Reinsurance Claims

COURT OKAYS “BATHTUB” ALLOCATION METHOD UNDER “FOLLOW THE FORTUNES” DOCTRINE

September 1, 2011 by Carlton Fields

Lexington Insurance Company participated in a tower of coverage for Dresser Industries, a manufacturer of asbestos-containing products that was forced into bankruptcy by the multi-billion dollar exposure it faced arising from product liability litigation against it. In the context of the bankruptcy proceeding, Dresser commenced an insurance coverage action against its various liability insurers. The several insurers named as defendants, including Lexington, ultimately participated in a global settlement, at a figure determined by an outside consultant hired by the group of settling insurers. For its part, Lexington utilized its own “bathtub” method of allocation to determine which of its policies would contribute to its share of the settlement, and in what amounts. By this method, each of its exposed policies were layered (as though in a bathtub) according to their layers of coverage, and those that were “underwater” given the settlement structure were tendered to their limits. Based on this analysis, Lexington paid out the limits under two particular $10,000,000 policies. As a participating reinsurer on these two policies, Clearwater denied Lexington’s claim under the theory that Lexington’s use of the “bathtub” methodology was contrary to the recommendations of the outside consultant that determined the ultimate global settlement. Lexington sued and the parties cross-moved for summary judgment on the issue. The Court found in favor of Lexington under the “follow the fortunes” doctrine, noting that there was nothing inherently unreasonable about Lexington’s chosen allocation method. Lexington Ins. Co. v. Clearwater Ins. Co., No. 09-0234C (Mass. Super. Ct. July 26, 2011).

This post written by John Pitblado.

PRELIMINARY APPROVAL GRANTED FOR CLASS SETTLEMENT INVOLVING ALLEGED UNDERREPORTING OF WORKERS COMPENSATION PREMIUMS

August 25, 2011 by Carlton Fields

We have previously reported on the class action lawsuit by members of the National Worker’s Compensation Reinsurance Pool (the “Pool”) against AIG for alleged “fraudulent underreporting of workers compensation premiums for the purpose of reducing its share of the residual workers compensation market – and consequently increasing the residual market costs of the other members of the [Pool].” The amount allegedly underreported by AIG was estimated at approximately $2.1 billion. Subject to “some minor modifications” to the class notice and settlement agreement, the district court has granted preliminarily approval to a class settlement between AIG and certain members of the Pool that intervened in the case. Factors militating in favor of settlement approval included: that the strength of plaintiffs’ case compared to the settlement offer was “within a reasonable range,” that the likely complexity, length and expense of trial weighed heavily in favor of the settlement’s fairness, and that the amount of opposition to the settlement was minimal thus far. The highlights of the settlement include A $450 million settlement award to the class, $146 million in penalties, back taxes, and assessments payable to certain states, and a reformation of AIG’s methodology for reporting workers compensation premiums. The settlement has also been approved by the insurance commissioners of all 50 states and the District of Columbia. American International Group, Inc. v. ACE INA Holdings, Inc., Case No. 07-02898 (USDC N.D. Ill. July 26, 2011).

This post written by Michael Wolgin.

COURT CONFIRMS ARBITRATION AWARD ADDING PREPAYMENT PROVISION TO REINSURANCE TREATY

August 15, 2011 by Carlton Fields

Citing the treaty’s honorable engagement clause, a federal district court denied a group of reinsurers’ motion to vacate an arbitration award in which the arbitrators had fashioned a remedy requiring prompt payment of all disputed and undisputed claims. Certain London market reinsurers had entered into a reinsurance treaty with Century Indemnity Company that indemnified Century for certain liabilities arising out of asbestos litigation. The agreement did not contain a “Reports and Remittances” clause dictating when claims should be paid, but provided that the “liability of the Reinsurers shall follow that of the Company in every case.” The treaty also included an “honorable engagement” clause, directing the arbitrators to interpret the agreement to effect its general purpose.

Facing significant losses due to a flood of asbestos litigation, the reinsurers imposed a program in which Century would have to meet documentation requirements before claims were paid. When payments became delayed, Century initiated arbitration. The arbitrators issued an interim order requiring the reinsurers to promptly pay 100% of all undisputed claims and 75% of any disputed claims, finding that arrangement would effectuate the general purpose of the parties’ agreement. After several years of paying claims pursuant to this arrangement, the reinsurers moved to vacate the award when the arbitrators, who had retained jurisdiction over the matter, made the award final. Citing the “honorable engagement” clause, the court denied the motion to vacate and confirmed the award, holding that the arbitrators had the power to fashion the remedy even though it included obligations not explicitly bargained for by the parties. Harper Insurance Ltd. v. Century Indemnity Co., Case No. 10 Civ. 7866 (USDC S.D.N.Y. July 28, 2011).

This post written by Ben Seessel.

REINSURANCE HELD NOT EXCLUDED FROM COVERAGE BASED ON LIABILITY LIMIT AND CLAIM REPORTING PROVISIONS

August 10, 2011 by Carlton Fields

In a dispute arising between Anthem Insurance (now known as Wellpoint) and what the court described as one of its excess reinsurers, Twin City Fire Insurers, Anthem sought defense and indemnification for several state and federal lawsuits alleging improper denial of reimbursement. Twin City denied coverage, arguing that those suits “related back” to the claim preceding its policy period and were accordingly excluded from coverage. An Indiana trial court agreed with Twin City, and Anthem subsequently appealed to the state appeals court. The Indiana Court of Appeals reversed and remanded, holding that none of the subject policy provisions operated to exclude such coverage. The court held specifically that the reinsurance agreement covered “claims made” and found no basis to read the agreement as excluding coverage retrospectively based on notice of claims preceding the inception of coverage. The court additionally found inapplicable Twin City’s attempt to superimpose the “prior notice exclusion” onto the agreement. Wellpoint, Inc. v. National Union Fire Ins. Co., No. 05-2011 (Ind. Ct. App. July 20, 2011).

This post written by John Black.

REINSURANCE DISPUTE REGARDING WATER REVENUE BONDS RESOLVED

August 4, 2011 by Carlton Fields

A dispute over rural water district revenue bonds has reached an end. CIFG commenced an action in the Supreme Court for New York County to recover for payments it made to its insured, Xenia Rural Water District, under a financial guarantee insurance policy which allegedly should have been made by defendant Assured Guaranty pursuant to a reinsurance agreement. CIFG further contended that failure to pay constitutes a breach of the parties’ administrative services agreement. CIFG moved for summary judgment. The Supreme Court granted the motion, finding that the reinsurance agreement clearly allows for exclusion of policies with investment ratings below certain thresholds, even if the policy was inadvertently listed as meeting the threshold requirement at the time. The court, however, also granted summary judgment to Assured on CIFG’s allegation that Assured acted in bad faith. Finally, the court dismissed several of Assured’s affirmative defenses and its counterclaims.

Shortly following the Supreme Court’s order, the parties announced in a press release that they had reached a settlement dismissing the action altogether. Under the settlement agreement, Assured will reinsure 100% of the Xenia policy, and CIFG and Assured will seek to novate the policy to Assured according to the terms and procedures adopted by the parties with respect to the novation of other CIFG policies covered by the reinsurance agreement. CIFG Assurance North America, Inc. v. Assured Guaranty Corp., No. 651090/10 (N.Y. Sup. Ct. June 15, 2011).

This post written by John Black.