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U.S. COVERED AGREEMENT POLICY STATEMENT AFFIRMS U.S. STATE-BASED REGULATION OF INSURANCE

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We have posted several times on the negotiation and finalization of the Covered Agreement (“the Agreement”) negotiated by the Obama Administration and approved by the Trump Administration with the European Union. The agreed text of the Agreement was released in January of this year, and the House Financial Services Committee held a hearing on the Agreement the following month. The Trump Administration’s decision to sign the Agreement was announced in July, and included a statement that the U.S. would issue a “U.S. policy statement on implementation.” That statement intrigued many, prompting speculation as to the positions that would be taken in that policy statement. We posted an analysis of the complicated timeline for the implementation of the Agreement later that month.

In conjunction with the signing of the Agreement on September 22, the U.S. released the anticipated policy statement. The policy statement is not remarkable, and is based upon a theme that the Agreement affirms, preserves, and builds upon the U.S. state-based structure for the regulation of the business of insurance. The policy statement summarizes various provisions of the Agreement, stating in part that the Agreement:

  • with respect to the collateral requirement, “does not prevent a state insurance regulator from imposing non-collateral requirements that do not have substantially the same regulatory impact as collateral requirements as conditions for ceding companies to enter into reinsurance agreements with EU reinsurers or to allow credit for such reinsurance, if the state insurance regulator applies the same requirements in the case of reinsurance agreements with U.S. reinsurers domiciled in that state;”
  • does not prevent parties to reinsurance agreements to contractually require collateral for reinsurance;
  • excludes the US parent of US-domiciled reinsurers from the need to comply with the requirements of Solvency II just because it has an affiliate doing business in the EU; and
  • preserves the authority of the states (in conjunction with the NAIC) to set capital requirements for US insurance groups.

The principal text of the Conclusion section of the policy statement provides:

The Agreement supports the principles specified in the Presidential Executive Order on Core Principles for Regulating the United States Financial System (Feb. 3, 2017) by enabling U.S. companies to be competitive with foreign firmshttps://www.reinsurancefocus.com/wp-admin/edit.php in domestic and foreign markets; advancing U.S. interests in international financial regulatory negotiations and meetings; and making regulation efficient, effective, and appropriately tailored. The United States looks forward to promoting the interests of U.S. stakeholders, U.S. insurance regulators, and the U.S. economy as the Agreement is implemented. The United States also shares with the EU the goal of protecting insurance and reinsurance consumers while respecting one another’s system for supervision and regulation.

This post written by Rollie Goss.
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AUTOMOBILE WARRANTY SERVICES PROVIDER LOSES ON MOTION TO DISMISS DEALERSHIP’S COUNTERCLAIMS AND REQUEST FOR PRELIMINARY INJUNCTION

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In a dispute between providers of automobile warranty services (“Plaintiffs” or “American Guardian”) and a Florida car dealership (“Defendants” or “JCR”), an Illinois federal district court recently dealt two blows to the Plaintiffs by refusing to dismiss the Defendants’ counterclaims and refusing to grant a requested preliminary injunction. The parties entered into an agreement in which American Guardian would provide warranties to JCR’s customers, as well as administer and approve payments for all claims under the American Guardian contracts sold by JCR, secure insurance policies indemnifying the parties against obligations, and administer reimbursement to JCR for the cost of repairs. The agreement contained a modification clause requiring amendments be supplemented by writing, which the parties utilized to make subsequent changes, including adding a production agreement requiring JCR to sell a minimum number of warranty and service contracts monthly for five-years and inserting an exclusivity provision.

The parties’ relationship eventually broke down and JCR stopped selling American Guardian contracts, leading American Guardian to file suit. Defendants counterclaimed for fraud in the inducement as well as breach of contract and the duty of good faith and fair dealing. The fraudulent inducement counterclaim was based on an American Guardian agent’s alleged representation before the master agreement was signed to JCR’s owner that Plaintiffs would establish an “offshore reinsurance company” to allow JCR to retain the warrant payments paid by customers as well as earn investment income. The good faith and fair dealing claim was based on American Guardian’s alleged failure to monitor JCR’s loss ratio on claims made by its customers on American Guardian contracts. The district court denied Plaintiffs’ motion to dismiss on each of these claims.

First, Plaintiffs challenged the fraud counterclaim’s sufficiency of pleadings regarding the elements of fraud and the specificity of pleadings in light of Rule 9(b)’s heightened pleading standard. The court rejected Plaintiffs’ argument that JCR’s allegations regarding false statements were non-actionable as representations of intent regarding future conduct. The court read the claim as one for promissory fraud rather than fraudulent inducement, finding that JCR had sufficiently alleged that American Guardian’s agent made a fraudulent promise regarding the formation of a reinsurance company with no intent to fulfill it. Furthermore, the court rejected Plaintiffs’ argument that the agreement’s integration clause was a no-reliance clause which precluded a fraud suit. Finally, the court found that JCR had alleged its fraud claim with sufficient particularity as to “when” the fraudulent promise occurred.

