Week's Best Posts

NAIC SUMMER MEETINGS RESULT IN MINIMAL PROGRESS ON REINSURANCE ISSUES

June 22, 2009 by Carlton Fields

The NAIC held its Summer 2009 meetings in Minneapolis last week, and there was only very modest progress on reinsurance-related issues. The Reinsurance Task Force meeting summary relates the following items:

Guidance Memorandum regarding reinsurance collateral: The exposure draft of this Guidance Memorandum (see our April 13, 2009 post) was adopted, for distribution to all state insurance commissioners.

Reinsurance Regulatory Modernization Framework: There was further discussion of the implementation of this initiative. The exposed draft Congressional bill is on hold pending the receipt of a legal opinion from Sidley Austin, LLP on constitutional issues that have been raised about this initiative.

Nonadmitted and Reinsurance Reform Act: An update was received on the status of this Congressional session’s version of this bill (HR 2571) (see our June 9, 2009 legislative update post). This bill was referred to committee upon its filing, without any progress since that time.

Credit for Reinsurance Model Act: Comments were received on a proposed amendment to this Act, which would provide a commissioner the authority to lower the minimum trusted surplus requirement applicable to a multiple-beneficiary trust maintained by an assuming insurer in run-off. Staff was directed to initiate the process for consideration of this amendment, and an additional amendment related to the implementation of the Reinsurance Regulatory Modernization Framework.

International Association of Insurance Supervisors’ Reinsurance Subcommittee and Reinsurance Transparency Subgroup: An update on recent activity of this group was received.

This post written by Rollie Goss.

REINSURANCE INFORMATION NOT DISCOVERABLE

June 16, 2009 by Carlton Fields

The Flintkote Company (“Flintkote”), an insolvent asbestos manufacturer, brought this action against its insurers for failure to defend or indemnify for claims allegedly covered under a policy in force between 1958 and 1961 and requested discovery of its insurer’s reserves and reinsurance information. In allowing discovery of reserves information, the district court found this information relevant to the plaintiff’s claims of bad faith in that the information could be relevant to show the difference between what the insurers expected to pay for claims and communication with the plaintiff regarding the scope of loss. The court then denied plaintiff’s request to discover reinsurance documents, determining that the reinsurance agreements were not directly at issue or relevant to the litigation. The Flintkote Co. v. Gen. Accident Assurance Co., Case No. 04-01827 (USDC N.D. Cal. May 26, 2009).

This post written by Dan Crisp.

REINSURER’S CLAIM FOR SETOFF IN LIQUIDATION PROCEEDING FOR PAYMENT OF LIQUIDATED COMPANY’S OBLIGATION DENIED

June 15, 2009 by Carlton Fields

Century Indemnity Company (“CIC”) reinsured The Home Insurance Company (“Home”). Due to Home’s liquidation proceedings, which began in 2003, CIC became fully liable for a $13 million settlement of certain environmental claims for which CIC and Home were both primarily liable under the parties’ respective insurance contracts. CIC, a debtor in the Home proceedings, sought a setoff of $8 million against other obligations owed to Home, for Home’s share of the settlement that CIC paid in full. The New Hampshire Supreme Court reversed the trial court’s order permitting the setoff. Finding that the trial court’s reading of the statute governing setoff was too narrow, the Court cited the remedial nature of the statute, and the legislative purpose of obtaining “full payment from reinsurers despite an insurer’s insolvency.” In Re Liquidation of The Home Ins. Co., No. 2008-407 (N.H. May 27, 2009).

This post written by John Pitblado.

STATE AND FEDERAL LEGISLATIVE UPDATE

June 9, 2009 by Carlton Fields

Following are selected bills in the captive insurance area, plus one relating to catastrophe risk, that have now been adopted in the state legislatures:

• South Carolina has amended its captive insurance company law by enacting S. 323, which we previously reported, to make changes relating to incorporation, licensing, capitalization and other requirements. The bill was ratified on May 27, 2009, and it took effect when it was approved by the Governor on June 2, 2009.

