Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

ARBITRATOR WHO BREACHED CONFIDENTIALITY AGREEMENT ORDERED OFF PANEL

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Trustmark Ins. Co. filed an action against John Hancock Life Ins. after the parties arbitrated one reinsurance dispute and had begun a separate arbitration of another reinsurance dispute. Trustmark sought a preliminary injunction barring the parties from proceeding with the second arbitration with Hancock’s appointed arbitrator on the panel. Trustmark argued that Hancock’s choice of arbitrator in the second arbitration – the same person who served as Hancock’s chosen arbitrator in the first arbitration – resulted in: (1) that arbitrator’s breach of the confidentiality agreement that the parties and arbitrators in the first arbitration had signed; and (2) an inherent conflict of interest by that arbitrator who was being asked to interpret the confidentiality agreement to which he was a signatory (and which he allegedly breached), and who was also being asked to consider the extent to which issues in the second arbitration had been resolved in the first arbitration. The Court agreed with Trustmark, noting that the arbitrator had breached the confidentiality agreement by discussing matters pertaining to the first arbitration with the other panel members in the second arbitration (who were not parties to the confidentiality agreement). The Court also noted that Trustmark’s arbitrator violated a court order, in that the previous arbitration award and the confidentiality agreement entered into in connection therewith had been confirmed by Court Order. In a separate decision released simultaneously with its memorandum granting Trustmark’s preliminary injunction, the Court addressed additional issues raised in a motion for reconsideration by Hancock, but reaffirmed its prior ruling. Trustmark Ins. Co. v. John Hancock Life Ins. Co., No. 09-c-3959 (N.D. Ill. Jan. 21, 2010)

This post written by John Pitblado.

SCOTTISH COURT BREATHES NEW LIFE INTO PETITION TO APPROVE SOLVENT SCHEME OF ARRANGEMENT

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The Scottish Court of Session, Inner House, has reversed a ruling of its Outer House refusing to approve a scheme of arrangement under the U.K. Companies Act of 2006.

A scheme of arrangement is a reorganization device through which a company may compromise its creditors’ claims with the approval of at least three-quarters of its creditors. A scheme of arrangement generally involves three stages. First, there must be a judicial application for an order summoning a meeting of creditors. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Finally, if the scheme is approved at the meeting, there must be a further application to the court for sanction of the arrangement.

In Petition of Scottish Lion Insurance Company, Scottish Lion, in runoff since late 1994, proposed in 2008 a scheme of arrangement to terminate exposures under short- and long-tail policies. The scheme was opposed by U.S.-based creditors insured under general liability or general aviation insurance policies with Scottish Lion. The Outer House declined to approve the scheme, concluding that sanctioning the scheme smacked of “unreasonableness” to minority creditors, and asking rhetorically, “where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?” The Inner House disagreed. Although the court acknowledged that insureds who were being required to accept current estimated values in lieu of their contingent claims may “possibly with other arguments, win the day,” it concluded that such circumstance alone was not so overwhelming a factor against the sanction. The case was remitted to the Outer House for further proceedings.

This post written by Brian Perryman.

STATE LEGISLATIVE UPDATE

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Following are selected bills in the captive insurance and reinsurance areas that have been recently introduced in the state legislatures:

• H.B. 314 proposes to amend Delaware’s captive insurance company laws by adding two new forms of captive insurance companies, “agency captive insurance companies” and “branch captive insurance companies,” to those that can currently be licensed in Delaware. In an agency captive structure, the insurance risk on policies is reinsured to the agency captive, thereby allowing the agents or brokers that placed the policies to share in the profits or losses attributable to these policies. Branch captive insurance companies are divisions of offshore captives that establish a business unit onshore. These new forms of captive insurance companies are intended to enhance the economic development potential of Delaware’s captive insurance laws. The bill also makes a technical change to the delinquency provisions applicable to sponsored captive insurance companies. The bill was introduced in the Delaware House of Representatives on January 26, 2010, and it was assigned on the same day to the Economic Development/Banking/Insurance/Commerce Committee. The following day the bill was reported out of committee favorably in the Delaware House of Representatives.

