Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

ENGLISH COURT ALLOWS UNDERWRITER TO CONTINUE RUN-OFF BUSINESS

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In 2003, insurer Europ Assistance, and underwriter, Temple Legal Protection, entered into a binding authority agreement that authorized Temple to write ‘after the expenses’ coverage and handle claims on behalf of Europ. In exchange, Temple received 35% commission on the net premium. In 2005, Europ terminated the business with respect to new business, and in April 2007, Europ informed Temple that it planned to revoke all of Temple’s authority. Temple asserted that Europ repudiated the binding authority agreement.

While waiting for resolution of the underlying dispute, Europ sought an injunction barring Temple from continuing to carry on the run-off business, alleging that Temple was causing loss by unlawful means and was guilty of unlawful interference and breach of trust in failing to hand over premiums.

Balancing the interest of both parties, the English court refused to enjoin Temple from continuing with the run-off business. The court seemed influenced by the fact that Europ, a subsidiary of the well known and substantial Italian insurance company Assurazioni Generali SpA, had no continuing interest in the expenses business. In contrast, Temple, a small company, would be adversely affected if it were barred from running off the business. Europ Assistance Ins. Ltd. v. Temple Legal Protection Ltd., [2007] EWHC 1785 (Queen’s Bench July 25, 2007).

SENATE COMMITTEE PASSES TRIA EXTENSION

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The Senate Banking Committee has approved an extension of the Terrorism Risk Insurance Act. Principal differences between the Senate Committee's version and the version approved by the full House are:

  • duration: the House version provides for a 15 year extension, the Senate Committee version 7 years;
  • coverage trigger level: the House version reduces the threshold for triggering coverage from $100 million to $50 million, while the Senate Committee version maintains the $100 million trigger level;
  • coverage: the House version adds credit life insurance and nuclear, biological, chemical and radiological attacks, while the Senate Committee version does not broaden the scope of coverage.

A copy of the Senate Committee's version is not yet available on the Thomas legislative site.

NEW YORK INSURANCE DEPARTMENT PROPOSES NEW REGULATION ON REINSURANCE COLLATERAL

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The New York Insurance Department has proposed a new regulation that moves from collateral-based security for reinsurance agreements to “principles-based” regulation based in large part on the financial rating of reinsurers, regardless of their domicile. A press release from the department provides a good summary of the reasons behind the change, as well as a summary of the new regulation, and touts the revised regulation as a substantial accomplishment, seemingly portraying it as an accomplished fact. A redlined version of the proposed regulation was also released, which will be published for comment. The target date for the effectiveness of the new regulation is July 1, 2008.

ILLINOIS COURT GRANTS SUMMARY JUDGMENT TO INSURANCE COMMISSIONER, AS STATUTORY LIQUIDATOR, ON RESCISSION AND SETOFF AFFIRMATIVE DEFENSES

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We have reported previously on developments in Legion Insurance’s liquidation proceeding (see January 16, 2007 and April 26, 2007 posts), including an attempt to recover premiums allegedly owed by American Patriot Insurance Agency, Inc. (“American Patriot”) relating to a workers’ compensation program under a limited agency agreement.

On September 7, an Illinois federal court granted the Commissioner’s motion for summary judgment on American Patriot’s affirmative defenses for setoff and rescission. The court concluded that American Patriot had waived their right to rescind the limited agency agreement where they failed to take any steps towards rescinding the agreement until three years after they acquired knowledge of the fraud, coupled with Defendants’ continued retention of the benefits of the contract. With respect to American Patriot’s setoff defense, the liquidator contended that the alleged debts could not be mutual because they were not due and owing between the same parties or based upon the same contracts, and that mutuality of capacity was lacking because the premium owed by American Patriot were held in a fiduciary capacity. The judge agreed, stating that “the debts asserted by Defendants lack a mutuality of time with the debts asserted against them by the Liquidator, and Defendants’ claim for setoff must be dismissed on these grounds.”

The court denied summary judgment to the liquidator on American Patriot’s remaining affirmative defenses of unclean hands, fraud, negligent misrepresentation, estoppel of a 2000 program year and breach of contract. Ario v. American Patriot Ins. Agency, Case No. 05 C 1049 (N.D.Ill. September 7, 2007).

COURT APPROVES SETTLEMENT OF BROKERAGE CLAIMS AGAINST ARTHUR GALLAGHER

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The court handling the insurance brokerage antitrust litigation (see prior blog posts dated April 27, 2007 and September 14, 2006) has approved a proposed settlement with Arthur J. Gallagher & Co. and related entities. The settlement relief includes: (1) a $28 million fund to be paid to class members; (2) reform of certain alleged business practices, including prohibitions on accepting contingent compensation, “pay to play” arrangements, “bid rigging” arrangements, reinsurance leveraging, and inappropriate use of wholesale insurance brokers; (3) requirements for certain disclosures to customers; (4) implementation of specified training for Gallagher employees; and (5) payment of attorneys’ fees and costs not to exceed $8.885 million. Two objections were received to the proposed settlement, only one of which challenged the proposed settlement relief. In re Antitrust Brokerage Antitrust Litigation, Case No. 04-5184 (USDC D.N.J. Sept. 4, 2007).