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New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

COURT DISMISSES SUIT BY REHABILITATOR FOR PMI INSURER AGAINST CAPTIVE REINSURER AND AFFILIATED BANK

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A district judge in the Northern District of Illinois has dismissed all claims brought by the Illinois Director of Insurance, acting as rehabilitator for Triad Guaranty Insurance Corporation and Triad Guaranty Assurance Corporation (collectively “Triad”), after it was placed in rehabilitation, against AAMBG Reinsurance, Inc. and Bank of America (“BOA”).

The dispute arose out of an arrangement under which AAMBG provided reinsurance to Triad for private mortgage insurance (PMI) provided by Triad to borrowers with mortgages from a set of lenders that were affiliates of AAMBG. The complaint alleged that AAMBG and BOA breached a contractual duty to disclose to borrowers any benefits the loan originators received from PMI premiums, breached the duty of good faith and fair dealing by only referring borrowers with the highest default risk to Triad, violated RESPA by accepting excessive reinsurance premiums, and were unjustly enriched by these practices. AAMBG and BOA moved to dismiss, and the court dismissed the complaint in its entirety.

In dismissing the breach of contract claim, the court found that the plaintiff had not pointed to anything creating a duty on the part of AAMBG to make any disclosures to borrowers. The court also found that the complaint failed to “allege who the affected borrower was, the specific regulation violated, how it was violated, and, most important, how Triad was damaged.”  The court found that the good faith and fair dealing claim was “totally implausible,” as it did “not make economic sense” for AAMBG to send poor risks to Triad when, under a hypothetical offered by the plaintiff,  AAMBG would actually be responsible for a larger portion of the loss than would Triad.  Fourth, the court found that the plaintiff had made no attempt to show that the safe harbor provision of RESPA Section 8(c) did not apply to AAMBG’s reinsurance contract with Triad, as the complaint did not allege that the agreement to provide reinsurance was illusory. The court also found that the RESPA claim was barred by the statute of limitations, rejecting a “continuing violation” theory put forth by the plaintiff and finding that the limitations period began to run when Triad last purchased reinsurance from AAMBG.  Finally, the court rejected the unjust enrichment claim because the parties’ relationship was governed by a contract.

People ex rel. Dowling v. AAMBG Reinsurance, Inc., 16 C 7477 (N.D. Ill. June 1, 2017)

This post written by Jason Brost.
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SEVENTH CIRCUIT AFFIRMS DISMISSAL OF POST-LIQUIDATION REINSURANCE CLAIM AS TIME-BARRED

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We previously posted on the trial court’s ruling addressing the statute of limitations in this case on June 23, 2016. By way of background, the underlying contract between the insurer and the reinsurer required the insurer to calculate the balances due to the respective parties and send statements to the reinsurer reflecting those balances on a quarterly basis.  The liquidator complied with this requirement for a number of years until it stopped without explanation.  Then, 15 years later, the liquidator sent the reinsurer a statement netting all of the balances purportedly due to the parties under the contract and a demand for $2 million.

The plaintiff assignee of the reinsurance balance (Pine Top) argued that the Illinois statute governing set-offs and counterclaims permitted the liquidator to ignore the underlying contractual provisions requiring quarterly statements and to instead wait until the end of the liquidation, at which point it would submit one bill netting all of the balances due to the parties. The Seventh Circuit disagreed. Although the court acknowledged a possible exception for cases where a liquidator proposes a time for netting and a judge approves that proposal after notice and a hearing, the opinion states that in the absence of such an agreement, the underlying contractual provisions continue to apply.  As a result, the liquidator’s demand for the balance due was barred by the statute of limitations.  Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 16-3499 (7th Cir. Aug. 7, 2017).

This post written by Benjamin E. Stearns.
See our disclaimer.

FOURTH CIRCUIT REVERSES RULING THAT REINSURANCE AGREEMENT IS AN “INSURANCE CONTRACT” UNDER VIRGINIA LAW

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Applying the doctrine of judicial estoppel, a district court refused to compel arbitration finding that the arbitration clause in a reinsurance agreement was unenforceable under a Virginia statute that voided a mandatory arbitration clause in an “insurance contract.” On appeal, the issue was whether an arbitrator can be delegated the authority to decide if a contract is an “insurance contract” under the statute. The Fourth Circuit held that the district court properly refused to compel arbitration, but committed reversible error by applying judicial estoppel to reach that conclusion.

