Reinsurance Claims

REINSURANCE COMPANIES VICTORIOUS IN SECURITIES FRAUD CLASS ACTIONS ARISING OUT OF CAT LOSSES

March 10, 2009 by Carlton Fields

Two reinsurance companies have prevailed on motions to dismiss in shareholder securities law putative class actions over the restatements of loss levels from cat events, illustrating that the process of estimating cat losses accurately may be challenging, and that companies are not guarantors of the completeness and accuracy of that process. PXRE prevailed in a lawsuit alleging a scheme to understate losses arising out of a series of hurricanes that devastated the Gulf Coast in 2005, restating the amount of losses several times. Judge Sullivan granted PXRE’s motion to dismiss, finding that plaintiffs “failed to plead that defendants were reckless in not knowing about the flaws in PXRE’s calculation of its loss estimates.” In re PXRE Group, Ltd., Securities Litigation, No. 06 CIV 3410 (S.D.N.Y. March 5, 2009). Judge Sullivan issued an order in a similar individual case filed against PXRE implying that he will follow the same course in that action. Anegada Master Fund Ltd v. PXRE Group Ltd., No. 08 Civ 10584 (S.D.N.Y. March 5, 2009).

Quanta Capital Holdings Ltd. (“Quanta”) issued several estimated loss projections relating to Hurricanes Katrina and Rita that ranged from $42-$68.5 million, resulting in multiple rating downgrades, forcing Quanta to cease writing new insurance and reinsurance business and to sell its remaining insurance and reinsurance portfolios. Noting the conjectural nature of insurance reserves established for losses that have been incurred but not yet reported, the court ruled that the Complaint did not put forth sufficient factual allegations such that the court could plausibly find that the loss estimate included in the offering documents was a material untruth at the time it was made, especially since the adjusted estimate was based on a single business interruption claim. The district court also held that the Complaint did not meet applicable heightened pleading requirements, and that some of the claims failed because the $68.5 million preliminary loss estimate was protected by the “bespeaks caution” doctrine. Zirkin v. Quanta Capital Holdings Ltd., Case No. 07-851 (USDC S.D.N.Y. Jan. 22, 2009).

This post written by Rollie Goss.

FEDERAL APPEALS COURT AFFIRMS DISMISSAL OF CLAIMS BY CONSTRUCTION COMPANY AGAINST ITS INSOLVENT INSURER’S REINSURER

February 23, 2009 by Carlton Fields

We previously posted on July 24, 2007 about a case brought by Jurupa Valley Spectrum, LLC (“Jurupa”) against its insurer’s reinsurer, National Indemnity Company (“NICO”). NICO reinsured Frontier Insurance Company, which was declared insolvent, and against whom Jurupa had an outstanding claim under a surety bond which Frontier issued to Jurupa. The case was dismissed by a New York federal court.

On February 4, 2009, the Second Circuit Court of Appeals affirmed the decision, agreeing with the trial court that (1) the contract between Frontier and NICO did not contemplate direct action by Frontier’s insureds against NICO; (2) the contract could not fairly be read to contain a “cut through” provision, as the contract made clear that all rights against the reinsurer inhered only with the insurer; and (3) the contract did not violate of a New York statute, which requires reinsurance contracts to contain “cut through” provisions when an insurer issues a surety bond in an amount exceeding ten percent of its surplus, because at the time of issuance of the surety bond, Frontier’s surplus exceeded ten percent of the value of Jurupa’s bond. Jurupa Valley Spectrum, LLC v. National Indemnity Co., No. 07-3211 (2d Cir. Feb. 4, 2009).

This post written by John Pitblado.

APPELLATE COURT HOLDS THAT SELF-INSURER GROUP IS ENTITLED TO COVERAGE THROUGH STATE INSURANCE GUARANTY ASSOCIATION

February 9, 2009 by Carlton Fields

The Louisiana Safety Association of Timbermen – Self Insurers Fund (the “Fund”) is a self-insurance group formed by member companies as a means of securing workers compensation coverage for their employees. In 1998, the Fund obtained statutorily required excess coverage from Reliance Indemnity Company, and in 2001 Reliance became insolvent. The Fund filed proofs of claim against Reliance with the Louisiana Insurance Guaranty Association (“LIGA”). LIGA denied the claims, asserting that the Fund was an insurer and the excess coverage was reinsurance, thus removing the claims from coverage by LIGA under the terms of governing state statutes. The fund brought suit to establish coverage for all past and future claims.

The trial court granted summary judgment to the Fund. The Louisiana Appellate Court affirmed, citing the terms of applicable workers compensation and insurance guaranty association statutes to support its determination that the excess coverage the Fund obtained was not “reinsurance” as that term is used under applicable statutes and that the Fund is not an “insurer” causing it to become statutorily exempt from coverage through LIGA. The Court also rejected LIGA’s argument that a statutory exclusion of coverage to any self-insured corporation with a net worth above $25,000,000 should apply to the Fund’s member companies in the aggregate. The court found that the member companies were not “affiliates” of one another as the term is used in the statute and thus held that their net worth should not be aggregated for purposes of the statutory exclusion. Louisiana Safety Assoc. of Timbermen – Self Insurers Fund v. Louisiana Ins. Guaranty Assoc., No. 43,615–CA (La. Ct. App. Dec. 3, 2008).

This post written by John Pitblado.

