Reinsurance Claims

The Court of Appeals of North Carolina has concluded that the state’s Reinsurance Facility has discretion to approve or deny petitions from members for reimbursement for extracontractual losses and that members have no right to reimbursement for such losses under the governing statutory scheme. The decision relates to a significant bad faith case against Allstate.

Allstate issued an auto insurance policy to an insured and ceded the policy to the North Carolina Reinsurance Facility, a nonprofit entity that insures drivers whom insurers determine they do not want to insure individually. The insured subsequently struck a minor riding a bicycle, causing serious injury. The insured reported the accident to the Allstate agent who sold him the policy. She told him to call an Allstate phone number to report the accident, but he never did. Allstate received notice of the accident when it heard from counsel for the injured minor. It investigated and offered to tender the policy limit of $50,000, but the injury party rejected that offer. The insured stipulated to a $13.8 million judgment against him and assigned his claims against Allstate to the injured party. That party then sued Allstate for breaching its duty of good faith and ultimately received $11 million in a settlement after an adverse jury verdict.

Allstate sought reimbursement for the bad faith loss from the Reinsurance Facility. The Reinsurance Facility denied Allstate’s request, and Allstate appealed to the North Carolina Commissioner of Insurance. The Commissioner ordered the Reinsurance Facility to reconsider its denial. The Reinsurance Facility petitioned for judicial review, and the trial court affirmed the Commissioner’s decision.

The Reinsurance Facility then appealed to the Court of Appeals of North Carolina. The court reversed and remanded the trial court’s decision. Analyzing the plain language of the statute governing the Reinsurance Facility, the court concluded that the Reinsurance Facility was required to consider a petition for reimbursement and gave member insurers the right to receive reimbursement for contractual losses, but concluded that members had no right to reimbursement for extracontractual losses and that the Reinsurance Facility had discretion to approve or deny such petitions. Thus, the Reinsurance Facility was well within its statutory rights to deny Allstate’s petition for reimbursement.

The Supreme Court of North Carolina then denied Allstate’s petition for further review.

N.C. Reinsurance Facility v. Causey, 830 S.E.2d 850 (N.C. Ct. App. 2019), review denied, 832 S.E.2d 731 (N.C. 2019).

The High Court of Justice Business and Property Courts of England & Wales refused to sanction a scheme proposed by Prudential Assurance Co. and Rothesay Life PLC to transfer approximately 370,000 annuity policies from Prudential to Rothesay. The scheme was proposed under Part VII of the Financial Services and Markets Act 2000. As part of the scheme, Prudential and Rothesay entered into a reinsurance agreement to transfer the majority of the economic risk and reward of Prudential’s annuity business covered by the agreement from Prudential to Rothesay. Although the scheme would not change any terms of any policies, the court found that the scheme offered no benefits to the transferred policyholders, who would no longer be entitled to look to Prudential to pay or service their annuities and instead would need to look solely to Rothesay in these respects. The court noted that the scheme was “strenuously opposed” by a number of policyholders, who contended that they selected Prudential as their annuity provider based specifically on its long history as a leading UK insurer, its size, reputation, and financial strength and resources.

On balance, the court concluded that a number of factors weighed heavily against exercising its discretion to sanction the scheme. It emphasized, among other things, the overall fairness of the scheme as between all affected persons, the annuity policyholders in particular. The court found that it was entirely reasonable for policyholders to have chosen Prudential based on its history and reputation, among other factors, and for policyholders to have assumed that Prudential would not seek to transfer their policies to another provider. The court rejected Rothesay’s contention that it would be prejudiced by any decision not to sanction the scheme by refusing it the benefits of the reinsurance agreement with Prudential referenced above, finding that Rothesay entered into the reinsurance agreement knowing the scheme was subject to the court’s sanction and thus was not guaranteed to be approved.

In re Prudential Assurance Co. Ltd. [2019] EWHC (Ch) 2245 (Eng.).

Lamorak Insurance Co. issued excess policies to Olin Corp. and also reinsured those policies with the defendants, Certain Underwriters at Lloyd’s, London. After Lamorak and Olin settled a declaratory judgment action concerning coverage for underlying environmental property damage suits against Olin, Lamorak sought payment from Lloyd’s under the relevant reinsurance contracts. Lloyd’s disputed the reinsurance billings, and Lamorak commenced the instant action. In response, Lloyd’s sought a declaration that it is not obligated to pay expenses that Lamorak incurred in connection with its declaratory judgment action against Olin, even though Lamorak never asked to be reimbursed for such costs. Lloyd’s moved to compel discovery regarding the declaratory judgment costs, for an order setting a deadline for Lamorak to request reimbursement of such costs, or, alternatively, for an order barring Lamorak from ever making such a request. The court denied the motion in its entirety, finding no basis for compelling Lamorak to produce documents about costs it had not asked Lloyd’s to reimburse, nor for setting an arbitrary deadline for Lamorak to assert such a claim in the future. The court also refused to affirmatively bar Lamorak from pursuing a claim for the declaratory judgment costs, as doing so would be to decide a hypothetical legal question before it is arises.

