New reinsurance-related and arbitration developments from Carlton Fields
The European Union’s Solvency II initiative has received considerable trade press exposure, but the NAIC’s Solvency Modernization Initiative has received less attention. Learn about the general outlines of these initiatives in our Special Focus article, Solvency Ho! An Update on U.S. and European Solvency Initiatives.
This post written by John Pitblado.
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In a suit between a life insurer, Security Life Insurance Company of America, and producer-owned reinsurance companies (PORCs) and their organizer/administrator, Southwest Reinsure, Inc. (SRI), Security Life’s complaint that SRI and the PORCs (SRI Defendants) failed to maintain a trust account containing Security Life’s required reserves largely survived dismissal. The parties had entered into a number of agreements, including various reinsurance agreements between Security Life and the PORCs, and an agreement between Security Life and SRI whereby the latter would administer the insurance covered by the reinsurance agreements. Under the reinsurance agreements, if Security Life’s reserves account was deficient, the PORCs would pay Security Life a fee equal to an amount needed to satisfy the deficiency. When a deficiency arose, SRI arranged for a letter of credit in lieu of the fee, and subsequently, the creation of a trust account. The trust agreement gave Security Life control over disposition of the trust and required the trustee to keep Security Life informed about trust activity. Without Security Life’s knowledge, SRI allegedly transferred the trust to another bank, and ultimately depleted the account. Security Life alleged that it consequently could not use the account to meet its statutory capital requirements, prompting the instant suit against the SRI Defendants for breach of contract, breach of fiduciary duties, fraud and conversion, among other counts.
Security Life’s breach of contract claim survived dismissal in the face of the SRI Defendants’ argument that Security Life did not either “charge a fee” or “terminate the agreement,” which were the only two actions contemplated by the relevant reinsurance agreement. The court found that factual questions arose regarding whether the agreement was modified pursuant to the parties’ course of dealing, namely, that in lieu of charging fees, the parties would use letters of credit and a trust account. Security Life’s alleged damages based on risk of “adverse regulatory action” or downgraded rating were not too speculative to defeat the contract claim. As to the fiduciary duty count, the court found it also survived dismissal, as “the complex relationships between and among Security Life, SRI, and the reinsurers call into [] question the arm’s length nature of the various agreements between the parties.” Security Life’s fraud claims also survived dismissal. Security Life’s claim for conversion failed, however, because Security Life did not allege that it had an immediate right to possess the funds in the trust account. Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., Case No. 11-1358 (USDC D. Minn. Dec. 20, 2011).
This post written by Michael Wolgin.
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An action for breach of contract and declaratory relief arising from “fronting” insurance arrangements and reinsurance contracts (some dating to the late 1960s) between Employers’ Liability Assurance Corp. (“ELAC,” a predecessor of OneBeacon) and a series of “Moving Party” reinsurers has fallen by the wayside. The moving party reinsurers filed a motion to dismiss for lack of personal jurisdiction, or alternatively, under the doctrine of forum non conveniens. The court granted the motion, finding that the reinsurers – based in the UK – did not transact business in Massachusetts under the Commonwealth’s long-arm statute, nor did they have the requisite minimum contacts consistent with due process under the federal Constitution. The court found that a separate insurance broker and not the reinsurers had contacted ELAC regarding the contracts. The reinsurers were likewise not party to the contracts, and those agreements to which they were parties were negotiated and entered into in London. Further, no moving party reinsurer had any contact with any Massachusetts entity after 1993, thus failing the “continuous and systematic” contacts standard. OneBeacon America Insurance Co. v. Argonaut Insurance Co., No. 09-5085 (Mass. Super. Ct. Nov. 9, 2011).
This post written by John Black.
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The Fourth Circuit Court of Appeals confirmed an arbitration award certifying a nationwide class of plaintiffs alleging violations of Maryland’s Consumer Protection Act. The underlying dispute concerns a debt management program run by defendants. The arbitrator held that Maryland’s consumer protection law could be applied to a nationwide class of plaintiffs based on a choice of law provision in the parties’ debt management agreements. The arbitrator reached this conclusion notwithstanding that no plaintiff resided in Maryland and the Maryland consumer protection law extends only to Maryland residents. The district court confirmed the award. The Fourth Circuit affirmed, holding that the arbitrator did not exceed his powers in construing the choice of law provision in the parties’ contracts to determine that the Maryland consumer protection law applied. The court also held that the arbitrator did not manifestly disregard the law in finding that the Maryland residency requirement did not apply based on the language of the choice of law provision in the parties’ contracts. Amerix Corp. v. Jones, No. 09-2174 (4th Cir. Dec. 9, 2011).
This post written by Ben Seessel.
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By Consent Order dated December 13, 2011, the Florida Office of Insurance Regulation approved the application of Bermuda reinsurer Platinum Underwriters Bermuda, Ltd. to operate in Florida with posting less than 100% collateral. The Order recites Platinum’s fulfillment of statutory criteria, and notes Platinum’s demonstration of $1.366 billion in capital and surplus and favorable ratings from two accepted agencies. According to the Office’s December 14, 2011 press release, Platinum is the sixteenth Bermuda reinsurer approved to use Florida as its port-of-entry state, in addition to a Germany company and a U.K. company. In the Matter of: Platinum Underwriters Bermuda, Ltd., Case No. 122414-11-CO (Fla. Office of Insurance Regulation Dec. 13, 2011).
This post written by John Pitblado.
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