Week's Best Posts

U.K. COURT AFFIRMS 21-MONTH SENTENCE FOR REINSURANCE BROKER CONVICTED OF GOVERNMENT CORRUPTION

August 16, 2011 by Carlton Fields

Julian Jeffrey Messent, a reinsurance broker who was head of the Property Division (Americas) of PWS International Limited, a London-based reinsurance broker, was convicted in London in late 2010 of corruption offenses, stemming from his supervision of payments made to various Costa Rican governmental officials. The payments were found to be bribes meant to steer reinsurance placement for Costa Rican government-owned utility organizations to PWS. For his placement of the contracts, Messent received large incentive bonuses between 1999 and 2002 from PWS. After a new President of Costa Rica was elected in 2002, newly appointed Costa Rican officials discovered the improper payments, and both the Costa Rican and U.K. governments undertook criminal investigations which led to Messent’s arrest in 2007. Messent appealed his sentencing of 21 months each on two counts of corruption (to run concurrently), as well as a fine of £100,000. The convictions were affirmed on appeal, the court noting “there can be no doubt that corruption of foreign government officials . . . is at the top end of serious corporate offending both in terms of culpability and harm.” Regina v. Messent, [2011] EWCA Crim 644 (Eng. Ct. App.).

This post written by John Pitblado.

COURT CONFIRMS ARBITRATION AWARD ADDING PREPAYMENT PROVISION TO REINSURANCE TREATY

August 15, 2011 by Carlton Fields

Citing the treaty’s honorable engagement clause, a federal district court denied a group of reinsurers’ motion to vacate an arbitration award in which the arbitrators had fashioned a remedy requiring prompt payment of all disputed and undisputed claims. Certain London market reinsurers had entered into a reinsurance treaty with Century Indemnity Company that indemnified Century for certain liabilities arising out of asbestos litigation. The agreement did not contain a “Reports and Remittances” clause dictating when claims should be paid, but provided that the “liability of the Reinsurers shall follow that of the Company in every case.” The treaty also included an “honorable engagement” clause, directing the arbitrators to interpret the agreement to effect its general purpose.

Facing significant losses due to a flood of asbestos litigation, the reinsurers imposed a program in which Century would have to meet documentation requirements before claims were paid. When payments became delayed, Century initiated arbitration. The arbitrators issued an interim order requiring the reinsurers to promptly pay 100% of all undisputed claims and 75% of any disputed claims, finding that arrangement would effectuate the general purpose of the parties’ agreement. After several years of paying claims pursuant to this arrangement, the reinsurers moved to vacate the award when the arbitrators, who had retained jurisdiction over the matter, made the award final. Citing the “honorable engagement” clause, the court denied the motion to vacate and confirmed the award, holding that the arbitrators had the power to fashion the remedy even though it included obligations not explicitly bargained for by the parties. Harper Insurance Ltd. v. Century Indemnity Co., Case No. 10 Civ. 7866 (USDC S.D.N.Y. July 28, 2011).

This post written by Ben Seessel.

REINSURANCE HELD NOT EXCLUDED FROM COVERAGE BASED ON LIABILITY LIMIT AND CLAIM REPORTING PROVISIONS

August 10, 2011 by Carlton Fields

In a dispute arising between Anthem Insurance (now known as Wellpoint) and what the court described as one of its excess reinsurers, Twin City Fire Insurers, Anthem sought defense and indemnification for several state and federal lawsuits alleging improper denial of reimbursement. Twin City denied coverage, arguing that those suits “related back” to the claim preceding its policy period and were accordingly excluded from coverage. An Indiana trial court agreed with Twin City, and Anthem subsequently appealed to the state appeals court. The Indiana Court of Appeals reversed and remanded, holding that none of the subject policy provisions operated to exclude such coverage. The court held specifically that the reinsurance agreement covered “claims made” and found no basis to read the agreement as excluding coverage retrospectively based on notice of claims preceding the inception of coverage. The court additionally found inapplicable Twin City’s attempt to superimpose the “prior notice exclusion” onto the agreement. Wellpoint, Inc. v. National Union Fire Ins. Co., No. 05-2011 (Ind. Ct. App. July 20, 2011).

This post written by John Black.

COURT OF APPEALS HOLDS THAT DISTRICT COURT CORRECTLY CONFIRMED AN ARBITRATION AWARD NOTWITHSTANDING PARTY FRAUD

August 8, 2011 by Carlton Fields

A federal court of appeals affirmed the confirmation of an arbitration award in favor of an employee who had committed fraud in connection with an arbitration, because, as the district court had held, the fraud was not material to the outcome of the proceeding. Michael Mickens, an employee of trucking company CBF, was terminated for allegedly failing to complete an assigned run. At meetings with CBF and union members that Mickens surreptitiously recorded, Mickens insisted that he had completed the run. After Mickens was terminated, the union demanded arbitration during which Mickens explained for the first time that he had not completed his assignment because a guard had purportedly relayed instructions from CBF not to complete the run. CBF introduced the minutes of the meetings which showed Mickens’s initial and false story, but the arbitrator concluded that Mickens was wrongfully terminated and ordered reinstatement with full back pay.

Mickens’s tapes of the meetings, which had been the subject of discovery requests during the arbitration but had not been disclosed or produced, were produced to CBF in subsequent litigation. When the union filed an action in district court to confirm the award, CBF moved to vacate on the grounds that the award had been procured by fraud. The district court confirmed the award, holding that the employee had lied and secretly withheld the tapes, thereby committing fraud, but that the fraud was not material to the outcome of the arbitration because the arbitrator was already aware of the essential facts on the tapes—that the employee had lied about completing the trucking run—because the minutes of the meetings had been introduced. The court of appeals agreed and affirmed. Int’l Brotherhood of Teamsters v. CBF Trucking, Inc., No. 10-3044 (3d Cir. July 28, 2011).

This post written by Ben Seessel.

CRIMINAL CONVICTIONS RELATING TO GEN RE-AIG FINITE REINSURANCE TRANSACTION VACATED BY COURT OF APPEAL

August 2, 2011 by Carlton Fields

The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”

The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.

With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”

This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).

This post written by Rollie Goss.