In a September 6, 2007 post to this blog, we reported on the decision of the UK Commercial Court striking a defense of settlement to reinsurance claims arising out of claims by North Korean insurers. The UK Court of appeals has affirmed that ruling. Korea National Ins. Corp. v. Allianz Global Corporate & Specialty AG [2007] EWCA Civ. 1066 (Court of Appeals Oct. 30, 2007).
Reinsurance Claims
CASE UPDATE: REINSURER LIABLE FOR COMPENSATORY AND PUNITIVE DAMAGES
The Oklahoma Insurance Commissioner, in her capacity as the court-appointed receiver of Hospital Casualty Company (“HCC”), brought this action against Employers Reinsurance Corporation (“ERC”) contending that HCC was entitled to recover from ERC for certain claims under reinsurance policies issued by ERC in HCC’s favor. The court recently ruled upon cross motions for summary judgment.
The Mulberry Claim: HCC issued a $1 million primary policy and a $5 million excess policy to Amity Care Corp., a nursing home company. ERC reinsured the excess policy. Amity was sued by the estate of Bonnie Mulberry, a nursing home resident. The case settled for over $1 million dollars. HCC sought indemnity from ERC, but ERC denied the claim asserting that public policy prohibited insurance coverage for punitive damages. The court ruled that the ERC was liable for the excess insurer’s entire share of the settlement because it was unclear which claims the jury relied upon in its determination that punitive damages should be awarded.
The Hepatitis Claim: HCC issued primary and excess general liability policies to Norman Regional Hospital over several years. HCC reinsured the excess policies with ERC. A number of lawsuits including a class action were filed against the hospital by patients exposed to or infected by hepatitis between 1999 and 2002. To settle the claims, NRH agreed to pay $11 million dollars, with HCC providing $8 million. The issue raised in this case was the proper allocation of the $8 million between the relevant policy years. ERC argued that the parties intended to allocate $3 million to the 2000-2001 policy year and $5 million to the 2001-2002 policy years, thereby exhausting both the primary and excess coverage in the 2001-2002 year. The judge agreed, pointing to the undisputed fact that this is what HCC intended.
Claims Expenses: The court further ruled that the reinsurer, ERC, was not obligated to pay additional costs because the excess insurer did not pay or incur any claim expenses in its capacity as the excess insurer. State of Oklahoma ex rel. Kim Holland v. Employers Reinsurance Corp., No. Civ-06-0426-HE (W.D. Okla. Sept. 13, 2007). A prior post dealing with the relationship between this case and the liquidation proceeding appear in this blog on September 20, 2006.
DISTRICT COURT CONFIRMS THAT REINSURANCE CLAIMS NOT SUBJECT TO TEXAS PROMPT PAYMENT STATUTE
After holding that the follow the fortunes doctrine required a reinsurer to pay claims for business interruption and property damage at a theme park due to Hurricane Floyd in 1999 (see August 16, 2006 post to this blog), a Magistrate Judge entered a Report and Recommendation holding that the reinsurance claim was not subject to the Texas prompt payment statute, Texas Insurance Code article 21.55. Houston Casualty filed objections to the Report and Recommendation, and the district court rejected the objections, adopting the Magistrate’s Report and Recommendation in a two sentence Order. Houston Cas. Co. v. Lexington Ins. Co., Case No. 05-1804 (USDC S.D. Tex. June 25, 2007).
COURT ALLOWS CASE AGAINST DIRECTORS OF MISSISSIPPI WINDSTORM UNDERWRITERS ASSOCIATION TO PROCEED
It has been estimated that as a result of Hurrican Katrina, the Mississippi Windstorm Underwriters Association will pay its insurance company members approximately $700 million in claims. The Association has only $175 million in reinsurance. A number of members have sued various members of the Association and individuals, who allegedly were members of the Board of Directors of the Association, contending that they breached fiduciary duties and committed other wrongdoing in failing to procure additional reinsurance for the Association. The Association purchased reinsurance to cover a 250 year event; the Plaintiffs contend that it should have purchased reinsurance to cover a 500 year event. A US District Court has denied a motion to dismiss and denied cross motions for summary judgment. The Motion to Dismiss had contended that the dispute was subject to the exclusive jurisdiction of the Mississippi Insurance Commissioner. This theory was rejected, in part because the Court found that any administrative remedy that the Insurance Department could provde would not be adequate. The Motion for Summary Judgment was denied because of factual disputes as to whether Board members were member companies or individuals, and if individuals, whether the individuals served in an individual capacity or as representatives of member companies.
REINSURER’S ATTEMPT TO ENFORCE INDEMNITY AGREEMENT FAILS
This dispute centered around a 1995 General Indemnity Agreement (“GIA”) between defendant PEC and Amwest, a surety company. Pursuant to the GIA, PEC agreed to indemnify Amwest in connection with any bonds written on behalf of PEC. In late 1998 or early 1999, Amwest issued a performance bond to the United States as obligee, with PEC as principal, in connection with a construction contract for the Army Corps of Engineers. Shortly thereafter, Swiss Re agreed to provide reinsurance to Amwest on that performance bond.
Two years later, a Nebraska court declared Amwest insolvent and entered an order of liquidation. When PEC was unable to obtain substitute bonding for the Corps construction project, PEC’s involvement was terminated and Swiss Re was required to complete the project at a cost of over 1.4 million dollars, exclusive of legal fees. Swiss Re filed the instant case seeking to enforce the indemnity agreement between Amwest and PEC.
The district court held that the indemnity agreement did not require PEC to indemnify Swiss Re. Specifically, the court concluded that: (1) the indemnity agreement was unenforceable due to a failure of consideration and/or Amwest’s prior material breach of the contract; and (2) the GIA was unenforceable under the doctrine of ‘frustration of purpose.’ Swiss Reinsurance v. Airport Industrial Park doing business as P.E.C. Contracting Engineers, Case No. 2:05-cv-01127 (USDC W.D. Pa. Aug. 27, 2007).