Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Special Focus

Florida Governor signs new hurricane preparedness and insurance bill into law

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New Florida Governor Charlie Crist has signed his first bill into law, House Bill 1A from a special session of the Florida Legislature dealing with insurance rates for homeowners. One of the principal goals of the special session was to increase the availability and lower the cost of homeowners insurance, particularly in coastal areas. A House of Representatives staff analysis of the bill contains background information about the insurance market in Florida and the impact of the eight major hurricanes that hit Florida during the 2004 and 2005 hurricane seasons. The staff analysis reports that claims payments were made relating to the eight hurricanes totaling $33,346,477,364, and describes the resulting impact on the number of insurers writing homeowners coverage in the state, the cost of coverage and the cost of reinsurance.

This 176 page bill makes extensive changes to the Florida property insurance and reinsurance markets. The changes are summarized in the staff analysis. Among the changes is expanding the Florida Hurricane Catastrophe Fund to provide a “temporary emergency program” for the 2007, 2008 and 2009 hurricane seasons providing less expensive reinsurance for insurers. Savings from the reduced cost of reinsurance must be passed on to consumers. It is unclear what the impact of this new law will be on the reinsurance market, but a large amount of reinsurance premium may now be diverted from the private reinsurance market to the public avenues set up or modified in this bill.

SPECIAL FOCUS: multiple arbitrations

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Courts are sometimes asked to consolidate mutliple arbitrations relating to insurance and reinsurance matters. This issue has been the topic of three recent court opinions.

  • In Markel International Ins. Co. v. Westchester Fire Ins. Co., Case No. 05-5522 (Aug. 10, 2006), the United States District Court for the District of New Jersey found that since the issue of the type of arbitration proceeding, including whether multiple arbitrations should be consolidated, was not a “gateway” issue under the Supreme Court’s analysis in Green Tree Financial Corp. v. Bazzle, 539, U.S. 444 (2003), the arbitrators, rather than the courts, should decide whether to use multiple arbitration panels or a consolidated panel.
  • In Allstate Ins. Co. v. Global Reinsurance Corp., Case No. 06-4419 (Aug. 8, 2006), the United States District Court for the Southern District of New York held that arbitrators should decide whether to consolidate two arbitrations related to two facultative reinsurance certificates.  The Court strongly implied that if the reinsurance agreements contained a provision relating to consolidated arbitrations, that the Court could have acted to enforce whatever the parties had agreed to in that regard.
  • In Certain Underwriters at Lloyd’s v. Westchester Fire Ins., Case No. 06-1457, the United States Court of Appeals for the Third Circuit currently is accepting briefing of an appeal of a decision of a District Court decision that required separate arbitration panels in multiple arbitrations.  The briefs suggest that conflict exists on this issue between a pre-Bazzle unreported Third Circuit opinion and a post-Bazzle Seventh Circuit opinion.

Expect further developments in this area.

SPECIAL FOCUS: manifest disregard of law

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The principal basis for seeking vacation of an arbitration award, other than the grounds contained in the Federal Arbitration Act (“FAA”) (9 U.S.C. section 10), is that the award was made in manifest disregard of law. Five of the United States Circuit Courts of Appeal have issued opinions dealing with this principle in recent months, with three of the opinions being issued in a ten day span during early August. All of these opinions hold that vacating an arbitration award on this basis is an extraordinary occurrence.

  • The Eleventh Circuit issued a very strong statement as to the finality of arbitration awards, holding that to prove manifest disregard of law, one must submit clear evidence that an arbitrator was conscious of the law and deliberately disregarded it. B. L. Harbert Internatiuonal, LLC v. Hercules Steel Co., Case No. 05-11153 (11th Cir. Feb. 29, 2006). The Court strongly cautioned the bar against appealing arbitration awards on the basis that the result was unacceptable.
  • The Seventh Circuit held that manifest disregard of the law is limited to situations in which arbitrators “direct the parties to violate the law ….” Wise v. Wachovia Securities, Case No. 05-2640 (7th Cir. June 7, 2006). The Seventh Circuit concluded that due to the extraordinarily narrow grounds for vacating an arbitration award, the FAA really does not provide for the “judicial review” of arbitration awards.
  • The D.C. Circuit held that the manifest disregard of law standard requires proof that the arbitration panel ignored well defined, explicit law that was clarly applicable, emphasizing that decisions based upon debatable points of law and disputed issues of fact did not meet this standard. Kurke v. Oscar Gruss and Son, Inc., Case No. 05-7018 (D.C. Cir. July 18, 2006).
  • The Ninth Circuit recently held that a decision on choice of law did not meet the manifest disregard of law standard since it was not “completely irrational.” Parsons v. Polen, 2006 WL 1082820, Case No. 04-35654 (9th Cir. April 25, 2006) (unreported opinion).
  • In the only opinion that vacated an arbitration award, the Fourth Circuit vacated an arbitration award, where an arbitrator implied a one year statute of limitation into an agreement that was silent as to the time for making a claim, and the law of the applicable state provided for either a three or a six year limitation period. Patten v. Signator Insurance Agency, Inc., Case No. 05-1148 (4th Cir. March 13, 2006).

These opinions demonstrate two principles of interest: (1) it is very difficult to convince a Court to vacate an arbitration award under the FAA; and (2) courts are becoming increasingly annoyed with what they view as frivolous motions to vacate awards under the FAA. The mere fact that five of the federal Circuit Courts of Appeal have addressed this issue recently illustrates the importance that the Courts attach to this issue.

The Seventh Circuit was correct in stating that the FAA simply does not provide for what is considered to be “judicial review” in a litigation context. Awards simply will not be vacated based upon alternative interpretations of evidence, sufficiency of evidence, or issues of law that are fairly debatable. Even if one can anticipate that an adverse award is likely, it is very difficult to establish a record that will support vacating an award under the FAA. Finally, if your arbitration occurs in the Eleventh Circuit, it is clear that motions to vacate awards and appeals of the denial of motions to vacate awards may be met with the imposition of sanctions unless there is a clearly arguable basis under the FAA to vacate the award.

SPECIAL FOCUS: solvent schemes of arrangement

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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.