Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

COURT CERTIFIES CLASS OF HOME BORROWERS WHO HAD PRIVATE MORTGAGE INSURANCE REINSURED WITH LENDER’S CAPTIVE REINSURER

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The US District Court for the Northern District of California has certified a nationwide class of persons who secured residential mortgage loans from Wells Fargo Bank, where the down payments were funded with borrowed funds subject to private mortgage insurance (“PMI”) with Wells Fargo as the beneficiary of the PMI, and the PMI was reinsured by Wells Fargo’s captive reinsurance company. The Complaint alleged violation of the federal Real Estate Settlement Procedures Act (“RESPA”) in that payments relating to the reinsurance amounted to illegal kickbacks. The court found that while the plaintiffs might not be able to maintain a claim that the amount paid for the insurance (and reinsurance) was excessive, claims that the payments amounted to illegal kickbacks under RESPA could be subject to class-wide treatment. Kay v. Wells Fargo & Co., Case No. C 07-01351 (USDC N.D. Cal. Nov. 30, 2007).

This post written by Rollie Goss.

COURT RULES ON QUESTIONS OF DIRECT ACCESS TO REINSURANCE PROCEEDS BY INSURED UPON INSOLVENCY OF INSURER/REINSURED

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Joel Ario, Commissioner of the Pennsylvania Department of Insurance, acting in his capacity as Liquidator of Reliance Insurance Company, initiated this action against Swiss Re and Tribune Company seeking a declaration that Tribune was not entitled to direct access to a series of reinsurance proceeds payable under various agreements between Swiss Re and Reliance. Tribune insured its workers’ compensation risks with Reliance, which was a fronting insurer that reinsured the risks with Swiss Re. When Reliance was declared insolvent, the issue arose as to whether Reliance’s reinsurance with Swiss Re was an asset of Reliance’s estate, or whether Tribune could gain direct access to the reinsurance proceeds. Generally, reinsurance is an important asset of the estate of the insolvent reinsured. However, if the reinsured does not take significant risks as an insurer, instead merely passing through the risks to the reinsurer, the ultimate insured may obtain direct access to the reinsurance proceeds.

The relationships were structured through two written agreements, which received different treatment by the court. The referee appointed to resolve the dispute concluded that Tribune was not entitled to direct access to the reinsurance proceeds under a Gross Compensation Program (GCP) agreement, but was entitled to direct access to proceeds under a Loss Portfolio Transfer (LPT) agreement. Both the Liquidator and Tribune filed objections. The Commonwealth Court of Pennsylvania sustained the findings of the Referee, concluding that: (1) Tribune was not entitled to direct access to the proceeds payable by Swiss Re to Reliance under the GCP because the Gross Compensation Program was not a true reinsurance arrangement, but rather, was more akin to traditional insurance; and (2) Tribune was, however, entitled to direct access to payments under the LPT because the evidence established that Reliance was a fronting company, and therefore the LPT was not an asset of the Reliance Estate. Ario v. Swiss Reinsurance America Corp. and Tribune Co., NO. 860 M.D. 2003 (Pa. Commw. Ct., Dec. 21, 2007).

This post written by Lynn Hawkins.

