Reinsurance Focus

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Reinsurance Regulation

EIGHTH CIRCUIT UPHOLDS DISMISSAL OF CLAIM AGAINST DEPARTMENT OF HEALTH & HUMAN SERVICES UNDER ACA TRANSITIONAL REINSURANCE PROGRAM FOR LACK OF SUBJECT MATTER JURISDICTION

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Seeking reimbursement of fees paid, allegedly by mistake, under the transitional reinsurance program in the Patient Protection and Affordable Care Act (“ACA”), the trustees of the Twin City Pipe Trades Welfare Fund’s sued the U.S. Department of Health and Human Services to recoup the payment. The Fund argued the Administrative Procedure Act (“APA”) waived the Department of Health & Human Services’ sovereign immunity.  The district court held that sovereign immunity was waived by the APA only if the suit challenges final agency action, seeks relief other than money damages, and the plaintiff has no other adequate remedy in a court.  5 U.S.C. §§ 702, 704.  Finding that the Complaint sought money damages, and that without sovereign immunity the suit should have been filed in the United States Court of Federal Claims, the district court found that the APA did not waive sovereign immunity and dismissed the Complaint.  The Eighth Circuit found the district court’s decision well-reasoned and affirmed.

Trustees of the Twin City Pipe Trades Welfare Fund, et al. v. Price, No. 16-403 (8th Cir. Nov. 27, 2017).

This post written by Nora A. Valenza-Frost.
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CALIFORNIA DOI AMENDS REGULATION OF REINSURANCE

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The California Department of Insurance (DOI) has adopted a set of amendments, effective January 1, 2018, to its regulations regarding reinsurance accounting, agreements and oversight. These changes were made to conform the regulations with the requirements of the federal Nonadmitted and Reinsurance Reform Act (NRRA), changes to the California Insurance Code, NAIC Model #787, and the practices of the DOI.

The amendments include several changes that clarify which regulations apply only to California domestic insurers versus which apply to both domestic and foreign (i.e., domiciled outside of California) insurers. This is a response to the preemption by the NRRA of certain state laws regarding reinsurance agreements when applied to nondomestic insurers. Among other things, the amendments make it clear that foreign insurers no longer have to file indemnity reinsurance transactions for commissioner approval. The amendments also include changes conforming the regulations to a 2013 change in the California Insurance Code that prevents the Commissioner from denying financial statement credit to a foreign ceding insurer if that credit is recognized by the ceding insurer’s domestic state and that state’s solvency requirement have been accredited by the NAIC or are substantially similar to the NAIC standards.

The largest additions made by the amendments adopt NAIC Model #787, which the NAIC created to establish uniform minimum standards for securing the obligations under captive reinsurance treaties and reserve financing arrangements. Model #787 is expected to become part of the NAIC’s accreditation standards within the next few years, and the adoption of its provisions in these regulations is intended to ensure that California will meet those accreditation standards whenever that occurs.

Additionally, in the section of the regulations providing that a domestic insurer must generally “retain at least 10% of direct premium written per line of business,” the amendments replace the phrase “per line of business” with “per reinsurance agreement,” as the Commissioner has historically exercised his discretion to apply this retention requirement to reinsurance agreements as a whole, which often include multiple lines of business. Further, the amendments remove all references to and requirements for “volume insurers,” a concept that no longer exists under California law.

Cal. Code Regs. tit. 10, §§ 2303 – 2303.29; Cal. Office of Administrative Law, 2017-1012-04 (Nov. 27, 2017); Cal. Dept. of Ins., Initial Statement of Reasons, Reinsurance Oversight, REG-2016-00024 (May 1, 2017)

This post written by Jason Brost.

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SPECIAL FOCUS: TREASURY REPORT MAY PROVIDE A PREVIEW OF THE TRUMP ADMINISTRATION’S INSURANCE REGULATORY AGENDA

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We earlier posted on a report issued by the U.S. Treasury Department that might provide a preview of the Trump Administration’s agenda for the insurance industry.  A more detailed analysis of that report appears in a Special Focus article.

This post written by Rollie Goss.
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CONNECTICUT INSURANCE DEPARTMENT ISSUES TWO BULLETINS

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The Connecticut Insurance Department recently issued two bulletins, both of which mandate financial reporting by insurers to the Department. Bulletin Number FS-4AR-17, issued on December 6, 2017, requires all accredited reinsurers doing business in Connecticut to submit to the Department a report of its financial condition as of December 31, 2017, by March 1, 2018, as well as a copy of the company’s 2017 independent audit report, by June 1, 2018. Bulletin Number FS-4C-17, issued on December 11, 2017, requires each captive insurance company domiciled or licensed in Connecticut to file financial reports with the Department by either March 1 or March 15, 2018, depending on the type of captive.

This post written by Jeanne Kohler.

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VIRGINIA SUPREME COURT CONSIDERS TERMS OF ASSUMPTION REINSURANCE TRANSACTION IN DETERMINING OBLIGATIONS OF INSOLVENT INSURER

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A group of Kentucky hospitals sought reimbursement for legal fees incurred in two lawsuits related to the insolvency of their insurer, Reciprocal of America (“ROA”). In the 1970s and 1980s, the hospitals created two trusts to provide the hospitals with workers’ compensation and employers’ liability coverage. In 1997, the trusts were merged into ROA, and ROA agreed to assume the trusts’ business liabilities and to indemnify the trusts and their member insureds, including the hospitals, “in defending [themselves] against any claim Damages arising from or connection with the Damages.”

In 2003, ROA was placed into receivership and was later found insolvent and ordered liquidated. This led to two judicial proceedings in which the hospitals were involved—one that they joined as claimants seeking to have ROA continue to pay worker’s compensation claims that ROA had assumed from the trusts, and one seeking a declaration that the Kentucky Insurance Guaranty Association (KIGA) was obligated to cover the hospitals’ claims that ROA had assumed but could not pay. After both matters were resolved, the hospitals filed claims with ROA’s Special Deputy Receiver for reimbursement of the legal fees and costs incurred in those matters under ROA’s indemnification obligations. The claim was denied, and the case ended up before the Virginia Supreme Court.

The court affirmed the denial of the hospitals’ claim. The court explained that the plain meaning of the phrase “defending against any claim” and the specific contractual definition of “Damages,” together support the characterization of the agreements as an assumption reinsurance transaction in which ROA stepped into the shoes of the trusts. ROA’s indemnity could rise no higher than the pre-merger obligations of the two trusts — for those were the only liabilities that ROA assumed, and thus the only “Damages” for which it was responsible to indemnify the trusts. This contractual definition of “Damages” necessarily excludes any obligation for ROA to indemnify the trusts and their member insureds for the legal fees and costs incurred in the underlying judicial proceedings. The court rejected the hospitals’ argument that ROA’s duty to pay for the expense of defending against claims covered the expense of asserting claims. While it may have been good legal strategy for the hospitals to proactively assert such claims, this did not turn the assertion of claims into the defense of claims covered by ROA’s indemnification agreement. Appalachian Regional Healthcare v. Cunningham, Case No. 161767 (Va. Nov. 22. 2017).

This post written by Jason Brost.

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