Reinsurance Avoidance

ENGLISH HIGH COURT OF JUSTICE ANALYZES STANDARDS GOVERNING FRAUDULENT INDUCEMENT CLAIMS IN REINSURANCE DISPUTES

May 16, 2017 by Michael Wolgin

The Court of Appeal of England and Wales approved the judgment of the trial court in a reinsurance dispute between Axa and Arab Insurance Group (Arig) related to certain insured energy construction risks. The trial court had ruled in favor of Arig finding that, notwithstanding that an “unfair presentation of the risk” was made to Axa by Arig by failing to disclose past loss statistics, the latter failed to establish that its underwriter was induced to accept the ceded risks, i.e., Axa did not demonstrate that it “would have declined the risk if a fair presentation had been made” to it by Arig. The appellate court analyzed at length the evidence and testimony before the trial court related to the placement of the risks and the negotiation process. The court upheld the judgment, clarifying that the standard for evaluating non-disclosure includes both an objective component involving what a reasonable underwriter would conclude, and subjective components involving what the insured or broker would have said to the underwriter. The court made clear that whether the underwriter was induced turns on a subjective test; the fact that a reinsurer “could have been interested in something is irrelevant if in fact he would not have been.” Axa Versicherung Ag v. Arab Insurance Group, Case No. [2017] EWCA Civ 96 (Royal Courts of Justice Feb. 28, 2017).

This post written by Michael Wolgin.

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NEW JERSEY STATE COURT REFUSES TO BIND PLAINTIFFS TO A BERMUDA COURT JUDGMENT WHERE THEY WERE NOT PARTIES TO THAT ACTION

April 10, 2017 by Rob DiUbaldo

A New Jersey state court recently held that the former shareholders of an insurance holding company suing its E&O insurers were not bound by a Bermuda court’s prior judgment where they were not parties to the suit in which the judgment was issued.

Raydon Underwriting Management Company (“Raydon”), as a managing general agent, purportedly gave bad advice to two operating companies (“Clarendon”) held by Lion Holding, Inc. Plaintiffs were former shareholders of Lion Holding. Plaintiffs sued Raydon in a Bermuda court for the allegedly bad advice that led to millions in losses. Shortly before the Bermuda court issued a judgment in that case, Travelers and ERSIC—Raydon’s E&O insurers—informed plaintiffs that they would not be covering the claims against Raydon. Thereafter, the E&O insurers filed suit in Bermuda against Raydon seeking a declaration that the E&O policy were void, and prevailed on that suit.

Plaintiffs filed the present action against the E&O insurers regarding the E&O insurance coverage, and the E&O insurers defended the suit by claiming plaintiffs were bound by the judgment in the Bermuda action. The court disagreed, holding that the Bermuda judgment was not binding against the plaintiffs because they were not made parties to the suit. The court applied the general rule that a party cannot be bound by a judgment in a case in which it was not a party, finding none of the six exceptions laid out in Taylor v. Sturgell applicable. It noted that the plaintiffs’ interests were not adequately represented in the Bermuda case and in fact were inimical to the E&O insurers’ interests in that case.

Furthermore, the court refused to apply the doctrine of collateral estoppel to plaintiffs’ claims because the issues were not identical. In the Bermuda case, the issue was whether the E&O coverage was procured by fraud in the inducement. In this case, the issue was whether Travelers should be compelled to provide coverage.

Lastly, the court refused to decline jurisdiction under forum non conveniens, finding that the lower court had erroneously weighed the factors based on the assumption that the Bermuda judgment was binding on plaintiffs. The factors were split, but there was no basis for finding New Jersey a demonstrably inappropriate venue.

Ferguson v. Travelers Indem. Co., Case No. A-0028-15T1 (N.J. Super. Ct. App. Div. Mar. 10, 2017)

This post written by Thaddeus Ewald .

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U.K. COURT DENIES REINSURER’S SUIT TO AVOID REINSURANCE AGREEMENTS

July 27, 2015 by Carlton Fields

The Commercial Court (a subdivision of the Queen’s Bench Division of the U.K.’s High Court of Justice), recently held that an underwriter could not avoid the reinsurance contracts it had underwritten because it failed to convince the court that it would not have underwritten those contracts. In a case involving nondisclosure of loss statistics, the court determined that plaintiff reinsurer, Axa, could not avoid two reinsurance agreements that it had entered into with defendant insured, Arab Insurance Group (ARIG). The court made this finding even though ARIG failed to disclose – and perhaps even misrepresented – the loss statistics associated with its existing book of internal risk that was subject to the reinsurance. The court agreed with Axa that the misrepresentation of ARIG’s loss statistics was a material fact that should have been disclosed. However, even if ARIG had disclosed this information prior to the completion of the underwriting process, Axa would still have entered into the reinsurance agreements. Axa failed to prove they were induced by ARIG’s misrepresentation into the reinsurance contracts; they were therefore bound to those contracts. Axa Versicherung AG v. Arab Insurance Group [2015] EWHC 1939 (Comm).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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FIRST CIRCUIT RECOGNIZES UBERRIMAE FIDEI IN ADMIRALTY CONTEXT

March 5, 2015 by Carlton Fields

The First Circuit recently examined, in the admiralty context, the doctrine of uberrimae fidei, a legal doctrine requiring that all parties to an insurance contract deal in good faith and fully disclose all material facts. The case involved a maritime insurance policy in which the insured failed to disclose that its dry dock had substantial, preexisting damage and failed to disclose the dry dock’s actual value. When the insured later made a claim and the facts were revealed, the insurer denied the claim. In subsequent coverage litigation, the district court decided in favor of the insurer, finding that the insurance policy was void ab initio because the insured failed to disclose the true value of the dry dock, its level of deterioration, and other material facts. The First Circuit affirmed, holding that uberrimae fidei is an established admiralty rule within the first circuit. The First Circuit, however, modified the district court’s ruling to reflect that the contract was merely voidable, not void ab initio.

Catlin at Lloyd’s v. San Juan Towing & Marine, No. 13-2491, 2015 WL 500744 (1st Cir. Feb. 6, 2015).

This post written by Catherine Acree.

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THIRD CIRCUIT EVALUATES THE DEFINITION OF “MATERIALITY” IN RESCISSION CLAIMS

March 3, 2015 by Carlton Fields

In a case on which we previously reported, the Third Circuit recently evaluated the legal standard for determining materiality in a claim for rescission of an insurance contract. The case involved a dispute between two reinsurers in which a federal court awarded the plaintiff $5.6 million based on breaches of the parties’ retrocession agreements. The district court also entered summary judgment in the plaintiff’s favor on the rescission counterclaim. The Third Circuit affirmed, ruling that the information plaintiff withheld was not material so as to amount to a breach of the duty of utmost good faith, approving the following definition of materiality under New York law: “A fact is material . . . if, had it been revealed, the insurer or reinsurer would either have not issued the policy or would have only at a higher premium.” The Third Circuit rejected the other party’s broader definition of materiality – that information is material if it “likely” would have influenced the decision.

Munich Reinsurance Am., Inc. v. Am. Nat’l Ins. Co., No. 14-2045 (3rd Cir. Feb. 3, 2015)

This post written by Catherine Acree.

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