Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

DISTRICT COURT AFFIRMS BANKRUPTCY COURT ORDER DENYING IMPOSITION OF CONSTRUCTIVE TRUST

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This matter came before the Northern District of New York on appeal from a Bankruptcy Court Order, awarding Richard Breeden, Chapter 11 trustee (the “Trustee”) of The Bennett Funding Group, judgment on the pleadings and dismissing the Ades and Berg Groups’ (the “Ades Investors”) counterclaims for imposition of a constructive trust upon the proceeds of a reinsurance policy allegedly covering the Ades Investors’ losses. The proceeds of the reinsurance policy were to be paid to the Trustee pursuant to the terms of a settlement agreement with Sphere Drake.

In a de novo review, the Court affirmed the Bankruptcy Court’s Order, concluding that the Ades Investors’ claim failed to satisfy all four elements applicable under New York law for the imposition of a constructive trust. Specifically, the Court concluded that while three of the four elements were satisfied, the fourth element, requiring a showing that the Trustee was unjustly enriched when he retained the settlement proceeds from Sphere Drake, was not met. In re: The Bennett Funding Group, Case No. 97-70049 (N.D.N.Y. July 10, 2007).

REINSURER’S CLAIMS DISMISSED FOR FAILURE TO COMPLY WITH LIQUIDATION ORDER

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This action was brought by the Statutory Liquidator of two insolvent Pennsylvania insurers (Legion and Villanova) against their reinsurer, Stateco Insurance Company. Plaintiff sought relief for an alleged breach of contract arising out of a Management Agreement between the insurers and Stateco. Stateco asserted several counterclaims.

Plaintiff moved to dismiss Stateco’s counterclaims on the basis that Stateco did not comply with an Order of Liquidation, pursuant to which anyone asserting claims against Legion was required to file a proof of claim on or before June 30, 2005. Defendants argued that their claims could not be barred by the Liquidation Order in light of Ninth Circuit precedent (Hawthorne Savings Bank v. Reliance Insurance Co.), as well as lack of personal jurisdiction, among other reasons.

In July, a California District Court granted plaintiff’s motion to dismiss defendant’s counterclaims. The court distinguished Hawthorne on the basis that the claim in Hawthorne was asserted by a policyholder against its insurer which had no connection to the insolvency proceedings. In contrast, the Court held the instant case was “inextricably intertwined with the liquidation proceedings, and Stateco’s counterclaims seek to interfere with those proceedings.” Additionally, the Court held that it did have personal jurisdiction over the defendant as a result of its long-term agency relationship with a Pennsylvania insurer in addition to the choice of law clause contained in the Management Agreement. The court summarily dismissed Defendant’s remaining arguments relating to mutuality and recoupment. Koken v. Stateco Inc., Case No. 05-03007 (N.D. Cal. July 25, 2007).

DISTRICT JUDGE CONFIRMS ORDER FOR PRODUCTION OF REINSURANCE INFORMATION IN COVERAGE ACTION

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On June 15, 2007, we reported on a ruling by a United States Magistrate Judge compelling the production of a reinsurance agreement and communications with reinsurers in a coverage action. The district court has entered a fairly detailed Order denying motions seeking to vacate the Magistrate Judge's decision. The Court rejected a strict rule against the production of such information, holding that discoverability and relevance should be evaluated based upon the facts of each case. United States Fire Insurance Co. v. Bunge North America, Inc., Case No., 05-2192 (USDC D. Kansas July 23, 2007).

COURT OF APPEALS REVERSES DISMISSAL OF REINSURANCE CONTRACT DISPUTE

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AXA Corporate Solutions sued Lumbermens Mutual for indemnity under bonds and other reinsurance agreements. After the district court dismissed the claims asserted in both the Amended Complaint and the Second Amended Complaint, the Second Circuit Court of Appeals reversed. The court of appeals found that dismisssal was inappropriate since the agreements were ambiguous as to whether they created a reinsurance obligation between the parties, and the scope of any reinsurance obligation. Such heavily fact dependent issues precluded dismissal. AXA Corporate Solutions Insurance Co. v. Lumbermens Mutual Casualty Co., Case No. 06-2923 (2d Cir. July 11, 2007).

UK Court of Appeal Grants Injunction to Restrain Proceedings in a United States District Court

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On July 20, 2007, this blog reported on a dispute relating to the mass defection of fourteen facultative reinsurance brokers from the U.K. based Marsh Services Limited to Integro, a competitor. A suite was filed in US District Court in New York, which the Court declined to dismiss on jurisdiction grounds. In a parallel suit in the UK, a judge declined to enjoin the prosecution of the US action, but the UK Court of Appeals has allowed an emergency appeal, entering an injunction to restrain the US proceedings. This opinion contains an interesting discussion of the relationships between the UK and US courts, as influenced by an EU regulation relating to employment contracts. Samengo-Turner v. J & H Marsh & McLennan (Services) Limited, [2007] EWCA Civ 723 (July 12, 2007).