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Reinsurance Regulation

STRUCTURE OF CFPB FOUND TO BE UNCONSTITUTIONAL BUT AGENCY SURVIVES WITH CUT TO DIRECTOR’S POWER

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The DC Circuit Court of Appeals recently held that the single-director structure of the Consumer Financial Protection Bureau (“CFPB”) was unconstitutional, and gave the President the authority to fire the director at will in order to provide a check on the CFPB’s expansive power.

The background of the case can be found here. PHH, a mortgage lender, was the subject of a CFPB enforcement action regarding allegations that it referred consumers to mortgage insurers who then purchased reinsurance from a PHH subsidiary. The captive reinsurance agreements, according to the CFPB, were an illegal kickback scheme and violated the Real Estate Settlement Procedures Act (“RESPA”) that resulted in a $109 million order against PHH. PHH sought to vacate the order. In its appeal, PHH argued that the CFPB, an independent agency headed by a single Director, violates Article II of the Constitution.

The D.C. Circuit agreed with PHH that the single-director structure given to the CFPB by Congress in the 2010 Dodd-Frank Act left the CFPB’s top official without any check on its authority as the director could only be fired by the President for cause. However, rather than dismantling the CFPB, the Court determined that giving the President the authority to fire the director at will would address the question of accountability at the CFPB. In this regard, the Court stated: “The president is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.”

The Court also found that the CFPB violated PHH’s due process rights by applying a retroactive penalty against PHH, finding that its captive reinsurance agreements violated RESPA. First, the Court noted that the CFPB had reinterpreted RESPA, a rule it inherited from the U.S. Department of Housing and Urban Development (“HUD”), in a way that invalidated HUD’s previous interpretation. HUD’s interpretation was that captive reinsurance arrangements were lawful “as long as the mortgage insurer paid no more than reasonable market value to the reinsurer for reinsurance actually furnished.” According to the Court, “[r]etroactivity — in particular, a new agency interpretation that is retroactively applied to proscribe past conduct — contravenes the bedrock due process principle that the people should have fair notice of what conduct is prohibited.” The D.C. Circuit also found that the CFPB was wrong in asserting that it could bring an administrative case beyond the three-year statute of limitations provided under RESPA. Noting that the CFPB could theoretically bring an action for a violation that occurred a century ago, the Court noted that “[w]e need not wait for an enforcement action 100 years after the fact. This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.”

Thus, the D.C. Circuit vacated the CFPB’s order and remanded for the CFPB to determine whether consistent with RESPA’s three year statute of limitations, the mortgage insurers paid more than reasonable market value for the reinsurance to PHH’s captive reinsurer. PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177, (D.C. Cir. Oct. 11, 2016).

This post written by Jeanne Kohler.

See our disclaimer.

D.C. COURT DISMISSES DISPUTE OVER REINSURANCE OF FEDERAL CROP INSURANCE PROGRAM

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On September 20, a federal district court in the District of Columbia dismissed a lawsuit brought by reinsurers of the federal crop insurance program. The plaintiffs-reinsurers alleged that the Federal Crop Insurance Corporation (“FCIC”) improperly modified the actuarial methodology that set the premiums owed for several crops, including corn and soybeans, resulting in plaintiffs purportedly paying more than what was allegedly conveyed to them at the time of contracting. Indeed, the plaintiffs had entered into five-year standard agreements which they claimed included representations that the methodology used to determine the premiums charged would not change, but it later did. The plaintiffs first challenged the methodology with the Deputy Director of Insurance Services, and later to the Civil Board of Contract Appeals (the “Board”), both of which granted summary relief to the FCIC.

