Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Avoidance

AIG POST-TRIAL MOTIONS DENIED

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In a March 5, 2008 post, we reported on a jury verdict against AIG subsidiaries for $28 million plus punitive damages in a case seeking the rescission of two reinsurance facilities. AIG filed a motion for judgment as a matter of law, or in the alternative for a new trial, and to amend the judgment. Finding no legal error and sufficient facts to support the jury's verdict, the court has denied AIG's motion. AXA Versicherung AG v. New Hampshire Insur. Co., Case No. 05-10180 (USDC S.D.N.Y. Apr. 22, 2008).

This post written by Rollie Goss.

COURT AFFIRMS SUMMARY JUDGMENT IN FAVOR OF BROKER ON STATUTE OF LIMITATION GROUND, REFUSING TO APPLY THE DISCOVERY RULE

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The US Court of Appeals for the Fifth Circuit has affirmed a summary judgment in favor of Aon, ruling that claims asserted against it by TIG arising out of the placement of reinsurance were barred by the statute of limitation. Aon acted as reinsurance intermediary and broker for TIG with respect to workers’ compensation risks that TIG ceded to U.S. Life. Aon failed to pass to U.S. Life historical loss information regarding the ceded risks that TIG had provided to Aon, and U.S. Life succeeded in rescinding that portion of the reinsurance in an arbitration due to the failure to provide known historical loss information. TIG then sued Aon for damages for breach of fiduciary duty. The district court held, and the Fifth Circuit affirmed, that the cause of action arose under Texas law when TIG and U.S. Life entered into an “impaired reinsurance agreement,” rather than when U.S. Life succeeded in rescinding the reinsurance (or even when U.S. Life first contended that it had the right to rescind). The courts refused to apply the discovery rule to delay the accrual of the cause of action because: (1) TIG only used Aon to solicit bids, dealing directly with bidders to negotiate reinsurance agreements and confirm the information that had been provided to the bidders; and (2) at the time that it received U.S. Life’s reinsurance proposal, TIG suspected that the loss information had not been passed to U.S. Life due to the fact that the proposal was much lower than other proposals it had received. The courts essentially imposed a duty to inquire upon TIG at that time, a duty which it had not satisfied. The Fifth Circuit concluded that “[i]nquiry could have been made to determine or confirm the facts and assumptions on which the bargain was to be based,” and that the “injury was not inherently undiscoverable” when the reinsurance agreement was executed. This seems like a harsh result, since neither party to the reinsurance agreement knew it was potentially voidable until the arbitration. There may have been a number of reasons why US Life's proposal was so low, some of which might not make the reinsurance agreement “impaired” from its inception. The effect of this decision, however, at least in the Fifth Circuit, is that cedents cannot rely upon brokers to do their jobs and pass on historical loss information that the cedent has provided to the broker if there is a reasonable doubt that the loss information may have been passed on to a prospective reinsurer. TIG Ins. Co. v. Aon Re Inc., No. 05-11450 (USCA 5th Cir. Mar. 13, 2008).

This post written by Rollie Goss.

SEVENTH CIRCUIT HOLDS STOP-LOSS POLICY NOT REINSURANCE UNDER WISCONSIN LAW

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The Seventh Circuit has reversed a federal magistrate’s ruling that defined a stop-loss policy as reinsurance under Wisconsin law.

Edstrom, a manufacturing company, had a stop loss policy in place for its group health plan with Companion Life. Prior to issuing the policy, Companion asked Edstrom to identify any participant who could reasonably be expected to incur more than $32,500 in medical expenses in 2004. Edstrom informed Companion that there was no such participant. In 2004, one of the plan participants had a child that developed a serious medical condition, which was based upon an undisclosed condition that existed prior to the issuance of the policy, and which resulted in claims of at least $890,000. When Companion discovered the child’s condition, it raised the child’s deductible to $450,000, pursuant to a policy provision that allowed the insurer to revise the deductible based on subsequent information that if known before issuing the policy would affect the rates, deductibles, and terms of the policy.

