Reinsurance Avoidance

COURT DENIES MOTION TO DISMISS FINDING ALTERNATIVE AVENUE FOR RECOVERY

May 14, 2009 by Carlton Fields

In an action arising out of an alleged failure to honor a reinsurance agreement, defendant reinsurer Carnforth Limited filed a third-party complaint against Mosaic Global Holdings asserting two breach of contract claims and a declaratory judgment claim. According to the third party complaint, Mosaic breached an Intercorporate Agreement and a 2007 Settlement Agreement by “refusing to honor its defense and indemnity obligations to Carnforth for the TIG Reinsurance Claims.” Mosaic subsequently moved to dismiss the third party complaint and to strike Carnforth’s claims for attorneys’ fees. The district court denied the motion to dismiss, citing that under the facts pled by Carnforth, Mosaic may be obligated to indemnify Carnforth for the costs it incurs in the defense of plaintiff TIG’s complaint. Thus, even if Mosaic was not found liable with respect to TIG’s complaint, Carnforth’s third-party complaint still provides an avenue of recovery against Mosaic. Finally, the court denied Mosaic’s motion to strike attorneys’ fees noting that the language of the parties’ Intercorporate Agreement requires Mosaic to indemnify Carnforth “for all sums expended in the defense, settlement and satisfaction of the TIG reinsurance.” Carnforth Ltd. v. Mosaic Global Holdings, Inc., Case No. 08-3618 (USDC N.D. Ill. April 22, 2009).

This post written by John Black.

UK COURT OF APPEALS DELIVERS SPLIT DECISION ON REINSURANCE AVOIDANCE

February 24, 2009 by Carlton Fields

The UK Court of Appeals has entered a decision dealing with reinsurance avoidance issues which may be of interest to US practitioners due to the similarity of avoidance standards in the UK and the US. On October 31, 2007 we reported on a decision of the UK Commercial Court, Queen’s Bench Division, avoiding two facultative reinsurance agreements due to misrepresentations by the placing broker as to the amount of deductibles required for ceded risks. The UK Court of Appeals has agreed that the initial reinsurance agreement (covering risks from July 1, 1996 through June 30, 1997, extended by endorsement through January 31, 1998) should be avoided, but has decided that the second reinsurance agreement (covering risks from February 1, 1998 through January 31, 1999) should not be avoided. The representation at issue was made prior to the placement of the first reinsurance agreement, and stated that “[a]s a matter of principle they [the cedents] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.”

The Commercial Court characterized this statement as a statement of “current policy,” which continued to be effective through the placement of the second reinsurance agreement. There was testimony that this was the policy and practice of the cedents up to the placement of the first reinsurance agreement, but that due to market conditions it was not possible to continue this practice after July 1996. The Court of Appeals stated that the claim of avoidance was based upon an alleged misrepresentation, not upon an asserted failure to disclose, and that to be actionable: (1) a statement must be a representation of existing fact, not of future fact or opinion; and (2) that a representation as to expectation or belief is not actionable if it is made in good faith. The first point is similar to the elements of fraud claims in many US jurisdictions.

The Court of Appeal held that the alleged representation was a statement of intention that was a representation of existing fact prior to July 1996, and that it was a material misrepresentation. The Court found that since the extension of the first reinsurance agreement for an additional seven months was an amendment to an existing contract, rather than a new contract, the reinsurance was avoided through January 31, 1998. The Court stated that the representation was not continuing in nature 19 months after it had been made, rather that it “relates to the time when it is made ….” The Court therefore held that the alleged misrepresentation was not a basis to avoid the second reinsurance agreement. Although not stated, the fact that there was testimony that the market conditions made it impossible for the cedents to maintain a policy or practice of maintaining deductibles at the levels represented after July 1996 supports this conclusion. The Court of Appeals was careful to state that it had not been contended that the cedents were under an obligation to disclose the level of deductibles intended to be written with respect to the second reinsurance agreement, leaving open the question of whether avoidance could be based upon a failure to disclose as opposed to an affirmative misrepresentation. Limit No. 2 Limited v. Axa Versicherung AG [2008] EWCA 1231 (Ct.App. Nov. 12, 2008).

This post written by Rollie Goss.

AVOIDANCE AVOIDED BY REINSURER

February 19, 2009 by Carlton Fields

Legion Insurance Company provided casualty insurance to businesses in the United States, including a Workers Compensation Act cover. This cover comprised two sections: Section A gave cover for statutory benefits in respect of death or bodily injury arising from an accident at work, and Section B gave cover for payments in respect of an employer’s fault based liability for an accident, killing or injuring an employee. This business was part of what was known as the “Mainframe Account.” In 1998, Hannover Re underwrote some excess of loss reinsurance policies giving cover to Legion for its liabilities in respect of business allocated to the Mainframe Account. By four excess of loss retrocession contracts, Syndicate 53 at Lloyd’s was a retrocessionaire of some of the Mainframe Accounts. One Ian Crane was the Syndicate’s active underwriter. Three of the four retrocessions included Hannover as reinsured. The retrocessions were limited to Section A of the cover.

