Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

NON-SIGNATORY BOUND TO REINSURANCE CONTRACT’S ARBITRATION PROVISION

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A Pennsylvania district court has held that a non-signatory insured is obligated to arbitrate claims against a reinsurer pursuant to the reinsurance contract’s arbitration provision. The plaintiff, a psychiatrist, purchased malpractice insurance from Transatlantic Reinsurance Company (“TRC”) using Legion Insurance as a fronting company. The insured later was sued for malpractice. Legion initially defended the action, but subsequently withdrew and a judgment was issued against the plaintiff.

Thereafter, Legion was declared insolvent and ordered into liquidation. Following a court ruling that Legion’s insureds could assert direct actions against TRC, the plaintiff filed an action against TRC for Legion’s breach of contract and breach of the duty of good faith and fair dealing and bad faith. The plaintiff also alleged bad faith against TRC for its own conduct.

TRC moved to compel arbitration arguing that as a third party beneficiary of the reinsurance contract, the plaintiff was bound to arbitrate the dispute. TRC also argued that the plaintiff was equitably estopped from disavowing the arbitration provision while simultaneously seeking to invoke the benefits of the agreement. The court granted TRC’s motion to compel arbitration finding in favor of TRC on both arguments. Doeff v. Transatlantic Reinsurance Company, Case No. 07-2110 (USDC E.D. Pa. Dec. 14, 2007).

This post written by Lynn Hawkins.

STATE LEGISLATIVE UPDATE

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It's state legislative session time of the year again – time to review what is going on in the state legislatures and insurance departments relating to reinsurance. This year there is considerable activity in three areas: (1) captive insurance companies; (2) catastrophe funds; and (3) reinsurance credit issues.

  • Captive insurers: Connecticut General Assembly Bill No. 281 would allow captive insurance companies to be licensed and domiciled in Connecticut. HB 2151, pending in the Hawaii House, would authorize medical malpractice captive insurance companies. Hawaii Senate Bill No. 3023 would authorize the creation and regulation of special purpose financial captive insurance companies. Hawaii HB No. 3101 is a House version of SB 3023. Michigan SB No. 1061, which has been passed and sent to the governor (bill text; bill analysis), would authorize the formation of captive insurance companies in Michigan, including special purpose financial captives for purposes of securitizations. The Missouri Insurance Department has proposed regulations containing requirements for the financial management and control of captives. New Jersey Assembly Bill No. 1580 would authorize and regulate captives. Utah HB 55 would modify Utah's Captive Insurance Companies Act and enact the Special Purpose Financial Captive Insurance Company Act.

  • Catastrophe funds: Five states have actions pending in this area. There is a bill pending in the Alabama Senate (SB 5) which would establish a coastal insurance authority and cat fund for wind and flood insurance for both residential and commercial property along the Gulf and authorize certain coverages by captive insurers. A bill is pending in the Connecticut General Assembly (No. 167) which would direct the Insurance Commissioner to study the feasibility of establishing a cat fund to offer reinsurance to the private insurance market. HB 1918 (bill text; bill summary), pending in the Missouri House, would create a cat fund for residential property earthquake risks. The fund would reimburse member insurers for a portion of losses paid by the insurers. The Insurance Department would be authorized to issue bonds to support the fund. Senate Bill No. 249, pending in the New Jersey Senate, would create a catastrophic health care claim reinsurance program. New Jersey Assembly Bill No. 2198 would create a state cat fund and fund it at an initial $10 million level. Virginia Senate Bill No. 318 would create a wind joint underwriting association to cover coastal areas.

  • Reinsurance credit: The Utah legislature has adopted a bill (SB 143) (which is awaiting action by the governor) which modifies a number of financial requirements relating to insurers and insurance products, including when domestic and foreign ceding insurers are allowed credit for reinsurance. It also addresses requirements for assumption agreements and reinsurance contracts and grants rulemaking authority on reinsurance credit issues.

This post written by Rollie Goss.

CONTROVERSY OVER ARBITRATION AWARD CENTERS OVER WHETHER PARTIAL AWARD WAS FINAL

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A single arbitrator heard evidence on claims for monies allegedly due under a facultative reinsurance contract. The arbitrator entered a partial final award, finding liability for indemnity payments, no liability for certain defense costs and requiring supplemental submissions on the amount of the indemnity and cost obligations. The parties moved for confirmation or vacation of this award, and the court declined to act, stating that the award was not yet final. The court remanded the matter to the arbitrator for further proceedings. On remand, the arbitrator held to his indemnity determination but decided that further submissions justified an award of defense costs. A final award was entered for $3 million, plus interest. The prevailing party sought to confirm the award, and the losing party contended that the partial award was final as to the defense cost issue, and the arbitrator did not have authority to change that ruling under the doctrine of functus officio. The court held that the partial award was not final, and hence the doctrine did not apply, and confirmed the final award, entering final judgment on the award. Employers' Surplus Lines Ins. Co. v. Global Reinsur. Corp., Case No. 07-2521 (USDFC S.D.N.Y. Feb. 2008).

This post written by Rollie Goss.

GUILTY VERDICTS IN FINITE REINSURANCE TRIAL

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All five former executives of Gen Re and AIG charged in a criminal trial in federal court in Hartford, Connecticut were convicted on all counts in a trial in which it was alleged that certain reinsurance transactions fraudulently added $500 million to AIG's loss reserves. Former AIG Chief Executive Hank Greenberg was named in the case as an unindicted conspirator. The transactions were entered into after AIG's stock price fell on concerns over its loss reserve. The charges included conspiracy, securities fraud, mail fraud and making false statements to the SEC. Sentencing is set for May 15, 1008. United States v. Ferguson, Case No. 06-cr-137 (USDC D. Conn. Feb. 25, 2008).

This post written by Rollie Goss.

COURT FINDS ARBITRATION CLAIMS BARRED BY PRIOR CLASS SETTLEMENT

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Plaintiffs allegedly suffered losses relating to stock options in WorldCom stock. They filed an NASD arbitration asserting claims, and were members of a class certified with respect to WorldCom stock losses. The class action settled and the proposed settlement received final approval one month before the arbitration hearing. The Claimants in the arbitration were members of the settlement class and had not excluded themselves from the class. The settlement's final approval Order included a fairly typical release of claims and an injunction against class members maintaining or participating in legal proceedings seeking to pursue claims that were released by the settlement. The arbitration proceeded, and Claimants recovered an award, at least part of which was for losses released by the class settlement. Both the District Court and the Court of Appeals found that the award should be vacated to the extent that it awarded damages for claims that had been released by the class settlement. Rich v. Spartis, No. 06-1723 (USCA 2d Cir. Feb. 8, 2008).

This post written by Rollie Goss.