Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

CEDENT IS NOT REQUIRED TO MINIMIZE ITS REINSURANCE RECOVERY IN ORDER FOR THE “FOLLOW THE FORTUNES” DOCTRINE TO APPLY

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On December 9, 2014 and August 20, 2015, we reported on the reinsurance dispute between Utica Mutual Insurance Company and Clearwater Insurance Company. In a recent ruling, the court rejected Clearwater’s argument that the follow the fortunes doctrine did not apply and that Clearwater was relieved of its obligations under the subject reinsurance contract. Clearwater contended that Utica unreasonably and in bad faith shifted all of its liabilities to its umbrella policies to maximize reinsurance recovery. As an alternative basis to avoid liability, Clearwater also argued that Utica billed it for items for which it was not entitled to recover.

In rejecting Clearwater’s arguments, the court explained that while the follow the fortunes doctrine requires the cedent to align its interests with its reinsurer, in order to show bad faith, Clearwater was required to establish an “extraordinary showing of a disingenuous or dishonest failure” and that the cedent acted with gross negligence or recklessness. The court found that Clearwater could not make such a showing. The Court noted that Utica did not have any fiduciary duty to place Clearwater’s interests above its own nor minimize its reinsurance recovery in order to avoid bad faith. And the Court summarily dismissed Clearwater’s argument that some of the billings were not covered by the reinsurance, ruling that if the payment was arguably within the scope of the insurance policy, then it was within the reinsurance. Utica Mutual Insurance Co. v. Clearwater Insurance Co., Case No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2016).

This post written by Barry Weissman.

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IRS REVOKES RULING THAT IMPOSED EXCISE TAX ON WHOLLY FOREIGN REINSURANCE TRANSACTIONS

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The Internal Revenue Service recently revoked a 2008 ruling that a 1% excise tax under section 4371(3) of the Internal Revenue Code applied to “reinsurance premiums paid by one foreign insurer or reinsurer to another.” The IRS’s shift came in the wake of the D.C. Circuit’s opinion in Validus Reinsurance, Ltd. v. United States, 786 F.3d 1039 (D.C. Cir. 2015).

In Validus, a foreign reinsurer filed claims for refund of excise taxes imposed on premiums paid to a foreign retrocessionaire. The United States argued that such reinsurance policies were within the excise tax’s scope because the risks ultimately underlying the multiple levels of reinsurance were situated within the United States. The taxpayer countered that the statute’s plain language applied only to reinsurance, not retrocession coverage. After extensive analysis of the statute’s plain language and legislative history, the D.C. Circuit concluded that the statute was ambiguous. To resolve the controversy, the court resorted to the presumption against extraterritorial application of U.S. laws. The court ruled that the excise tax did not apply because the transaction was a “wholly foreign retrocession[].”

Going forward, therefore, a foreign insurer who pays reinsurance premiums to another foreign insurer likely will not have to pay the excise tax under section 4371(3) of the Internal Revenue Code, though the IRS has noted some narrow exceptions. Moreover, any foreign insurers who have paid such taxes within the statute of limitations should consider contacting counsel about the prospect of claims for refund. IRS Rev. Ruling 2016-03.

This post written by Richard Euliss.

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NEW YORK FEDERAL BANKRUPTCY COURT FINDS INSURANCE INSOLVENCY PROCEEDING DOES NOT “REVERSE – PREEMPT” BANKRUPTCY COURT JURISDICTION

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In a recent adversary proceeding in the chapter 11 case involving Ames Department Stores, Inc. (“Ames”), Lumbermens Mutual Casualty Company (“Lumbermen’s”) argued that under the McCarran-Ferguson Act, the issues in dispute between it and Ames should be decided in Illinois state court as part of Lumbermens’ insolvency proceedings.

The procedural history and the issues in the case between Ames and Lumbermens can be found here. In short, Ames filed a Chapter 11 bankruptcy in New York in 2001. In 2006, a dispute between Lumbermens and Ames commenced, which centered around the ownership of an approximate $8 million trust account. By 2012, Lumbermens entered state rehabilitation proceedings in Illinois. Lumbermens’ rehabilitator challenged the bankruptcy court’s jurisdiction over the adversary proceeding in New York federal court, arguing for the issues to be addressed in Illinois state court as part of Lumbermens’ ongoing insolvency proceeding. The court granted the rehabilitator’s motion to withdraw reference, and requested a report and recommendation on Lumbermens’ jurisdictional motion from a New York federal bankruptcy court.