The Syndicate avoided as against Hannover. During the ensuing trial, the Syndicate’s claims focused on nondisclosure by Hannover of underwriting and claims audits which it had conducted of Legion; misrepresentation and nondisclosure concerning the “comparative strictness of the underwriting requirements for the Mainframe Account”; and misrepresentation and nondisclosure concerning Legion’s underwriting practices (specifically, it was alleged that Legion had underwritten by reference to an “underwriting box” and had not used actual loss histories to calculate expected losses). In response, Hannover principally argued that the underwriting audits were not relevant and that the Syndicate’s criticism of Legion’s loss rating approach was not material since Crane had ample information with which to form his own judgment. Further, the claims audits did not reveal any serious problems relating to a Mainframe carve-out renewal proposal.

The court found that the underwriting and claims audits contained serious issues that were known to Hannover, and that Crane had not been able to consider these audits. Nonetheless, the 1998 carve-out renewal proposals described Legion’s loss rating approach, so Crane was in an equally good position as Hannover to form his own judgment about Legion’s loss rating practice. Regarding the nondisclosed claims audits, it was found that they described Legion’s practices as average, so this would not affect the judgment of a prudent underwriter. Regarding the allegation of the “comparative strictness of the underwriting requirements for the Mainframe Account,” the court found that these requirements had been explained to Crane. Finally, regarding the allegation on the use by Legion of an underwriting box was rejected as failing to understand how the box actually worked: Legion’s underwriters would individually underwrite each new piece of business going into the program and that business had to have enough experience to qualify it for the Mainframe Account, so Legion was providing cover to individual insureds by reference to their actual loss histories. The requirements for use of the underwriting box were consistent with the actual loss histories. Moreover, Crane was informed of the underwriting box in a November 1998 discussion. Thus, the Syndicate was not entitled, as against Hannover, to avoid the 1998 Mainframe carve-outs. Crane v. Hannover Ruckversicherungs-Aktiengesellschaft [2008] EWHC 3165 (Q.B. Comm. Div. Dec. 19, 2008).

This post written by Brian Perryman.

COURT REFUSES BLANKET MATERIALITY RULE FOR INSURANCE APPLICATION MISREPRESENTATIONS

February 16, 2009 by Carlton Fields

The parties in this case moved for summary judgment as to whether the theft of Defendants' boat was covered under a maritime insurance policy. Plaintiff Great Lakes Reinsurance PLC asserted that because the defendant failed to disclose a prior theft of a boat on the insurance application, the insurance should be void ab initio under the doctrine of ubberimae fidei, which frequently has application in reinsurance matters. The insurance application specifically asked whether the prospective insured had suffered a “marine loss” in the prior ten years. This question was answered in the negative, despite the fact that the responding party had a boat stolen the prior year. The court found that there was no disputed issue of fact that this response was a misrepresentation, but that there was insufficient evidence to support summary judgment as to whether the question was material, which was required for avoidance. The court declined to follow Ninth Circuit precedent that every specific question on an application is material, holding that controlling Eleventh Circuit precedent required a factual demonstration of materiality. The detailed opinion is in a Magistrate Judge's Report and Recommendation, which were adopted by the district court judge. Great Lakes Reinsurance PLC v. Roca, Case No. 07-23322 (USDC S.D.Fl. Jan. 6, 2009).

This post written by John Black.

JURY AWARDS $23.87 MILLION VERDICT IN DAMAGES RESULTING FROM PARTIAL RESCISSION OF REINSURANCE OBLIGATIONS

December 15, 2008 by Carlton Fields

A court entered an Order on a jury verdict of $23.87 million in favor of several of the United National group of insurance companies and against Aon Limited and certain of its predecessors. The verdict was composed of $16.87 million in damages and $7 million in attorneys’ fees.

United National brought the action seeking indemnification from Aon for damages it sustained as a result of an arbitration award that partially rescinded the reinsurance obligations of an Italian reinsurer, Riunione Adriatica di Sicurta, to United National. The partial rescission was made in connection with a program providing insurance coverage to United States contractors and allied trades for risks arising out of residential and commercial construction projects. The arbitration award stemmed out of Aon’s improper conduct in soliciting RAS’s participation in this program without disclosing to RAS material information relating to, among other things, the program’s loss reserve methodology, premium discounts, and the frequency of claims. In the arbitration, RAS alleged that the program – which was placed and managed by Aon as the agent for United National – had been misrepresented by Aon to RAS as a successful program with low loss ratios. RAS also alleged that Aon failed to disclose until after the negotiations over RAS’s participation in the program were complete that RAS’s underwriter had solicited a $250,000 kickback from Aon. Due to the partial rescission, United National was obligated to pay RAS’s damages. United National then brought the indemnity suit against Aon to recover not only those damages United National paid to RAS, but also its attorneys’ fees and costs paid in defending the arbitration initiated by RAS. United National Insurance Co. v. Aon Limited, Case No. 04-CV-539 (USDC E.D. Pa. Dec. 4, 2008).

This post written by Brian Perryman.