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New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

STATE LEGISLATIVE ACTION REGARDING CAT FUNDS

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Following are legislative developments relating to State catastrophe funds:

S.B. 923 was introduced on February 8, 2010 in the Missouri State Senate. The bill would establish the Missouri Catastrophe Fund to help pay covered residential property damage insurance claims in the aftermath of an earthquake, which affects Missouri homeowners and their property/casualty insurers. The catastrophe fund, which would consist of premiums paid by insurers, bond revenues, and appropriated state funds, would provide a backstop for insurance companies to insure against covered catastrophic losses to avoid the collapse of the property insurance market in the wake of a major earthquake. The bill also would establish an advisory council to provide information and advice with regard to the fund and develop prevention and mitigation standards related to covered losses. If a federal or multistate catastrophic insurance fund or reinsurance program is created, recommendations must be made to the General Assembly as to how the fund can coordinate with such programs.

S.B. 923 was referred on February 11, 2010 to the Small Business, Insurance and Industry Committee of the Missouri State Senate. Earlier this year, a companion bill (H.R. 1468) to S.B. 923 was introduced in the Missouri House of Representatives. No action has been reported with regard to H.B. 1468.

Also, on February 8, 2010, A1983 was introduced in the New Jersey General Assembly to implement the New Jersey Consumer Catastrophe Preparedness and Protection Act through an advisory council. The Act would establish the New Jersey Catastrophe Fund to help pay covered resident property damage insurance claims in the aftermath of a natural disaster or other catastrophe in the State, which affects New Jersey homeowners and their property/casualty insurers. The Act would appropriate from the General Fund $10 million for deposit in the fund. If a federal or multistate catastrophic insurance fund or reinsurance program is created, recommendations must be made to the State legislature as to how to how the fund can coordinate with such programs.

This post written by Karen Benson.

SCOTTISH COURT BREATHES NEW LIFE INTO PETITION TO APPROVE SOLVENT SCHEME OF ARRANGEMENT

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The Scottish Court of Session, Inner House, has reversed a ruling of its Outer House refusing to approve a scheme of arrangement under the U.K. Companies Act of 2006.

A scheme of arrangement is a reorganization device through which a company may compromise its creditors’ claims with the approval of at least three-quarters of its creditors. A scheme of arrangement generally involves three stages. First, there must be a judicial application for an order summoning a meeting of creditors. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Finally, if the scheme is approved at the meeting, there must be a further application to the court for sanction of the arrangement.

In Petition of Scottish Lion Insurance Company, Scottish Lion, in runoff since late 1994, proposed in 2008 a scheme of arrangement to terminate exposures under short- and long-tail policies. The scheme was opposed by U.S.-based creditors insured under general liability or general aviation insurance policies with Scottish Lion. The Outer House declined to approve the scheme, concluding that sanctioning the scheme smacked of “unreasonableness” to minority creditors, and asking rhetorically, “where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?” The Inner House disagreed. Although the court acknowledged that insureds who were being required to accept current estimated values in lieu of their contingent claims may “possibly with other arguments, win the day,” it concluded that such circumstance alone was not so overwhelming a factor against the sanction. The case was remitted to the Outer House for further proceedings.

This post written by Brian Perryman.

STATE LEGISLATIVE UPDATE

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Following are selected bills in the captive insurance and reinsurance areas that have been recently introduced in the state legislatures:

• H.B. 314 proposes to amend Delaware’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. In an agency captive structure, the insurance risk on policies is reinsured to the agency captive, thereby allowing the agents or brokers that placed the policies to share in the profits or losses attributable to these policies. Branch captive insurance companies are divisions of offshore captives that establish a business unit onshore. These new forms of captive insurance companies are intended to enhance the economic development potential of Delaware’s captive insurance laws. The bill also makes a technical change to the delinquency provisions applicable to sponsored captive insurance companies. The bill was introduced in the Delaware House of Representatives on January 26, 2010, and it was assigned on the same day to the Economic Development/Banking/Insurance/Commerce Committee. The following day the bill was reported out of committee favorably in the Delaware House of Representatives.

• H.B. 305 proposes to amend Maryland’s domestic reinsurance law requirements for various purposes, including: (i) specifying an assessment fee payable by specified domestic reinsures to the Maryland Insurance Commissioner; (ii) exempting domestic reinsurers from a requirement to have an office in the State; (iii) requiring domestic reinsurers to keep specified assets in the State; and (iv) authorizing domestic reinsurers to keep their general ledger account records outside the State under specified circumstances. The bill was introduced in the Maryland House of Representatives on January 27, 2010.

This post written by Karen Benson.

TEXAS APPELLATE COURT REVERSES ORDER IN FAVOR OF TEXAS DEPARTMENT OF INSURANCE CONCERNING INTERPRETATION OF REINSURANCE REPORTING OBLIGATIONS

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The Texas Insurance Department (“Department”) determined that American National Ins. Co. and other insurance companies were incorrect when they reported stop-loss insurance policies that they sold to self-funded employee benefit plans as reinsurance instead of direct insurance. The Companies disagreed, and brought the matter to court. The trial court granted the Department’s motion for summary judgment, agreeing with the Department that self-funded plans are not insurers under Texas law. The Companies appealed, and the Appellate Court reversed. It found that by selling the stop-loss policies at issue in this case to self-funded benefits plans and reporting their sale to the Department as a sale of assumed reinsurance, the Companies did not violate those provisions of the Texas Insurance Code cited by the Department. The Court filed an Order with instructions to enter judgment in favor of Companies on the issue. American National Ins. Co. v. Texas Dept. of Insurance, No. 03-08-00535-CV (Tex. App. Ct. Dec. 16, 2009).

This post written by John Pitblado.

NEW YORK INSURANCE DEPARTMENT SEEKS COMMENTS ON FIRST SUPPLEMENT TO CIRCULAR LETTER NO. 20

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In October 2008, the New York Insurance Department issued Circular Letter No. 20 to address the topic of contract certainty in reinsurance contracts (as noted in our November 11, 2008 post). In its first draft supplement to the circular letter, the Department proposes further guidance on the subject in response to inquiries by interested persons. Initially, the definition of “promptly” in the context of delivering policy documentation would be construed to mean “within 30 business days.” Next, the draft supplement suggests the Department will ensure compliance with the Circular Letter on a case-by-case basis, depending on the “unique nature or size of the risk.” It also clarifies that the Department will employ principles of contract certainty in effect in the United Kingdom and Bermuda as standards for what constitutes adequate “policy documentation.” Finally, the 30-day period for achieving contract certainty would be allocated as follows: where a producer intermediates a transaction, the insurer should deliver policy terms and conditions within 18 business days post-inception. The broker then would have 12 business days to deliver the contract to the policyholder. The deadline for submitting public comments on this draft supplement is January 22, 2010.

This post written by Brian Perryman.