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Reinsurance Regulation

UK COURT OF APPEALS AFFIRMS RULING THAT LLOYD’S NAMES CAN NOT SUE NATIONAL GOVERNMENT OVER IMPLEMENTATION OF AN EEC INSURANCE DIRECTIVE

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On November 28, 2006, we reported on a ruling by the UK Commercial Court that Lloyd’s Names did not have a cause of action against the government for alleged damages due to the improper implementation of an EEC Insurance Directive. The UK Court of Appeals has affirmed that decision, holding that the assumed failure to transpose the requirements of the Insurance Directive into national law can not be the basis for claims against the national government by the Names. Having disposed of the appeal on this issue, the Court of Appeals did not reach the alternative holding that the claims of the Names were barred by the statute of limitation. Poole v. Her Majesty’s Treasury [2007] EWCA Civ 1021 (Oct. 24, 2007).

This post written by Rollie Goss.

COURT DENIES INSOLVENT INSURER’S MOTION TO DISMISS; ACTION TO BAR ARBITRATION WILL PROCEED

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Plaintiff, Midwest Employers Casualty Company (“MECC”) filed an action to bar Legion Insurance Company (“Legion”) from arbitrating forty-three reinsurance contracts, which MECC claimed did not contain arbitration provisions. MECC also sought a declaration of its liability under those contracts. Legion filed a motion to dismiss on four separate grounds. The court denied the motion to dismiss.

First, Legion, which is in liquidation, argued that because the Pennsylvania court had in rem jurisdiction over its assets, the Missouri federal court could not exercise jurisdiction. The court disagreed, finding that while the liquidation action was in rem, the present action was in personam. Second, Legion argued that the case was “reverse preempted” by the McCarran-Ferguson Act. The court disagreed on the basis that the ultimate issue in the case was a standard contract dispute, and did not involve the state’s regulation of insurance. Third, Legion argued that the court should abstain from deciding the case under Burford v. Sun Oil Company. In Burford, the Supreme Court held that abstention is appropriate where “exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” The district court concluded that abstention under Burford was not appropriate because this case did not affect complex state administrative processes and would not impair the liquidation process. Finally, Legion argued that full faith and credit and the principle of comity required the court to defer to the liquidation proceedings. The court disagreed, finding that those principles did not prevent its exercise of jurisdiction. Midwest Employers Casualty Co. v. Legion Ins. Co., Case No. 4:07-cv-00870, (USDC E.D. Mo. Nov. 11, 2007).

COURT RULES ON VALIDITY OF AMENDMENTS TO FEDERAL CROP REINSURANCE PROGRAM

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The D.C. district court recently addressed whether the Federal Crop Insurance Corporation (“FCIC”) had authority to promulgate two federal regulations relating to the administration of its reinsurance agreements, and if so, whether they also had authority to promulgate an amendment to those regulations. Plaintiffs, agricultural insurance providers, alleged the FCIC’s unilateral amendments to their reinsurance agreements constituted a breach of contract.

Following a lengthy procedural path, the plaintiffs filed their claim with the Department of Agriculture Board of Contract Appeals. The Board concluded that plaintiffs’ claims were time barred pursuant to a federal regulation that mandated a 45-day period for bringing administrative claims. Plaintiffs subsequently filed a complaint in the D.C. district court requesting the court conclude that the agency lacked jurisdiction to hear the plaintiffs’ claims and to overturn the agency’s interpretations of the contract and relevant statutes and regulations. Plaintiffs also sought a determination that the agency’s procedures and final decision violated the Constitution. Both parties filed motions for summary judgment.

Applying the “Chevron deference” analysis, the court concluded that the FCIC had authority to promulgate both regulations. With respect to the amendment, the court concluded that it qualified as an “interpretive rule,” and therefore was not required to comply with the notice and comment requirements under the APA. As such, the rule was valid, and the court granted the defendant’s motion for summary judgment as to several of plaintiff’s claims. The court remanded some of plaintiffs’ claims to the Board to address what action triggered the limitations period and whether the 45-day limitations period was controlling in light of a conflicting 6-year statutory limitation period.

Finally, the court dismissed plaintiffs’ constitutional claims stating that they were “without merit” and dismissed plaintiffs’ contract and unjust enrichment claims for failure to exhaust administrative remedies. Ace Property and Casualty Ins. Co. v. Federal Crop Ins. Corp., Case No. 06-1430 (RMU) (D.D.C., Sept. 28, 2007).

IRS PROPOSES ELIMINATION OF LONG-STANDING TAX BENEFIT FOR CAPTIVES

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The IRS has proposed a regulation (full text here) which would postpone the tax deduction for an incurred loss arising from related party business until the loss is paid, instead of permitting an earlier deduction for certain loss reserves. This proposal has surprised the industry, as it was issued without any notice. The proposal would affect a single parent captive filing a consolidated tax return with its parent. There is concern among the US captive regulators that this would eliminate an important tax incentive for US domiciled captives, resulting in captives moving offshore. The Captive Insurance Companies Association has posted a frequently asked question document relating to this proposal. There is a comment period open on this proposal until December 27, 2007.

NAIC REINSURANCE TASK FORCE ADVANCES COLLATERAL AND REINSURANCE REGULATION PROPOSAL

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The NAIC’s Reinsurance Task Force has advanced a proposal “to comprehensively modernize reinsurance regulation in the United States.” The proposal is outlined in a press release issued in conjunction with the recent meeting of the Annual Conference of the International Association of Insurance Supervisors. The proposal is in two parts: (1) NAIC Reinsurance Supervision Review Department; draft proposal to grant recognition of regulatory equivalence to non-U.S. insurance supervisors; and (2) Port of Entry State Criteria for Reinsures [sic] Supervised in Jurisdictions Approved by the NAIC Reinsurance Supervision Review Department and U.S. Licensed Reinsurers. Generally, the proposals provide for the regulation of US domiciled reinsurers through a single state, and the agreement to allow non-US domiciled reinsurers to be regulated in the United States through a single state “port of entry” if the foreign regulatory authorities provide a regulatory regime for the company that is functionally equivalent” to that in the United States The proposals also partially change the collateral requirements to a credit-based system, but do not by any means completely eliminate the collateral requirements. The NAIC has also posted on its website a PowerPoint presentation titled NAIC Reinsurance Collateral Update. The next step in this process is a meeting on November 7-8 in Atlanta in conjunction with the NAIC Financial Summit. Comments on the proposal are posted on the NAIC Reinsurance Task Force’s web site.