Thereafter, the plaintiffs filed suit in federal court alleging counts of breach of contract, promissory estoppel, unjust enrichment, violation of a statute limiting renegotiation of standard contracts to once every five years, violation of a statute in that the FCIC did not consider the reinsurer’s financial condition, reformation and rescission, and for a declaratory judgment. The FCIC filed a motion for judgment on the pleadings under FRCP 12(c), which the court granted. In so doing, the court found that many claims were barred by res judicata as they had been decided by the Board and were not appealed under the Administrative Procedures Act. The court also found that the promissory estoppel and unjust enrichment counts were not actionable because the parties’ agreement was governed by existing contracts. As to the new counts not raised before the Board, the court found that the claims should be dismissed for failure to exhaust administrative remedies. Thus, the court dismissed the suit brought by the reinsurers.

Ace American Ins. Co. v. Federal Crop Ins. Corp., Case No. 1:14-cv-01992-RCL (D.D.C. Sept. 20, 2016).

This post written by Zach Ludens.

See our disclaimer.

OKLAHOMA INSURANCE COMMISSIONER ORDERS ELECTRONIC FILING OF FORMS AND ASSOCIATED PAYMENTS BY ACCREDITED REINSURERS

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On August 24, 2016, the Oklahoma Insurance Commissioner issued an order requiring all accredited reinsurers in the state to file all annual statements, audited financial statements, forms, documents and accompanying fees, fines, and payments, by electronic means. The new requirements are effective on or before March 1, 2017. The Commissioner acted pursuant to a statute in effect as of November, 2014, which granted authority to require certain forms and associated payments to be filed electronically, “notwithstanding” other provisions of law requiring particular forms and payments be filed in paper form or mailed or hand-delivered to the Insurance Department.

In re: Electronic Filings of Accredited Reinsurers in the State of Oklahoma, Case No. 16-0633 (Aug. 24, 2016)

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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TENNESSEE DEPARTMENT OF COMMERCE AND INSURANCE ISSUES BULLETIN ADVISING OF TAXATION OF SURPLUS LINES PREMIUMS POST-NIMA DISSOLUTION

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In a special focus article in May, we wrote about the future of multi-state allocation of nonadmitted premium tax revenue following the dissolution of the Non-Admitted Insurance Multistate Agreement (NIMA). We followed up on this issue in July, with an article regarding Florida’s bulletin on the topic. On September 6, 2016, the Tennessee Department of Commerce and Insurance issued its own bulletin with the following guidance, effective October 1, 2016. The bulletin begins by noting that Tennessee has reached agreement with the Florida Surplus Lines Service Office for continued use of the Surplus Lines Information Portal (SLIP). The bulletin then provides that all policies effective on or after October 1, 2016, for which Tennessee is designated as the Home State, will be reported as single state policies with 100 percent of the premium being reported to and taxed by Tennessee through SLIP. These policies will, however, be subject to a 0.175 percent gross premium SLIP transaction fee, in addition to the 5 percent surplus lines premium tax, though these costs may be passed along to the insured. For all policies with effective dates of October 1, 2014 through September 30, 2016, no SLIP transaction fee will be charged.

This post written by Zach Ludens.

See our disclaimer.

ALABAMA AMENDS CAPTIVE INSURERS ACT

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On April 26, 2016, Alabama Governor Robert J. Bentley approved House Bill No. 270, which revised Alabama’s Captive Insurers Act. The revised Captive Insurers Act went into effect on July 1, 2016, and included amendments to several provisions of the act to make it easier to establish captives and provides tax-friendly measures for captives. In particular, we note that the amended act lowers capital requirements, allows captives to be formed as any form of business entity, provides for a 60-day provisional license in certain circumstances, and caps premium taxes. Under Alabama’s 2006 Captive Insurers Act, captives could only be formed as corporations. Norman Chandler, President of the Alabama Captive Association, has stated that “The newly revised Captive Act will significantly help the captive industry grow in Alabama.”

A copy of the revised Chapter 31B is available here, which shows in redline form the changes to the Act. 2016 Alabama Laws Act 2016-191 (H.B. 270).

This post written by Zach Ludens.

See our disclaimer.