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Reinsurance Claims

Southern District of New York Rejects Reinsurer’s Claim that Exhaustion Provision Was Not Met; Concludes Indemnification Was Required Under Follow-the-Settlement Clause

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The United States District Court for the Southern District of New York rejected a reinsurer’s denial of a claim. The court disagreed with the reinsurer’s position than exhaustion language had not been satisfied, and found the exhaustion language ambiguous and concluded that payment was required under a “follow-the-settlement” clause in the reinsurance certificate.

Fireman’s Fund Insurance Company issued three excess liability policies to Asarco. The third policy (“Policy 3”) provided “coverage of $20 million for losses in excess of $75 million in excess of a $3 million self-insured retention for the period March 15, 1983 to March 15, 1984.”

General Accident Insurance Company reinsured Policy 3 under a facultative reinsurance contract in which it assumed “15% . . . of the risk assumed in Policy 3.”  OneBeacon Insurance Company subsequently became the successor-in-interest to General Accident.

Asarco filed an action against Fireman’s seeking coverage for asbestos exposure. Fireman’s estimated its exposure at $50.3 million. It settled with Asarco for $35 million and allocated a portion of that settlement to Policy 3 in accordance with its exposure analysis.

Fireman’s then billed OneBeacon pursuant to the reinsurance agreement. OneBeacon denied Fireman’s claim, asserting that the policies underlying Policy 3 had not been exhausted.

The court granted summary judgment to Fireman’s. In short, the court explained that the reinsurance certificate contained a “follow-the-settlements” provision that required OneBeacon to make payments in accordance with Fireman’s good-faith settlement, which was reasonable. That clause was not trumped by any exhaustion clause in Fireman’s policies because the term exhaustion was ambiguous within the meaning of Fireman’s policies.

Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., No. 14-civ-4718 (PGG) (Oct. 19, 2020).

New York Federal Court Confirms Arbitration Award Where Plaintiff Offered No Grounds to Vacate, Modify, or Correct Award

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PB Life and Annuity Co. Ltd. brought this action seeking a declaratory judgment that a breach of contract dispute with Universal Life Insurance Co. was not subject to arbitration and must be litigated in federal or state courts in New York. Universal Life filed a motion to compel arbitration, and PB Life filed a motion for a preliminary injunction, which the parties later agreed would be converted into a motion for a permanent injunction.

We have previously addressed the district court’s May 12, 2020, decision granting Universal Life’s motion to compel arbitration and denying the plaintiff’s motion for a permanent injunction of the arbitration.

On June 2, 2020, the arbitral panel issued an interim award to Universal Life. Universal Life subsequently moved to confirm the arbitration award, and PB Life cross-moved to vacate the award on four grounds:

1. Whether the Panel Denied PB Life Due Process

PB Life argued that the arbitral panel denied it a fair opportunity to present its case under the Federal Arbitration Act and the New York Convention because PB Life was not given the opportunity to generate new independent expert reports showing the value of the trust assets, or the opportunity to obtain important discovery from Universal Life on the same issue. The court rejected PB Life’s argument, noting that the basis for the panel’s ruling was not the value of the assets in the trust account, but rather whether they were qualifying assets, and that the panel’s conclusion that they were not qualifying would not be undermined by evidence that the assets were valuable. The court found that PB Life “does little more than complain that the panel issued its interim award without conducting a full hearing on the merits of its defenses.”

2. Whether the Award Was Entered in Manifest Disregard of the Law

PB Life argued that the panel manifestly disregarded the law by finding irreparable harm when Universal Life sought money damages alone. The court found that PB Life failed to provide any law that is contrary to the panel’s decision or provide any basis for its assertion that the panel misapplied the law to find “immediate and irreparable loss or damage” other than its bare disagreement with the outcome.

3. Whether Recognition or Enforcement of the Award Would Be Contrary to Public Policy

PB Life argued that the award would be contrary to public policy under the Convention because its recognition or enforcement would require PB Life to violate a temporary restraining order entered by a North Carolina state court to which PB Life voluntarily subjected itself.

The court construed PB Life’s arguments in one of two ways:

  • First, that PB Life argued the temporary restraining order relieved it of its obligations under the reinsurance agreement. The court rejected this argument, finding that PB Life forfeited such an argument when it failed to raise this argument before the panel.
  • Second, that PB Life was in essence stating a restraint on the power of the court – that it would be contrary to public policy for the court to enter a judgment that would require PB Life to violate an order of another court. Again, the court rejected PB Life’s argument, finding that PB Life offered no reason to believe that the North Carolina state court would not honor the district court’s judgment, nor identified any public policy that prevents a second court from awarding judgment in favor of a party entitled to it simply because the defendant is subject to a prior court order from an earlier court that would make compliance difficult or impossible.

Simply put, PB Life had not identified any public policy that prevented the court from ordering interim relief in favor of Universal Life that the panel determined Universal Life was plainly entitled to under the Convention and the FAA. The panel found in favor of Universal Life, and under governing law, Universal Life was entitled to confirmation of the award. The court advised that to the extent the judgment conflicts with that of the temporary restraining order in the North Carolina court, PB Life has the means to address that conflict by either petitioning the North Carolina court for relief or, if the plaintiffs in the North Carolina proceeding can successfully resist, find another way to satisfy those parties.

