Reinsurance Claims

Court Permits Munich Re to Expand Its Counterclaims Against Cedent AMIC, Following Dismissal of AMIC’s Bad Faith Claims

October 1, 2021 by Michael Wolgin

On April 13, 2021, we reported on a decision by the U.S. District Court for the Middle District of Alabama that dismissed a portion of a complaint brought by cedent Alabama Municipal Insurance Corp. (AMIC) for bad faith against its reinsurer Munich Reinsurance America Inc., based on the court’s prediction that the Alabama Supreme Court would refuse to recognize bad faith claims in the context of reinsurance disputes.

The district court has now granted Munich Re’s motion for leave to file a second amended answer and add two counts for declaratory relief to its counterclaim regarding the parties’ rights under the relevant reinsurance treaties, including AMIC’s alleged litigation management and reporting responsibilities. The court rejected AMIC’s arguments that the request to amend was unduly delayed, or that the discovery plan would be inadequate if the amendments were permitted.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America Inc., No. 2:20-cv-00300 (Sept. 8, 2021).

Court Holds the ACA and Implementing Regulations Do Not Preempt State Creditor Priority Laws in Reinsurance Debt Dispute

June 28, 2021 by Benjamin Stearns

In 2016, Colorado Health Insurance Cooperative Inc. was ordered into liquidation by a Colorado court. At the time, the federal government owed Colorado Health $24.5 million for reinsurance debts under the Affordable Care Act (ACA), while Colorado Health owed the federal government $42 million for risk adjustment debts pursuant to another program promulgated under the ACA. The government attempted to “leapfrog” other insolvency creditors by offsetting the amounts Colorado Health owed under one ACA program against the amounts the federal government owed the Colorado Health estate under the other federal program, rather than paying its debt to the estate in full and making a claim against the estate as an insolvency creditor. The trustee sued, and the U.S. Court of Federal Claims ordered the government to pay.

The U.S. Court of Appeals for the Federal Circuit affirmed. The court analyzed the explicit statutory and regulatory language and the structure and purpose of the federal scheme erected by the ACA and implementing regulations. The court found that, with specific regard to the prioritization of insolvency creditors, the text of the statutes and regulations was silent. The court also found that the structure of the law suggested that state law controlled creditor priority, and further that the purposes of the law did not evidence a preemptive intent that was otherwise absent from the text and structure of the federal scheme. As such, the federal scheme, collectively, did not demonstrate a “clear and manifest” intent to preempt state law fixing creditors’ rights during insolvency.

Therefore, applying the presumption against preemption, the court held that the federal scheme did not preempt Colorado’s creditor priority framework, and the federal government could not offset the amounts that were owed to it by Colorado Health rather than paying its debt to the estate and making a claim for the amounts it was owed, just as any other creditor would be required to do.

Conway v. United States, No. 1:18-cv-01623 (Fed. Cir. May 17, 2021).

District Court Predicts that Alabama Supreme Court Would Refuse to Extend Bad Faith to Reinsurance Disputes

April 13, 2021 by Brendan Gooley

The United States District Court for the Middle District of Alabama recently predicted that the Alabama Supreme Court would refuse to recognize bad faith claims in the context of reinsurance disputes if it was presented with the question. The district court therefore granted a reinsurer’s motion to dismiss several bad faith claims against it.

Alabama Municipal Insurance Corporation (“AMIC”) sued Munich Reinsurance America, Inc. for purportedly underpaying several reinsurance claims by approximately $1.9 million. AMIC asserted bad faith claims as part of its suit. Munich Re moved to dismiss those claims, arguing Alabama does not (or rather, would not) recognize bad faith in the context of reinsurance disputes.

The district court agreed. It therefore granted Munich Re’s motion to dismiss and denied a motion by AMIC to amend. In sum, the court noted that the Alabama Supreme Court has limited bad faith claims to insurance situations “that most resemble typical insurance contracts” (e.g., those in which the insured is a consumer or individual, etc.) The district court noted that the Alabama Supreme Court declined to extend the tort to a situation involving a dispute between a primary and excess insurer and that another United States district court had predicted “that the Alabama Supreme Court would not choose to extend the tort to suretyships.” The district court noted that the tort was designed to protect vulnerable insureds who have little negotiating power when signing insurance contracts and that the insurer-reinsurer dynamic is not such a situation.

The court therefore predicted that the Alabama Supreme Court would not recognize bad faith claims in the context of insurer-reinsurer disputes and dismissed those claims.

Alabama Municipal Ins. Corp. v. Munich Reinsurance Am., Inc., No. 2:20-cv-00300-MHT-JTA (Doc. No. March 16, 2021).

London Court of Appeal Vacates and Remands Decision Blocking Transfer of Approximately 370K Annuity Policies

March 1, 2021 by Brendan Gooley

A London Court of Appeal recently vacated and remanded a High Court’s decision precluding the approval of a deal to transfer approximately 370,000 annuities after concluding that the High Court made several errors in its analysis of the relevant factors in play.

