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REINSURANCE COMPANIES VICTORIOUS IN SECURITIES FRAUD CLASS ACTIONS ARISING OUT OF CAT LOSSES

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Two reinsurance companies have prevailed on motions to dismiss in shareholder securities law putative class actions over the restatements of loss levels from cat events, illustrating that the process of estimating cat losses accurately may be challenging, and that companies are not guarantors of the completeness and accuracy of that process. PXRE prevailed in a lawsuit alleging a scheme to understate losses arising out of a series of hurricanes that devastated the Gulf Coast in 2005, restating the amount of losses several times. Judge Sullivan granted PXRE’s motion to dismiss, finding that plaintiffs “failed to plead that defendants were reckless in not knowing about the flaws in PXRE’s calculation of its loss estimates.” In re PXRE Group, Ltd., Securities Litigation, No. 06 CIV 3410 (S.D.N.Y. March 5, 2009). Judge Sullivan issued an order in a similar individual case filed against PXRE implying that he will follow the same course in that action. Anegada Master Fund Ltd v. PXRE Group Ltd., No. 08 Civ 10584 (S.D.N.Y. March 5, 2009).

Quanta Capital Holdings Ltd. (“Quanta”) issued several estimated loss projections relating to Hurricanes Katrina and Rita that ranged from $42-$68.5 million, resulting in multiple rating downgrades, forcing Quanta to cease writing new insurance and reinsurance business and to sell its remaining insurance and reinsurance portfolios. Noting the conjectural nature of insurance reserves established for losses that have been incurred but not yet reported, the court ruled that the Complaint did not put forth sufficient factual allegations such that the court could plausibly find that the loss estimate included in the offering documents was a material untruth at the time it was made, especially since the adjusted estimate was based on a single business interruption claim. The district court also held that the Complaint did not meet applicable heightened pleading requirements, and that some of the claims failed because the $68.5 million preliminary loss estimate was protected by the “bespeaks caution” doctrine. Zirkin v. Quanta Capital Holdings Ltd., Case No. 07-851 (USDC S.D.N.Y. Jan. 22, 2009).

This post written by Rollie Goss.

UK COURT DETERMINES THAT INSURED CAN GIVE EFFECTIVE NOTICE OF POTENTIAL CLAIMS FOR PROFESSIONAL NEGLIGENCE BY APPRISING INSURER OF GENERAL CIRCUMSTANCES THAT MIGHT LEAD TO SUCH CLAIMS

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In this action for declaratory relief, the UK Court of Appeal issued a judgment on the construction and application of notification provisions in a claims made policy, which may be of interest in interpreting similar provisions in reinsurance agreements. The court held that where a professional indemnity insurance policy required the insured to notify the insurers of potential claims against the insured “as soon as practicable,” the insured could satisfy this requirement by notifying the underwriters of circumstances which might give rise to claims for professional negligence, if made within the insured period, even if the notification of the claim itself was not given until after the policy period. However, notification of such circumstances given after the policy expired relating to new potential claims was not effective.

The essential issue was whether Kidsons gave the underwriters effective notification of the circumstances that might lead to subsequent claims for professional negligence within the policy period. The policy provided no details as to how a notification was to be made, other than that it must be in writing and given as soon as practicable after awareness of circumstances which might give rise to a claim. This was a factual issue, requiring an analysis of various letters and presentations. The court held that the “as soon as reasonably practicable” language was, in effect, a condition precedent in the claims-made policy. This result was not undone by another policy provision stating that “Where the assured’s breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded . . . shall be reduced to such sum as in the underwriters’ opinion would have been payable by them in the absence of such prejudice.” Although the provision referred to “any conditions of this Insurance,” it did not in terms refer to – and therefore modify – conditions precedent. One Justice dissented, agreeing with the judge below that the letter relied upon as providing notice of the circumstances was incapable of constituting an effective notification because it was too nebulous. HLB Kidsons v. Lloyd’s Underwriters [2008] EWCA Civ 1206 (Ct. App. Nov. 5, 2008).

This post written by Brian Perryman.

COURTS CONFIRM ARBITRATION AWARDS WITH SOME DISCUSSION OF MANIFEST DISREGARD OF LAW DOCTRINE

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Courts have continued (with one exception) to confirm arbitration awards, with some discussion of the manifest disregard of law doctrine.

This post written by Rollie Goss.

