter dated March 3, World Wide responded, stating that it would continue to write business until an arbitration decision was rendered granting the relief sought. World Wide has since continued to bind risks on behalf of UIC. UIC subsequently filed the instant motion for a preliminary injunction.

The Magistrate issued a Report and Recommendation (adopted by the District Court) granting the motion. The Magistrate concluded that World Wide’s continued actions to continue binding risk on behalf of UIC constituted irreparable harm, and that UIC had demonstrated a likelihood of success on the merits. Accordingly, World Wide was enjoined from writing reinsurance risks on behalf of UIC or modifying or canceling existing risks. United Insurance Co. Ltd. v. Word Wide Web Re, Case No. 11-01177 (E.D. N.Y. Apr. 27, 2011).

This post written by John Black.

SAFECO GRANTED COLLATERAL SECURITY BUT MUST SUBTRACT CLAIMS ACTUALLY PAID

November 18, 2010 by Carlton Fields

The case involves the interpretation and enforcement of a collateral security provision of an indemnification agreement relating to Safeco’s service as a surety on construction contracts. Following the District Court’s grant of plaintiff Safeco’s motion for summary judgment regarding its right to collateral security and the Second Circuit’s subsequent dismissal of an appeal for lack of jurisdiction, defendant M.E.S. filed a motion for reconsideration on the grant of summary judgment. M.E.S. argued that a recent document production showed that plaintiff’s collateral security demand is not based on estimated loss exposure, but rather on “actual claimed losses,” which are treated differently under the terms of the parties’ indemnity agreements.

The court cited a number of authorities, including reinsurances cases, which dictate that where claims have actually been paid, Safeco has an adequate remedy at law in the enforcement of the indemnification clause and is not entitled to the equitable remedy of specific performance of the collateral security provision. The District Court directed Safeco to provide the Court with its collateral security demand in an amount net of paid claims. Safeco Ins. Co. of Am. v. M.E.S., Inc., Case No. 09-3312 (E.D. N.Y. Oct. 4, 2010).

This post written by John Black.

TRIAL COURT’S PREMATURE DISCHARGE OF BOND RELATING TO REINSURANCE AGREEMENT EXCUSES SURETY FROM PAYING ON BOND DEMAND

June 14, 2010 by Carlton Fields

Petitioner, Founders Insurance Company, sought a preliminary injunction to enjoin the respondents from drawing down on a $32,000,000 trust account created for their benefit under the parties’ reinsurance agreement pending the outcome of the arbitration of a dispute. The preliminary injunction was granted, and Founders posted a bond in the amount of $1.6 million as a condition for the injunction, which was fully secured by cash. Great American Insurance Company was the surety on the bond. The injunction was subsequently reversed on appeal. On remand, the trial court indicated on the record that it “vacated” the bond and, at the same time, also awarded respondents damages in the amount of $389,282.74 for lost income as a result of the improper injunction.

Relying on the trial court’s statement that the undertaking was vacated, Founders contacted Great American and requested the return of the cash collateral, and Great American released the collateral. Subsequently, respondents contacted Great American and demanded disbursement from the bond of the amount of lost income damages fixed by the trial court. Upon learning that the bond had been cancelled, respondents moved for an order resettling and clarifying the court’s earlier order. The court granted the motion to the extent of directing Founders to post another bond in the amount of $500,000. Respondents appealed the decision of the trial court ordering Founders to post the second bond rather than directing Great American to make immediate payment of the lost income, contending that the order “failed to adequately remedy the consequences of its ill considered statement that it was vacating the undertaking [the first bond].” The appellate court found that Great American had fulfilled its obligation as surety, since it had released the collateral relying in good faith upon the trial court’s “vacated” statement. Great American, therefore, could not be held liable on the first bond for respondents’ damages. Founders Insurance Co. Ltd. v. Everest National Insurance Co., Index No. 600523/07 (N.Y. App. Div. May 4, 2010).

This post written by Brian Perryman.