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New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

COURT DISMISSES INTERVENOR/REINSURER’S CLAIM AGAINST GENERAL ELECTRIC ON ALLEGED WRONGFUL REDOMESTICATION

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General Electric (“GE”) brought an action for breach of contract against the joint liquidators of the entity formerly known as Electric Mutual Liability Insurance Company (“EMLIC”). Years ago, a solvent EMLIC had refused to defend and indemnify GE in regards to liability for environmental contamination. OneBeacon America Insurance Company (“OneBeacon”), whose predecessor reinsured EMLIC in connection with GE’s claims, intervened as the defendant and asserted three counterclaims. GE then filed a motion for summary judgment on the third counterclaim, which alleged a breach of fiduciary duty by GE regarding EMLIC’s wrongful redomestication to Bermuda to declare itself insolvent and to pursue liquidation. The court granted GE’s motion, ruling that GE, as sole policyholder, shareholder, and creditor to EMLIC, owed no fiduciary duty to EMLIC. The court then stated that, even if GE owed a fiduciary duty, no breach occurred because EMLIC was not harmed by the redomestication. Finally, the court denied OneBeacon, standing in EMLIC’s shoes, equitable relief from its contractual obligations because EMLIC was complicit in the wrongful redomestication. General Elec. Co. v. Lines, Case No. 2006-3106 (Mass. July 2009).

This post written by Dan Crisp.

LEGISLATIVE AND REGULATORY UPDATE

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FEDERAL LEGISLATIVE UPDATE

On September 9, 2009, the U.S. House of Representatives passed unanimously H.R. 2571, the Nonadmitted and Reinsurance Reform Act (bill text and bill summary), by voice vote. As previously reported in our June 9, 2009 post, this legislation seeks to streamline the regulation of non-admitted insurance and reinsurance.

The principal provisions of the legislation: (1) regulate premium taxes for nonadmitted insurance; (2) provide that the placement of nonadmitted insurance shall be subject to regulation solely by the insured’s home state; (3) limit the ability of a state to establish eligibility requirements for US domiciled nonadmitted insurers that vary from the Non-Admitted Insurance Model Act; (4) require a GAO study of the nonadmitted insurance market; (5) regulate the extent to which a state may not recognize credit for reinsurance for an insurer’s ceded risk; (6) partially pre-empt the extraterritorial application of the law of a state to a ceding insurer not domiciled in that state; and (7) provide that in most circumstances a state that is the domicile of a reinsurer shall be solely responsible for regulating its financial solvency. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on the Judiciary.

The legislation was received in the Senate and referred to the Committee on Banking, Housing, and Urban Affairs on September 10, 2009.

STATE REGULATORY UPDATE

The Oregon Division of Insurance (DOI) adopted temporary rule OAR 836-012-0331 (rule text and rulemaking order) on the treatment of reinsurance reserve credits or assets under agreements prior to November 9, 1995. The temporary rule replaces OAR 836-012-0330, which, according to the DOI, was apparently repealed in error. The repeal of that rule removed the prohibition of an insurer reporting reserve credits or assets established with respect to existing reinsurance agreements entered into prior to the effective date of the Life and Health Reinsurance Agreements Model Regulation (OAR 836-012-0300 to 836-012-0330). According to the DOI, the repeal violated the Reinsurance Ceded accreditation standard, Part A, 10(m).

In order to remain accredited, the DOI was required to adopt the temporary rule. The temporary rule provides that any reserve credits or assets established with respect to reinsurance agreements entered into prior to November 9, 1995 that would not be entitled to recognition under the provisions of OAR 836-012-0300 to 836-012-0330 must be reduced to zero for purposes of the insurer’s annual statement filing. The temporary rule is effective July 9, 2009 through December 24, 2009.

This post written by Karen Benson.

EQUITAS BUSINESS TRANSFER SCHEME SANCTIONED

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A UK court has entered judgment in an application brought by Equitas Ltd. and Equitas Insurance Ltd. for an order under section 111 of the Financial Services and Markets Act 2000 sanctioning a scheme for the transfer to Equitas Insurance Ltd. of the 1992 and Prior Business carried on at Lloyd’s. Section 111 is concerned with business transfer schemes. Per the court, the scheme is intended to bring finality to a process which began with a reconstruction and renewal plan promoted and implemented by Lloyd’s in the second half of 1996. In the Matter of the Names at Lloyd’s for the 1992 and Prior Years of Account, Represented by Equitas Ltd., [2009] EWHC 1595 (Ch. Ct. July 7, 2009).

This post written by John Black.

RELIANCE INSURANCE RECEIVES COURT APPROVAL FOR TWO MORE SETTLEMENTS

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We reported on September 3 of the court approval of a settlement and commutation between Reliance Insurance Company (in liquidation), and Munich Reinsurance America. The liquidation court has also approved settlement/commutation agreements betwen Reliance and the Clarendon group of companies and with XL Reinsurance. The benefit to the estate of the agreement with the Clarendon group of companies is $9.498 million; the benefit to the estate of the agreement with XL Re is $6.325 million. Ario v. Reliance Insurance Co., Case No. 269 M.D. 2001 (Pa. Commw. Ct. July 16, 2009).

This post written by Rollie Goss.

COMMUTATION, SETTLEMENT AGREEMENT, AND RELEASE BETWEEN INSURER (IN LIQUIDATION) AND REINSURER APPROVED

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A Pennsylvania state court recently approved a Commutation, Settlement Agreement, and Release (“Settlement Agreement”) between Reliance Insurance Company (“Reliance”) and Munich Reinsurance America, Inc., formerly known as American Re-Insurance Company (“Munich Re”). Under the Settlement Agreement, Munich Re agreed to pay the Reliance estate $73,250,000 to terminate and commute the Reinsurance Agreement and release Munich Re from all liability under the Reinsurance Agreement. The court approved the Settlement Agreement, accepting representations that the Settlement Agreement constituted a fair and reasonable settlement of Munich Re’s past, present, and future obligations to the Reliance estate. Ario v. Reliance Ins. Co., No. 269 M.D. 2001 (Pa. Commw. Ct. July 15, 2009).

This post written by Dan Crisp.