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New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

LEGISLATIVE UPDATE: STATES IMPLEMENT TRIA EXTENSION

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On December 21, 2007, we reported on the enactment and signing of the Terrorism Risk Insurance Program Reauthorization Extension Act of 2007, which extended TRIA. That Act made some changes to the TRIA program. A number of state insurance departments have issued Bulletins implementing the changes adopted in the extension. While it is not our intention to provide an exhaustive listing of the state actions in this area, we are providing in this post access to the Bulletins issued by the first group of insurance departments to address this matter, so that our readers can see the types of implementation activity that is occurring. You should check for Bulletins in states of interest to you if this topic is of concern to you. Alabama; Arizona; Illinois; Louisiana; Maine; New Hampshire; New Jersey; South Dakota; West Virginia.

This post written by Rollie Goss.

COURT APPROVES INSURANCE COMPANY REORGANIZATION PLAN BASED UPON ASSUMPTION REINSURANCE AGREEMENT

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A Pennsylvania judge has approved the fourth amended plan for the rehabilitation of Fidelity Mutual Life Insurance Company, which is based upon Fidelity transferring its outstanding insurance and annuity contracts to Commonwealth Annuity and Life Insurance Company under an assumption reinsurance agreement. Assets of value equal to the assumed liabilities are also being transferred to Commonwealth, which is paying a ceding commission of $3.9 million and a contingent payment of up to $5.9 million. The proposed reinsurance transaction drew a single objection, which contended that Commonwealth was potentially financially unstable. The court rejected the objection, based in part upon Commonwealth’s A. M. Best rating of “A-“ and its estimated risk-based capital ratio of 8 to 1. The court found that the proposed plan complied with applicable regulations and was fair, equitable and financially sound. Ario v. Fidelity Mutual Life Ins. Co., No. 389 M.D. 1992 (Pa. Commonwealth Ct. Oct. 25, 2007).

This post written by Rollie Goss.

COURT RULES ON QUESTIONS OF DIRECT ACCESS TO REINSURANCE PROCEEDS BY INSURED UPON INSOLVENCY OF INSURER/REINSURED

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Joel Ario, Commissioner of the Pennsylvania Department of Insurance, acting in his capacity as Liquidator of Reliance Insurance Company, initiated this action against Swiss Re and Tribune Company seeking a declaration that Tribune was not entitled to direct access to a series of reinsurance proceeds payable under various agreements between Swiss Re and Reliance. Tribune insured its workers’ compensation risks with Reliance, which was a fronting insurer that reinsured the risks with Swiss Re. When Reliance was declared insolvent, the issue arose as to whether Reliance’s reinsurance with Swiss Re was an asset of Reliance’s estate, or whether Tribune could gain direct access to the reinsurance proceeds. Generally, reinsurance is an important asset of the estate of the insolvent reinsured. However, if the reinsured does not take significant risks as an insurer, instead merely passing through the risks to the reinsurer, the ultimate insured may obtain direct access to the reinsurance proceeds.

The relationships were structured through two written agreements, which received different treatment by the court. The referee appointed to resolve the dispute concluded that Tribune was not entitled to direct access to the reinsurance proceeds under a Gross Compensation Program (GCP) agreement, but was entitled to direct access to proceeds under a Loss Portfolio Transfer (LPT) agreement. Both the Liquidator and Tribune filed objections. The Commonwealth Court of Pennsylvania sustained the findings of the Referee, concluding that: (1) Tribune was not entitled to direct access to the proceeds payable by Swiss Re to Reliance under the GCP because the Gross Compensation Program was not a true reinsurance arrangement, but rather, was more akin to traditional insurance; and (2) Tribune was, however, entitled to direct access to payments under the LPT because the evidence established that Reliance was a fronting company, and therefore the LPT was not an asset of the Reliance Estate. Ario v. Swiss Reinsurance America Corp. and Tribune Co., NO. 860 M.D. 2003 (Pa. Commw. Ct., Dec. 21, 2007).

This post written by Lynn Hawkins.

NEW JERSEY SUPREME COURT HOLDS THAT IBNR CLAIMS CANNOT PARTICIPATE IN FINAL DIVIDEND PLAN FOR INSOLVENT INSURER

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Integrity Insurance Company, which among other risks insured environmental and products liability risks with long claim tails that were subject to reinsurance, was declared insolvent. The issue arose as to whether the IBNR claims for such risks could participate in the liquidation plan, which would mean that the liquidator could collect on such claims from Integrity’s reinsurers immediately. The applicable New Jersey statute provides that only “absolute” claims may participate in a liquidation plan. The liquidation court held that IBNR claims could participate in the liquidation plan, but the Court of Appeals reversed (reported on in an October 11, 2006 post to this blog). The New Jersey Supreme Court held that since IBNR claims are actuarial estimates, they are not “absolute” as of the claim bar date, and therefore cannot participate in the liquidation plan. The holding turned on the interpretation of “absolute,” which the Court held required that the claims be capable of being determined on their own merit, standing on their own, independent of any other claim. Since IBNR claims are estimated in part based upon the insurer’s historical experience, they did not qualify as being “absolute.” It had been estimated that allowing IBNR claims, instead of requiring that they be considered in a run-off mode, would have saved $45 million in administrative expense. This principle could have a significant effect upon the duration of liquidation proceedings, their expense and the amount and timing of funds available from reinsurance to fund liquidation plans. In re Liquidation of Integrity Insurance Company, A-29 (December 13, 2007).

This post written by Rollie Goss.

OREGON SUPREME COURT PIERCES SUPERIOR NATIONAL CORPORATE VEIL IN INSOLVENCY CONTEXT

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The case involved a dispute over a $10.6 million deposit that Superior National Insurance Company (“SNIC”) made with the Oregon Department of Consumer and Business Services (“DCBS”). The Court was asked to decide whether DCBS could use SNIC’s deposit to satisfy the statutory liabilities of an insolvent insurer, Commercial Compensation Casualty Company (“CCCC”). SNIC was a retrocessionaire of CCCC, and both SNIC and CCCC were under the common control of a parent holding company, Superior National Insurance Group (“Superior National”).

The court first concluded that a retrocessionaire was a “reinsurer” for purposes of the insurance code, making its statutory deposits subject to control by DCBS. Despite this, the court held that SNIC was not liable for all of CCCC’s losses since, under the pooling agreement, SNIC only agreed to pay for 22% of the losses and expenses of the pooled business.

The court next concluded that SNIC and CCCC were “operationally a single company for all practical purposes,” and held that Superior National caused CCCC to violate the Insurance Code by failing to make the required deposit. Because SNIC and CCCC were under the common control of Superior National and because Superior National took actions to evade government regulation, the Oregon Supreme Court held that the requirements for corporate veil piercing were met. As such, the Court ordered Superior National to reimburse the Oregon Insurance Guaranty Association for payments made on behalf of CCCC. Oregon Insurance Guaranty Association v. Superior National Insurance Company, No. 00C-18554, (Or. Nov. 29, 2007).

This post written by Lynn Hawkins.