REINSURER LIABLE UNDER WORKERS’ COMPENSATION POLICY

January 21, 2009 by Carlton Fields

PEO Services provided SMJ Environmental with laborers to perform asbestos removal at construction sites. SMJ hired Feliz Amado Jara as one such laborer, retained the right to control and direct his work, and furnished him with the equipment necessary to do his job. When PEO could no longer provide SMJ with workers’ compensation coverage, SMJ obtained a policy from Frontier Insurance, which was reinsured by Clarendon National.

Jara was injured on the job and submitted a claim for workers’ compensation to SMJ. The workers’ compensation law judge determined that SMJ was Jara’s sole employer and that Clarendon National, as the reinsurer of Frontier, was liable for the payment of benefits. On appeal, the court affirmed the finding regarding the employment relationship as having been supported by substantial evidence. The court also rejected the insurers’ argument that the workers’ compensation coverage covered only four employees, since the only specific exclusion was in the policy was for SMJ’s president. Jara v. SMJ Environmental, Inc., Case No. 500512 (N.Y. App. Div. Oct. 30, 2008).

This post written by Brian Perryman.

RELEASE OF CLAIMS HELD TO CONFER EXCLUSIVE JURISDICTION ON ENGLISH COURTS TO DECIDE ACTIONS OF “FRAUD”

January 20, 2009 by Carlton Fields

This is the latest chapter in the transatlantic saga involving the Seaton Insurance and Stonewall Insurance companies. We blogged earlier about related lawsuits in the United States (see our December 22, 2008 post), and an English court’s decision denying those insurance companies’ application for a stay for proceedings pending resolution of a motion to dismiss in the United States District Court for the Southern District of New York (see our July 23, 2008 post). This complex case presents interesting issues of the interface between US and UK courts and between US and UK law.

The underlying facts and procedural history of the disputes are tortuously complex. At the risk of understatement, it suffices to say that Seaton and Stonewell became involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes (the “Term Sheet”), which contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.” The Term Sheet included a “carve-out” provision for “fraud” on the part of former managers, related companies and individuals.

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurer in the United States, National Indemnity Company (“NICO”), and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the United States District Court for the Southern District of New York, alleging what was said to be “fraud” under New York law. The gist of the fraud claim focused on the delegation by Cavell of claims handling for Seaton and Stonewall to NICO pursuant to a Collaboration Agreement; it was alleged that Cavell and Randall “fraudulently” subordinated the interests of Seaton and Stonewall to those of NICO by entering into, operating and concealing the Collaboration Agreement.

Cavell and Randall then separately sued Seaton and Stonewell in the United Kingdom, seeking a declaration that all of their disputes had been compromised by the Term Sheet, as well as damages resulting from Seaton and Stonewell involving them in the United States arbitration and litigation. Seaton and Stonewell challenged the jurisdiction of the English court, and sought the aforementioned (denied) stay of the English lawsuit pending a decision on a motion to dismiss the United States lawsuit they had filed.

In May 2008, the English court ordered a trial of preliminary issues, which included: “(1) whether the parties have agreed to submit all their disputes, including claims in fraud to the exclusive jurisdiction of the English Court; (2)(i) what is meant by fraud; and (ii) whether claims advanced in the New York Court are claims in fraud, within the meaning of the carve-out.” The claimants, Cavell and Randall, submitted that the answer to issue (1) was “yes,” since any proceedings brought other than in the English court system are in breach of the Term Sheet. They also submitted that the answer to issue (2)(i) was that “fraud” meant “deceit,” as in the English tort of deceit, “and no more.” Finally, the claimants argued that the answer to (2)(ii) did not arise but, if so, it was “no.” The English court agreed with the claimants on both issues (1) and (2)(i). It found a determination of issue (2)(ii) to be unnecessary in light of its predicate determinations.

Reaching the first delineated issue, the court observed that resolution turned on a “double actionability” test: any claim brought must constitute “fraud” both within the meaning of the Term Sheet, as construed under English law (there was no dispute that English law governed interpretation of the Term Sheet), and as a matter of the law governing the “antecedent transactions,” that is, the alleged “fraudulent” conduct itself. Thus, the court would – in both sides’ views – be required to determine whether a particular claim is or is not a claim of “fraud” within the meaning of the carve-out. “The critical difference between the parties was that, on the Claimants’ case, this Court would be dealing, in addition, with the substance of any surviving claim; whereas, on the Defendants’ case, determination of the substance of any claims would rest with some other court or tribunal.” The court, as noted, concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of the English courts, principally finding that a provision for all disputes not otherwise resolved to be dealt with in a single jurisdiction was consistent with the Term Sheet’s overall purpose of achieving an orderly termination of the parties’ relationships. The court further observed that the plain language of the jurisdiction clause (“and the parties submit to the exclusive jurisdiction of the English Courts”) “is wide rather than restricted,” and did not exclude claims sounding in fraud.

The court next turned to what was meant by “fraud” in the carve-out, beginning with the natural meaning of “fraud” in an English contract. Fraud has the “ordinary and primary meaning of deceit,” although it was observed that fraud was also capable of a wider meaning, referring generally to “dishonesty” as required by the context. However, the context did not require such a broad meaning in the court’s view, as it would have eviscerated the Term Sheet’s purpose, allowing virtually any claim permitted by clever pleading. “Indeed, once the safe ground of the primary meaning of ‘fraud’ is abandoned, it is not at all clear where to stop.” Thus, the court concluded that “fraud,” as was meant by the carve-out, had only the primary meaning of deceit. Cavell USA Inc. v. Seaton Insurance Co. [2008] EWHC 3043 (Nov. 12, 2008).

This post written by Brian Perryman.