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Reinsurance Regulation

LIQUIDATION COURT GRANTS RECEIVER’S APPLICATION FOR AUTHORITY TO ENTER INTO REINSURANCE SETTLEMENTS WITH THREE REINSURERS

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A Texas court presiding over the liquidation of Santa Fe Auto Insurance Company approved an application by the Special Deputy Receiver for the liquidating company (“SDR”) to enter into a reinsurance settlement with three reinsurers. The agreement provides that the reinsurers will pay over $11 million due under certain quota share reinsurance agreements. The order noted that no objections to the application were filed. Texas v. Santa Fe Auto Ins. Co., Case No. D-1-GV-13-000204 (Tex. Dist. Ct. Dec. 7, 2015) (application) and (Tex. Dist. Ct. Dec. 21, 2015) (order).

This post written by Joshua S. Wirth, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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IRS REVOKES RULING THAT IMPOSED EXCISE TAX ON WHOLLY FOREIGN REINSURANCE TRANSACTIONS

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The Internal Revenue Service recently revoked a 2008 ruling that a 1% excise tax under section 4371(3) of the Internal Revenue Code applied to “reinsurance premiums paid by one foreign insurer or reinsurer to another.” The IRS’s shift came in the wake of the D.C. Circuit’s opinion in Validus Reinsurance, Ltd. v. United States, 786 F.3d 1039 (D.C. Cir. 2015).

In Validus, a foreign reinsurer filed claims for refund of excise taxes imposed on premiums paid to a foreign retrocessionaire. The United States argued that such reinsurance policies were within the excise tax’s scope because the risks ultimately underlying the multiple levels of reinsurance were situated within the United States. The taxpayer countered that the statute’s plain language applied only to reinsurance, not retrocession coverage. After extensive analysis of the statute’s plain language and legislative history, the D.C. Circuit concluded that the statute was ambiguous. To resolve the controversy, the court resorted to the presumption against extraterritorial application of U.S. laws. The court ruled that the excise tax did not apply because the transaction was a “wholly foreign retrocession[].”

Going forward, therefore, a foreign insurer who pays reinsurance premiums to another foreign insurer likely will not have to pay the excise tax under section 4371(3) of the Internal Revenue Code, though the IRS has noted some narrow exceptions. Moreover, any foreign insurers who have paid such taxes within the statute of limitations should consider contacting counsel about the prospect of claims for refund. IRS Rev. Ruling 2016-03.

This post written by Richard Euliss.

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WASHINGTON ADOPTS NEW RULES REGARDING CREDIT FOR REINSURANCE

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The Office of the Insurance Commissioner for Washington State recently adopted rules that amend the existing Credit for Reinsurance rules within the state. In addition, that office adopted new rules to conform Washington’s rules regarding credit for reinsurance to the NAIC Credit for Reinsurance Model Regulation and amendments made by the 2015 legislative session to the credit for reinsurance laws. The new rules went into effect on January 2, 2016.

Washington Insurance Commissioner Matter No. R 2015-09.

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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NEW YORK FEDERAL BANKRUPTCY COURT FINDS INSURANCE INSOLVENCY PROCEEDING DOES NOT “REVERSE – PREEMPT” BANKRUPTCY COURT JURISDICTION

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In a recent adversary proceeding in the chapter 11 case involving Ames Department Stores, Inc. (“Ames”), Lumbermens Mutual Casualty Company (“Lumbermen’s”) argued that under the McCarran-Ferguson Act, the issues in dispute between it and Ames should be decided in Illinois state court as part of Lumbermens’ insolvency proceedings.

The procedural history and the issues in the case between Ames and Lumbermens can be found here. In short, Ames filed a Chapter 11 bankruptcy in New York in 2001. In 2006, a dispute between Lumbermens and Ames commenced, which centered around the ownership of an approximate $8 million trust account. By 2012, Lumbermens entered state rehabilitation proceedings in Illinois. Lumbermens’ rehabilitator challenged the bankruptcy court’s jurisdiction over the adversary proceeding in New York federal court, arguing for the issues to be addressed in Illinois state court as part of Lumbermens’ ongoing insolvency proceeding. The court granted the rehabilitator’s motion to withdraw reference, and requested a report and recommendation on Lumbermens’ jurisdictional motion from a New York federal bankruptcy court.

