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Reinsurance Claims

Court Dismisses Reinsurance Litigation in Favor of Prior Pending Action

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The plaintiffs, U.S. Fire Insurance Co. and North River Insurance Co., issued 12 umbrella and excess umbrella liability policies for a combined coverage of $244 million to a manufacturer of respiratory protection equipment and asbestos-containing personal protective products. The plaintiffs subsequently entered into reinsurance contracts that covered the 12 policies. Beginning in March 2017, the plaintiffs billed the reinsurers for amounts they claimed were due under the reinsurance contracts as a result of the plaintiffs’ payments for settling liability under the umbrella policies.

When certain reinsurers refused to pay a portion of the reinsurance billings, the plaintiffs brought this lawsuit in the District of New Hampshire, alleging breach of several of the reinsurance contracts and seeking a declaratory judgment arising out of the reinsurers’ refusal to pay certain billings. However, less than an hour before the plaintiffs initiated the lawsuit, the plaintiffs’ reinsurers (mostly the same reinsurers in the initial action, as well as additional reinsurers) sued the plaintiffs in a New Jersey court. There, the reinsurers alleged that they had made payments to the plaintiffs pursuant to the reinsurance contracts under a reservation of rights and sought reimbursement of those amounts. The reinsurers then moved to dismiss or stay the New Hampshire case, arguing, inter alia, that the court should defer to the New Jersey action pursuant to the prior-pending-action doctrine or the related first-filed doctrine. While this motion was pending, the reinsurers filed a notice of an order issued in the New Jersey action denying U.S. Fire and North River’s motion to dismiss or stay on comity, forum non conveniens, and other grounds.

The New Hampshire court granted the reinsurers’ motion to dismiss. The court based its ruling on the prior-pending-action doctrine, which holds that the pendency of a prior action, in a court of competent jurisdiction, between the same parties, predicated upon the same cause of action and growing out of the same transaction, and in which identical relief is sought, constitutes a good ground for abatement of the later suit. The court cited to the interests of judicial efficiency and avoiding inconsistent judgments. The court found that the New Jersey action involved the same issues presented in this case: “the various reinsurers’ obligations to provide payments to plaintiffs under the Reinsurance Contracts.” The court explained: “As the [reinsurers] seek not only the return of payments they previously made to North River, but also a declaratory judgment as to the parties’ respective rights and obligations under the Reinsurance Contracts, the controlling issues in this litigation will be determined in the New Jersey Action.” The court further found that U.S. Fire and North River already moved to dismiss the New Jersey action, and the court in that case denied the motion and made several rulings that directly impacted the arguments raised by the parties in the New Hampshire case. The court concluded that “principles of comity and the convenience of the parties and witnesses weigh in favor of dismissal of this case in favor of the New Jersey Action.”

U.S. Fire Insurance Co. v. Equitas Ins. Ltd., No. 1:18-cv-01205 (D.N.H. Oct. 24, 2019).

Court Orders Stay of New Arbitration Over Disputed Reinsurance Billings and Compels Parties to Proceed Before a Predecessor Arbitration Panel

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The case involved a “second layer special casualty excess agreement of reinsurance” under which reinsurers General Reinsurance Corp. and SCOR Reinsurance Co. agreed to cover a certain amount in excess of Chicago Insurance Co.’s $1 million per occurrence retention. An arbitration ensued after the reinsurers disputed reinsurance billings from Chicago Insurance arising out of certain asbestos insurance liability. The arbitration panel rejected Chicago Insurance’s attempt to bill its losses on the basis that each site where the insured had operated constituted an “occurrence” under the reinsurance agreement, and issued an award for the reinsurers. The award expressly retained the panel’s jurisdiction to “resolve any dispute arising out of [the] Final Award.”

Subsequent to the award, Chicago Insurance submitted a new billing to the reinsurers, which stated that the “loss allocation was prepared in accordance with the Award’s protocols.” The reinsurers disputed the new billing and alerted the prior arbitration panel. The umpire confirmed that it had retained jurisdiction but noted that Chicago Insurance’s appointed arbitrator disagreed and would not participate in the new dispute. Chicago Insurance then initiated a new separate arbitration, in which the reinsurers refused to participate, and filed a petition to compel the reinsurers’ participation and to stay the original arbitration. The reinsurers responded by filing a cross-petition to stay the new arbitration and for a declaration that the prior panel had jurisdiction to resolve the dispute.

The court denied Chicago Insurance’s petition and granted the reinsurers’ cross-petition to stay the new arbitration. The court rejected Chicago Insurance’s argument that the prior panel was functus officio by fully exercising their authority to adjudicate the issue submitted to them. The court found that the prior panel retained jurisdiction to resolve any dispute arising out of the prior award and that Chicago Insurance had consented to that by failing to dispute the award. The court also found that Chicago Insurance “repeatedly claimed that the new bill that it sent to the Reinsurers was offered pursuant to the ‘protocols’ set forth by” the prior award, and therefore, consistent with what the majority of the original panel determined, the current dispute “clearly” fell within the original arbitration jurisdiction. The court, therefore, ruled that the prior panel retained jurisdiction to adjudicate whether the new bill comported with its prior award.

Chicago Ins. Co. v. Gen. Reinsurance Corp., No. 1:18-cv-10450 (S.D.N.Y. Oct. 22, 2019).

