Reinsurance Avoidance

COURT INTERPRETS REINSURANCE AGREEMENT BUT FINDS DISPUTE AS TO RESCISSION CLAIM

January 7, 2008 by Carlton Fields

A New York state court, in an action involving claims under a quota share reinsurance of insurance issued to automobile financing institutions covering the residual value of motor vehicle leases, has resolved some issues as to the interpretation of the reinsurance as a matter of law, finding no ambiguity in the quota share agreements. At the same time, the court denied summary judgment on a claim to rescind the reinsurance on the basis that the cedent had not disclosed to the reinsurer, at the time the reinsurance was placed, that its own actuary had projected a loss ratio of over 100% on the underlying risks. The court found that there was a disputed issue of fact as to when the cedent had knowledge of high losses, but that if it was established that the cedent had such knowledge at the time of placement, rescission would be appropriate. The interpretation issues included such important issues as determining that an entire block of risks could not be ceded to the quota share agreement and the percentage of the pool reinsured by a particular quota share reinsurer. Gulf Insurance Co. v. Transatlantic Reinsurance Co.,. No. 601602/03 (N.Y. Sup. Ct. Nov. 21, 2007).

This post written by Rollie Goss.

UK COURT GRANTS AVOIDANCE OF REINSURANCE AGREEMENTS DUE TO MISREPRESENTATIONS IN THE PLACEMENT PROCESS

October 31, 2007 by Carlton Fields

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).

ILLINOIS COURT GRANTS SUMMARY JUDGMENT TO INSURANCE COMMISSIONER, AS STATUTORY LIQUIDATOR, ON RESCISSION AND SETOFF AFFIRMATIVE DEFENSES

October 18, 2007 by Carlton Fields

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).

COURT DENIES CROSS MOTIONS FOR SUMMARY JUDGMENT IN CASE SEEKING RESCISSION OF TWO REINSURANCE FACILITIES

August 16, 2007 by Carlton Fields

This dispute relates to two reinsurance contracts between Axa Versicherung (“Axa”) and three subsidiaries of American International Group (collectively, “AIG”). In 1996, Axa’s predecessor in interest, Albingia Verischerungs AG, agreed to participate in a reinsurance facility for AIG for a fourteen month period. Following that term, Algingia agreed to renew its participation for a thirteen month period commencing on December 1, 1997. Axa sought to rescind those contracts on the basis of fraud, alleging that AIG misrepresented or failed to disclose certain material facts in connection with the negotiation of those contracts. Specifically, Axa alleged that AIG misled Algingia concerning what sort of facility the contracts created, “facultative” or “facultative obligatory.” Both parties moved for summary judgment – Axa on the merits and AIG on a statute of limitations defense.

The Southern District of New York denied both motions in their entirety. With respect to AIG’s statute of limitations argument, the court recognized that Axa initiated this action after the six year statute of limitations expired, however, could not conclude that the case was time-barred because “the determination of when plaintiff reasonably could have discovered the alleged misrepresentations involves genuinely disputed issues of fact not appropriate for summary judgment.” The court concluded that those same disputed issues of fact rendered the case inappropriate for summary judgment on the merits. Axa Versicherung v. New Hampshire Ins. Co., Case No. 05-10180 (S.D.N.Y. July 23, 2007).

Reinsurer’s Calculation Of “Incurred Loss” Could Lead To Finding Of Bad Faith

March 13, 2007 by Carlton Fields

BJC, a network of hospitals is the sole shareholder of ATG, a captive insurance company that provides insurance for BJC. A dispute arose between ATG and its reinsurer, Columbia Casualty pertaining to the “incurred loss condition” clause in their reinsurance agreement. The incurred loss condition provided that continued coverage would be conditioned upon an incurred loss ratio of less than 75%. A few days before the end of the second policy year, Columbia terminated the agreement, claiming that BJC had exceeded the incurred loss ratio on an aggregate basis and on an individual claim.

Much of the case revolved around the actuarial work Columbia presented to BJC to justify Columbia’s determination that the incurred loss ratio had exceeded 75%. While the Eighth Circuit agreed that Columbia had broad discretion to determine the incurred loss, it held BJC presented sufficient evidence from which a reasonable jury could conclude that Columbia acted in bad faith.

The Court also agreed with the district court’s decision to strike the prayer for punitive damages because ATG’s complaint failed to allege fraud with the particularity required by Federal Rule of Civil Procedure 9(b).

Finally, the Court affirmed the district court’s finding that BCA was precluded from recovering compensatory damages resulting from Columbia’s decision to terminate the Contract because BJC failed to properly quantify its costs.

BJC v. Columbia Casualty, Case No. 06-1326 (8th Cir., February 23, 2007).