Reinsurance Regulation

State Legislative Update: Reinsurance and Captives

May 4, 2010 by Carlton Fields

Activity in the various State Legislatures highlights our latest updates on legislative developments in the areas of reinsurance and captive insurers.

State Reinsurance: Tennessee SB 2863 (bill text and bill summary), signed by the Governor on April 5, 2010, makes numerous changes and clarifications concerning the authority and responsibility of the Tennessee Life and Health Guaranty Association. The bill, as it relates to reinsurance, amends Section 56-12-207 of the Tennessee Code to authorize the Guaranty Association to elect to succeed to the rights of the insolvent insurer regarding any reinsurance agreement to the extent that such agreement provides coverage for losses occurring after the date of the order of liquidation or rehabilitation. This provision seems to give a preference to the Guaranty Association contrary to the basic concept and structure of the rehabilitation and liquidation process. It became effective on April 12, 2010.

Louisiana HB 1326 proposes, in addition to the policy take-out program authorized by present law, to authorize the Louisiana Citizens Property Insurance Corporation (Corporation) to transfer residential and commercial property insurance policies to domestic insurers licensed to write property insurance in Louisiana via reinsurance of those policies to be taken out of the Corporation. The bill provides that the reinsurance may be facilitated by property insurance companies domiciled in Louisiana and licensed by the Louisiana Department of Insurance (DOI). The proposed legislation is designed to facilitate the transfer of risk from the Corporation to the voluntary insurance market, and that the Corporation and DOI are given broad latitude to effectuate these reinsurance programs with all deliberate speed in order to achieve the intent of the legislation. The bill was introduced on April 19, 2010, and referred the next day to the Committee on Insurance.

Maryland HB 305, signed by the Governor on April 13, 2010, amends the state’s domestic reinsurance law requirements by: (1) specifying an assessment fee payable by specified domestic reinsurers to the Maryland Insurance; (2) exempting domestic reinsurers from a requirement to have an office in the State; (3) requiring domestic reinsurers to keep specified assets in the State; and (4) authorizing domestic reinsurers to keep their general ledger account records outside the State under specified circumstances. The amendments become effective June 1, 2010.

Kansas HB 2500, signed by the Governor on April 12, 2010 amends the Kansas Municipal Group-Funded Pool Act to allow municipal insurance pool applicants to submit a confirmation that reinsurance approved by the Insurance Commission is in effect or will be effective at the time the pool assumes risk. The bill takes effect upon its publication in the Kansas Statute Book.

State Captive Insurers: Delaware enacted HB 314 (mentioned in our February 8, 2010 posting), which amends the state’s captive insurance company laws by adding two new forms of captive insurance companies, “agency captive insurance companies” and “branch captive insurance companies,” to those that can currently be licensed in Delaware. The legislation was passed by the Delaware House in March 2010 and by the Delaware Senate in April 2010, subject to an amendment introduced by the Senate, which requires the Insurance Commissioner to make a finding that a “branch captive” insurer is financially stable in order to exempt the insurer from the minimum capital and surplus requirements and reserve requirements of the State insurance law.

This post written by Karen Benson.

No McCarran-Ferguson Reverse Pre-Emption Under State Insurance Insolvency Statutes

April 28, 2010 by Carlton Fields

Acting as Rehabilitator of Centaur Insurance Company, the Director of the Illinois Department of Insurance, Michael McRaith, brought suit against two reinsurers, seeking a declaration that they are obligated to reimburse Centaur for portions of a $32 million settlement it agreed to in resolving underlying asbestos litigation. The reinsurers had removed the case to federal court, but McRaith sought a remand based on the doctrines of McCarran-Ferguson reverse preemption and Burford abstention. The court denied the motion to remand under both theories, finding that none of the McCarran-Ferguson reverse preemption criteria had been met, as the state law issues pertaining to the rehabilitation proceedings did not specifically relate to the business of insurance, and there was not a clear conflict with federal law vis-à-vis state insurance solvency rehabilitation procedure. Burford abstention was also inappropriate because the dispute pertained less to the “complex [state] regulations pertaining to insolvent insurers” than to a simple breach of contract dispute between the parties under certain reinsurance certificates. McRaith v. American Re-Insurance Co., No. 09-C-4027 (USDC N.D. Ill. Feb. 17, 2010).

This post written by John Pitblado.

