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Arbitration / Court Decisions

COURT ALLOWS REINSURER DISCOVERY DESPITE “FOLLOW THE SETTLEMENTS” DEFENSE

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A Connecticut federal court decided some thorny discovery issues in a reinsurance dispute between Travelers and one of its reinsurers, Excalibur. The suit arose from underlying asbestos claims settled by Travelers, for which it looked to Excalibur and its other reinsurers for coverage.

Holding that New York law applied, the Court identified several operative principles. First, a “follow the settlements” clause in a reinsurance contract requires deference to a cedent’s decision on the allocation of settlement payments among reinsurers. Second, a cedent’s allocation decision, however, is not immune from scrutiny, and must be reasonable. That is, it must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at but for the reinsurance. Third, an allocation that violates or disregards the reinsurance contract’s provisions is invalid.

Excalibur argued that as one of Travelers’ reinsurers, it was entitled to challenge Travelers’ allocation of its settlement among the reinsurers. It argued that Travelers’ allocation was unreasonable, and contrary to the reinsurance policies, and that it was therefore entitled to discovery of information pertaining to the allocation decision. Travelers responded that the “follow the settlements” clause meant Excalibur could not challenge, question, or inquire into Travelers’ settlement and allocation decisions. Holding that Excalibur’s position accorded better with New York law, the court allowed Excalibur’s requested discovery. Travelers Indemnity Co. v. Excalibur Reinsurance Corp., No. 3:11-CV-1209 (USDC D. Conn. April 8, 2013).

This post written by John Pitblado.

See our disclaimer.

COURT HOLDS THAT FLORIDA LAW APPLIES TO TORT CLAIMS BROUGHT BY INSURER AGAINST FLORIDIAN AND LONDON REINSURANCE BROKERS

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We reported earlier on an action brought by Instituto Nacional de Seguros (“INS”), a Costa Rican state-owned insurer, against Florida insurance broker Hemispheric Reinsurance Group, L.L.C. and London-based Howden Insurance Brokers Limited. INS alleges breach of contract and tort claims based on Hemspheric’s and Howden’s alleged commission overcharge on $300 million in faculty reinsurance coverage INS obtained on a single property damage and business interruption policy. INS had retained Hemispheric as broker for its reinsurance program; Hemispheric, in turn, retained Howden as sub-broker to gain access to the London reinsurance market.

Howden moved for a determination that English law and practice should apply to INS’s tort claims. INS argued in opposition that the relationship between the parties began in Florida, and that Florida continued to be the center of the parties’ relationship. INS further argued that the funds for the reinsurance program, including the alleged overcharges, flowed through Florida. Howden argued that its conduct took place in England and, further, that there was no “center” of the parties’ relationship because there was no cognizable relationship between INS and Howden as the parties were not in privity. Agreeing with INS, the court held that Florida law applies to INS’s tort claims under Florida’s “most significant relationship” test. Instituto Nacional de Seguros v. Hemispheric Reinsurance Group, L.L.C., Case No. 10-33653 CA 04 (Fla. Cir. Ct. Apr. 10, 2013).

This post written by Ben Seessel.

See our disclaimer.

COURT COMPELS ARBITRATION IN REINSURANCE DISPUTE

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New Jersey Physicians United Reciprocal Exchange (“NJ Pure”) filed a complaint claiming that its reinsurer breached a 2007 reinsurance contract under which it owed plaintiff some $2.3 million, having allegedly improperly offset an amount owed by NJ Pure under the parties’ 2004 contract. The reinsurer moved to dismiss/stay in favor of arbitration. NJ Pure resisted, citing the forum selection clause as evidence that the parties did not intend for arbitration to be mandatory. The court disagreed, pointing out that such a reading would eviscerate the arbitration clause, and that the forum selection clause was intended for situations involving enforcement or challenge to the arbitration award. Finding the suit within the scope of the arbitration clause, the court compelled the parties to arbitrate. New Jersey Physicians United Reciprocal Exchange v. Ace Underwriting Agencies, Ltd., No. 12-04397 (USDC D.N.J. April 11, 2013).

