Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

UPDATE: COURT ENTERS DEFAULT JUDGMENT AWARDING COMPENSATORY DAMAGES PLUS INTEREST

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On December 20, 2007, we reported that claims arising out of allegedly purposeful undercapitalization of a captive reinsurer survived a motion to dismiss. Since that time, the plaintiff (rehabilitator for Frontier Insurance Co.) moved for entry of a declaratory judgment and an award of compensatory damages plus prejudgment interest by default.

The Southern District of California concluded that plaintiff met the standards for entry of a default judgment, adequately alleged both an enforceable contract and a breach of contract by ASIL (the captive reinsurer), and that the default was not due to excusable neglect. ASIL indicated to Frontier that it would “allow judgment to be entered by default and pay all the available funds to Frontier.” The court granted the motion for entry of default and entered a judgment finding ASIL liable to plaintiff for $577,966.33 in compensatory damages and $91,511.33 in prejudgment interest (calculated at 10% per annum). Mills v. Ramona Tire, Inc., Case No. 07-0052 (USDC S.D. Cal., Sept. 23, 2008).

This post written by John Black.

REINSURED’S CONSTITUTIONAL TAKINGS CLAIM AGAINST UNITED STATES DISMISSED FOR FAILURE TO ALLEGE LOSS OF ACTUAL “PROPERTY”

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We previously posted on March 17, 2008 about a bankruptcy judgment in favor of a reinsured, Acceptance Insurance Companies, Inc. (“Acceptance”), which sought to be excused from the payment of $9 million in premium owed to its reinsurer for the remaining term of a five year contract because it had ceased writing the underlying crop insurance which was the subject of the reinsurance contract. As we posted, a bankruptcy appellate panel of the US Court of Appeals for the Eighth Circuit reversed the judgment, finding that Acceptance’s failure to continue writing the underlying risk did not excuse it from its premium obligation to the reinsurer.

Separately, Acceptance had also filed suit in the Federal Court of Claims, seeking money damages against the United States on the theory that it was forced to stop writing its crop insurance business, which had become worthless due to the unwarranted regulatory action of the U.S. Department of Agriculture Risk Management Agency (“RMA”). In particular, Acceptance alleged that an RMA Administrator improperly rejected a deal requiring his regulatory approval, by which Acceptance had proposed to sell its crop insurance business to an interested third party. Acceptance alleged that the subsequent failure of the deal caused the loss of all value of its crop insurance business, which loss constituted an unwarranted governmental taking of its property under the Fifth Amendment. The United States moved to dismiss Acceptance’s claim for failure to state a legally cognizable cause of action. The court granted the government’s motion, distinguishing the taking of “property” from government action which merely has the effect of interfering with or frustrating the performance of a contract. The court found that, despite regulatory action which allegedly rendered the property worthless, Acceptance nevertheless retained possession of the business, and thus lost no “property” as that term is construed under applicable Fifth Amendment takings jurisprudence. Acceptance Insurance Companies, Inc. v. United States, No. 03-2794 (Fed. Cl. Sept. 25, 2008).

This post written by John Pitblado.

STATE LEGISLATIVE/REGULATORY UPDATE

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The following is an update on what has recently transpired in the state legislatures and insurance departments relating to reinsurance:

  • On October 2, 2008, the New Jersey Consumer Catastrophe Preparedness and Protection Act was introduced in the state Senate (Bill No. 2089). This Act would establish the New Jersey Catastrophe Fund, and cites instability in global reinsurance markets leading to an increase in reinsurance costs as one of the reasons for creating this fund.

  • The New York Insurance Department issued a circular letter declaring the department’s position and expectations on the topic of contract certainty in all reinsurance contracts. Circular Letter No. 20 (2008).

  • On the topic of assumption reinsurance, the New York Insurance Department issued an Office of General Counsel opinion stating that the insured’s consent must be obtained to effectuate a transfer of the contract and that state insurance law does not require foreign insurers’ assumption reinsurance transactions (save for life insurers) to be filed with the state insurance department. OGC Op. No. 08-07015.

  • Florida implemented a paragraph within their state statutes that permits the commissioner to allow credit for reinsurance without full collateral for transactions involving assuming insurers that do not meet statutory requirements. 69O-144.007 (effective 10/29/2008)

This post written by Dan Crisp.

COURT UPHOLDS SANCTIONS ORDER BASED UPON FRIVOLOUS APPEAL BY LLOYDS NAME

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In 1979, Bennett signed a contract with Lloyd’s as a Name to provide underwriting capital for insurance syndicates. The contract contained clauses stating that English law applied to Names’ disputes and such disputes can only be resolved in the courts of England. At the time the contract was signed, Lloyd’s failed to disclose massive anticipated losses. In 1998, Bennett and 600 other Names sought to avoid the forum selection and choice of law clauses. The Ninth Circuit upheld the clauses. Lloyd’s sued in England and won a large judgment against non-settling Names to recover mandatory premiums. Lloyd’s then sought to enforce its claim against Bennett, a non-settling Name, in Utah District Court. The court found in favor of Lloyd’s. Bennett appealed, and this appeal was consolidated with other Names cases in the Reinhart case before the Tenth Circuit. The circuit court upheld the forum selection and choice of law clauses.

During the pendency of the Reinhart appeal, Bennett filed for bankruptcy and brought two separate lawsuits under the auspices of the bankruptcy case. The parties stipulated to the dismissal of the first suit, and the second suit went to trial. In the second suit, the court granted Lloyd’s summary judgment motion and a motion for sanctions, finding that the forum selection issue had been previously determined. Bennett appealed, but the district court affirmed the ruling.

Bennett appealed the bankruptcy court’s sanctions order, again advancing arguments against the forum selection clause. The court upheld the award of sanctions, finding the appeal from the bankruptcy court to be frivolous, and that “no reasonable attorney” could believe otherwise based upon the doctrine of res judicata and the Tenth Circuit’s prior opinions. Bennett v. Soc’y of Lloyd’s (In re Bennett), Case No. 2:07-CV-736 TS (USDC Utah Sept. 24, 2008).

This post written by Dan Crisp.

TREASURY DEPARTMENT ISSUES PROPOSED TRIA REGULATIONS

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The United States Treasury Department has issued proposed regulations on two topics relating to the Terrorism Risk Insurance Act of 2002 (“TRIA”), both with short comment periods: (1) how the Treasury will determine the amounts to be recouped and the procedures that insurers are to use for collecting Federal Terrorism Policy Surcharges and remitting them to Treasury – comment period expires October 17, 2008; and (2) how the Treasury intends to determine the pro rata share of insured losses under TRIA when insured losses would otherwise exceed the $100 billion cap on annual liability – comment period expires October 30, 2008.

This post written by Rollie Goss.