Edstrom initiated arbitration proceedings against Companion. The arbitrator found in favor of Companion finding that the terms of the policy provided the insurer with unfettered rights to raise the deductible. Edstrom unsuccessfully moved to have the award vacated by the District Court claiming that the decision violated Wisconsin Statute Section 631.11(1)(b), which provides that a misrepresentation cannot affect an insurer’s obligations unless the insured “knew or should have known that the representation was false.” Edstrom contended that since it neither knew, nor had reason to know, that the representation regarding potential claims was false, Companion could not raise the deductible. While the arbitrator did not mention this statute, the magistrate judge held that the policy was a contract of reinsurance, and that the statute did not apply to contracts of reinsurance.

The Seventh Circuit held that the federal magistrate’s definition of stop loss policy as reinsurance under Wisconsin law was incorrect. The court stated that “it is a mistake to think that anything someone does to insure someone else against a risk is ‘insurance’ within the meaning of statutes that regulate insurance.” “Stop-loss insurance is an insurance policy for losses that the insured self-insures up to the limit of the deductible,” according to the court.

The contract contained a provision which required that the arbitrator “strictly abide by the terms of this [policy] and shall strictly apply rules of law applicable thereto,” namely the rules of Wisconsin law. The Court of Appeals found this provision to be enforceable. Since there was no evidence in the record that the arbitrator had considered the applicability of the statute to this situation, the appellate court remanded the case to the district court with instructions to vacate the award and to return the case to the arbitrator for consideration of the statute and to determine whether the policyholder knew or should have known that its representation to the insurer was false. Edstrom v. Companion Life Ins. Co., No. 06 C 964 (USCA 7th Cir. Feb. 11, 2008).

This post written by Lynn Hawkins.

JURY FINDS AIG SUBSIDIARIES LIABLE FOR $28 MILLION PLUS PUNITIVE DAMAGES FOR FRAUDULENT INDUCEMENT

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In an August 16, 2007 post, we commented on a New York district court’s denial of cross motions for summary judgment in a case seeking rescission of two reinsurance facilities. The court rejected the defendants’ statute of limitations defense on summary judgment, however, following a jury trial, the court agreed that plaintiff’s negligent misrepresentation and breach of the duty of utmost good faith claims were barred by the statute of limitations. The court also merged plaintiff’s claims for material nondisclosure and intentional misrepresentation into a single claim of fraudulent inducement. The bases for the claims are set out in the Second Amended Complaint and in our prior post. Shortly before trial, the court denied a motion by Axa to collaterally estop AIG from “relitigating” certain issues that had been determined in a prior arbitration between AIG and a Lloyd’s syndicate.

At trial, a jury found the defendants liable for fraudulent inducement and concluded that plaintiffs were entitled to rescission of both facilities. The defendants were ordered to remit to plaintiff $20,087,166 plus interest of $8,536,004. The jury also found defendants liable for punitive damages in the amount of $5,750,000. Defendants have posted a supersedeas bond in the amount of $36,000,000 in preparation for an appeal. Axa Versicherung Ag v. New Hampshire Ins. Co., No. 05-cv-10180 (USDC S.D.N.Y. Feb. 6, 2008).

This post written by Lynn Hawkins.

NINTH CIRCUIT RULES INSURER ALLOWED TO CANCEL POLICY DUE TO UNAVAILABLITY OF REINSURANCE

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The Ninth Circuit affirmed a magistrate’s ruling that Coregis Insurance Company complied with the plain language of an insurance policy issued to Independent School District of Boise City when Coregis cancelled coverage. The policy permitted Coregis to cancel the policy after it had been in effect for more than 60 days if it was unable to secure adequate reinsurance. The policy also contained a rate guarantee endorsement in which Coregis agreed “to keep this policy in effect and that rates will not increase more than 3% per year for the 2002-2003 and 2003-2004 policy years.” After one of the school shootings, reinsurance for terrorism risks was not available. The court determined that the two policy provisions could be read in harmony. Independent School District of Boise City v. Coregis Ins. Co., No. 06-35627 (9th Cir. Jan. 23, 2008).

This post written by Lynn Hawkins.