Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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UPDATE ON NAIC ACTION TO IMPLEMENT THE COVERED AGREEMENT

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We recently posted a Special Focus article on a hearing held by the NAIC’s Reinsurance Task Force concerning the implementation of the reduced collateral for reinsurance provisions of the Covered Agreement between the U.S. and the E.U. The NAIC is attempting to move quickly on the implementation of the Covered Agreement, with a recent flurry of activity.  At the NAIC Spring National Meeting earlier this week, the Reinsurance Task Force approved and forwarded to the Financial Condition (E) Committee a Memorandum report on the February 20, 2018 public hearing, which also contained a number of recommendations for action.  The next day the Financial Condition (E) Committee adopted those recommendations and included them in its report to the Executive (EX) Committee, which “received” the report of the (E) Committee the following day.

The description of the hearing in the report of the Task Force and its recommendations are consistent with the discussion in our Special Focus article.  The basic approach in the Task Force’s Memorandum report is to revise the Model Credit for Reinsurance Model Law and Model Regulation so that they comply with the requirements of the Covered Agreement, and to extend the reduced collateral benefit of the Covered Agreement to reinsurers domiciled in the non-E.U. NAIC-approved Qualified Jurisdictions, on condition that those jurisdictions agree to the group supervision, group capital, and information-sharing provisions in the Covered Agreement.  Qualified jurisdictions outside the E.U. that would benefit from this approach include Bermuda, Japan, Switzerland, and, after Brexit, the United Kingdom.  This portion of this process is anticipated to be completed by the NAIC’s 2018 Fall National Meeting in November of this year.  The concern raised in the context of the public hearing concerning the possible need for “guardrails” due to the increased credit and collection risk to which ceding insurers would be exposed as a result of reduced collateral resulted in recommendations by the Reinsurance Task Force for review and monitoring of the financial and risk impact of the collateral changes, and recommendations for modifications to the Models, risk-based capital rules, and financial statement presentation requirements, if needed, with this portion of the process to take longer, with target completion dates for different aspects of this part of the implementation process of the NAIC’s 2019 and 2020 Fall National meetings.

The Task force made a number of specific recommendations to the Financial Condition (E) Committee, which took the following action:

  1. Adopted the Reinsurance Task Force’s request for the development of revisions to the Model Credit for Reinsurance Model Law and Model Regulation to bring the Models into compliance with the terms of the Covered Agreement.  The NAIC has a process for the development of model laws and regulations.
  2. Adopted charges to the Reinsurance Task Force, the Qualified Jurisdiction (E) Working Group, and the Reinsurance Financial Analysis (E) Working Group, which would have to develop processes to implement the anticipated revisions to the Models.
  3. Adopted charges to the Capital Adequacy (E) Task Force and the Statutory Accounting Principles (E) Working Group to address related reduced reinsurance collateral issues.

Details of the actions of the Financial Condition (E) Committee are found in the Reinsurance Task Force’s Memorandum report.  This process anticipates a very aggressive schedule, with the proposed revisions to the Models (and possibly other changes) being ready for consideration by the Reinsurance Task Force at the NAIC’s 2018 Summer National meetings in August, and by the NAIC’s membership at the NAIC’s 2018 Fall National meetings in November.  One possible timing complication is that any agreement of non-E.U. Qualified Jurisdictions to the group supervision, group capital, and information-sharing provisions in the Covered Agreement might have to be documented through a Memorandum of Understanding with each such jurisdiction, which might take more time to negotiate and finalize.  It was the clear sense of the participants in the public hearing, and of the Reinsurance Task Force’s subsequent Memorandum report to the Financial Condition (E) Committee, that reinsurers domiciled outside the E.U. should not have the benefit of reduced collateral for reinsurance without there being an agreement with their domiciliary jurisdictions with respect to group supervision, group capital, and information-sharing issues.  Absent such an agreement, reinsurers domiciled in non-E.U. jurisdictions would, from the standpoint of the United States and U.S. domiciled ceding insurers, have a more favorable agreement than those domiciled in Covered Agreement jurisdictions.  There is likely to be great resistance to such a potential scenario.