NEW JERSEY SUPREME COURT HOLDS THAT IBNR CLAIMS CANNOT PARTICIPATE IN FINAL DIVIDEND PLAN FOR INSOLVENT INSURER

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Integrity Insurance Company, which among other risks insured environmental and products liability risks with long claim tails that were subject to reinsurance, was declared insolvent. The issue arose as to whether the IBNR claims for such risks could participate in the liquidation plan, which would mean that the liquidator could collect on such claims from Integrity’s reinsurers immediately. The applicable New Jersey statute provides that only “absolute” claims may participate in a liquidation plan. The liquidation court held that IBNR claims could participate in the liquidation plan, but the Court of Appeals reversed (reported on in an October 11, 2006 post to this blog). The New Jersey Supreme Court held that since IBNR claims are actuarial estimates, they are not “absolute” as of the claim bar date, and therefore cannot participate in the liquidation plan. The holding turned on the interpretation of “absolute,” which the Court held required that the claims be capable of being determined on their own merit, standing on their own, independent of any other claim. Since IBNR claims are estimated in part based upon the insurer’s historical experience, they did not qualify as being “absolute.” It had been estimated that allowing IBNR claims, instead of requiring that they be considered in a run-off mode, would have saved $45 million in administrative expense. This principle could have a significant effect upon the duration of liquidation proceedings, their expense and the amount and timing of funds available from reinsurance to fund liquidation plans. In re Liquidation of Integrity Insurance Company, A-29 (December 13, 2007).

This post written by Rollie Goss.

OREGON SUPREME COURT PIERCES SUPERIOR NATIONAL CORPORATE VEIL IN INSOLVENCY CONTEXT

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The case involved a dispute over a $10.6 million deposit that Superior National Insurance Company (“SNIC”) made with the Oregon Department of Consumer and Business Services (“DCBS”). The Court was asked to decide whether DCBS could use SNIC’s deposit to satisfy the statutory liabilities of an insolvent insurer, Commercial Compensation Casualty Company (“CCCC”). SNIC was a retrocessionaire of CCCC, and both SNIC and CCCC were under the common control of a parent holding company, Superior National Insurance Group (“Superior National”).

The court first concluded that a retrocessionaire was a “reinsurer” for purposes of the insurance code, making its statutory deposits subject to control by DCBS. Despite this, the court held that SNIC was not liable for all of CCCC’s losses since, under the pooling agreement, SNIC only agreed to pay for 22% of the losses and expenses of the pooled business.

The court next concluded that SNIC and CCCC were “operationally a single company for all practical purposes,” and held that Superior National caused CCCC to violate the Insurance Code by failing to make the required deposit. Because SNIC and CCCC were under the common control of Superior National and because Superior National took actions to evade government regulation, the Oregon Supreme Court held that the requirements for corporate veil piercing were met. As such, the Court ordered Superior National to reimburse the Oregon Insurance Guaranty Association for payments made on behalf of CCCC. Oregon Insurance Guaranty Association v. Superior National Insurance Company, No. 00C-18554, (Or. Nov. 29, 2007).

This post written by Lynn Hawkins.

COURT DENIES MOTION TO VACATE ARBITRATION AWARD

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Commercial Risk Reinsurance Company Limited (“Commercial Risk”) brought this action to vacate an arbitration award against it and in favor of Security Insurance Company of Hartford (“Security”). In the underlying arbitration, Security sought to recover losses arising from workers compensation programs covered by two reinsurance agreements entered into by the parties in 1999 and 2000. In those contracts, Commercial Risk agreed to accept a certain share of Security’s interests and liabilities associated with the covered workers compensation programs insured by Security. Commercial Risk denied payments of amounts billed by Security under the treaties contending that a portion of the losses were not covered. The arbitration panel found in favor of Security.

Commercial Risk argued that the award should be overturned because: (1) the panel issued the Award jointly rather than severally against the two separate Commercial Risk entities; (2) the arbitration proceeding was fundamentally unfair because the panel excluded testimony of Commercial Risk’s witnesses and exhibits pertaining to damages; and (3) the panel exceeded its authority in a variety of ways. The Court rejected all of Commercial Risk’s arguments finding “no evidence that the arbitrators engaged in misconduct, or exceeded their authority, or that Security committed any fraud sufficient to vacate the Award.” Commercial Risk Reinsurance Co. Ltd. v. Security Insurance Co. of Hartford, Case No. 07 Civ 2772 (S.D.N.Y., Nov. 30, 2007). Commercial Risk’s motion for reconsideration also was denied. Commercial Risk Reinsurance Co. Ltd. v. Security Insurance Co. of Hartford, Case No. 07 Civ 2772 (S.D.N.Y., Dec. 12, 2007).

This post written by Lynn Hawkins.