Prudential Assurance Co. (PAC) and Rothesay Life PLC entered into a reinsurance agreement “to transfer the majority of the economic risk and reward of the annuity business covered by the agreement from PAC to Rothesay.” The “assets backing the annuity policies were transferred by PAC to Rothesay as part of the premium for the reinsurance.”

A separate business transfer agreement “contemplated that the parties would cooperate to achieve the actual transfer of th[e] business through” regulatory and court approval.

As part of the approval process, the parties asked the High Court of Justice of the Business and Property Courts in London “to sanction a scheme … providing for the transfer from PAC to Rothesay of some 370,000 annuity policies written by PAC” under the United Kingdom’s Financial Services and Markets Act 2000, which permits discretionary court approval of such schemes if “in all the circumstances of the case, it is appropriate to sanction the scheme.”

The High Court declined to approve the scheme. In short, the court did so because, among other things, (1) “Rothesay did not have the same capital management policies or the backing of a large well-resourced group” (in other words, PAC, which was part of the Prudential family, had much more support from its parent in the event of a financial crisis) and (2) “it had been reasonable, in the light of PAC’s sales materials, age and reputation, for policyholders to have chosen PAC on the basis of an assumption that it would not seek to transfer their policies” (in other words, policyholders selected PAC for its financial strength and reputation and reasonably believed that they would be dealing with PAC for the life of their annuities, which could be decades).

PAC and Rothesay appealed, and the Court of Appeal vacated and remanded.

In sum, the Court of Appeal held, among other things, that the High Court “ought not to have concluded that there was a material disparity between the non-contractual external support potentially available for each of PAC and Rothesay” (put differently, the court wrongly believed Rothesay had less support from its parent than PAC had from its parent) because the High Court “disregarded the opinion of [an independent] expert and the [Prudential Regulation Authority] as to [PAC’s and Rothesay’s] future financial resilience on the false basis that those opinions were themselves founded upon only a snapshot of the current year” when they were not.

Even putting that aside, the Court of Appeal explained that the theoretical availability of “non-contractual parental support” that the High Court felt would be provided by PAC’s parent (Prudential) to protect its reputation in the event of a financial crisis at PAC was irrelevant because it was not proper to “assume that any non-contractual parental support will be available in the future” because, among other things, “[p]arents can never be required to support their subsidiaries” and “parents of insurers are always at liberty to sell their regulated subsidiaries.” The independent expert had, in any event, concluded that the risk of either “PAC or Rothesay needing external support in the future was remote,” and the High Court failed to give that opinion proper weight.

Turning to the High Court’s analysis concerning the policyholders’ decisions and expectations, the Court of Appeal concluded that the High Court “ought not to have accorded any weight to the fact that the objecting policyholders chose PAC on the basis of its age, venerability and established reputation, and reasonably assumed that PAC would always provide their annuities” because such subjective considerations were irrelevant and the “only correct question was whether the transfer would have a material adverse effect on the security of their benefits.”

In re Prudential Assurance Co., No. [2020] EWCA Civ 1626 (Feb. 12, 2020).

New Jersey Supreme Court Affirms $56M Refund to Johnson & Johnson for Overpayment of Insurance Premium Tax

February 12, 2021 by Carlton Fields

The New Jersey Supreme Court recently ruled that Johnson & Johnson is required to pay an insurance premium tax (IPT) based only on its premiums for risks located within the state of New Jersey rather than nationwide, entitling the company to a $56 million tax refund.

Prior to 2011, New Jersey insurance laws required J&J, as a holder of self-procured insurance, to pay its IPT based only on risks located in New Jersey. However, in a 2011 amendment to the state’s insurance laws, the Legislature authorized additional taxation on surplus lines insurance policies by adding the following sentence to N.J.S.A. 17:22-6.64: “If a surplus lines policy covers risks or exposures in this State and other states, where this State is the home state, … the tax payable pursuant to this section shall be based on the total United States premium for the applicable policy.” J&J, despite not being a holder of surplus lines coverage, thereafter voluntarily increased its IPT payments to reflect the amount due on its nationwide insurance premiums. In November 2015, J&J filed a claim with the New Jersey Department of Banking and Insurance (DOBI) and the director of the Division of Taxation, seeking a refund of nearly $56 million in excess IPT that it had paid since 2011.

After the division denied its refund claim, J&J filed a complaint in the Tax Court. The Tax Court found in favor of the DOBI and the division, concluding that the 2011 amendments that authorized the collection of IPT for surplus lines insurance coverage based on total nationwide premiums applied equally to self-procured coverage. The Appellate Division reversed, finding that J&J’s IPT obligations should have continued to be based solely on the risks it insured that were located within New Jersey. Stressing that the original plain language of the statute “clearly limited J&J’s tax liability to the risks it insured in New Jersey [and] was not changed in any way, shape, or form in the 2011 amendment,” the Appellate Division explained that it was “bound to follow and apply” that language. The Appellate Division ultimately declared itself unable to conclude that the New Jersey Legislature, by specifically stating that the amendment applied only to surplus lines insurance coverage, likewise intended to extend it to self-procured coverage.

In a one-paragraph majority decision, the New Jersey Supreme Court affirmed the ruling “substantially for the reasons expressed” by the Appellate Division.