Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Week's Best Posts

Week's Best Posts

SUPREME COURT HOLDS THAT ARBITRATORS, NOT COURTS, ARE TO INTERPRET A TREATY’S ARBITRATION PREREQUISITE

by

The United States Supreme Court has held that arbitrators, not courts, bear the primary responsibility for interpreting and applying a local litigation requirement of an investment treaty between the United Kingdom and Argentina that operated as a condition precedent to arbitration. BG Group plc, a British firm that had invested in an Argentine entity, sought arbitration for a dispute arising out of that treaty. Argentina claimed that the arbitrators lacked jurisdiction over the dispute because BG Group had not complied with the treaty’s requirement that the dispute first be submitted to an Argentinean court for consideration. The arbitrators concluded that they had jurisdiction finding, in part, that Argentina’s conduct in enacting new laws that hindered recourse to its judiciary had excused BG Group’s failure to comply with the treaty’s local litigation requirement. The arbitrators then found in favor of BG Group and awarded it $185 million in damages.

After decisions by the federal district and appellate courts, both of which were reported here previously, the Supreme Court held that the treaty’s local litigation requirement was a procedural condition precedent to arbitration and that, absent a contrary intent reflected in the treaty itself, the interpretation and application of that procedural provision should be decided by the arbitrators and that decision should be reviewed with considerable deference. The fact that the document at issue was a treaty rather than an ordinary contract did not change the Court’s analysis, a position on which the dissent strongly disagreed. The Court concluded that the arbitrators’ jurisdictional determination was lawful and the judgment of the Court of Appeals to the contrary was therefore reversed. BG Group PLC v. Republic of Argentina, No. 12-138 (U.S. March 5, 2014).

This post written by Renee Schimkat.

See our disclaimer.

ONLY ARBITRATOR, NOT FEDERAL COURT, CAN DETERMINE PRECLUSIVE EFFECT OF CONFIRMED ARBITRATION AWARD

by

In a case of first impression in the First Circuit, Employers Insurance Company of Wausau and National Casualty Company (“Wausau”), two of three reinsurers under identical agreements with OneBeacon American Insurance Co. (“OneBeacon”), petitioned a federal court for a declaration that a prior arbitration award between One Beacon and the third reinsurer had preclusive effect over OneBeacon’s subsequent demand for arbitration against Wausau. The district court dismissed the action, agreeing with OneBeacon that a determination of the preclusive effect of the arbitration award itself was arbitrable. On appeal, Wausau argued that because the federal court confirmed the prior arbitration award, thus affording that award the same “force and effect” as any other federal court judgment pursuant 9 U.S.C. §13, then only the federal court could determine its preclusive effect. The First Circuit rejected this argument, noting that an arbitration award is distinct from the federal judgment confirming the award. Because a federal court’s review of an arbitration award does not include a review of the merits or legal basis of the award, which would be required in order to determine its preclusive effect, the First Circuit concluded that such a determination fell outside the purview of the federal court. Employers Insurance Company of Wausau and National Casualty Company v. OneBeacon American Insurance Co., et. al., Case No. 13-1913 (1st Cir. Feb. 26, 2014).

This post written by Leonor Lagomasino.

See our disclaimer.

CEDING REINSURER’S DISCLOSURE DEFICIENCIES INSUFFICIENT TO SUPPORT RETROCESSIONAIRE’S RESCISSION CLAIM

by

A federal district court recently made findings of fact and conclusions of law following a nine-day bench trial upholding a ceding reinsurer’s right to receive certain payments from a retrocessionaire under two retrocession agreements, and rejecting the retrocessionaire’s counterclaim for rescission. The plaintiff, Munich Reinsurance America, Inc., was the ceding reinsurer who contended that its own reinsurer, the retrocessionaire defendant American National Insurance Company, failed to pay certain claims submitted. ANICO countered that the retrocession agreements should be rescinded due to material disclosure deficiencies during the underwriting process and improper claims-handling procedures. The parties also disagreed regarding the payment of certain claims based on the agreement’s wording.

With respect to the counterclaim for rescission, the court agreed with ANICO that Munich had failed to fully disclose information relating to Munich’s own evaluation of the primary insurer’s program (such as Munich’s internal calculations of its estimated loss ratios), but nevertheless concluded that the counterclaim failed because the deficiencies in reporting were not material. There was a lack of evidence that ANICO’s underwriters would have acted differently if the information about the primary insurer’s program had been disclosed. ANICO’s underwriter testified that she considered Munich’s internal calculations to be material to her underwriting process, but the court did not find the testimony to be credible, noting that the underwriting procedures and forms could be completed without such information. Moreover, ANICO had failed to show that it was objectively reasonable for Munich to have believed that its own loss ratios were material to the retrocessionaire’s underwriting. The court also rejected ANICO’s claim for rescission based on Munich’s alleged improper claims-handling practices, finding no willful violation of Munich’s obligations under the agreements and concluding that ANICO waived such a claim by failing to timely raise it. Finally, applying New York law, the court concluded that late notice of the claim did not relieve ANICO of its obligations to pay under the agreements. Munich Reinsurance America, Inc. v. American National Insurance Co., Case No. 09-6435 (FLW) (USDC D.N.J. Feb. 27, 2014).

This post written by Catherine Acree.

See our disclaimer.

VERMONT ISSUES GUIDANCE ON SPECIAL PURPOSE FINANCIAL INSURERS

by

The Vermont Department of Financial Regulation’s Captive Insurance Division has released a bulletin entitled “Guidance for Special Purpose Financial Insurers” to provide guidance regarding licensing standards and regulatory requirements for Special Purpose Financial Insurance Companies, formerly known in Vermont as “Special Purpose Financial Captives” until legislation mid-last year. With a pronounced goal of “support[ing] the use of appropriate uniform standards for regulation of insurer-owned captives and Special Purpose Financial Insurance Companies and to establish best practices and high standards for their continued use,” the bulletin has an NAIC-esque tone. Among other standards, the bulletin provides a sampling of qualified transactions and then discusses transaction review, reporting, and disclosure procedures that appear to engender significant collaboration between and among interested and/or cedents’ regulators. Vermont’s bulletin comes on the heels of a string of regulator releases addressing the captive insurance market, including releases from the New York Department of Financial Services and NAIC in June and July 2013, respectively, and, most recently, the FIO in December 2013. Vt. Ins. Bulletin No. C-2014-01 (Jan. 27, 2014).

This post written by Kyle Whitehead.

See our disclaimer.

SILENCE IS GOLDEN: REINSURER ORDERED TO PAY PREJUDGMENT INTEREST TO INSURANCE COMPANY’S LIQUIDATOR ON AGREEMENT SILENT AS TO INTEREST

by

A New Hampshire insurance company, Home Insurance Company (“Home”), was placed in liquidation in 2003. When its reinsurer Century Indemnity Company (“CIC”) tried to claim an $8 million setoff from amounts owed to Home, the liquidator balked and demanded the $8 million. A New Hampshire statute allows for the payment of prejudgment interest on an “action on a debt or account stated.” Finding no “meaningful distinction” between an “action on a debt” and the dispute at hand, the New Hampshire Supreme Court held that the statute applied and that the liquidator was entitled to prejudgment interest from the date CIC was informed the setoff would not be allowed. The court’s holding was also based on the fact that key agreements between CIC and Home were silent as to interest. Interpreting that contractual silence as to interest, the court declined to write into the contract a provision which made the interest statute inapplicable. In re Rehabilitation of The Home Insurance Company, No. 2012-623 (N.H. Feb. 13, 2014).

This post written by Abigail Kortz.

See our disclaimer.