Court of Federal Claims Finds HHS Offset Invalid Under Colorado’s Insurance Liquidating Priority Scheme

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The U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services (HHS) operates the reinsurance and risk-adjustments program for Colorado, including the application of the “netting rule” — a method by which it would aggregate and offset money owed by or to different insurers under various Affordable Care Act (ACA) payment programs. Colorado Health Insurance Cooperative Inc. ran into financial difficulties and was put into liquidation. According to the liquidator, the HHS would offset $20,255,084 of the amount the HHS owed Colorado Health under the risk-adjustment program against $21,775,432 that Colorado Health owed the HHS under the risk-adjustment program. Ultimately, the liquidator sent the HHS a claims-determination letter, disallowing the HHS’ claims and requesting a return of all unauthorized offsets. The HHS did not timely object under Colorado law and, upon the liquidator’s motion, a Colorado court affirmed the liquidator’s claim determination.

The liquidator then sued the HHS, alleging that (1) the HHS failed to make obligatory payments under the reinsurance program; and (2) the HHS’ offset of payments it owed to Colorado Health violated Colorado law and was therefore invalid.

As a threshold matter, the court held that the ACA does not prohibit offset otherwise allowed under federal common law or state law, and dismissed the first cause of action as it did not provide an independent basis for relief. As to the second cause of action, the court held that the HHS’ offset was invalid under Colorado’s insurance liquidation priority scheme. “Because neither the ACA nor another statute authorizes the Netting Rule’s application in the insurance liquidation context, HHS must have taken its offset in its capacity as a creditor. Although federal law governs HHS’s rights as a creditor in implementing the nationwide reinsurance and risk-adjustment programs, its interest in uniformity is insufficient to warrant this Court creating a federal common law rule to displace Colorado’s insurance liquidating priority scheme.”

Conway v. United States, No. 18-1623 (Fed. Cl. Oct. 3, 2019).

North Carolina Court Rules Reimbursement for Extracontractual Losses Discretionary

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The Court of Appeals of North Carolina has concluded that the state’s Reinsurance Facility has discretion to approve or deny petitions from members for reimbursement for extracontractual losses and that members have no right to reimbursement for such losses under the governing statutory scheme. The decision relates to a significant bad faith case against Allstate.

Allstate issued an auto insurance policy to an insured and ceded the policy to the North Carolina Reinsurance Facility, a nonprofit entity that insures drivers whom insurers determine they do not want to insure individually. The insured subsequently struck a minor riding a bicycle, causing serious injury. The insured reported the accident to the Allstate agent who sold him the policy. She told him to call an Allstate phone number to report the accident, but he never did. Allstate received notice of the accident when it heard from counsel for the injured minor. It investigated and offered to tender the policy limit of $50,000, but the injury party rejected that offer. The insured stipulated to a $13.8 million judgment against him and assigned his claims against Allstate to the injured party. That party then sued Allstate for breaching its duty of good faith and ultimately received $11 million in a settlement after an adverse jury verdict.

Allstate sought reimbursement for the bad faith loss from the Reinsurance Facility. The Reinsurance Facility denied Allstate’s request, and Allstate appealed to the North Carolina Commissioner of Insurance. The Commissioner ordered the Reinsurance Facility to reconsider its denial. The Reinsurance Facility petitioned for judicial review, and the trial court affirmed the Commissioner’s decision.

The Reinsurance Facility then appealed to the Court of Appeals of North Carolina. The court reversed and remanded the trial court’s decision. Analyzing the plain language of the statute governing the Reinsurance Facility, the court concluded that the Reinsurance Facility was required to consider a petition for reimbursement and gave member insurers the right to receive reimbursement for contractual losses, but concluded that members had no right to reimbursement for extracontractual losses and that the Reinsurance Facility had discretion to approve or deny such petitions. Thus, the Reinsurance Facility was well within its statutory rights to deny Allstate’s petition for reimbursement.

The Supreme Court of North Carolina then denied Allstate’s petition for further review.

N.C. Reinsurance Facility v. Causey, 830 S.E.2d 850 (N.C. Ct. App. 2019), review denied, 832 S.E.2d 731 (N.C. 2019).

UK High Court Declines to Sanction Transfer of Annuity Portfolio

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The High Court of Justice Business and Property Courts of England & Wales refused to sanction a scheme proposed by Prudential Assurance Co. and Rothesay Life PLC to transfer approximately 370,000 annuity policies from Prudential to Rothesay. The scheme was proposed under Part VII of the Financial Services and Markets Act 2000. As part of the scheme, Prudential and Rothesay entered into a reinsurance agreement to transfer the majority of the economic risk and reward of Prudential’s annuity business covered by the agreement from Prudential to Rothesay. Although the scheme would not change any terms of any policies, the court found that the scheme offered no benefits to the transferred policyholders, who would no longer be entitled to look to Prudential to pay or service their annuities and instead would need to look solely to Rothesay in these respects. The court noted that the scheme was “strenuously opposed” by a number of policyholders, who contended that they selected Prudential as their annuity provider based specifically on its long history as a leading UK insurer, its size, reputation, and financial strength and resources.

On balance, the court concluded that a number of factors weighed heavily against exercising its discretion to sanction the scheme. It emphasized, among other things, the overall fairness of the scheme as between all affected persons, the annuity policyholders in particular. The court found that it was entirely reasonable for policyholders to have chosen Prudential based on its history and reputation, among other factors, and for policyholders to have assumed that Prudential would not seek to transfer their policies to another provider. The court rejected Rothesay’s contention that it would be prejudiced by any decision not to sanction the scheme by refusing it the benefits of the reinsurance agreement with Prudential referenced above, finding that Rothesay entered into the reinsurance agreement knowing the scheme was subject to the court’s sanction and thus was not guaranteed to be approved.

In re Prudential Assurance Co. Ltd. [2019] EWHC (Ch) 2245 (Eng.).