• H.B. 305 proposes to amend Maryland’s domestic reinsurance law requirements for various purposes, including: (i) specifying an assessment fee payable by specified domestic reinsures to the Maryland Insurance Commissioner; (ii) exempting domestic reinsurers from a requirement to have an office in the State; (iii) requiring domestic reinsurers to keep specified assets in the State; and (iv) authorizing domestic reinsurers to keep their general ledger account records outside the State under specified circumstances. The bill was introduced in the Maryland House of Representatives on January 27, 2010.

This post written by Karen Benson.

REINSURER NOT LIABLE FOR LOSSES, “FOLLOW THE FORTUNES” CLAUSE NOT APPLICABLE

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Royal Surplus Lines Insurance Company, the plaintiff’s predecessor, assumed the liabilities and acquired the related assets of an insurer that provided a one-year general liability policy to Equity Residential (“Equity”). Employers Reinsurance Company, the defendant’s predecessor, reinsured this policy until it terminated the reinsurance agreement on August 18, 2000. In this action, the plaintiff, Arrowood Surplus Lines Insurance Company (“Arrowood”), sought reimbursement for a settlement payment to Equity and claim expense in connection with losses occurring between December 15, 2000 and December 15, 2002, and the defendant, Westport Insurance Corporation (“Westport”), moved for judgment on the pleadings, arguing that Westport has no liability for losses after December 15, 2000. Arrowood argued that the Equity settlement was covered under the reinsurance agreement under the “follow the fortunes” clause.

The court, however, found that the losses under the Equity policy were outside of the reinsurance agreement, which stated that a policy issued for a period of more than one year shall be considered as “becoming effective” on the policy’s anniversary date while the policy is in force. Even if the runoff option was exercised, the policy would only be in effect until the anniversary date. Therefore, the reinsurance coverage period was limited to one year at a time, regardless of the length of the underlying insurance contract. Losses after the anniversary date would not be covered because the Equity policy could not “become effective” under a terminated reinsurance agreement. Moreover, the “follow the fortunes” clause only applies to a reinsurance contract in force. The court thus granted Westport’s motion for judgment on the pleadings. Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., Case No. 08-1393 (USDC D. Conn. Jan. 5, 2010).

This post written by Dan Crisp.

WHICH COURT WANTS THIS CASE?

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AXA Belgium S.A. (“AXA”) reinsured Century Indemnity Co. (“Century”) under certain treaties dating back to the 1970’s. In 2005, Century disputed AXA’s fulfillment of certain payment obligations, and the parties arbitrated the matter. The award, rendered in 2007, was in Century’s favor on a number of issues, and ordered AXA to make payments to Century. After AXA refused to make the ordered payments, Century filed an action in Pennsylvania in 2009 to confirm the award, and the award was confirmed. Thereafter, Century claims AXA still did not make required payments, and moved for contempt in the Pennsylvania action.

For its part, AXA claims that correlated issues involving the parties that were not subject to the arbitration impact AXA’s payment obligations because they entitle AXA to offsets or credits against its payment obligations ordered in the arbitration and confirmed in court. AXA thus filed its own action in New York federal court, seeking to compel arbitration of the offset issues it claims impact its payment obligations. The New York court deferred and transferred the action, suggesting that AXA was engaged in forum shopping, and finding that the Pennsylvania court was already familiar with the issues and was the appropriate forum for AXA to raise its claims pertaining to the offset. However, in an Order ironically issued the same day as the New York Order, the Pennsylvania court – plainly displeased by the bitter tone of the parties’ dispute – refused to enjoin the New York litigation, but did not grant Century’s motion for contempt, based on its review of the arbitration award, finding that the award did not command the payment of a sum certain by AXA. It also held that the arbitrability of the offset issue should be determined in the New York action. Both courts have now deferred the resolution of this issue to the other court. AXA Belgium, S.A. v. Century Indemnity Co., 09-9703 (USDC S.D.N.Y. Jan. 11, 2010); Century Indemnity Co. v. Certain Underwriters at Lloyd’s, No. 09-94 (USDC E.D.Pa. Jan 11, 2010).

This post written by John Pitblado.