Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

REINSURANCE DISCOVERY DISPUTE TRANSFERRED

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The FDIC receiver of a bank served subpoenas on reinsurers, seeking information as to how the cedent insurer interpreted certain ambiguous terms in the underlying liability insurance policy. The insurer and reinsurer objected to the subpoenas, and the receiver filed an action in the reinsurer’s district to compel responses. Rather than ruling on the objections, the court elected to transfer the matter to the court in which the underlying litigation was pending. The transferor court relied on considerations of judicial efficiency and comity, explaining that it was not in a position to resolve arguments over the transferee court’s intentions with respect to the scope of permitted discovery, and that differences in the districts’ respective case law on the relevance of reinsurance information presented a risk of conflicting discovery rulings. The court also noted that recent revisions to the Federal Rule of Civil Procedure governing subpoenas further supported transfer of the action. FDIC v. Everest Reinsurance Holdings, Inc., Case No. 1:13-mc-00381 (USDC S.D.N.Y. January 23, 2014).

This post written by Michael Wolgin.

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COURT CONFIRMS ARBITRATION AWARD IN REINSURANCE BILLING DISPUTE

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A New York federal district court affirmed an arbitration award in favor of R&Q Reinsurance Company as against its cedent, Utica Mutual, in a reinsurance dispute arising from certificates issued by R&Q reinsuring certain umbrella coverage Utica had written covering asbestos-related exposure of its insured. The parties began arbitrating a billing dispute in 2008 which, as of May, 2013, involved more than $21.7 million in disputed amounts. Utica sought coverage for four categories of loss: indemnity, defense, “orphan shares,” and declaratory judgment expense. The panel heard the case and decided in Utica’s favor only on the first category, and in R&Q’s favor on the other three. The panel did not, however, indicate in its award the precise amount owed to Utica by R&Q for the indemnity losses. Both parties made various post-award motions for clarification, but Utica never sought in any of these motions for the panel to set out the precise amount Utica was owed under the first category of loss which it was awarded. R&Q thereafter brought an action in court to confirm the award. The court found that Utica’s failure to seek clarification of the amount with the panel precluded vacatur of the award and that, “[f]or better or worse, the parties to this arbitration tasked the arbitral panel with resolving their dispute at a conceptual, rather than a mathematical, level.” R&Q Reinsurance Co. v. Utica Mutual Insurance Co., Case No. 13-Civ-8013 (USDC S.D.N.Y. Feb. 14, 2014).

This post written by John Pitblado.

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NO U.S. EXCISE TAXES ON FOREIGN RETROCESSIONS

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Foreign retrocession insurance transactions are beyond the reach of IRS excise taxes based on the plain language of 26 U.S.C. § 4371(3), which aims to tax insurance transactions involving policies issued by foreign insurers or reinsurers. The District Court for the District of Columbia recently granted summary judgment to a Bermuda reinsurer in its suit against the IRS for a refund of an excise tax extracted from the foreign reinsurer in connection with its ceding of risk to a retrocessionaire. The Government maintained that Congress intended to impose a tax on any and all successive levels of insurance or reinsurance obtained from a foreign insurer, but the court held that the statute had clear internal limitations on its application. Specifically, taxes could be levied on premiums paid on policies of reinsurance covering specific insurance contracts, including casualty insurance, indemnity bonds, life insurance, sickness or accident insurance, or annuity contracts. However, retrocession policies are reinsurance policies covering the risks of reinsurance policies, not one of the types of insurance contracts enumerated by Section 4371(3). Validus Reinsurance, Ltd. v. United States, Case No. 13-0109 (ABJ) (D.D.C. Feb. 5, 2014).

This post written by Kyle Whitehead.

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TENTH CIRCUIT HOLDS FAA PREEMPTS NEW MEXICO UNCONSCIONABILITY LAW

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New Mexico law considers arbitration provisions that apply primarily to the claims that one party to the contract is likely to bring to be unconscionable and unenforceable.  This law, the Tenth Circuit holds, is preempted by the Federal Arbitration Act because it is based on the underlying assumption that arbitration is inferior to litigation in court.  Supreme Court precedent is clear that arbitration provisions cannot be invalidated by generally applicable contract defenses, like unconscionability, “that derive their meaning from the fact that an agreement to arbitrate is at issue.”  Thus, an arbitration provision that permits a nursing home to litigate its most likely claims against its residents, but requires arbitration of the residents’ most likely claims against the nursing home, is enforceable.  THI of New Mexico at Hobbs Center, LLC v. Patton, No. 13-2012 (10th Cir. Jan. 28, 2014).

This post written by Abigail Kortz.

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CFPB ANNOUNCES ACTION AGAINST PHH CORPORATION FOR ALLEGED REINSURANCE PRACTICES

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The Consumer Financial Protection Bureau issued a press release on January 29, 2014, announcing that it has initiated an administrative proceeding against PHH Corporation and its affiliates arising from an alleged mortgage insurance “kickback” scheme. CFPB claims that when PHH initiated mortgages requiring mortgage insurance (typically, where the buyer cannot put up a 20 percent downpayment), it referred the consumers to mortgage insurers with which PHH partnered, in exchange for the insurers then purchasing reinsurance from PHH’s subsidiaries. The CFPB claims this violated the Real Estate Settlement Procedures Act and unfairly increased the cost of borrowing for consumers. The CFPB’s Notice of Charges will be available on the CFPB website after February 12, 2014.

This post written by John Pitblado.

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