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Reinsurance Regulation

FRAUD CLAIM AGAINST PARTICIPANT IN REINSURANCE PROGRAM HELD TIME-BARRED

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A fraud claim asserted by the New York Superintendent of Insurance against a tire company was barred by the applicable California statute of limitations, since the “discovery rule” did not operate to save the claim. The plaintiff superintendent, in his capacity as rehabilitator of Frontier Insurance Company, alleged that Frontier entered into a reinsurance agreement with Automotive Services Insurance Limited in 1999. ASIL was a captive insurance agency set up by the president of the defendant tire company, Ramona Tire. Under this agreement, ASIL agreed to reinsure Frontier for insurance proceeds paid out by Frontier on policies for a group of independent tire dealers, including Ramona. The superintendent alleged that Ramona defrauded Frontier by purposefully undercapitalizing and underfunding ASIL so as to make it unable to comply with its contractual obligations to Frontier. A suit was filed in 2007. In its motion for summary judgment, Ramona argued that Frontier was on notice of ASIL’s undercapitalization from the moment it began negotiations on the reinsurance agreement. For example, Frontier investigated ASIL’s capitalization prior to approving the workers compensation program in which Ramona participated. This was held sufficient to trigger the discovery rule and run the three-year statute of limitations beginning in at least 2000. Accordingly, the fraud claims were time-barred. Mills v. Ramona Tire, Inc., Case No. 07-52 (USDC S.D. Cal. May 22, 2009).

This post written by Brian Perryman.

TWO RECENT CASES ADDRESS REVERSE-PREEMPTION UNDER THE MCCARRAN-FERGUSON ACT

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On March 15, 2007, we reported on an Oklahoma district court’s denial of a motion to compel arbitration, finding that an Oklahoma statute prohibiting enforcement of arbitration clauses in insurance contracts controlled pursuant to the McCarran-Ferguson Act. Soon thereafter, the Oklahoma legislature amended the statute excepting reinsurance contracts from the prohibition. On appeal, despite the legislature not specifying whether the amendment would apply retroactively, the Tenth Circuit found that the statute itself was retroactive by its express terms and as interpreted by the Oklahoma Supreme Court, and, after acknowledging that arbitration agreements are contrary to Oklahoma public policy, the Tenth Circuit then found that specific legislative approval rendered the agreements valid and enforceable. Mid-Continent Cas. Co. v. Gen. Reins. Corp., No. 07-5050 (10th Cir. May 22, 2009).

Theodore L. Kessner (“Kessner”), appointed as the Special Deputy Liquidator of an insolvent insurer, filed an action in Nebraska state court seeking to recover on a reinsurance policy issued by One Beacon Insurance Company, which removed the action to federal court based on diversity jurisdiction. Kessner then moved to remand, arguing that the McCarran-Ferguson Act reverse-preempted the federal removal statute. In the Report and Recommendation, the Magistrate Judge concluded that the matters at issue related to the business of insurance and that a proceeding in the district court would likely invalidate, impair or supersede the Nebraska insurer liquidation statutes utilized in the state liquidation proceeding, requiring remand. A short, two paragraph opinion by the District Judge adopted the Magistrate Judge’s Report and Recommendation, with a colorful conclusion that “intervention by a federal court could screw up the comprehensive scheme Nebraska has set up to deal with matters like this one. Federal law has a bias against such meddling.” Kessner v. One Beacon Ins. Co., Case No. 09-3003 (USDC D. Neb. Apr. 20, 2009).

This post written by Dan Crisp.

E.U.’S SOLVENCY II INSURANCE REGULATORY FRAMEWORK MOVING ALONG ON TRACK

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The European Union’s Economic and Financial Affairs Council recently approved the Solvency II Amended Directive, an insurance and reinsurance regulatory framework which we initially reported on in a September 14, 2007 post, and which moved forward with recent approval by the European Parliament last month. The Council’s approval is mentioned on page 14 of a release describing a meeting of the Council, which followed a press release about the Parliament's action. The proposal will now be up for adoption by the Council at its next meeting, and implementation remains on track for October 31, 2012.

This post written by John Pitblado.

REINSURANCE LEGISLATIVE UPDATE

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As the state legislative session nears an end, there continues to be activity in the following three areas: (1) reinsurance, (2) captive insurers, and (2) catastrophe funds. There is also continuing interest in a proposed federal bill.

Reinsurance. Oregon House Bill No. 2755 was introduced to require the Department of Consumer and Business Services to conduct a study of reinsurance alternatives for individual and small employer group health insurance markets and submit proposals to the Legislative Assembly by October 1, 2010. Two work sessions regarding the bill were held on April 10 and 24, 2009. Massachusetts Senate Bill No. 495 was also introduced to establish a reinsurance program to protect consumers of small group health insurance.

Captive Insurers. Missouri House Bill No. 577 was introduced to modify various provisions of Missouri’s captive insurance company law and permit an association captive insurance company or an industrial insured captive insurance company to be organized as a reciprocal insurer. Two companion bills (SB 269 and SB 464) to HB 577 were introduced in the Missouri Senate. There is also a bill (SB 323) pending in the South Carolina Senate that would make several changes to the state’s captive insurance company law relating to incorporation, licensing, capitalization and other requirements.

Catastrophe Funds. The New York Consumers Catastrophe Preparedness and Protection Act (SB 4188) was introduced in the New York Senate. This Act would establish the New York state catastrophe fund and an advisory council, comprised of experts from many professions related to disaster preparedness and mitigation, that is specifically charged with developing disaster prevention and mitigation standards and developing a consumer education program. A companion bill (AB 7781) to SB 4188 was introduced in the New York State Assembly. A bill (SB 295) was also introduced in the Louisiana Senate, which would create a Louisiana state catastrophe fund and implement the Louisiana Consumers Catastrophe Preparedness and Protection Act.

Federal legislation. On December 29, 2008, we posted about a proposed bill relating to the tax treatment of related party reinsurance premiums which was exposed for comment by the Senate Committee on Finance. As of this date, the bill has not been introduced, and over 50 comments have been submitted to the Committee and posted to its Web site. The comments come from individuals, law firms, trade associations, companies, Germany, Switzerland and the European Union. One interesting comment submitted by the Risk and Insurance Management Society is a study by The Brattle Group, prepared on behalf of foreign reinsurers, titled The Impact on the US Insurance Market of a Tax on Offshore Affiliate Reinsurance: An Economic Analysis. While this post does not take a position as to the appropriateness or desirability of this proposed bill, this document contains an interesting description of the US reinsurance market, which is interesting reading independently of the proposed bill.

This post written by Karen Benson.

SPECIAL FOCUS: FEDERAL REGULATORY MODERNIZATION PROPOSALS

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There have been many proposals floated for the “modernization” of the regulation of various sectors of the financial services industry. What are the implications of such proposals for the reinsurance industry? In a SPECIAL FOCUS feature, Rollie Goss, blogmaster and chair of a Task Force formed by Carlton Fields to monitor federal regulatory proposals which may affect its clients, discusses generally the major proposals to date which may affect the reinsurance industry. Many of the proposals made to date remain in a fairly conceptual stage, but a few now are progressing to the stage of proposed Congressional bills. The documents discussed in this short paper include:

For additional Special Focus items, see the new sidebar box with quick links to selected Special Focus items.

This post written by Rollie Goss.