Reinsurance Claims

SEVENTH CIRCUIT DENIES REHEARING IN FAILED ATTEMPT TO COMPEL ARBITRATION AND TO REQUIRE PRE-PLEADING SECURITY FROM URUGUAY STATE-OWNED REINSURER

March 9, 2015 by Carlton Fields

On November 18, 2014, we reported on the Seventh Circuit’s decision in Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, in which Pine Top claimed that Banco de Seguros owed it $2,352,464.08 under certain reinsurance contracts. The Seventh Circuit affirmed the trial court’s ruling denying Pine Top’s motion to compel arbitration, agreeing that Pine Top’s assigned rights under the reinsurance contracts were limited to the collections of certain debts and did not include the right to arbitrate. The Seventh Circuit also had affirmed the trial court’s denial of a motion to strike Banco Seguros’s pleading for failure to post security, holding that such pre-judgment security is a form of attachment that violates the Foreign Sovereign Immunities Act. On December 22, 2014, the Seventh Circuit denied Pine Top’s petition for rehearing and rehearing en banc, as no judge requested a vote on the petition, and the judges on the prior panel voted to deny rehearing. Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 13–1364 (7th Cir. Dec. 22, 2014).

This post written by Michael Wolgin.

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THIRD CIRCUIT EVALUATES THE DEFINITION OF “MATERIALITY” IN RESCISSION CLAIMS

March 3, 2015 by Carlton Fields

In a case on which we previously reported, the Third Circuit recently evaluated the legal standard for determining materiality in a claim for rescission of an insurance contract. The case involved a dispute between two reinsurers in which a federal court awarded the plaintiff $5.6 million based on breaches of the parties’ retrocession agreements. The district court also entered summary judgment in the plaintiff’s favor on the rescission counterclaim. The Third Circuit affirmed, ruling that the information plaintiff withheld was not material so as to amount to a breach of the duty of utmost good faith, approving the following definition of materiality under New York law: “A fact is material . . . if, had it been revealed, the insurer or reinsurer would either have not issued the policy or would have only at a higher premium.” The Third Circuit rejected the other party’s broader definition of materiality – that information is material if it “likely” would have influenced the decision.

Munich Reinsurance Am., Inc. v. Am. Nat’l Ins. Co., No. 14-2045 (3rd Cir. Feb. 3, 2015)

This post written by Catherine Acree.

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REINSURER FOUND PREJUDICED BY DISADVANTAGEOUS COMMUTATIONS RESULTING FROM CEDING INSURER’S LATE NOTICE

February 27, 2015 by Carlton Fields

A legal dispute stemmed from Utica Mutual Insurance Company’s late notice of claim to Fireman’s Fund Insurance Company, Utica’s reinsurer. Although the parties’ facultative reinsurance certificate required Utica to provide prompt notice “of any occurrence or accident which appears likely to involve reinsurance,” Utica did not provide notice of its claim until 2008 after it entered into a settlement agreement with its own insured surrounding litigation which commenced in 1997. Fireman’s Fund argued that it was prejudiced by Utica’s late notice of its $35 million claim because Fireman’s Fund did not take the claim into account when it negotiated thirteen commutation agreements with retrocessionaires. According to Fireman’s Fund, the retrocessionaires would have been responsible for almost $20 million of the $35 million claim had Fireman’s Fund known of the claim because those claims would have been part of their negotiations. Utica maintained that the commutations were collateral matters which did not constitute prejudice and sought partial summary judgment on the issue of late notice. The court concluded that a reinsurer may be prejudiced by its ceding insurer’s late notice which caused it to make disadvantageous commutations. However, the reinsurer must prove that it suffered tangible loss. If it can do so, then the reinsurer is entitled to complete relief from its duty to indemnify and not merely for those damages caused by the prejudice. The court also denied Utica’s motion for partial summary judgment on Fireman’s Funds bad faith defense. Genuine issues of material fact existed as to whether Utica was grossly negligent or reckless in failing to provide prompt notice to Fireman’s Fund. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 6:09-CV-853 (USDC N.D.N.Y. Feb. 9, 2015).

This post written by Leonor Lagomasino.

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REINSURANCE-RELATED DISPUTE STAYED PENDING ARBITRATION DESPITE LATER EXECUTED SETTLEMENT AGREEMENT

February 25, 2015 by Carlton Fields

Steadfast Insurance Company entered into a settlement agreement with its insured, Barton Malow Enterprises after agreeing to pay $15 million on Barton’s claim. The settlement included a complete release of all claims by Steadfast against Barton and its affiliates and subsidiaries. Thereafter, Steadfast discovered that it had purchased reinsurance covering a portion of the settlement proceeds under a reinsurance agreement with United Integrity. United denied the claim, arguing that Steadfast released United because United was in fact a wholly-owned subsidiary of Barton’s. Steadfast then served an arbitration demand on United pursuant to the arbitration clause in their reinsurance agreement. Barton and United responded by filing suit against Steadfast, which moved to stay the action pending arbitration. Barton and United opposed the motion for stay, arguing that the later-executed settlement agreement overrode the arbitration provision. The court disagreed and stayed the case pending arbitration. The arbitration provision was not superseded by the settlement agreement because the settlement agreement did not specifically preclude arbitration. Moreover, United’s claims fell within the scope of the arbitration provision; the claims implicated both sides’ rights and obligations under the reinsurance agreement. Finally, although Barton was not a party to the reinsurance agreement, the court found that judicial economy warranted staying Barton’s claims against Steadfast pending conclusion of the arbitration. Barton Malow Enterprises, Inc. v. Steadfast Insurance Co., No. 14-cv-7347 (USDC S.D.N.Y. Dec. 31, 2014).

This post written by Leonor Lagomasino.

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SOUTHERN DISTRICT OF NEW YORK: “IF YOU WANT STRICT APPLICATION OF THE LAW, DON’T AGREE TO ARBITRATION CLAUSES.”

February 9, 2015 by Carlton Fields

A federal judge in the Southern District of New York recently denied a motion to vacate an arbitration award in a reinsurance dispute, scolding the movant for complaining that the arbitrators reached a compromise verdict. The movant, the ceding insurer, argued that two of the three members of the arbitration panel had engaged in “manifest disregard of the law” by failing to properly apply the “follow the fortunes” doctrine when they disallowed reimbursement for several claims. The movant challenged a portion of the award holding that the reinsurer was not required to reimburse the movant for certain claims due to negligent claims handling and/or late notice. In a somewhat gruff opinion (“Petitioner’s argument is manifestly wrong . . . .”), the court stated that the movant “asks this court to do what it cannot do – review the award for correctness.” The court noted that all the relevant legal issues were placed squarely before the panel, that considerable evidence and argument was presented on those issues during a five-day hearing, and the evidence on the disputed issues “could be read either way.” In denying the motion to vacate and confirming the award, the court noted that the arbitrators were not required to follow “judicial formalities” in making their decision, and therefore were not required to predict what a court would hold. Rather, all that was required of them was that the decision have “colorable justification.” Apparently frustrated by the movant’s “manifest disregard of the law” argument, the court lectured: “If parties want the luxury of judicial review and reasoned results that require strict application of the law, without the sort of compromises that often characterize arbitral awards, they should not agree to arbitration clauses. Having done so, they should not be heard to complain when the arbitrators do what arbitrators so often do – reach compromise verdicts that can easily be justified by taking a particular view of the evidence.”

Associated Industries Ins. Co., Inc. v. Excalibur Reinsurance Corp., Case No. 1:13-cv-08239 (USDC S.D.N.Y November 26, 2014)

This post written by Catherine Acree.

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