Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Reinsurance Transactions

Reinsurance Transactions

Eastern District of California Grants Partial Summary Judgment to Plaintiffs in Reinsurance Mortgage Kickback Class Action; Reinsurer May Still Prevail

by

The Eastern District of California recently granted partial summary judgment to a class of plaintiffs suing a reinsurer and related entities with respect to a reinsurance arrangement regarding private mortgage insurance that allegedly involved illicit kickbacks. The reinsurer and its related entities may still prevail, however, because the court concluded it could not rule on whether or not the reinsurer and its related entities were entitled to a safe harbor that negates liability.

Home buyers who cannot put down 20% of the purchase price on their house are generally required to purchase private mortgage insurance (PMI) from a mortgage insurer (MI). Mortgage lenders usually direct home purchasers (borrowers) to one of the lender’s preferred MIs.

MIs began transferring some of the risk they took on through PMI by obtaining reinsurance. Mortgage lenders, in turn, created affiliate reinsurers that provided reinsurance to MIs. Through captive reinsurance agreements (CRAs), the MIs allegedly purchased reinsurance from the reinsurers affiliated with the lenders in exchange for PMI referrals from those lenders.

For example, PHH Mortgage Corporation (“PHH Mortgage”), a lender, owns Atrium Insurance Corporation (“Atrium”), a reinsurer that has agreements with MIs to which PHH Mortgage refers a great deal of its borrowers in order for the borrowers to obtain PMI. The MIs then cede a portion of the premiums obtained from PMI to Atrium through captive reinsurance agreements.

The potential problem with that arrangement is that the Real Estate Settlement Procedures Act (RESPA) prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise [in relation to the referral of] a real estate settlement service involving a federal related mortgage loan.” RESPA also contains a safe harbor that provides that it does not prohibit “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

A class of plaintiffs sued PHH Mortgage, Atrium, and related entities claiming that the arrangement PHH Mortgage had with Atrium and certain MIs violated RESPA by effectuating kickbacks on mortgage loans. The parties eventually cross-moved for summary judgment.

After addressing Daubert motions, the court granted in part the plaintiffs’ motion for summary judgment and denied the defendants’ motion for summary judgment, finding that the plaintiffs had established a prima facie case of a RESPA violation based on the reinsurance arrangement. They concluded that a genuine issue of fact existed as to whether the defendants were protected by RESPA’s safe harbor. Specifically, the court concluded that plaintiffs had satisfied the three elements of a prima facie case: (1) because the “MIs ceded a percentage of their PMI premiums to Atrium pursuant to the CRAs, and those ceded premiums constituted a payment or thing of value,” the requirement that a payment or exchange of a thing of value was satisfied; (2) “payments were made pursuant to an agreement to refer real estate settlement services” involving federally-related mortgage loans because substantial evidence established that “PHH had a practice of referring PMI business to MIs that had agreed to CRAs with Atrium, and that the captive MIs ceded premiums to Atrium pursuant to the CRAs”; (3) a referral occurred because it was “undisputed that PHH directed the vast majority of its borrowers who needed PMI to one of the four captive MIs” and “at no point during the class period did PHH direct less than 80% of its retail PMI business to the captive MIs” (i.e., the ones that obtained reinsurance from Atrium).

The court then turned to RESPA’s safe harbor, which required it to determine whether the MI’s “payment to the lender was a bona fide payment for the reinsurance rather than a disguised payment for the lender’s referral of a customer to the insurer?” The answer to that question turned on whether the payments to Atrium were “more than the reasonable market value of the reinsurance” obtained. The court found that, although there was “substantial evidence” supporting the plaintiffs’ theory that “no real risk was transferred, and thus, Atrium did not provide actual reinsurance services” (there was evidence that Atrium procured substantial profits and that its dividends far surpassed its reinsurance claims, though the court noted that was not necessarily determinative), there also was evidence that Atrium suffered losses during several book years and thus that the reinsurance agreements had actually transferred real risk to Atrium. Thus, the court concluded that there was “a sufficiently genuine dispute . . . that the court [could not] resolve on summary judgment [as to] whether Atrium provided actual reinsurance services to the captive MIs.” PHH Mortgage and Atrium may, therefore, still prevail in this class action.

The court also rejected the defendants’ defenses regarding compliance with governing law and the filed rate doctrine, standing arguments, and their motion for class decertification.

Efrain Munoz et al. v. PHH Mortgage Corp. et al., No. 1:08-cv-00759-DAD-BAM (E.D. Cal. August 12, 2020).

