Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

ARBITRATION VENUE PROVISION NOT UNCONSCIONABLE

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Plaintiff Ellison Framing Inc. recently filed a complaint with the California Department of Insurance against Zurich American Insurance claiming that Zurich had overcharged Ellison by almost $200,000 in improper fees pursuant to a workers compensation insurance plan. Zurich subsequently made a demand for arbitration, alleging nearly $570,000 in unpaid deductibles. Ellison responded by filing a suit in California Superior Court seeking declaratory and injunctive relief, contending that the venue provision, which provides that arbitration should occur in Schaumburg, Illinois, Zurich’s principal place of business, was unconscionable. Zurich removed the action to Federal Court and submitted a motion to stay the action and compel arbitration. The US District Court for the Eastern District of California granted Zurich’s motion finding that the American Arbitration Association’s decision as to venue may not be reversed because the AAA met the minimum standards for fair dealing. Further, plaintiff had not met its burden in claiming that the arbitration venue provision was unconscionable. Accordingly, the Court stayed the action, and found that plaintiff’s claim for fraud fell with the scope of arbitration. Zurich was additionally found not to have waived its right to seek relief. Ellison Framing, Inc. v. Zurich Am. Ins. Co., Case No. 11-0122 (USDC E.D. Cal. Apr. 4, 2011).

This post written by John Black.

COURT OF APPEAL HOLDS THAT ARBITRATOR BIAS NOT PROVEN AND THAT PANEL DID NOT MANIFESTLY DISREGARD APPLICABLE LAW

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Credit Suisse sold STMicroelectronics (“ST”) auction rate securities to manage its cash and cash equivalents, replacing prior investments in money market funds and floating rate notes, which ST had selected for their safety and liquidity. While Credit Suisse promised that it would invest only in safe and liquid instruments, it instead invested in higher risk un-guaranteed collateralized debt obligations and credit-linked notes, sending ST false transaction confirmations. When the auction rate securities market failed, ST was left holding over $400 million of securities which failed at auction. ST demanded arbitration. A three member panel issued an award in favor of ST, pursuant to which ST returned the securities in exchange for a payment of approximately $404.5 million in damages, interest and attorneys’ fees.

Credit Suisse unsuccessfully attempted to have one of the arbitrators thrown off the panel part way through the proceeding, contending that he had failed to make adequate disclosure of a prior expert witness engagement on an issue relevant to the arbitration. Affirming the District Court’s confirmation of the award, the Court of Appeals noted that Credit Suisse never asked the arbitrator for details of his expert engagements, had misstated the evidence, and had not satisfied the very high burden to show arbitrator bias or misconduct. The Court also rejected the contention that the panel had manifestly disregarded the law, finding that even if the doctrine still existed, Credit Suisse’s proof fell well short of establishing manifest disregard. While confirming the award, the Court agreed that the District Court should have credited against the amount of the award $97 million received by ST after the issuance of the award for the sale of the auction rate securities to another institution. STMicroelectronics, N.V. v. Credit Suisse Securities, No. 10-3847 (2d Cir. June 2, 2011).

This post written by Rollie Goss.

REINSURER CANNOT DENY COVERAGE BASED ON LATE NOTICE WITHOUT SHOWING PREJUDICE

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A federal district court held that, under Pennsylvania law, a reinsurer must show prejudice to deny coverage based on an insurer’s failure to provide prompt notice of loss, even where timely notice is a condition precedent to coverage. Global Reinsurance Corporation of America claimed that Pacific Employers Insurance Company was not entitled to benefits under the parties’ facultative reinsurance contract because Pacific Employers failed to provide prompt notice of loss arising from underlying asbestos litigation. Under the contract, prompt notice was a condition precedent to coverage. New York law, which Global argued should apply, provides that a reinsurer is not required to show prejudice to avoid coverage if the insurer fails to provide prompt notice and timely notice is a condition precedent. The court concluded, however, that Pennsylvania law should apply and denied Global’s attempt to avoid paying benefits for what it called the insurer’s “technical breach” of providing late notice. Pacific Employers Insurance Co. v. Global Reinsurance Corp. of America, Case No. 09-6055 (USDC E.D. Pa. May 23, 2011).

This post written by Ben Seessel.

JUDGMENT AFFIRMED AGAINST GUY CARPENTER OVER TERMINATION OF REINSURANCE BROKERAGE AGREEMENT

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The Second Circuit affirmed a judgment against reinsurance broker Guy Carpenter, finding that its former client, Royal Palm Insurance Company, effectively terminated the parties’ brokerage agreement when it switched to another broker before the end of the agreement’s three-year term. Guy Carpenter contended the district court improperly relied on a Florida statute, which allows a reinsurer to terminate a brokerage agreement at any time. The Second Circuit affirmed, however, noting the statute was irrelevant given the plain terms of the brokerage agreement, which afforded Royal Palm the right to unilaterally terminate the agreement at any time. The three-year term was merely an outer time limit for the relationship, rather than a fixed term. Royal Palm Insurance Co. v. Guy Carpenter & Co., No. 10-2814-CV (2d Cir. May 27, 2011).

This post written by John Pitblado.

TWO MORE BERMUDA-BASED REINSURERS PERMITTED TO OPERATE IN FLORIDA WITH REDUCED COLLATERAL AS AN “ELIGIBLE REINSURER”

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The Florida Office of Insurance Regulation (FOIR) has approved two more Bermuda-based reinsurance companies, Aspen Insurance Ltd. and AXIS Specialty Ltd., to become an “eligible reinsurer” under Florida law and thereby operate in Florida’s property catastrophe reinsurance market with reduced collateral. Ceding insurance companies may now receive full credit on their financial statements for their Aspen or AXIS Specialty property catastrophe reinsurance ceded without full collateral. These approvals bring to fourteen the number of reinsurance companies approved under this program. In re Aspen Insurance Ltd., Case No. 117338-11-CO (FOIR May 6, 2011) and In re AXIS Specialty Ltd., Case No. 117743-11-CO (FOIR May 23, 2011).

This post written by Michael Wolgin.