COURT RULES ON DIRECT ACTION ISSUES RELATING TO TWO LEVEL REINSURANCE RELATIONSHIPS

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Guarantee Trust Life Insurance Company (“GTL”) sells health insurance to college students, and obtained reinsurance from First Student Programs, LLC (“FSP”). The reinsurance agreement required that FSP obtain reinsurance, and it purportedly reached an agreement to reinsure its risks with American United Life Insurance Company (AUL), which also provided excess reinsurance directly to GTL. When AUL failed to pay claims, GLT sued FSP for breach of the reinsurance requirement of their agreement, and FSP filed a third-party complaint against AUL. AUL moved to dismiss. In an earlier dispute between GTL and AUL, which was arbitrated, an arbitrator found that AUL was not contractually bound to provide excess reinsurance to GTL. AUL contended that this prior adjudication precluded FSP’s claim against it based upon the doctrine of res judicata.

Applying Pennsylvania law, the US District Court for the Northern District of Illinois granted AUL's motion to dismiss in part, and denied it without prejudice in part. The court determined that FSP's breach of contract action should not be dismissed because it was not clear, as a matter of law, that FSP was acting merely as an agent for GTL when it allegedly contracted with AUL so the rule that agents may not sue for contracts entered into on behalf of a principal should not be applied here. The court further held that FSP sufficiently pleaded a claim for promissory estoppel but applied Pennsylvania's “gist of the action” doctrine to dismiss the fraud claim. The court surmised that the fraud claim was inextricably tied to the breach of contract claim so it was barred as a matter of law under the doctrine. The court also dismissed the indemnification and contribution claims as they were expressly conditioned upon a finding that FSP is liable to GTL, and those parties had settled the matter as between them.

Finding that the third party excess reinsurance agreement was not actually intended to benefit FSP, the court dismissed FSP's Third-Party Beneficiary claim. AUL’s res judicata defense remains pending. Guarantee Trust Life Ins. Co. v. First Student Programs, LLC, Case No. 05-1261 (USDC N.D.Ill. Jan. 28, 2009).

This post written by John Black.

THIRD CIRCUIT ALLOWS STATE LAW UNCONSCIONABILITY LAW TO VOID CLASS ARBITRATION WAIVER PROVISION

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The Third Circuit Court of Appeals has held that the Federal Arbitration Act does not preclude a court from applying state law unconscionability principles to void a class arbitration waiver. At the district court, American Express argued that plaintiff should be required to arbitrate his claims on an individual basis because Utah law governed the class arbitration waiver clause, and expressly allowed class arbitration waivers in consumer credit agreements. In opposition, plaintiff argued that, as a New Jersey resident, New Jersey law applied and that application of Utah law would violate New Jersey’s public policy against class arbitration waivers, so New Jersey choice of law principles dictated that the choice of Utah law was invalid. The district court agreed with American Express and dismissed the complaint.

In the ensuing appeal, the Third Circuit passed on its prior opinion in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007), where the court applied the parties’ contractual choice of Virginia law in concluding that the waiver was valid, rejecting Pennsylvania cases on the unconscionability issue as being preempted by the FAA. According to the court, this issue in Gay appeared to be dicta. But “[w]hether dicta or not,” the defense New Jersey law provides to class arbitration waivers is “a general contract defense” that applies to all waivers of classwide actions, not simply those that also compel arbitration. Thus, following the Ninth Circuit’s lead in Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008), the court held that the application to an arbitration provision of a general ban on class action waivers was not preempted by the FAA because the ban applies equally to a contract that permits only individual, not class, litigation. Having so concluded, the court next turned to the question of whether New Jersey courts would enforce Utah law allowing class arbitration waivers. After reviewing the salient New Jersey Supreme Court decisions, the court decided that class arbitration waivers violate fundamental New Jersey public policy “as applied to small-sum cases.” The court next determined that New Jersey’s policy against such waivers conflicted with Utah law and that, although both states had significant contacts with the litigation, it seemed likely that the New Jersey Supreme Court would determine that New Jersey had a materially greater interest than Utah in the enforceability of a class arbitration waiver that could operate to preclude a New Jersey resident from relief under New Jersey law. Accordingly, New Jersey law applied and the waiver was held to be unconscionable. Homa v. American Express Co., Case No. 07-2921 (3d Cir. Feb. 24, 2009).

This post written by Brian Perryman.