Court Holds Former Director in Contempt Following Wild Reinsurance Dispute

by

Recovering returns from reinsurance commissions can be a costly and time-consuming endeavor, at least when a former director of the agency that received the provisional commissions allegedly engages in a slew of activity to transfer and comingle the funds from the commissions.

Odyssey Reinsurance Co. knows that lesson all too well: Recovering funds from the director of an underwriter has been quite the odyssey for Odyssey Reinsurance Co.

Diana Dostalik and her husband were the officers, directors, managers, and shareholders of Cal-Regent Insurance Services Corp. Cal-Regent underwrote certain risks on behalf of State National Insurance Co. Odyssey Reinsurance Co. reinsured State National. Pursuant to the reinsurance agreements between Odyssey and State National, Cal-Regent received a provisional commission paid in part by Odyssey for the policies it underwrote for State National. The provisional commissions were subsequently adjusted depending on the profitability of the business Cal-Regent underwrote. Thus, Cal-Regent was sometimes required to return portions of the provisional commissions.

In 2013, Ms. Dostalik and her husband allegedly realized that they would be obligated to return a significant portion of the commissions they had received from, among others, Odyssey, due to a settlement in a lawsuit against State National. As a result, Ms. Dostalik and her husband allegedly “embarked on a plan to strip Cal-Regent of assets” by forming Pacific Brokers Insurance Services” and transferring substantially all of Cal-Regents assets to Pacific Brokers.

Odyssey sued in the District of Connecticut. While that suit was pending, Ms. Dostalik and her husband allegedly sold substantially all the assets of Pacific Brokers to AmTrust North America Inc. Ms. Dostalik and her husband then agreed that Ms. Dostalik would receive $2,500,000 from AmTrust’s initial payment to Pacific Brokers as part of the couple’s divorce.

After obtaining a $3,200,000 judgment in the District of Connecticut against Cal-Regent, Odyssey brought suit in the Southern District of California against Pacific Brokers, Cal-Regent, Ms. Dostalik and her former husband, and others in a continued effort to recover the returns it was owed from the provisional commissions it paid to Cal-Regent. The court issued temporary restraining orders and injunctions that, in short, prohibited Ms. Dostalik from transferring, assigning, disposing of, or comingling any of the funds she received from the sale of Pacific Brokers’ assets to AmTrust and ordering Ms. Dostalik to deposit into the court’s registry all the funds she had received from AmTrust.

Ms. Dostalik apparently not only failed to deposit funds into the court’s registry despite having several accounts that consisted of more than 99% funds from AmTrust totaling hundreds of thousands of dollars, but also then comingled AmTrust funds with proceeds from the sale of real estate and continued to engage in efforts to shield the AmTrust funds from the court.

The court, however, had had enough. It held Ms. Dostalik in contempt of several of its temporary restraining orders and gave her 14 days to, among other things, deposit nearly $700,000 in the court registry or ordered that she would “be committed to the custody of the U.S. Marshal.” The court also awarded Odyssey its attorneys’ fees and entered additional injunctions.

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. 2019).

District Court Denies Summary Judgment to Trustee of Trust Account Maintained for Beneficiary of “Fronted” Reinsurance Program

by

The U.S. District Court for the District of South Carolina denied summary judgment to the trustee of an account established pursuant to a “fronted” reinsurance program. The plaintiff, Accident Insurance Co. (AIC), participated in the program with non-party Freestone Insurance Co. Freestone paid AIC a fee to use its name and paper as a “front,” while bearing the actual risk of the fronted policies by reinsuring them under a “Program Agreement” with AIC. That agreement required Freestone to deposit funds into a separate trust account to be maintained by a trustee for AIC’s benefit. The defendant, U.S. Bank National Association, was the trustee. After Freeman went into receivership, AIC sued U.S. Bank for civil conspiracy and breach of fiduciary duty, among other things, after learning that nearly $7 million in trust assets seemingly disappeared. U.S. Bank moved for summary judgment on the civil conspiracy claim, arguing AIC could not have conspired with its wholly owned subsidiaries, and had no evidence of a “meeting of the minds” between these entities to “illegally transfer” trust assets. The court denied the motion, finding a genuine issue of fact as to each element of the civil conspiracy claim, and that breach of fiduciary duty is an independent tort that can give rise to a civil conspiracy claim under Delaware law.

Accident Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:16-cv-02621-JMC (D. S.C. Mar. 22, 2019).

Covered Agreements: Covered Agreement Reached With UK; Implementation of Covered Agreement With EU Slows

by

On December 11, 2018, the Secretary of the Treasury and the United States Trade Representative sent the Chairs and Ranking Members of the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Finance, the House Committee  on Financial Services, and the House Committee on Ways and Means the text of a new Covered Agreement agreed to by the United States and the United Kingdom concerning the business of reinsurance, with the notification letters required for such agreements by the Dodd-Frank Act.  A press release also was issued describing the new US-UK Covered Agreement.