Lamorak Ins. Co. v. Certain Underwriters at Lloyd’s, London, No. 1884CV00200BLS2 (Mass. Super. Ct. June 19, 2019).

In 2005 and 2006, Christopher Blake and James Orkis took out mortgages from JP Morgan to buy homes. Then in 2013, they filed a class action against JP Morgan under the Real Estate Settlement and Procedures Act (RESPA), alleging a scheme to refer homeowners to mortgage insurers/reinsurers in exchange for streams of kickbacks. RESPA has a one-year statute of limitations that runs from the date of the violation. 12 U.S.C. § 2614.

Blake and Orkis argued that each kickback separately violates the Act and has its own limitations period. The court disagreed and held that the kickbacks ended more than a year before they sued, so the Act’s one-year limitations period would still bar their claims.

Blake and Orkis further argued that the statute of limitations had also been extended by a 2011 lawsuit filed over the same conduct in a California federal court, Samp v. JP Morgan Chase Bank, N.A. The Third Circuit again disagreed and held that a pending class action tolls the time only for putative class members’ individual claims, not their class claims. The court explained that tolling class actions would cause problems in three ways. First, it would encourage duplicative lawsuits instead of reducing them. Second, tolling new class actions would be inequitable. Third, it would encourage repetitive claims and allow class claimants to stack their claims forever.

Blake v. JP Morgan Chase Bank NA, 927 F.3d 701 (3d Cir. June 19, 2019).

The Southern District of New York has concluded that an insurer’s threat to terminate a reinsurance agreement if the other insurer to the agreement did not comply with its obligations did not terminate the agreement or give the other insurer the right to terminate the agreement.

Amtrust North America Inc. and Signify Insurance Ltd. entered into a captive reinsurance agreement in which Signify reinsured a portion of certain policies issued by AmTrust. The agreement required, among other things, that Signify post collateral and that AmTrust cede certain premiums. Signify’s duties to post collateral continued after the termination of the agreement.

AmTrust sent Signify a letter accusing it of failing to post the requisite collateral and stating: “Accordingly, unless Signify posts security in full … within thirty days … [AmTrust] hereby terminates the Agreement from inception.” Signify caused a bank to issue standby letters of credit in response to the letter for most of the collateral AmTrust claimed was due, but also wrote to AmTrust accepting AmTrust’s “termination” of the agreement. According to AmTrust, Signify subsequently failed to increase the collateral as required by the agreement.

AmTrust filed suit claiming that Signify had breached the agreement and seeking a declaration that Signify was required to post collateral. Signify filed a number of counterclaims seeking, inter alia, a declaration that AmTrust had terminated the agreement, seeking rescission of the agreement, claiming that AmTrust had breached the agreement, asserting that AmTrust had been unjustly enriched, and seeking a declaration that AmTrust had to cede certain premiums.

The parties cross-moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c): AmTrust moved to dismiss Signify’s counterclaims seeking a declaration that the agreement was terminated and asking the court to rescind the agreement; Signify moved for judgment to dismiss AmTrust’s complaint and grant all of its counterclaims discussed above. The court granted AmTrust’s motion and denied Signify’s motion.

With respect to rescission, the court disagreed that AmTrust’s letter constituted a unilateral rescission. Even though the letter used the present tense phrase “hereby terminates,” it was clear when that phrase was read in context that AmTrust was threatening to terminate the agreement if Signify did not post collateral; not terminating the agreement at that time. AmTrust’s letter also was not an offer that allowed Signify to rescind the agreement, which Signify attempted to do in its reply letter. AmTrust’s letter was a threat to terminate, not an offer for Signify to do so.

Turning to Signify’s counterclaims, the court noted that AmTrust had adequately pleaded that Signify did not perform under the terms of the agreement and that Signify had not established that it had performed. Signify had not shown that the conditions that allowed it to cease posting collateral had occurred. With respect to AmTrust’s duty to cede certain premiums, the court noted that this duty arose only after certain triggering events, which had not all occurred. AmTrust’s duty to cede premiums therefore “never arose,” and the court denied Signify’s motion.

AmTrust N. Am., Inc. v. Signify Ins. Ltd., No. 1:18-cv-03779 (S.D.N.Y. July 11, 2019).