Week's Best Posts

COURT COMPELS DISCLOSURE OF REINSURANCE POLICY

June 8, 2010 by Carlton Fields

Federal Rule of Civil Procedure 26(a)(1) requires parties to disclose certain information at the outset of the case, including “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” Pursuant to this rule, a federal magistrate judge recently ordered the American Red Cross to disclose a copy of its reinsurance policy, which the Red Cross had resisted on grounds that the damages claimed in the suit would not reach the $1,000,000 threshold to trigger any potential reinsurance coverage. The Court granted the plaintiff’s motion to compel production of a copy of the entire reinsurance policy. The Court discredited Red Cross’s counsel’s valuation of the case based on certain factual allegations in the complaint as speculative, particularly given claims for punitive damages and attorneys fees, noting that even a remote possibility of exposure to a risk warrants disclosure of an applicable insurance policy. Hartman v. American Red Cross, 1:09-cv-01302 (USDC C.D. Ill. May 11, 2010).

This post written by John Pitblado.

‘FOLLOW THE SETTLEMENTS’ DOCTRINE DOES NOT SPARE AIG’S CLAIMS AGAINST ITS REINSURERS

June 7, 2010 by Carlton Fields

Various AIG entities filed an action against their reinsurers seeking a declaration of coverage for portions of a settlement AIG made in a coverage dispute with its insured, Monsanto Corporation. Monsanto faced extensive litigation in underlying chemical pollution cases against it, which it ultimately settled for approximately $600 million. AIG sought reinsurance coverage for portions of its payments to Monsanto. The reinsurers denied AIG’s claims on the basis that AIG’s payments to Monsanto were “ex gratia” and not covered under AIG’s policies, citing the pollution exclusion, exclusions for punitive damages, and allocation issues with other underlying insurers. In defending against the reinsurers’ motions for summary judgment, AIG raised the “follow the settlements” doctrine, which binds a reinsurer to a settlement agreed to by the ceding company if the underlying risk is “reasonably within the terms of the original policy” even if not technically covered. The court granted the reinsurers’ motions and dismissed AIG’s case. It found that, even affording AIG the greater leeway of the “follow the settlements” doctrine, the claims were not reasonably within the coverage of AIG’s underyling policies, and AIG, in entering into the settlement with Monsanto, failed to conduct a reasonable investigation of the Monsanto claims by glossing over critical coverage issues, unnecessarily exposing its reinsurers to non-covered claims. American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010).

This post written by John Pitblado.

ROMANIAN GOVERNMENT DEFEATS EFFORT TO MAKE IT PICK UP THE TAB ON REINSURANCE OBLIGATIONS

June 2, 2010 by Carlton Fields

A plaintiff insurance company (General Star National Insurance Company) unsuccessfully moved for entry of a writ of execution and restraining notice against the Romanian Bank of Foreign Trade and its purported successors-in-interest. In an underlying action in an Ohio federal district court, General Star alleged that a Romanian company (Astra) acquired the reinsurance obligations a state-owned Romanian insurance company, but failed to remit funds owed to General Star under certain reinsurance contracts. The Ohio court found that the Romanian goverment was Astra’s alter ego and permitted General Star to attach the government’s assets to satisfy a default judgment in General Star’s favor.

Unable to satisfy its judgment in Ohio, General Star sought to execute the judgment in New York, arguing that the Romanian Bank of Foreign Trade and its successors were alter egos of the Romanian government. The argument was rejected, as General Star could not demonstrate grounds for disregarding the Bank of Foreign Trade’s or its successors’ corporate forms. Among other things, there was no proof the Romanian government exercised daily control over these entities. Moreover, although the corporate form may be disregarded if necessary to prevent fraud or injustice, General Star failed to persuade the Court that the equities weighed in favor of piercing the corporate veil. There was no showing that the corporate form was used by the Romanian government to avoid payment. The writ of execution and restraining notice were denied. General Star National Insurance Co. v. Administratia Asigurarilor de Stat, Case No. 18 MS 302 (USDC S.D.N.Y. May 12, 2010).

This post written by Brian Perryman.

THIRD CIRCUIT CLARIFIES THAT FEDERAL ARBITRATION ACT DOES NOT NECESSARILY PREEMPT UNCONSCIONABILITY CHALLENGES TO CLASS ARBITRATION PROVISIONS

June 1, 2010 by Carlton Fields

In an unpublished disposition, the Third Circuit vacated an order compelling arbitration of a putative class action against Verizon Wireless based on Verizon’s alleged unlawful imposition of
administrative charges on class members’ cell phone accounts. The arbitration clause in the customer agreements prohibited class arbitrations. The plaintiffs argued that arbitration provisions in contracts of adhesion that prohibit use of a class action mechanism for low-value claims are unconscionable under New Jersey law. Verizon countered that Third Circuit precedent held that the Federal Arbitration Act preempted such laws. The appellate court concluded its prior cases on the question could not be read as establishing a blanket prohibition on unconscionability challenges to class arbitration provisions since the Federal Arbitration Act permits the use of generally applicable contract defenses to attack arbitration agreements. The order compelling arbitration was vacated and the case remanded to the district court. Litman v. Cellco Partnership, No. 08-4103 (3d Cir. May 21, 2010).

This post written by Brian Perryman.

UNAUTHORIZED INSURER’S OBJECTION TO RULING ON PRE-PLEADING SECURITY OVERRULED

May 25, 2010 by Carlton Fields

On April 19, 2010, we reported on a magistrate judge ordering that the defendant, an unauthorized insurer, post pre-pleading security in the amount of $660,389. The defendant subsequently filed an objection to this ruling, arguing that the plaintiff could not recover more than the current amount contained in the segregated accounts at issue. Affirming the ruling of the magistrate judge, the district court observed that the pre-pleading security statute contemplated the posting of an amount sufficient to secure the judgment sought by the plaintiff and concluded that the ruling was not erroneous or contrary to law. Arrowood Surplus Lines Ins. Co. v. Gettysburg Nat’l Indem. Co., Case No. 09-972 (USDC D. Conn. May 7, 2010).

This post written by Dan Crisp.