The contract here was a Reinsurance Participation Agreement (“RPA”). An arbitration clause in the RPA had a “delegation provision” granting authority to resolve all questions of arbitrability to the arbitrator. This included the right to decide if the RPA was an “insurance contract” under Virginia law, and, in turn, whether the arbitration clause was void. The Fourth Circuit narrowed the issue to the enforceability of the delegation provision itself and applied a two-prong test: (1) did the insured specifically challenge the delegation provision, not the entire arbitration clause; and if so (2) was the provision unenforceable “upon such grounds as exist at law or in equity.”

The Court held that the first prong was satisfied because the insured challenged “any” arbitration provision in the RPA, and asserted that the delegation provision was unenforceable under Virginia law. It explained that, to grant an arbitrator the authority to answer a “core” question of Virginia insurance law—whether a contract is an “insurance contract”—would undermine “the precise outcome Virginia sought to prevent” in enacting the statute; namely, guaranteeing insureds access to Virginia courts. Thus, the Court found that delegation provisions in even “putative” insurance contracts governed by Virginia law are invalid, “at least to the extent such provisions authorize an arbitrator to resolve whether the contract at issue is an ‘insurance contract.’”

Finally, the Court held that the district court abused its discretion in applying judicial estoppel to preclude the insurer from arguing on the merits that the RPA was not an “insurance contract” for purposes of Virginia law. The Court therefore remanded the case for full briefing on that issue.

MinnieLand Private Dayschool, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 16-1511 (4th Cir. Aug. 11, 2017)

This post written by Alex Silverman.

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CFPB ISSUES FINAL RULE PROHIBITING CLASS ACTION WAIVER ARBITRATION AGREEMENTS IN CERTAIN CONSUMER FINANCIAL CONTRACTS

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The Consumer Financial Protection Bureau issued a final rule on July 10, 2017, prohibiting providers of certain consumer financial products and services from including within consumer agreements a requirement that any future disputes that might otherwise be the basis of a class action to instead be arbitrated on an individual basis. The rule also requires providers to insert a provision into their arbitration agreements acknowledging this limitation. The rule is based on the Bureau’s finding that pre-dispute arbitration agreements “are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.”

The final rule also requires providers that use pre-dispute arbitration agreements to submit records relating to arbitral and court proceedings to the Bureau. The rule applies to providers engaged in extending consumer credit, extending or brokering automobile leases, providing debt management or debt settlement services, providing assistance in avoiding foreclosure or modifying consumer credit, providing check cashing, collection or guaranty services, and collecting debt arising from any of these services, among other consumer services and products. The rule becomes effective September 18, 2017, and consumer agreements entered into as of March 19, 2018, must comply with the rule. 12 C.F.R. Part 1040 (July 10, 2017).

This post written by Benjamin E. Stearns.
See our disclaimer.

GEORGIA REVAMPS LAW GOVERNING CAPTIVE INSURANCE COMPANIES

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Significant changes to Georgia law governing captive insurance companies took effect on July 1, 2017. The changes relate to the permitted corporate structure of captive insurance companies, new restrictions on risks that may be reinsured by certain captives, procedures for forming, converting and dissolving a captive, and streamlining the issuance of certificates of authority to newly formed captives, among other changes.

Specifically, the new law authorizes captive insurance companies to be formed as manager-managed limited liability companies, in addition to continuing to permit them to be organized as stock or mutual insurers. The Act streamlines the default process to obtain a certificate of authority by directing the Insurance Commissioner to “promptly issue” a certificate of authority to a captive upon satisfaction that the documents filed by the captive comply with the requirements for captive formation. The prior procedure, which the Act authorizes the Commissioner to follow if he chooses, required a captive to provide additional documentation regarding the company’s capital or surplus and a certified financial statement. Under the new default procedure, the captive is required to provide this same documentation “as soon as practicable” after issuance of the certificate of authority, rather than before.

In addition, the law restricts “agency captive insurance companies” to reinsuring (1) risks of insurance or annuity contracts placed by the entity owning the agency captive, or (2) contractual liabilities arising out of service contracts or warranties sold by an entity owning the agency captive. Captives are exempted from the provisions of the insurance code relating to domestic stock and mutual insurers except as otherwise provided by certain specified provisions of the insurance code or by the Commissioner through regulation. The law also requires a captive to obtain prior written approval from the Commissioner before reinsuring certain risks, restricts taxes that apply to risk retention group captives to those on direct premiums for coverages in Georgia, and substantially amends several definitions. Georgia SB 173 (eff. 7/1/2017).

This post written by Benjamin E. Stearns.

See our disclaimer.