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New reinsurance-related and arbitration developments from Carlton Fields

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Reorganization and Liquidation

COURT ORDERS THE REHABILITATION PROCEEDING OF INSURER TERMINATED

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Hudson, the Superintendent of the Ohio Department of Insurance, in her capacity as Rehabilitator of Colonial Insurance Company (“Colonial”), brought an application for an order, which was subsequently granted, terminating the rehabilitation proceeding of Colonial, authorizing the transfer of funds to the Ohio Department of Commerce, discharging and releasing the Rehabilitator, authorizing the final accounting, authorizing the closing of the estate and the dissolving of the corporate entity, approving the destruction of certain books and records, approving abandonment of physical assets, authorizing the closing of Colonial bank accounts, and authorizing related actions to close the estate or carry out the court’s orders. Hudson v. Colonial Ins. Co., Case No. 03 CVC 01 00597 (Ohio Super. Ct. Dec. 22, 2008).

This post written by Dan Crisp.

STATE INSURER LIQUIDATION ACT PREEMPTS FEDERAL REMOVAL STATUTE

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The Florida Department of Financial Services (“FDFS”) filed a claim in state court against General Reinsurance Corporation (“Gen Re”) after discovering that in the course of Aries Insurance Company’s (“Aries”) receivership, Aries made improper preferential transfers to Gen Re within six months of the rehabilitation date. Alleging diversity jurisdiction, Gen Re removed the action to Florida district court. FDFS moved to remand the claim to state court pursuant to the McCarran-Ferguson Act. The district court first determined that, under the Florida Insurers Rehabilitation and Liquidation Act (the “Liquidation Act”), the assets at issue are subject to the exclusive jurisdiction of the Leon County Circuit Court. Granting the motion to remand, the district court stated that the federal removal statute does not specifically relate to the business of insurance, found that the Liquidation Act provision vesting exclusive jurisdiction in the state court served to regulate the business of insurance, cited similar findings by other courts regarding such jurisdictional provisions, and concluded that the McCarran-Ferguson Act applies causing the Liquidation Act to preempt the federal removal statute. Fla. Dep’t. of Fin. Servs. v. Gen. Reins. Corp., Case No. 08-443 (USDC N.D. Fla. Feb. 2, 2009).

This post written by Dan Crisp.

COURT APPROVES COMMUTATION AND SETTLEMENT BETWEEN RELIANCE INSURANCE COMPANY (IN LIQUIDATION) AND REINSURER

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In an opinion illustrating the principles for the approval of commutations in liquidation proceedings, a Pennsylvania state court approved a commutation and settlement agreement by and between Reliance Insurance Company (“Reliance”) and General Security National Insurance Company, formerly known as Sorema North America Reinsurance Company (“GSN”). Under the terms of the agreement, GSN agreed to pay Reliance $13,000,000 in exchange for a release of all past, present, and future liabilities which have arisen or may arise under certain reinsurance contracts issued by GSN to certain enumerated Reliance subsidiaries (though generally excluding certain foreign subsidiaries). The court found that the agreement constituted a fair and reasonable settlement of GSN’s past and potential future obligations to Reliance under the reinsurance agreements recited. Ario v. Reliance Ins. Co., Docket No. 269 M.D. 2001 (Pa. Commw. Ct. Dec. 30, 2008).

This post written by John Pitblado.

APPELLATE COURT HOLDS THAT SELF-INSURER GROUP IS ENTITLED TO COVERAGE THROUGH STATE INSURANCE GUARANTY ASSOCIATION

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The Louisiana Safety Association of Timbermen – Self Insurers Fund (the “Fund”) is a self-insurance group formed by member companies as a means of securing workers compensation coverage for their employees. In 1998, the Fund obtained statutorily required excess coverage from Reliance Indemnity Company, and in 2001 Reliance became insolvent. The Fund filed proofs of claim against Reliance with the Louisiana Insurance Guaranty Association (“LIGA”). LIGA denied the claims, asserting that the Fund was an insurer and the excess coverage was reinsurance, thus removing the claims from coverage by LIGA under the terms of governing state statutes. The fund brought suit to establish coverage for all past and future claims.

The trial court granted summary judgment to the Fund. The Louisiana Appellate Court affirmed, citing the terms of applicable workers compensation and insurance guaranty association statutes to support its determination that the excess coverage the Fund obtained was not “reinsurance” as that term is used under applicable statutes and that the Fund is not an “insurer” causing it to become statutorily exempt from coverage through LIGA. The Court also rejected LIGA’s argument that a statutory exclusion of coverage to any self-insured corporation with a net worth above $25,000,000 should apply to the Fund’s member companies in the aggregate. The court found that the member companies were not “affiliates” of one another as the term is used in the statute and thus held that their net worth should not be aggregated for purposes of the statutory exclusion. Louisiana Safety Assoc. of Timbermen – Self Insurers Fund v. Louisiana Ins. Guaranty Assoc., No. 43,615–CA (La. Ct. App. Dec. 3, 2008).

This post written by John Pitblado.

TROUBLED FINANCIAL GUARANTY INSURER RESTRUCTURES

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CIFG Holding, Ltd., the holding company for CIFG's financial guaranty subsidiaries, has reached an agreement to commute approximately $12 billion in troubled credit swaps and reinsure $13 billion of municipal bonds. The transactions were announced in a press release by CIFG and a news release from the New York Insurance Department. According to New York Superintendent Eric Dinallo, the result will be that the bonds are novated to Assured Guaranty Corp., with the municipal bonds going from junk bond to highest investment grade rating, leaving CIFG as a solvent bond insurer in a position to pay claims on its remaining policies. The consideration for the transactions include cash payment and equity consideration. The result is a change in the controlling shareholders of CIFG, with changes in senior management expected.

This post written by Rollie Goss.