Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

COURT DISMISSES SECURITIES LAW CLAIMS AGAINST REINSURER, GRANTS LEAVE TO AMEND COMPLAINT

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PXRE Group Ltd. (“PXRE”) suffered significant losses following Hurricanes Katrina and Rita and sought to raise funds to pay out reinsurance claims through a public offering of common stock and a private offering of preferred shares. In October 2005, plaintiffs, a group of nineteen hedge funds, purchased preferred shares and were provided with a private placement memorandum in connection with the purchase. In February 2006, PXRE disclosed that actual losses were twice as much as previously announced. The plaintiffs then brought this action asserting claims for violations of sections 12(a)(2) and 15 of the Securities Act of 1933 and state law claims for fraud and negligent misrepresentation. The defendants subsequently filed a motion to dismiss.

On the section 12(a)(2) claim, which imposes liability for selling securities via a prospectus that includes a material misrepresentation, the court first ruled that this claim must fail because private offerings are not effected by means of a prospectus. Still, the plaintiffs sought to invoke the integration doctrine, arguing that the private offering of preferred shares was integrated with the public offering of common stock and therefore liability attached to the alleged misrepresentations in the private placement memorandum, but the court ruled that the plaintiffs failed to allege facts sufficient to invoke the integration doctrine. The court then dismissed the section 15 claim, which establishes control person liability for a violation of section 12(a)(2), and declined to exercise supplemental jurisdiction over the remaining state law claims. The district court thus granted the defendants’ motion to dismiss, but did grant the plaintiffs leave to amend the complaint. In a February 23, 2010 Order, the district court acknowledged receipt of the plaintiffs’ Second Amended Complaint and instructed the defendants to provide the court with a letter on whether the defendants intend to answer the complaint or renew their motion to dismiss. Anegada Master Fund, Ltd. v. PXRE Group Ltd., Case No. 08-10584 (USDC S.D.N.Y. Jan. 26, 2010).

This post written by Dan Crisp.

STATE LEGISLATIVE ACTION REGARDING CAT FUNDS

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Following are legislative developments relating to State catastrophe funds:

S.B. 923 was introduced on February 8, 2010 in the Missouri State Senate. The bill would establish the Missouri Catastrophe Fund to help pay covered residential property damage insurance claims in the aftermath of an earthquake, which affects Missouri homeowners and their property/casualty insurers. The catastrophe fund, which would consist of premiums paid by insurers, bond revenues, and appropriated state funds, would provide a backstop for insurance companies to insure against covered catastrophic losses to avoid the collapse of the property insurance market in the wake of a major earthquake. The bill also would establish an advisory council to provide information and advice with regard to the fund and develop prevention and mitigation standards related to covered losses. If a federal or multistate catastrophic insurance fund or reinsurance program is created, recommendations must be made to the General Assembly as to how the fund can coordinate with such programs.

S.B. 923 was referred on February 11, 2010 to the Small Business, Insurance and Industry Committee of the Missouri State Senate. Earlier this year, a companion bill (H.R. 1468) to S.B. 923 was introduced in the Missouri House of Representatives. No action has been reported with regard to H.B. 1468.

Also, on February 8, 2010, A1983 was introduced in the New Jersey General Assembly to implement the New Jersey Consumer Catastrophe Preparedness and Protection Act through an advisory council. The Act would establish the New Jersey Catastrophe Fund to help pay covered resident property damage insurance claims in the aftermath of a natural disaster or other catastrophe in the State, which affects New Jersey homeowners and their property/casualty insurers. The Act would appropriate from the General Fund $10 million for deposit in the fund. If a federal or multistate catastrophic insurance fund or reinsurance program is created, recommendations must be made to the State legislature as to how to how the fund can coordinate with such programs.

This post written by Karen Benson.

EVIDENTIARY PRIVILEGES DEEMED WAIVED BY SHARING DOCUMENTS WITH REINSURER

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Last year, a defendant insurer filed an unsuccessful motion for protective order concerning subpoenas to the defendant’s reinsurers; the court more recently declined to reconsider that ruling. The issues presented in the underlying litigation included the defendant’s alleged conduct and representations in selling coverage to the plaintiff insureds, and in denying that coverage. The defendant sought to protect documents relating to positions it took with its reinsurers in the ordinary course of business and arbitrations attempting to secure coverage from the reinsurers for the plaintiffs. In denying the motion, the court found the discovery was “undoubtedly” relevant to the plaintiff’s lawsuit since it could include impeachment evidence on the question of whether defendant denied the existence of coverage, or reveal motives suggesting bad faith. The court rejected assertions of the attorney-client and work product privileges because no specific prejudice would result without the protective order, and because an insurance company waives any privilege if it shares its counsel’s documents with a reinsurer when the parties’ interests are not aligned. The defendant’s interests were not aligned with the interests of the reinsurers because the defendant engaged in two contested arbitrations with the reinsurers. The Regence Group v. TIG Specialty Insurance Co., Case No. 07-1337 (USDC D. Or. May 1, 2009).

On the defendant’s motion for reconsideration, the court found the defendant did not show an intervening change in the law or newly discovered evidence warranting reconsideration. Rather, the defendant relied on several older cases which the court found distinguishable. The court further clarified that it granted the plaintiff’s discovery requests in their entirety, without reservation. The Regence Group v. TIG Specialty Insurance Co., Case No. 07-1337 (USDC D. Or. Feb. 4, 2010).

This post written by Brian Perryman.

ARBITRATOR WHO MIGHT BREACH CONFIDENTIALITY AGREEMENT NOT ORDERED OFF PANEL

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Trustmark Ins. Co. brought an action against Clarendon Nat’l Ins. Co. and Clarendon America Ins. Co. (“Clarendon”) seeking a preliminary injunction barring any arbitration between Trustmark and Clarendon with Clarendon’s appointed arbitrator on the panel. In a decision issued ten days after a similar decision in favor of Trustmark in another case in the same district (see our February 15, 2010 post), a different judge rejected nearly identical arguments made by Trustmark. Trustmark argued that Clarendon’s arbitrator would necessarily breach a confidentiality agreement entered into by the parties and arbitrators relating to a prior arbitration between the parties (see our December 9, 2009 arbitration roundup). Clarendon named the same arbitrator it used in the first arbitration for the second, unrelated arbitration. Trustmark argued this would require the arbitrator necessarily to import information from the first arbitration into the second, in violation of the confidentiality agreement. The court rejected Trustmark’s argument, finding that a potential future breach of the confidentiality agreement by Clarendon’s arbitrator was not sufficient ground for a preliminary injunction barring the proceeding, and that any challenge to an arbitrator’s conduct or impartiality must be made post-award. It seems questionable whether this result can be harmonized with the prior ruling in favor of Trustmark on the basis that in the earlier decision there was an actual breach by the party-appointed arbitrator of the confidentiality agreement, not a hypothetical future breach. The issue now seems a good candidate for review by the Seventh Circuit Court of Appeals. Trustmark Ins. Co. v. Clarendon Nat’l Ins. Co., No. 09-c-6169 (N.D. Ill. Feb. 1, 2010).

This post written by John Pitblado.