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Arbitration / Court Decisions

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.

COURT CERTIFIES CLASS OF HOME BORROWERS WHO HAD PRIVATE MORTGAGE INSURANCE REINSURED WITH LENDER’S CAPTIVE REINSURER

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The US District Court for the Northern District of California has certified a nationwide class of persons who secured residential mortgage loans from Wells Fargo Bank, where the down payments were funded with borrowed funds subject to private mortgage insurance (“PMI”) with Wells Fargo as the beneficiary of the PMI, and the PMI was reinsured by Wells Fargo’s captive reinsurance company. The Complaint alleged violation of the federal Real Estate Settlement Procedures Act (“RESPA”) in that payments relating to the reinsurance amounted to illegal kickbacks. The court found that while the plaintiffs might not be able to maintain a claim that the amount paid for the insurance (and reinsurance) was excessive, claims that the payments amounted to illegal kickbacks under RESPA could be subject to class-wide treatment. Kay v. Wells Fargo & Co., Case No. C 07-01351 (USDC N.D. Cal. Nov. 30, 2007).

This post written by Rollie Goss.

NEW YORK COURTS ADDRESS DISCOVERY AND VENUE DISPUTES IN CONTRACT RESCISSION CASE INVOLVING ALLEGED FINITE REINSURANCE TRANSACTION

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In a recent discovery dispute between Udayan Ghose (the former Chairman of the Board of Directors of New Cap Reinsurance Corporation ) and CNA Reinsurance, a New York trial court compelled CNA to produce underwriting manuals and guidelines, claims handling manuals, and documents concerning whether it sold finite reinsurance. Plaintiffs argued that the underwriting manuals and other such documents were necessary to disprove defendants’ defense of rescission of the D&O liability policy at issue in the litigation. CNA argued that its underwriting materials were irrelevant since a third party (Encon Underwriting) was responsible for underwriting the policy. Because the defendants were arguing that they would not have issued the policy if they had known of certain misrepresentations made by New Cap, the court concluded that the requested documents were discoverable as being relevant to the issue of materiality. Ghose v. CNA Reinsurance Co. Ltd, No. 108121/04 (N.Y. Sup. Ct., Aug. 20, 2007).

Just a few weeks later, the New York Supreme Court Appellate Division issued an opinion on defendants’ appeal of an order denying a motion to dismiss on forum non conveniens grounds. In a unanimous decision, the Appellate court reversed and granted the motion to dismiss on the condition that the defendants consent to jurisdiction in either Australia, England, or Bermuda, and to waive any statute of limitations defense. The court noted in dicta that if the case had remained in New York state court, it would have sustained an interim award of defense costs, pending resolution of the insurers’ attempt unilaterally to rescind the underlying policy. Ghose v. CNA Reinsurance Co. Ltd, 2007 NY Slip Op 06572 (NY App. Div. Sept. 6, 2007).

This post written by Lynn Hawkins.

NURSING HOME ARBITRATION AGREEMENT UPHELD

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A former Air Force intelligence officer with a bachelor’s degree in English and 27 years of experience as a claims examiner and manager for an insurance company, pursuant to a power of attorney and health care directive, signed papers admitting his 91-year old father to a nursing home. The arbitration provision was presented as a separate document, was not a requirement for admission and was discussed prior to its execution. After the father passed away and negligence claims were filed, a motion to compel arbitration was filed, and the validity of the arbitration provision was contested. The Massachusetts Supreme Court, applying both Massachusetts law and the Federal Arbitration Act, found that the arbitration agreement was enforceable, and not unconscionable. Some of the defendants were parties to the arbitration agreement, while others were not. The lower courts had held that it was inequitable and inefficient to force the plaintiff to litigate against some defendants in court and others in arbitration, but the Supreme Court disagreed, holding that this was “the necessary result of the choice that Miller made when he signed the arbitration agreement.” Miller v. Cotter, 448 Mass. 671 (Mass. 2007).

This post written by Rollie Goss.

INSURANCE COMPANY SANCTIONED FOR FAILURE TO COMMUNICATE

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A New York district court sanctioned Excess Insurance Company in the amount of $4,500 for its failure to communicate with the defendants and with the court. The plaintiff initially filed this action in December 2005, seeking reimbursement under reinsurance agreements executed in 1979 and 1980 with Metropolitan Reinsurance Company. At the initial pre-trial conference, Defendant Odyssey America maintained that it was not the proper party because it was not the successor-in-interest to Met Re. Shortly thereafter, plaintiffs commenced arbitration proceedings against the proper party. For the following six months, the defendant and the court were unable to contact the plaintiff regarding voluntary dismissal of the action. The court, recognizing plaintiff’s “grossly negligent” conduct, sanctioned plaintiff’s in the amount of $4,500 and dismissed the case with prejudice. Excess Ins. Co. v. Odyssey Am. Reinsurance Co., No. 05 Civ. 10884 (NRB), (USDC S.D.N.Y. Nov. 28, 2007).

This post written by Lynn Hawkins.