STATE LEGISLATIVE UPDATE

March 24, 2010 by Carlton Fields

Following are selected bills relevant to reinsurance in the Kansas and Mississippi Legislatures:

HB 2500, as introduced, would amend a provision in the Kansas Municipal Group-Funded Pool Act to allow municipal insurance pool applicants to submit a confirmation that reinsurance approved by the Insurance Commission is in effect or will be effective at the time the pool assumes risk. Confirmation of reinsurance approval would be in addition to the current statutory requirement that a municipal bond holds excess insurance provided by an insurance company holding a Kansas certificate of authority. The Senate Committee on Financial Institutions and Insurance amended the bill to add reinsurance to a notification requirement in the current law. The House nonconcurred with the amendment by the Senate and requested a Conference Committee on March 11, 2010. The Senate acceded to the request to conference on the same day.

Mississippi HB 173, signed by the Governor on March 9, 2010, amends Section 83-34-39 of the Mississippi Code to extend the date of the repealer on the requirement that a portion of the State insurance premium tax revenue be deposited into the Mississippi Windstorm Underwriting Association Reinsurance Assistance Fund for the purpose of reducing the premium rates charged for insuring property through the association. This section shall take effect on July 1, 2010 and shall stand repealed on July 1, 2013.
This post written by Karen Benson.

STATUTORY REQUIREMENT OF NOTICE TO INSURED OF NONRENEWAL IS NOT EXCUSED IF THE INSURED OBTAINS REPLACEMENT COVERAGE

March 23, 2010 by Carlton Fields

In an unpublished disposition, a California appellate court reversed a summary judgment order as to a reinsured’s claims for breach of contract and insurance bad faith where the policy period was extended by statute (California Insurance Code section 678.1) because the underlying insured was not provided with the requisite notice of nonrenewal, but affirmed the summary judgment order as to the reinsured’s negligence claim. The defendants reinsured plaintiff Norcal Mutual Insurance Company for any liability Norcal might incur under a managed health care professional liability policy for the initial policy period of August 1999 through August 2000. Although the claim by Norcal’s insured that created Norcal’s liability fell outside the period of the 1999/2000 policy, Norcal contended the policy period was extended until June 2001 because its insured was not provided with notice of nonrenewal of the 1999/2000 policy, as required by section 678.1.

On appeal, the court held that notice of nonrenewal was not excused by a statutory provision that notice is not required where the insured “has obtained replacement coverage or has agreed, in writing, within 60 days of the termination of the policy, to obtain that coverage.” Norcal’s insured agreed in writing to obtain replacement coverage, but section 678.1 “taken as a whole” compelled the conclusion that a “replacement” policy “is not synonymous with renewal of existing coverage.” The court found that “replacement” coverage referred to in one subsection of the statute means insurance obtained from a different insurer, while renewal of coverage referred to elsewhere in the same statute means coverage obtained from the same insurer for a subsequent policy period. The court, however, rejected Norcal’s negligence claim because section 678.1 “clearly” places the duty to provide notice of nonrenewal on the insurer, not a reinsurer. Norcal Mutual Insurance Co. v. Certain Underwriters at Lloyd’s of London, No. B213122 (Cal. Ct. App. Feb. 22, 2010).

This post written by Brian Perryman.

NEW YORK LAW APPLIES TO ALL CLAIMS IN THE MIDLAND INSURANCE COMPANY LIQUIDATION PROCEEDING

March 17, 2010 by Carlton Fields

In this long-running legal saga surrounding the liquidation of Midland Insurance Company (“Midland”), the Superintendent of Insurance, Midland’s reinsurers, and certain major policyholders stipulated to a case management order for determining the issue of whether New York substantive law controlled the interpretation of the Midland insurance policies at issue or whether the New York choice-of-law test must be conducted for each policy to determine the applicable substantive law. The trial court granted the policyholders’ motion for partial summary judgment, declaring that a choice-of-law review for each policyholder must be undertaken. This appeal followed. The New York appellate court first recounted its 1990 decision involving Midland and another policyholder where the choice-of-law issue was not litigated but the court stated that New York substantive law applied so that Midland’s creditors would receive equal treatment. The appellate court then reversed the trial court’s order for the following reasons: (1) the application of New York law in the prior case is binding on the trial court under the doctrine of stare decisis; (2) the “law of the case” precluded the policyholders from re-litigating an issue decided in an ongoing proceeding, finding that the policyholders in this case had identical interests with the policyholder in the 1990 case; and (3) that public policy required the equal treatment of all creditors in a liquidation proceeding. Finally, the court granted the intervening reinsurers’ cross motion, declaring that New York substantive law controlled the interpretation of the Midland insurance policies. In re Liquidation of Midland Ins. Co., 2010 NY Slip Op 00209 (N.Y. App. Div. Jan. 12, 2010).

This post written by Dan Crisp.