A District Court has held that a $1.5 million default judgment entered against a Bermuda insurance company that had been placed in liquidation in Bermuda was not enforceable against its Arizona-domiciled parent company. Significant factual background to the ruling may be found in a motion for summary judgment. Employers Reinsurance Corp. v. Guaranteed Financial Corp., Case No. 04-884 (D. Az. Sept. 26, 2006). A major basis for the ruling was the fact that the Bermuda authorities had siezed control of the Bermuda-domiciled company, and that the parent therefore had lost any ability to control the litigation in which the default had been entered.
Reorganization and Liquidation
District Court retains action by receiver on reinsurance agreement
A District Court has denied a motion by the Oklahoma Commissioner, as receiver of Hospital Casualty Company, to remand or abstain from proceeding with a claim filed by the receiver against a reinsurer on a reinsurance agreement with Hospital Casualty. The Court declined to apply the Burford abstention doctrine, finding that although the case had a financial effect on the liquidation, the issues were not so intertwined with issues of agency authority or state regulatory policy that their resolution in federal court would imperil the regulatory scheme. Holland v. Employers Reinsurance Corp., Case No. 06-0426 (W.D. Ok. Aug. 29, 2006).
Arbitration award confirmed over objection of regulator
In Koken v. Cologne Reinsurance (Barbados) Ltd., Case No. 98-0678 (USDC M.D. Pa. Aug. 23, 2006), a District Court reaffirmed its earlier decision that an arbitration provision was binding upon the Insurance Commissioner of Pennsylvania, acting as the liquidator of American Integrity Insurance Company, rejecting an argument based upon the McCarran-Ferguson Act. The Court declined to vacate the majority of the award under the manifest disregard of law standard, holding that “an erroneous interpretation by the arbitration panel does not warrant a finding of manifest disregard,” but vacated one paragraph of the award as being in manifest disregard of law, becuase it continued an insurance coverage past the time provided for by an unambiguous Pennsylvania statute.
California court vacates arbitration award involving insurer in liquidation
A California Court of Appeal has reversed an order of a Liquidation Court, directing it to vacate an arbitration award that rescinded a reinsurance contract where the reinsureds had been placed in liquidation by the California Insurance Commissioner. The Court had no difficulty with the rescission of the reinsurance, but took exception with the panel's action of imposing a set-off of approximately $4.5 million against the accompanying return of premium by the reinsurer to the company in liquidation. The Court of Appeals held that the set-off award violated an injunction issued when the reinsureds were placed in liquidation, which prohibited any party from maintaining any claims, or asserting any right of set-off, against the parties in liquidation. Garamendi v. California Compensation Ins. Co., 2005 WL 3485747 (Cal.Ct.App. 2 Dist. Jan. 20, 2006). Since the arbitration award only provided the amount of the payment due to the reinsureds, which was net of the set-off amount, the Court could not determine the amount of premium that should be returned. It therefore remanded the matter to the Liquidation Court, with directions that it order a new arbitration hearing.
SPECIAL FOCUS: solvent schemes of arrangement
Solvent schemes of arrangement are processes through which solvent companies may commute all policies within the purview of the scheme, effecting a voluntary dissolution or clean reorganization with a relatively short tail. Found predominantly in the UK, they have been subject to some recent court decisions, which have included jurisdictional questions, such as whether such schemes can be imposed where some creditors or policy holders are domiciled in the US or other countries. They are controversial with US companies since they effect a reorganization outside bankruptcy laws or “traditional” US insurance rehabilitation/liquidation proceedings:
- This process is described by PriceWaterhouse Coopers and Marsh Risk Consulting in special papers found on their web sites.
- PWC has compiled a guide to specific schemes of arrangement, which describes actual schemes of arrangement administered in the UK.
- Rhode Island is the first US jurisdiction to adopt a statutory structure providing for such a process, which can be utilized only by companies domiciled under Rhode Island law. Since its adoption in 2002, there have not been any reported court opinions relating to the Rhode Island statutes. There has been some speculation as to whether the availability of this “abbreviated” form of reorganization might prompt run-off companies, or those preparing to enter a run-off mode, to re-domicile in Rhode Island.