The New York bankruptcy court first found that it had authority to hear all the claims at issue. Next, it determined whether the McCarran-Ferguson Act applied to “reverse – preempt” federal law. The court utilized a three part analysis to determine whether the McCarran-Ferguson Act applies and whether a federal statute can be reverse preempted by a state law. First, the court considered whether the Bankruptcy Code, the federal law at issue, specifically relates to the business of insurance, and concluded that it does not. Next, the court considered whether the state law at issue relates to the business of insurance, finding that the Illinois statute, relegating jurisdiction to the Illinois state court, was to ensure orderly and predictable liquidations of insurance companies. Thus, the court found that the state law at issue was enacted for the purpose of regulating the business of insurance. Finally, with respect to the third prong, whether allowing the case to proceed in federal bankruptcy court would “impair, invalidate, or supersede” Illinois state law, the court found that the bankruptcy court’s jurisdiction would not contravene Illinois law in any meaningful way, because any bankruptcy court judgment would remain subject to the priority scheme of the Illinois insurance insolvency proceeding. Therefore, the court held that hearing the adversary proceeding in federal bankruptcy court would not impair, invalidate or supersede Illinois insurance law, and thus, found that the Bankruptcy Code was not reverse – preempted by McCarran-Ferguson.

In re Ames Department Stores Inc., et al., No. 01-42217 (REG) (Bankr. S.D.N.Y. Dec. 7, 2015).

This post written by Jeanne Kohler.

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NEW JERSEY APPELLATE COURT AFFIRMS RULING THAT SOLVENT INSURERS NOT RESPONSIBLE FOR PORTIONS OF INSOLVENT INSURERS

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Earlier this month, a New Jersey appellate court affirmed a lower court’s ruling that the insured, not solvent insurers, was responsible for the liability apportioned to policies not covered by New Jersey’s Property Liability Insurance Guaranty Association (PLIGA). The insured, Ward Sand and Materials Company (Ward), was sued by the New Jersey Department of Environmental Protection related to cleanup of municipal waste accepted at a sand mining facility from 1970 to 1991.

Prior to litigation, three of Ward’s insurers—Mission National Insurance Company, Integrity Insurance Company, and Western Employers Insurance Company—had been declared insolvent. During the litigation, two of Ward’s insurers, Reliance Insurance Company and Home Insurance Company, were declared insolvent.  Following a multi-million dollar settlement in the environmental litigation, Ward brought suit against its primary and excess insurance carriers, as well as PLIGA, seeking an order allocating insurance coverage for the settlement.  PLIGA settled with Ward on behalf of the insolvent insurers, but the trial court issued a decision requiring Ward to assume any sums allocated to its insolvent insurers in excess of the payments by PLIGA.

Ward filed a motion for reconsideration, which the trial court denied, and then appealed the decision. After all of the relevant insurers had become insolvent but before the litigation in this case, the New Jersey legislature amended the statute regarding PLIGA to clarify that exhaustion of underlying policies had only occurred once all available insurance limits had been met.  The New Jersey Supreme Court held that this meant that “for the years in which PLIGA is standing in the palce of an insolvent carrier in a long-tail environmental contamination case, the insured—not the solvent insurer—is compelled to make payments before accessing statutory benefits under the PLIGA Act.”  Thus, the appellate court affirmed the trial court’s determination that Ward was responsible for the shares allocated to its insolvent insurers. Ward Sand and Materials Co. v. The TransAmerica Insurance Company, No. A-1479-13T1 (N.J. Super. Ct. App. Div. Jan. 12, 2016).

This post written by Zach Ludens.
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