This post written by Rollie Goss.
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THE FAA’S PRESUMPTION IN FAVOR OF ARBITRATION DOES NOT REQUIRE ARGUABLE AMBIGUITIES IN ARBITRATION AGREEMENTS TO BE INTERPRETED AS “BROADLY AS POSSIBLE”

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In a dispute over the scope of a mandatory arbitration provision, the Sixth Circuit rejected the argument that it is required by the Federal Arbitration Act’s presumption in favor of arbitration to interpret an arbitration agreement “as broadly as possible” to compel arbitration. Rather, the FAA requires a court to interpret ambiguous provisions “only as broadly as [] remains consistent with the terms of the contract and the intention of the parties.”

The court found that the plain language of the provision required the parties to submit to arbitration only any disagreements that were included in a “Notice of Disagreement.” The district court interpreted (and the parties agreed) that this language only reached any disagreements that were “properly” included in the notice, although the word “properly” did not appear in the agreement. The defendant, however, sought to argue that the arbitration provision still applied to issues that arguably affected the proper subject matter of the notice, even though those issues themselves would not have been properly included in the notice. The court disagreed, distinguishing cases involving broadly written arbitration provisions from the relatively circumscribed provision involved here, noting that the FAA’s presumption “applies only where the arbitration provision could ‘fairly be read to cover’ the particular dispute.” Smith v. Altisource Solutions, Case No. 17-501 (6th Cir. Mar. 2, 2018).

This post written by Benjamin E. Stearns.

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FOURTH CIRCUIT INSTRUCTS DISTRICT COURT TO VACATE ARBITRATION AWARD THAT WAS NOT MUTUAL, FINAL, AND DEFINITE

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The Fourth Circuit reversed and remanded the district court’s order granting Norfolk Southern Railway Company’s motion to confirm an arbitration award determining the amount Sprint must pay to Norfolk Southern for continued use of railroad rights. Under the parties’ contract, because the parties’ respective appraisers disagreed as to the proper amount, a third appraiser was instructed to arrive at a compromise with one (or both) of the other appraisers. Ultimately, the third appraiser agreed with the amount set forth by Norfolk Southern’s appraiser, but conditioned his assent to the award subject to two conditions- (1) that Norfolk Southern had marketable title and (2) that the value used by Norfolk Southern’s appraiser was reasonable. The third appraiser also reserved the right to withdraw his assent if his assumptions proved to be incorrect. The AAA panel found that this decision constituted a final and binding arbitration award, which upon Norfolk Southern’s motion, the district court confirmed.

Sprint appealed the district court’s confirmation of the award, and despite the deferential standard of review accorded to arbitration awards, the Fourth Circuit found that the district court did err in determining that the third appraiser’s decision was a “final” award. Specifically, the Fourth Circuit found significant that the third appraiser “made clear that he might withdraw his assent — thus dissolving the compromise and the arbitration award itself — at some point in the future.” Moreover, the Court noted that the third appraiser “did not merely base his assent on certain assumptions, but rather reserved the right to withdraw his assent [even] if his assumptions proved to be incorrect… [and therefore, could not] be squared with any conception of ‘finality.’” As such, the Fourth Circuit instructed the district court to vacate the award. Norfolk So. Railway Co. v. Sprint Comm’s Co. L.P., Case No. 16-2017 (4th Cir. Feb. 22, 2018).

This post written by Gail Jankowski.

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COURT INTERPRETS CONTRACT CONTAINING MANDATORY DE NOVO REVIEW PROVISION OF ARBITRATION AWARD

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The Tenth Circuit Court of Appeals determined that an ADR provision of an agreement which called for arbitration, but also indicated that either party may “notwithstanding any provision of law bring an action against the other in a federal district court for the de novo review of any arbitration award” was legally invalid, rendering the arbitration clause unenforceable.

Relying on the Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., which “makes clear de novo review is entirely incompatible with the expedited process envisioned in the FAA,” the Tenth Circuit was “unwilling to treat the mere provision of a federal forum in [the Indian Gaming Regulatory Act] as some implicit rejection of the applicability of the FAA review standards to arbitrations involving gaming compacts.”

The Court recognized that the ADR provision “makes clear that the parties’ agreement to engage in binding arbitration was specifically conditioned on, and inextricably linked to, the availability of de novo review in federal court” and would not sever the de novo language from the parties’ agreement.

Citizen Potawatomi Nation v. State of Oklahoma, No. 16-6224 (10th Cir. Feb. 6, 2018)

This post written by Nora A. Valenza-Frost.

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