• Missouri enacted House Bill No. 577 (mentioned in our May 8, 2009 post), which modifies various provisions of the state’s captive insurance company law and permits an association captive insurance company or an industrial insured captive insurance company to be organized as a reciprocal insurer. On May 29, 2009, the bill was delivered to the Governor for his signature.

• The Governor of Vermont, on May 27, 2009, signed S. 42 into law, which makes amendments to the captive provisions of the Vermont Code including, among other things, providing new captive formations a $7,500 tax credit and increasing state funding for captive regulation and examination.

• On June 1, 2009, the Texas legislature passed House Bill No. 4409, which includes provisions dealing with the reform and funding of the Texas Windstorm Insurance Association (TWIA), the state’s insurer of last resort for wind and hail coverage for certain coastal parts of the state. Among other things, the legislation provides for various layers of funding, including the imposition of certain insurance carrier assessments. Reinsurance to cover an assessment may be purchased at the insurer’s election subject to certain conditions. The bill has been delivered and is awaiting the Governor’s signature.

Congress has also recently introduced three bills relevant to reinsurance or catastrophe funds. These bills are as follows:

• H.R. 2555, proposes to establish a program to provide Federal support for State-sponsored insurance programs to help homeowners prepare for and recover from the damages caused by natural catastrophes, to encourage mitigation and prevention for such catastrophes, to promote the use of private market capital as a means to insure against such catastrophes, to expedite the payment of claims and better assist in the financial recovery from such catastrophes. The bill has been referred to the Committee on Financial Services.

• H.R. 2571, proposes to streamline the regulation of nonadmitted insurance and reinsurance, and for other purposes. The principal provisions of the Act: (1) regulate premium taxes for nonadmitted insurance; (2) provide that the placement of nonadmitted insurance shall be subject to regulation solely by the insured’s home state; (3) limit the ability of a state to establish eligibility requirements for US domiciled nonadmitted insurers that vary from the Non-Admitted Insurance Model Act; (4) require a GAO study of the nonadmitted insurance market; (5) regulate the extent to which a state may not recognize credit for reinsurance for an insurer’s ceded risk; (6) partially pre-empt the extraterritorial application of the law of a state to a ceding insurer not domiciled in that state; and (7) provide that in most circumstances a state that is the domicile of a reinsurer shall be solely responsible for regulating its financial solvency. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on the Judiciary.

• H.R. 2589, proposes to establish the Office of Public Finance in the Department of the Treasury to make available Federal reinsurance for insurers of tax-exempt municipal bonds. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on Ways and Means.

This post written by Karen Benson.

FRAUD CLAIM AGAINST PARTICIPANT IN REINSURANCE PROGRAM HELD TIME-BARRED

June 8, 2009 by Carlton Fields

A fraud claim asserted by the New York Superintendent of Insurance against a tire company was barred by the applicable California statute of limitations, since the “discovery rule” did not operate to save the claim. The plaintiff superintendent, in his capacity as rehabilitator of Frontier Insurance Company, alleged that Frontier entered into a reinsurance agreement with Automotive Services Insurance Limited in 1999. ASIL was a captive insurance agency set up by the president of the defendant tire company, Ramona Tire. Under this agreement, ASIL agreed to reinsure Frontier for insurance proceeds paid out by Frontier on policies for a group of independent tire dealers, including Ramona. The superintendent alleged that Ramona defrauded Frontier by purposefully undercapitalizing and underfunding ASIL so as to make it unable to comply with its contractual obligations to Frontier. A suit was filed in 2007. In its motion for summary judgment, Ramona argued that Frontier was on notice of ASIL’s undercapitalization from the moment it began negotiations on the reinsurance agreement. For example, Frontier investigated ASIL’s capitalization prior to approving the workers compensation program in which Ramona participated. This was held sufficient to trigger the discovery rule and run the three-year statute of limitations beginning in at least 2000. Accordingly, the fraud claims were time-barred. Mills v. Ramona Tire, Inc., Case No. 07-52 (USDC S.D. Cal. May 22, 2009).

This post written by Brian Perryman.