This post written by John Pitblado.

See our disclaimer.

INSURER PREVAILS IN BREACH OF CONTRACT ACTION AGAINST REINSURER IN DISPUTE REGARDING ASBESTOS BODILY INJURY CLAIMS

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ACE Property & Casualty Insurance Company, as successor in interest to Central National Insurance Company of Omaha, sued Global Reinsurance Corporation of America for breach of a facultative reinsurance certificate issued by Global’s predecessor in interest reinsuring a portion of an umbrella policy issued by Central National. Central National’s insured incurred significant asbestos bodily injury claims that Central National and other umbrella insurers settled. ACE brought suit for breach of contract and declaratory judgment after Global refused to honor remittances submitted by Central National under the reinsurance certificate.

Global asserted several defenses to ACE’s claims. First, Global asserted that a substantial part of Central National’s settlement included defense costs where the policy arguably did not cover such costs. Citing the follow-the-fortunes doctrine, the court rejected this defense, holding that Global failed to meet its burden of demonstrating that Central National’s payment of defense costs was not arguably covered by the policy. The court similarly discarded Global’s argument that, under the language of the reinsurance certificate, Global was only required to pay defense costs where an indemnity payment had been made, holding that the reinsurance certificate must be construed in keeping with underlying policy language which included no such restriction. The court refused to accept Global’s argument that an endorsement extending the expiration date of the certificate created a separate $10 million retention limit for Central National. After a bench trial, the court entered judgment in ACE’s favor. ACE Property & Casualty Insurance Co. v. Global Reinsurance Corp. of America, Case No. 11-2838 (USDC E.D. Pa. Mar. 31, 2013).

This post written by Ben Seessel.

See our disclaimer.

REINSURANCE DISPUTE SETTLEMENTS

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Following are summaries of three recently announced settlements of reinsurance-related disputes.

Mortgage insurance dispute – This class action suit alleged violations of the Real Estate Settlement Procedures Act (“RESPA”) for acceptance of “kickbacks” from mortgage insurers under “captive reinsurance agreements” in exchange for the referral of business. Wells Fargo has agreed to pay roughly $12,750,000 to class members, which includes over $4,000,000 in attorneys fees and litigation costs and a case contribution award of $7,500 for each named plaintiff as approved by the court. Liguori v. Wells Fargo & Co., Case No. 08-479 (USDC E.D. Pa. Feb. 7, 2013) (final approval Order and Order approving attorneys’ fees, costs and class representative incentive payments).

Life insurance retrocession – Swiss Re and Berkshire Hathaway announced the settlement of a dispute over a life retrocession agreement entered into in 2010 by allowing Swiss Re to recapture certain treaties from the portfolio of term life business in return for a payment of $610 million from Berkshire Hathaway, and a reduction in the assumption of losses by Berkshire Hathaway from $1.5 billion to $1.05 billion. The payment is expected to result in a gain of approximately $100 million for Swiss Re in the first quarter of 2013. See Swiss Re’s press release.

Workers’ compensation reinsurance – In this dispute, members of a pool for workers’ compensation reinsurance sought $3.1 billion from AIG for underreporting premiums, which caused other pool members to bear a disproportionate share of the pool’s losses. The district court approved a class settlement for $450 million, which Safeco challenged on appeal, claiming that the settlement did not adequately compensate it for individual claims against AIG. The Seventh Circuit dismissed the appeal based on Safeco and AIG’s representations that they have reached an additional settlement regarding the individual claims. Judge Posner dissented, finding dismissal to be premature since the terms of the additional settlement were not disclosed to the court. Safeco Ins. Co. of Am. v. Am. Int’l Group, Inc., No. 12-1157 (7th Cir. Mar. 25, 2013).

This post written by Abigail Kortz.

See our disclaimer.