Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

COURT INTERPRETS REINSURANCE AGREEMENT BUT FINDS DISPUTE AS TO RESCISSION CLAIM

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A New York state court, in an action involving claims under a quota share reinsurance of insurance issued to automobile financing institutions covering the residual value of motor vehicle leases, has resolved some issues as to the interpretation of the reinsurance as a matter of law, finding no ambiguity in the quota share agreements. At the same time, the court denied summary judgment on a claim to rescind the reinsurance on the basis that the cedent had not disclosed to the reinsurer, at the time the reinsurance was placed, that its own actuary had projected a loss ratio of over 100% on the underlying risks. The court found that there was a disputed issue of fact as to when the cedent had knowledge of high losses, but that if it was established that the cedent had such knowledge at the time of placement, rescission would be appropriate. The interpretation issues included such important issues as determining that an entire block of risks could not be ceded to the quota share agreement and the percentage of the pool reinsured by a particular quota share reinsurer. Gulf Insurance Co. v. Transatlantic Reinsurance Co.,. No. 601602/03 (N.Y. Sup. Ct. Nov. 21, 2007).

This post written by Rollie Goss.

SUPREME COURT HEARS ORAL ARGUMENT ON WHETHER PARTIES MAY SUPPLEMENT ARBITRATION AGREEMENTS BEYOND FAA’S VACATUR STANDARDS

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The Supreme Court recently heard oral arguments on whether an arbitration agreement may provide for more expansive judicial review of an arbitration award than the narrow standard of review provided for in the Federal Arbitration Act. This case arose out of a property lease dispute between Mattel, the well-known toy manufacturer, and its landlord, Hall Street Associates. The parties agreed to arbitrate the dispute pursuant to the FAA procedures, but also agreed that a district court could overrule the arbitrator’s decision if the arbitrator’s “conclusions of law [we]re erroneous.”

The Ninth Circuit barred this type of court review, reasoning that private parties cannot expand the Congressionally-determined role of courts in reviewing arbitration awards. In contrast, the First, Third, Fourth, Fifth, and Sixth Circuits appear to have interpreted the FAA’s vacatur standards as non-exclusive standards which parties may supplement by agreement. While the Seventh Circuit has not squarely addressed the issue, it stated in dicta that the parties “cannot contract for a judicial review” of a labor arbitration award “because federal jurisdiction cannot be created by contract.”

After hearing oral arguments on the issue, the Supreme Court asked for additional briefing on three issues: (1) whether authority exists outside the FAA under which a party to litigation begun without reliance on the FAA may enforce a provision for judicial review of an arbitration award; (2) if such authority does exist, did the parties, in agreeing to arbitrate, rely in whole or part on that authority; and (3) whether the petitioner waived any reliance on authority outside the FAA for enforcing the judicial review provision of the parties’ arbitration agreement.

Hall Street Associates, LLC v. Mattel, Inc., No. 06-989.

This post written by Lynn Hawkins.

COURT CONFIRMS $443.5 MILLION ARBITRATION AWARD AND ORDERS $600 MILLION BOND

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The California Department of Insurance Conservation and Liquidation Office won a $443.5 million dollar arbitration award in favor of five Superior National Insurance Companies in liquidation. The award was against the United States Life Insurance Company, a subsidiary of AIG.

The arbitration arose out of a dispute of a 1998 reinsurance contract between U.S. Life and the five Superior National Companies. In 1999, U.S. Life initiated arbitration proceedings seeking rescission of the reinsurance contract, alleging misrepresentation and nondisclosure. The following year, Superior National, having suffered significant losses from its workers’ compensation business, became insolvent. California’s Insurance Commissioner seized the companies and placed them in conservation.

The arbitration panel denied U.S. Life’s claim for rescission, which was affirmed by the federal district court and Ninth Circuit. The arbitration panel then convened a second phase of arbitration to determine the amount of damages. The Final Arbitration Award ordered U.S. Life to pay the Superior National companies $443,515,724.

Following the district court’s confirmation of the award, the court entered a memorandum opinion requiring that U.S. Life post a $600 million dollar supersedeas bond (Order on bond memorandum decision) to provide adequate security for the judgment pending appeal. United States Life Ins. Co. v. Superior Nat'l. Ins. Co., Case No. 07-850 (USDC C.D. Cal.). This case is a consolidation of two cases.

This post written by Lynn Hawkins.

NAIC COLLATERAL PROPOSALS ADVANCE

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The NAIC's Reinsurance Task Force's proposals for modernization of U.S. reinsurance regulation have advanced. At a December 2 meeting, the Task Force adopted the proposed reinsurance regulatory framework with some minor revisions and discussed the possibility of an interim meeting in late January 2008 to address various aspects of the proposal. The Financial Condition (E) Committee adopted the report of the Reinsurance Task Force, including the reinsurance framework proposal, at its December 4 meeting.

This post written by Rollie Goss.

FLORIDA PROPOSES NEW REINSURANCE CREDIT/COLLATERAL RULE

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The State of Florida has proposed a new rule permitting a ceding insurer to take credit, as an asset or deduction from reserves, for reinsurance ceded to an eligible reinsurer based not upon the posting of collateral, but rather upon the reinsurer holding surplus in excess of $100 million and a stand-alone financial strength rating from at least two rating agencies. The amount of the credit allowed varies depending upon the reinsurers' financial rating.

This post written by Rollie Goss.