Reinsurance Claims

APPELLATE COURT REJECTS CLAIM OF ARBITRATOR BIAS BASED ON UMPIRE’S SERVICE AS A PARTY ARBITRATOR IN OTHER MATTERS INVOLVING A RETROCESSIONAIRES’ ALLEGED AFFILIATE

February 28, 2017 by Rob DiUbaldo

The Second Circuit has rejected the attempt of a retrocedent, IRB Brasil Reseguros S.A. (“IRB”), to vacate certain arbitration awards against it in favor of its retrocessionaire, National Indemnity Company (“NICO”). IRB argued that vacatur was required because the neutral umpire on a three arbitrator panel accepted a position as party arbitrator on behalf of an alleged affiliate of NICO while the NICO/IRB arbitration was ongoing. Notwithstanding this, the court found that this did not amount to “evident partiality” or any other basis for vacatur of an arbitration award under the Federal Arbitration Act based upon arbitrator misconduct.

IRB and NICO were involved in a series of arbitrations over seven years regarding NICO’s obligations to indemnify IRB for losses it incurred under certain reinsurance contracts that covered losses suffered by large Brazilian company. The three-member arbitration panel was made up of two party-appointed arbitrators and one neutral umpire. In 2012, IRB demanded that the neutral umpire withdraw from the arbitration because he had served as a party-arbitrator for an alleged affiliate of NICO in another matter. The umpire refused to step down and later accepted another appointment as a party-arbitrator for that same purported NICO affiliate. The majority of the arbitration panel in the NICO/IRB matters ultimately issued three awards in NICO’s favor.

The court found that the umpire’s conduct did not demonstrate “evident partiality” under the FAA, which the court, quoting an earlier Second Circuit decision, said exists when “a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side.” The umpire was not alleged to have a familial, business, or employment relationship with NICO or its alleged affiliate, or a financial interest in the outcome of the arbitrations, and had in fact voted against NICO’s purported affiliate when acting as party arbitrator. The court also rejected IRB’s argument that his conduct constituted “misbehavior” under the FAA because this argument was not raised before the district court. However, the court found that IRB’s arguments were not frivolous and thus rejected NICO’s request for attorneys’ fees and costs. National Indemnity Co. v. IRB Brasilia Reseguros S.A., No. 16-627-cv (2d Cir. Jan. 31, 3017)

This post written by Jason Brost.

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NEW YORK APPELLATE COURT AFFIRMS DENIAL OF MOTION FOR CHANGE OF VENUE

January 25, 2017 by John Pitblado

In this reinsurance coverage case in a New York court, certain defendant reinsurers made a motion for a change of venue under NY CPLR 510 (2) on the ground that “an impartial trial could not be had” based on the fact that plaintiffs’ former lead counsel, who was scheduled to be a fact witness, had retired from law firm practice and was now a judge of that same court’s Commercial Division. The New York court denied the motion, and the reinsurers appealed.

On appeal, the New York appellate court noted that the lower court correctly determined that the reinsurers’ motion for a change of venue was untimely, in that they waited “until the eve of trial,” after plaintiffs’ former counsel’s was designated a judge of the court’s Commercial Division, which was nine months after he was first designated as a judge of the court. The court noted that all of the arguments raised by the reinsurers in support of the venue change when he was appointed to the Commercial Division existed at the time he was first appointed as judge of the court.

Noting that to succeed on a CPLR 510(2) motion, a movant must demonstrate by factual evidence that there is a strong possibility that an impartial trial cannot be had in the venue. But the New York appellate court concluded that the reinsurers’ arguments consisted not of factual evidence, but of conclusory allegations, beliefs, and suspicions. The court noted that “[t]here is no personal relationship between the trial judge and the judge-witness and no personal relationship between the judge-witness and the party. The mere fact that the jury may discover a nonparty witness is a judge is not enough to prejudice a defendant where a plaintiff does not seek to exploit the witness’s status to enhance his credibility. Moreover, the same concerns would exist, no matter in what venue the case is tried.” Thus, the court affirmed the lower court’s denial of the reinsurers’ motion.

U.S. Fidelity & Guaranty Co. v. American Re-Insurance Co., No. 604517/02 (N.Y. App. 1st Dep’t Dec. 22, 2016).

This post written by Jeanne Kohler.

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NY HIGHEST COURT ASKED CERTIFIED QUESTION ON REINSURER LIABILITY CAP

January 3, 2017 by John Pitblado

The Second Circuit certified to the New York Court of Appeals the question of whether its 2004 decision (Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004)) imposed
“either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total insurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?”

Relying on the Second Circuit’s decision in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., the SDNY previously determined the limits in the reinsurance certificates capped the reinsurer’s liabilities for both the cedent’s indemnity payments (“losses”) and its defense costs (“expenses”). Courts across the United States have reached different results on this issue.

Noting the potential economic impact of a reversal of Bellefonte and Unigard Security Insurance Co. Inc. v. North River Insurance Co., the panel stated its intention “is to seek the New York Court of Appeals as to whether a consistent rule of construction specifically applicable to reinsurance contracts exists” and that the “interpretation of the certificates at issue here is a question of New York law that the New York Court of Appeals has a greater interest and greater expertise in deciding.”

Global Reinsurance Corp. of Am. v. Century Indem. Co., Docket No. 15-2164-cv (2d Cir. Dec. 8, 2016).

This post written by Nora A. Valenza-Frost.

