Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Reinsurance Regulation

Reinsurance Regulation

ATTORNEYS’ FEES AND COSTS AWARDED AGAINST NEW YORK SUPERINTENDENT FOR IMPROPER BANKRUPTCY FILING

by

The New York Insurance Department, as Liquidator of Nassau Insurance Company, pursued Jeanne Diloreto for 20 years to recover what it contended were assets diverted from Nassau, recovering a judgment in state court that it attempt to execute upon. Superintendent DiNallo ended up filing an involuntary bankruptcy petition against Ms. Diloreto, which was dismissed, in part based upon procedural infirmities. Diloreto sought damages for a bad faith filing, and established to the satisfaction of the bankruptcy court that the motivation for filing the petition was related to a potential recovery in an ancillary malpractice action that Diloreto had filed against her former law firm. The bankruptcy court judge determined that while the filing by Superintendent DiNallo had not been in bad faith, Diloreto nevertheless was entitled to a judgment against Superintendent DiNallo in his capacity as Liquidator in an amount exceeding $70,000 for attorney’s fees and costs, which it Ordered could not be offset against the Liquidator’s state court judgment against Diloreto. This is a procedurally tortured case, centering on a very long running dispute, which included Diloreto purchasing property in Florida shortly after the state court judgment was entered, apparently in the hope of shielding assets under the Florida homestead provision. In re Diloreto, Bank. No. 07-15413 (US Bank. Ct. E.D. Pa. June 19, 2008).

This post written by Rollie Goss.

BANKRUPTCY COURT DISMISSES FRAUD CLAIMS AGAINST ALPHASTAR’S FORMER SHAREHOLDERS, DIRECTORS AND OFFICERS

by

AlphaStar Insurance Group Ltd. (“AlphaStar”) (f/k/a Stirling Cooke Brown Holdings Ltd) was a group of companies which provided, among other services, reinsurance brokerage and intermediary services through companies in London, Bermuda and the United States. The companies collapsed and eventually declared bankruptcy, largely as a result of their involvement in the personal accident reinsurance market. Richard E. O'Connell, the chapter 7 trustee (the “Trustee”), commenced this proceeding against AlphaStar's former officers and directors, Arthur Andersen LLP, and several entities affiliated with Goldman Sachs. Goldman Sachs essentially controlled AlphaStar prior to its 1997 initial public offering. By 1999, special investigations revealed that the activities of the companies “were run or had been run by or associated with unsavory, dishonest people who had engaged in questionable transactions,” and that the businesses “were rife with fraud; its subsidiaries had made material misrepresentations to counterparties, who were thus entitled to rescind their contractual obligations; most of AlphaStar’s assets were impaired; its businesses were no longer viable; it could not afford to defend against the recent onslaught of litigation claims and it ‘faced a probable loss of staggering proportions.’” Prior management was terminated, but the litigation exposure arising out of their activities matured into a series of lawsuits and arbitrations with disastrous results. The thrust of the allegations in the Trustee's Amended Complaint was that the defendants, in light of these problems, used fraudulent and other improper means to continue AlphaStar's corporate existence to advance their personal interests to the detriment of AlphaStar. Another words, the Amended Complaint contended that the defendants should have pulled the plug instead of attempting to clean up the companies. The defendants moved to dismiss the Amended Complaint with prejudice.

The court concluded that the efforts to shift the losses of the companies to third parties was unsupported by any evidence, and that the claims were based upon information that allegedly was concealed by the defendants, but which the public knew. “In the end, his conscious misbehavior claim is impermissibly based on 20/20 hindsight, as he candidly admitted.” Motions to dismiss were granted, except that the motions to dismiss the avoidance claims were denied, and the motion to dismiss the contract claim was granted, but with leave to replead. In dismissing the trustee’s fraud based claims, the Court concluded that the Amended Complaint did not allege facts that gave rise to a strong inference of fraudulent intent, and that the motives alleged by the Trustee were insufficient as a matter of law, and failed to identify specific information that would support the inference of conscious misbehavior. The Court also dismissed the breach of fiduciary duty cause of action concluding that, under Bermuda law, no fiduciary duty existed. In re AlphaStar Ins. Group Ltd., No. 03-17903 (Bankr. S.D.N.Y., Feb. 19, 2008).

This post written by Lynn Hawkins.

STATES CONTINUE TO AMEND CAPTIVE INSURER PROVISIONS

by

Competition continues among the states with respect to captive insurer regulation.

  • The proposed Missouri regulations described in our March 10, 2008 post relating to the financial management and control of captives has been adopted, with an effective date of June 30, 2008.

  • On May 20, 2008, the Governor of Arizona signed an enacted bill which amended its captives law to permit branch captives to cover any risk a traditional single-parent captive could write. Last year, Arizona amended its rules to permit its branch captives to fund employee benefit risks.

  • On June 2, 2008, the Governor of Connecticut signed into law Senate Bill 281 (mentioned in our March 10, 2008 post), which provides for the formation and regulation of captives under Connecticut law. See an analysis of the new law and its final text.

This post written by Rollie Goss.

DELAWARE AND SOUTH CAROLINA REVISE CAPTIVE INSURER REGULATIONS

by

Regulators continue to pursue new regulatory efforts with respect to captive insurers. Delaware has proposed amended regulations governing financial reporting by captive insurance companies, while South Carolina has issued a bulletin addressing the requirements for the managers of captive insurers. The comment period for the proposed Delaware regulations closed May 5.

This post written by Rollie Goss.

COURT DISMISSES CASE AGAINST INSURERS ALLEGING UNDERREPORTING OF WORKERS’ COMPENSATION PREMIUMS

by

The Workers’ Compensation Reinsurance Association and the Minnesota Workers’ Compensation insurance Association sued nine insurers, alleging violation of the federal RICO statute and unjust enrichment due to the intentional underreporting of the amount of workers’ compensation insurance they had written in order to minimize assessments and reinsurance premiums. Disagreeing with a Magistrate Judge, a District Judge granted a motion to dismiss, dismissing the RICO claims with prejudice and the unjust enrichment claims for lack of jurisdiction. The court found that allegations focusing on the participation of the defendants in their own business, rather than the business of an enterprise, failed to allege a RICO violation. The unjust enrichment claim failed due to the failure properly to allege diversity jurisdiction. The RICO claims were dismissed with prejudice, and the unjust enrichment claims were dismissed without prejudice. Workers’ Compensation Reinsurance Association v. American International Group, Inc., Case No. 07-3371 (USDC D. Minn. Mar. 28, 2008).

This post written by Rollie Goss.