4. Whether the Dispute Is Arbitrable

Lastly, PB Life argued that the dispute was not arbitrable because the arbitration clause of the reinsurance agreement was superseded by the trust agreement. The court stood by its original decision, which held that the reinsurance agreement and its arbitration clause were not superseded by the trust agreement and that the question of arbitrability was for the arbitrators to decide, who ultimately determined that the dispute was arbitrable. The court found that PB Life failed to show an “intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”

Ultimately concluding that PB Life had not provided any ground to vacate, modify, or correct the award, the U.S. District Court for the Southern District of New York confirmed the arbitration award.

PB Life & Annuity Co. v. Universal Life Insurance Co., No. 1:20-cv-02284 (S.D.N.Y. July 30, 2020).

Eleventh Circuit Affirms Order Compelling Arbitration of Cruise Liner Class Action

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Plaintiffs filed a putative class action against Norwegian Cruise Lines claiming that Norwegian failed to disclose profits it earned when the plaintiffs elected to purchase travel insurance during the cruise booking process. Each plaintiff acknowledged accepting the terms of a “guest contract” with Norwegian, which contained a mandatory arbitration clause covering any dispute “relating to or in any way arising out of or connected with this Contract or Guest’s cruise.” The district court granted Norwegian’s motion to compel arbitration and the plaintiffs appealed, claiming the arbitration clause was inapplicable. According to the plaintiffs, Norwegian was not being sued as a cruise line carrier, but for its role in a purported “reinsurance scheme” whereby it received “kickbacks” on the sale of each travel insurance plan. Thus, the plaintiffs claimed, the class action was unrelated to the guest contract or their cruises. The district court disagreed, however, as did the Eleventh Circuit. Both courts concluded that the plaintiffs’ claims “arose out of,” were “related to,” and were “connected with” Norwegian’s obligations under the guest contract, as any alleged wrongdoing by Norwegian was inextricable from the transaction that culminated in the contract, as well as the plaintiffs’ cruises. The Eleventh Circuit also rejected the notion that Norwegian was being sued in its capacity as a “distribution participant” for the travel insurer. As such, the court affirmed the district court order enforcing the arbitration clause and dismissing the plaintiffs’ allegations.

Phillips v. NCL Corp., No. 19-12463 (11th Cir. Aug. 10, 2020).

SDNY Finds Cedent Entitled to Indemnification for $20 Million Settlement Payment Under English Law

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The question before the Southern District of New York was whether, under English law, certain facultative reinsurance policies obligated a reinsurer to indemnify its cedent for a $20 million settlement. The finding was notwithstanding the three-year stated policy period of each of the reinsurance policies, as the insured was held liable on an “all sums” basis for a continuous injury occurring outside the relevant policy period.

Similar to the laws in the United States, “[u]nder English law, settlements paid under the reinsured policy are presumed to be covered as a matter of law by the reinsurance policy if the reinsured can prove: (1) that the reinsured has actually paid the settlement sums; and (2) that the claim arguably falls within the insurance/reinsurance policy under which the payment was made as a matter of law.” Further, English law has a strong presumption that liability under a proportional facultative reinsurance policy is “co-extensive” with the underlying insurance policy.

Accordingly, the court found both the cedent and the reinsurer assumed the risk that the cedent could be held liable on an “all sums” basis for continuous injury occurring outside the insured’s policy period. Thus, the reinsurer would have to indemnify the cedent for any settlement the cedent was required to pay its insured as a result of the injury under the follow-the-settlements provision in the reinsurance policies.

The court also rejected the reinsurer’s argument that the cedent breached its notice obligations by providing notice of the claims nearly six years after the cedent first became aware of an occurrence likely to result in a claim under the policies. The court found the reinsurer failed to meet its burden establishing its cedent acted with “extreme dishonesty” such that the reinsurer was “seriously prejudiced” under English law, or that its cedent acted in “bad faith” under New York law. The cedent’s motion for summary judgment was granted.

Insurance Company of Pennsylvania v. Equitas Insurance Ltd., No. 1:17-cv-06850 (S.D.N.Y. July 16, 2020).

Court Affirms Ruling That Insured Cannot Recover From Captive Reinsurer or Affiliated Insurance Brokerage

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The plaintiffs sued Public Storage seeking insurance coverage after Public Storage allegedly disposed of personal belongings the plaintiffs had in a rented storage unit. The belongings were insured under a policy produced by PSCC Inc., an insurance brokerage affiliated with Public Storage. The coverage was also reinsured by a captive reinsurer affiliated with Public Storage – PS Insurance Company-Hawaii Ltd. The cedent-insurer was sued as well but was ultimately dismissed, after which Public Storage moved for summary judgment. The lower court granted Public Storage’s motion, finding that it could not be liable to the plaintiffs under the policy as neither it nor its affiliates were parties to the contract. The plaintiffs appealed, but the California appellate court affirmed.

Although PSCC is a Public Storage affiliate, and was identified in the insurance policy, the court agreed that it was only identified as a producer, not a principal, and thus could not be contractually liable to the plaintiffs under the policy. And while PS Insurance Co. is also affiliated with Public Storage, the court held that the reinsurance agreement between the cedent-insurer and PS Insurance had no effect on the contract between the cedent and its insureds – the plaintiffs. The court also rejected the plaintiffs’ “alter ego liability” theory, finding no evidence that Public Storage and/or its affiliates were alter egos of the cedent-insurer. Indeed, the court ruled, it is an “essential feature” of reinsurance that it does not alter the terms or conditions of the insurance contract between the cedent and its insured. As such, the lower court order was affirmed.

Cabral v. Public Storage, No. B294798 (Cal. Ct. App. Apr. 10, 2020).