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COURT TOSSES TIME-BARRED RICO CLAIMS ALLEGING CAPTIVE REINSURANCE KICKBACK SCHEME

December 22, 2016 by Michael Wolgin

Plaintiffs asserted class claims for RICO violations based on allegations that Bank of America referred borrowers to private mortgage insurance providers in exchange for kickbacks, funneled through a captive reinsurance company. Bank of America argued that plaintiffs’ lack of due diligence precluded them from tolling the four-year statute of limitations under the “injury discovery rule.” The Court found that Bank of America met its initial burden to establish the existence of “storm warnings” of the alleged wrongs, shifting the burden to plaintiffs to show that they exercised reasonable due diligence but were nevertheless unable to discover their injuries. The Court noted that before closing on their loans, plaintiffs received a disclosure explaining that their reinsurance could be placed with a lender-affiliated company, and plaintiffs were given the opportunity to opt out of reinsurance. However, the plaintiffs took no steps to investigate the reinsurance. Since plaintiffs did not exercise reasonable due diligence, the Court held that they had constructive notice of all facts that could have been learned through diligent investigation during the limitations period.

Plaintiffs also attempted to delay the accrual of the limitations period based on the “separate accrual rule.” Plaintiffs argued that each transmission of a periodic account statement was in furtherance of the RICO scheme and constituted a new predicate act of mail and wire fraud, which in turn, resulted in the payment of illegal kickbacks. The Court disagreed, concluding that the present account statements – even if each prompted and caused plaintiffs to make a payment – arose from obligations and facts already known and acknowledged at the time of the parties’ mortgage agreements and thus were not “new and separate.” As such, the Court granted summary judgment in Bank of America’s favor, holding the RICO claims were time-barred.

Weiss v. Bank of America Corp., Case No. 15-62 (USDC W.D. Pa. Nov. 22, 2016).

This post written by Gail Jankowski.

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SOUTH CAROLINA FEDERAL COURT MAKES TWO RULINGS ON MOTIONS TO DISMISS IN DISPUTE INVOLVING REINSURANCE TRUST AGREEMENTS

December 14, 2016 by John Pitblado

This case was previously reported by us on our blog on January 5, 2016, June 28, 2016 and July 20, 2016. For the full procedural background, we refer to the recent November 3, 2016 and November 16, 2016 decisions. In sum, Plaintiff Companion Property and Casualty Insurance Company (“Companion”) participated in a fronted insurance program with two reinsurers, Redwood and Freestone. Reinsurance collateral trusts were established for Companion’s benefit and maintained by defendant U.S. Bank as trustee. Companion authorized Redwood and Freestone to administer the trusts’ assets by giving direction to U.S. Bank. One such direction was to authorize certain third-parties who could act for Redwood and Freestone with regard to each trust account. Through the direction of Redwood, Freestone and their authorized third-parties, U.S. Bank made certain investments which were ultimately to the detriment of the trusts.

U.S. Bank then made claims against the third-parties for apportionment, contribution and indemnification for its liability to Companion. The third-parties moved to dismiss U.S. Bank’s claims, which was granted except for U.S. Bank’s claim for contribution. U.S. Bank then filed an amended third-party complaint, adding Aon Insurance Managers (Cayman) Ltd. (“Aon”) as a third-party defendant. One of the third-parties, Alexander Chatfield Burns (“Burns”) also filed an answer to U.S. Bank’s third-party complaint, which contained seven counterclaims against U.S. Bank. U.S. Bank then moved to dismiss Burns’ counterclaims. Aon also moved to dismiss the third-party complaint by U.S. Bank on the basis that the court lacked personal jurisdiction over it. Burns also filed a fourth party complaint against U.S. Bank Trust National Association (“USBT”) for contribution. USBT also moved to dismiss the complaint by Burns on the basis that the court lacked personal jurisdiction over it.

The South Carolina federal court recently ruled on the motions to dismiss by U.S. Bank, Aon and USBT. On November 3, 2016, the court granted in part and denied in part U.S. Bank’s motion to dismiss Burns’ counterclaims. First, the court noted that Burns’ contribution counterclaims were premised on its liability to either U.S. Bank or Companion. The court dismissed Burns’ contribution counterclaim against U.S. Bank premised on Burns’ liability to U.S. Bank as contribution is not available in such case. As for Burns’ contribution counterclaim premised on its liability to Companion, even though Companion had not yet formally sued Burns, that counterclaim remained. The court noted that the torts giving rise to U.S. Bank’s and Burns’ liability to Companion have already occurred and thus, Burns’ cause of action for contribution had accrued. Burns’ remaining counterclaims sounding in contract and tort, however, were dismissed because through those claims, Burns was seeking to recover damages on behalf of Redwood and Freestone, and thus ran afoul of the prudential standing doctrine.

On November 16, 2016, the South Carolina federal court granted the motions to dismiss by Aon and USBT. With respect to USBT’s motion to dismiss Burns’ fourth party complaint, the court found that Burns failed to meet his burden that USBT, which is incorporated and has its principal place of business in Delaware, should be subject to the court’s general or specific personal jurisdiction, and thus the complaint against USBT was dismissed. With respect to Aon’s motion to dismiss U.S. Bank’s third-party complaint, the court found that U.S. Bank also failed to meet its burden that Aon, which is incorporated and has its principal place of business in the Cayman Islands, should be subject to the court’s specific personal jurisdiction, and thus the complaint against Aon was dismissed.

Companion Property and Casualty Insurance Co. v. U.S. Bank Nat’l Association, No. 3:15-cv-01300 (USDC D.S.C. Nov. 3, 2016 and Nov. 16, 2016).

This post written by Jeanne Kohler.

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