Second, Plaintiffs challenged the good faith and fair dealing counterclaim only on damage grounds—that any excess payments on claims would harm Plaintiffs, and not Defendants, because only American Guardian was responsible for payment on claims. The court concluded this misread the agreement, which provided for both parties making payments for repairs and expenses incurred by JCR customers, and thus declined to dismiss the claim. Interestingly, the court did go on to note “a few of the intricacies at play” with the claim that Plaintiffs did not mention in their motion but which might affect the claim later in the litigation—a bone thrown by the court to counter Plaintiffs’ “misapprehension of many of the salient issues” in the case.

The district court also denied Plaintiffs’ request for a preliminary injunction blocking Defendants from selling vehicle service contracts and related warranty products on behalf of Plaintiffs’ competitors. The court held that Plaintiffs had failed to show a likelihood of success on the merits because they failed to adequately address the host of Defendants’ affirmative defenses that would preclude recovery. The court noted that for the defenses of estoppel and accord and satisfaction in particular, the Plaintiffs introduced inapposite evidence or no evidence at all, thus failing to show a likelihood of overcoming those defenses. Furthermore, the court noted, Plaintiffs’ requested injunction of preventing JCR’s sales of competitor warranties would do nothing to redress the alleged injury (denied profits on JCR’s warranty sales). Nor had Plaintiffs shown that loses could not be compensated for purely by monetary damages later at trial, that waiting for a final judgment would fail to redress their injury, or that their goodwill had been harmed in any way. Thus, the court refused to impose a preliminary injunction.

Am. Guardian Warranty Servs., Inc. v. JCR-Wesley Chapel, LLC, Case No. 16 C 11407 (USDC N.D. Ill. May 22, 2017)

This post written by Thaddeus Ewald .

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MCCARRAN-FERGUSON ACT PROHIBITS PURSUIT OF RICO CLAIMS AGAINST INSURER

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A Plaintiff annuity holder was prohibited from pursuing her federal racketeering claims against an insurance company and its affiliates, as doing so would impair state regulation of insurance business, contrary to the McCarran-Ferguson Act.

The question addressed by the Eighth Circuit Court on appeal of the dismissal of Plaintiff’s RICO claim, was whether the RICO charge would impair state insurance regulation. Applying the standard set forth in Humana Inc. v. Forsyth, 525 U.S. 299 (1999), the Court focused on the precise federal claims asserted. Here, it was Plaintiff’s claim the insurer “misrepresented the true financial conditions of the company in its public reports and marketing materials, artificially inflating its purported assets and surplus.” Ruling on those claims would require the Court to decide whether the purported sham transactions left the insurer in the “healthy financial position it reported” or whether Plaintiff was correct that “a proper accounting would have shown liabilities substantially exceeding” the insurer’s assets.

As questions about an insurer’s solvency are “squarely within the regulatory oversight by state insurance departments” a federal court could not rule in Plaintiff’s favor without holding “that state insurance regulators were wrong” – essentially “double-checking” the regulator’s work. Such a result runs contrary to the McCarran-Ferguson Act.

Ludwick v. Harbinger Group, Inc., No. 16-1561 (8th Cir. April 13, 2017)

This post written by Nora A. Valenza-Frost.

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COURT OF APPEALS AFFIRMS DISMISSAL OF “SHADOW INSURANCE” LAWSUITS

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In a summary order, the United States Court of Appeals for the Second Circuit has affirmed the dismissal of two “shadow insurance” putative class action lawsuits against Axa Equitable Life Insurance and Metropolitan Life Insurance on the basis that the plaintiffs lacked standing under Article III of the United States Constitution to sue them in United States District Court.  The Complaints alleged that the insurance companies misused captive reinsurers domiciled in foreign jurisdictions to avoid higher reserve requirements of U.S. jurisdictions, resulting in the misstatement of their financial information and increased risks for plaintiffs.  The District Court had dismissed the suits based on the failure of the plaintiffs to establish Article III standing.

The Court of Appeals found that the Complaints failed adequately to allege that the plaintiffs had suffered injury-in-fact, a necessary element of Article III standing.  First, the court rejected plaintiffs’ argument that allegations that the companies had violated New York Insurance Law section 4226 sufficiently alleged injury-in-fact because of injury “inherent in the statutory violation.”  The Court held that “[t]he mere fact that an insurer may make a misleading representation does not require or even lead to the necessary conclusion that the misleading representation is material or even likely to cause harm.”  Second, the Court held that to establish standing plaintiffs had to allege that the injury-in-fact was concrete, particularized, and “actual or imminent, not conjectural or hypothetical.”  (Citing Spokeo, Inc. v. Robbins, 136 S.Ct. 1540 (2016).  The Court found that the harm alleged in the Complaints was speculative and hypothetical, insufficient to establish standing.

For readers interested in a deeper reading of this appeal, following are links to the recording of the oral argument at the Second Circuit and some of the briefs of the parties in the consolidated appeal: Appellants’ principal brief; Axa’s brief; MetLife’s brief; and Appellants’ reply brief.

Appellate oral argument:


Ross v. Axa Equitable Life Insurance Company and Robainas v. Metropolitan Life Insurance Company, Nos. 15-2665, 15-3504, 15-3553 and 15-4189 (2d Cir. Feb. 23. 2017).

This post written by Rollie Goss.
See our disclaimer.