The UK Commercial Court, Queen’s Bench Division, has granted a request to avoid several reinsurance agreements based upon misrepresentations in the placement of the treaties. The treaties were first loss facultative reinsurance agreements, and the court found that there had been material misrepresentations of the cedent’s underwriting policies. Specifically, the court found that although the placement materials had represented that the cedent insured risks subject to deductibles of from £500,000 to 1 million, the reinsured risks in actuality had deductibles of from £100,000 – 200,000. The court found that the misrepresentations were of a present fact, rather than of future intention, and were highly material to the acceptance of the risk given the conditions of the particular market. The court found that if the actual underwriting practices of the cedent had been disclosed, the reinsurer would not have agreed to the reinsurance agreements. The fact that the reinsurance was a first loss cover made the amount of the deductibles particularly important. Limit No. 2 Limited v. Axa Versicherung AG [2007] EWHC 2321 (Comm. Queen’s Bench October 17, 2007).
Arbitration / Court Decisions
COURT HOLDS REQUEST FOR PRODUCTION OF ALL DOCUMENTS FILED WITH ANY REGULATORY AUTHORITIES FOR TEN YEARS OVERBROAD
Excess Insurance Company reinsured H. S. Weavers on more than 500 reinsurance contracts, and entered into a commutation agreement with Weavers. Rochdale Insurance Company partially reinsured one of the reinsurance agreements. Excess sued Rochdale, and sought production of every document filed by Rochdale with regulatory authorities over a ten year period of time. On a motion to compel, the court held that the request was overbroad. Excess did not state a rationale for the breadth of the request. Counsel had failed to meet and confer on the discovery dispute as required by a local rule, prompting a rebuke from the court. Excess Insurance Co. v. Rochdale Insurance Co., Case No. 05-10174 (USDC S.D. N.Y. October 4, 2007). Background on this dispute may be found in a Memorandum of Law filed in opposition to the motion to compel.
ENGLISH COURT ALLOWS UNDERWRITER TO CONTINUE RUN-OFF BUSINESS
In 2003, insurer Europ Assistance, and underwriter, Temple Legal Protection, entered into a binding authority agreement that authorized Temple to write ‘after the expenses’ coverage and handle claims on behalf of Europ. In exchange, Temple received 35% commission on the net premium. In 2005, Europ terminated the business with respect to new business, and in April 2007, Europ informed Temple that it planned to revoke all of Temple’s authority. Temple asserted that Europ repudiated the binding authority agreement.
While waiting for resolution of the underlying dispute, Europ sought an injunction barring Temple from continuing to carry on the run-off business, alleging that Temple was causing loss by unlawful means and was guilty of unlawful interference and breach of trust in failing to hand over premiums.
Balancing the interest of both parties, the English court refused to enjoin Temple from continuing with the run-off business. The court seemed influenced by the fact that Europ, a subsidiary of the well known and substantial Italian insurance company Assurazioni Generali SpA, had no continuing interest in the expenses business. In contrast, Temple, a small company, would be adversely affected if it were barred from running off the business. Europ Assistance Ins. Ltd. v. Temple Legal Protection Ltd., [2007] EWHC 1785 (Queen’s Bench July 25, 2007).
DISTRICT COURT QUASHES CRIMINAL SUBPOENAS ISSUED TO INSURANCE COMPANIES AND THEIR ATTORNEYS
Last year, a federal grand jury in New Haven indicted four former senior executives of General Re Corporation and one former senior executive of AIG for their participation in a fraudulent scheme to manipulate AIG’s financial statements. Recently, three of the defendants issued multiple subpoenas to several insurance companies and their attorneys pursuant to Federal Rule of Criminal Procedure 17(c). The subpoenas were contested by both the government and the third party subpoena recipients.
Applying the legal standard set forth by the Supreme Court in U.S. v. Nixon, the district court concluded that the subpoenas were unenforceable because they sought materials outside the proper scope of Rule 17(c). Specifically, the materials sought by several of the subpoenas would only be useful as impeachment materials, and therefore failed Nixon’s admissibility requirement. Other subpoenas were to be found unenforceable because they failed Nixon’s relevancy requirement. United States of America v. Ferguson, Case No. 3:06cr137, (USDC D. Ct. Sept. 26, 2007).
ILLINOIS COURT GRANTS SUMMARY JUDGMENT TO INSURANCE COMMISSIONER, AS STATUTORY LIQUIDATOR, ON RESCISSION AND SETOFF AFFIRMATIVE DEFENSES
We have reported previously on developments in Legion Insurance’s liquidation proceeding (see January 16, 2007 and April 26, 2007 posts), including an attempt to recover premiums allegedly owed by American Patriot Insurance Agency, Inc. (“American Patriot”) relating to a workers’ compensation program under a limited agency agreement.
On September 7, an Illinois federal court granted the Commissioner’s motion for summary judgment on American Patriot’s affirmative defenses for setoff and rescission. The court concluded that American Patriot had waived their right to rescind the limited agency agreement where they failed to take any steps towards rescinding the agreement until three years after they acquired knowledge of the fraud, coupled with Defendants’ continued retention of the benefits of the contract. With respect to American Patriot’s setoff defense, the liquidator contended that the alleged debts could not be mutual because they were not due and owing between the same parties or based upon the same contracts, and that mutuality of capacity was lacking because the premium owed by American Patriot were held in a fiduciary capacity. The judge agreed, stating that “the debts asserted by Defendants lack a mutuality of time with the debts asserted against them by the Liquidator, and Defendants’ claim for setoff must be dismissed on these grounds.”
The court denied summary judgment to the liquidator on American Patriot’s remaining affirmative defenses of unclean hands, fraud, negligent misrepresentation, estoppel of a 2000 program year and breach of contract. Ario v. American Patriot Ins. Agency, Case No. 05 C 1049 (N.D.Ill. September 7, 2007).