The substantive terms of the US-UK Covered Agreement appear to be materially the same as the terms of the previously existing US-EU Covered Agreement.  The implementation provisions of the US-EU Covered Agreement were a bit complicated, and the provisions of Article 9 (“Implementation of the Agreement”) and Article 10 (“Application of the Agreement”) of the new US-UK Covered Agreement also are complicated.  For example, the agreement becomes applicable the later of the date it enters into force or 60 months from September 22, 2017.  September 22, 2017 was the date that the US-EU Covered Agreement was officially signed.  More curious is the provision of Article 9 paragraph 3.(a) of the new US-UK Covered Agreement that “[f]rom the date of entry into force of this Agreement, the United States shall encourage each U.S. State to promptly adopt the following measures: (a) the reduction, in each year following 7 November 2017, of the amount of collateral required by each State to allow full credit for reinsurance by 20 percent of the collateral that the U.S. State required as of 1 January 2017 ….”  Perhaps these provisions reflect a desire that the two covered agreements become applicable at the same time, with no resulting advantage or disadvantage to reinsurers domiciled in either the EU or the UK post-Brexit.

Meanwhile, the implementation of the US-EU Covered Agreement has slowed somewhat.  Consideration of final approval of the proposed amendments to the Credit for Reinsurance Model Act and Model Regulation, which is part of the implementation process, was on the agenda for the December 19, 2018 telephonic meeting of the NAIC Executive Committee and Plenary, but at the end of the meeting NAIC President McPeak, who was moderating the meeting, announced without comment that the consideration of the revisions to the Models was being deferred to a later date to allow for the consideration of late comments on the proposed Model revisions received from the US Treasury and the US Trade Representative.  Neither the substance of those comments nor a revised timeline for consideration of the proposed Model revisions was provided during that meeting.  It remains to be seen what the next step will be in the consideration of the proposed amendments to the Models.

European Reinsurers Question Whether Proposed Changes to the Credit for Reinsurance Models Would Ensure Compliance with the Covered Agreement

by

We have posted a number of times on the Covered Agreement between the U.S. and the E.U. concerning the reduction of collateral requirements for reinsurance provided by reinsurers domiciled in the E.U. The approach of the National Association of Insurance Commissioners (“NAIC”) to the implementation of the Covered Agreement, through its Reinsurance Task Force, has been based upon proposed amendments to the Credit for Reinsurance Model Act and Credit for Reinsurance Model Regulation, with the assumption being that the adoption of the revised Models by the individual states would ensure compliance with the Covered Agreement. Drafts of the revised Models have been under consideration, and are scheduled to be presented for a vote at the NAIC’s Fall National Meeting in approximately two weeks. The Reinsurance Advisory Board (“RAB”), which is a trade association composed of European domiciled reinsurers that purport to account for “approximately 60% of worldwide reinsurance business,” has submitted a comment letter to the chair of the NAIC’s Reinsurance Task Force expressing doubts over whether the proposed revisions to the Models would appropriately implement the Covered Agreement. This is potentially a serious issue, because if the revised Models do not appropriately implement the requirements of the Covered Agreement, the adoption of the revised Models by the states might not save state credit for reinsurance laws from preemption by the Covered Agreement. The RAB is represented at the CEO level by Gen Re, Hannover Re, Lloyd’s of London, Munich Re, Partner Re, Scor, and Swiss Re.

While many of the comments in the RAB’s letter concern fairly modest wording issues, one of the concerns expressed by the RAB is that “some of the language in the exposure drafts [of the proposed Model revisions] deviates significantly from the language of the bilateral agreement [i.e., the Covered Agreement] and thereby provides extensive discretion to state regulators in their compliance with the terms of the bilateral agreement.” We raised this issue as a possible concern in our last post on the Covered Agreement. One of the criticisms of the Covered Agreement in the Congressional hearing on the agreement shortly after it was announced was that it was too rigid, and took away the discretion and flexibility that individual state insurance commissioners have in our state-based structure of insurance regulation. The focus of the letter on the ability of individual state insurance commissioners to exercise some discretion in the implementation of the Models raises an issue that may be problematic. It will be interesting to see if and how the NAIC responds to this letter.

On a related note, the U.S. Department of the Treasury has announced plans to engage in discussions with the United Kingdom aimed at agreeing to a Covered Agreement with the U.K. that would be similar to that in place with the E.U. The NAIC has stated its position on that announcement.

This post written by Rollie Goss.
See our disclaimer.