The New York bankruptcy court first found that it had authority to hear all the claims at issue. Next, it determined whether the McCarran-Ferguson Act applied to “reverse – preempt” federal law. The court utilized a three part analysis to determine whether the McCarran-Ferguson Act applies and whether a federal statute can be reverse preempted by a state law. First, the court considered whether the Bankruptcy Code, the federal law at issue, specifically relates to the business of insurance, and concluded that it does not. Next, the court considered whether the state law at issue relates to the business of insurance, finding that the Illinois statute, relegating jurisdiction to the Illinois state court, was to ensure orderly and predictable liquidations of insurance companies. Thus, the court found that the state law at issue was enacted for the purpose of regulating the business of insurance. Finally, with respect to the third prong, whether allowing the case to proceed in federal bankruptcy court would “impair, invalidate, or supersede” Illinois state law, the court found that the bankruptcy court’s jurisdiction would not contravene Illinois law in any meaningful way, because any bankruptcy court judgment would remain subject to the priority scheme of the Illinois insurance insolvency proceeding. Therefore, the court held that hearing the adversary proceeding in federal bankruptcy court would not impair, invalidate or supersede Illinois insurance law, and thus, found that the Bankruptcy Code was not reverse – preempted by McCarran-Ferguson.

In re Ames Department Stores Inc., et al., No. 01-42217 (REG) (Bankr. S.D.N.Y. Dec. 7, 2015).

This post written by Jeanne Kohler.

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GEORGIA APPELLATE COURT HOLDS MALPRACTICE COVERAGE SUIT MUST BE ARBITRATED

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The Court of Appeals of Georgia recently affirmed a trial court’s ruling compelling arbitration in a malpractice coverage dispute. McLarens Young International Inc. (McLarens) and American Safety Casualty Insurance Company (ASCIC) shared a claims handling agreement (CHA) that required McLarens to provide the insurer with claims management and adjustment services for ASCIC policies issued under a Lawyers Professional Liability Program. Under one of those policies, ASCIC was required to pay the $2 million policy limits to satisfy a malpractice settlement. ASCIC then sought reimbursement from its reinsurer, Excalibur Reinsurance Corp. (Excalibur), and the reinsurer paid.

Both McLarens and Excalibur filed a demand for arbitration against McLarens for a claim of negligent oversight of the underlying claim. McLarens countered in the trial court that the arbitration demand was outside the scope of the CHA’s arbitration provision. Both the trial court and the appellate court disagreed, holding that “the dispute pertains solely to whether McLarens is required to indemnify ASCIC under the terms of the CHA, and there is no greater or lesser right to indemnification because Excalibur has been inserted into the proceedings.” Because of the Reinsurance Agreement with ASCIC, Excalibur is merely subrogated to any right to indemnification that ASCIC may have against McLarens under the CHA due to the negligent handling of the claim. The appellate court held that the scope of the suit remains the same as if it were only between McLarens and ASCIC and, thus, is within the scope of the arbitration clause.

McLarens Young International, Inc. v. American Safety Casualty Insurance Co., et al., No. A15A0932 (Ga. App., 4th Div. Nov. 20, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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THIRD CIRCUIT REAFFIRMS HIGH BURDEN TO ESTABLISH DELEGATION OF CLASS ARBITRABILITY DETERMINATION

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Earlier this month, the Third Circuit Court of Appeals reaffirmed its holding that the availability of class arbitration constitutes a question of arbitrability to be decided by courts unless the arbitration agreement “clearly and unmistakably” provides otherwise and expanded this holding to encompass situations in which the alleged delegation occurs through incorporation of American Arbitration Association (AAA) rules. The case arose out of a dispute regarding leases over oil and gas with landowners in Pennsylvania.

The lease agreements contained an arbitration provision that said that “all such disputes shall be determined by arbitration in accordance with the rules of the” AAA. The AAA rules included various subparts which, among other things, allow an arbitrator to determine if an arbitration should go forward on a class basis.  A lessee filed an arbitration demand with the AAA on behalf of itself and other similarly situated, and the lessor countered by filing a declaratory judgment action seeking a declaration that a court must determine class arbitrability and that the leases at issue did not allow for this.

The trial court granted summary judgment to the lessor and vacated the arbitrators’ decision regarding class arbitrability. The Third Circuit has set out a two part test to determine whether an arbitrator may determine class arbitrability: 1) does the agreement provide that class-wide arbitration is a question of arbitrability; and, if so 2) does the agreement clearly and unmistakably provide for the arbitrator to make this determination.  The Third Circuit has set this standard as an “onerous” one that simply could not be done in a case such as this where the agreement of the parties purported to incorporate rules which have various subparts, some of which allowed for an arbitrator to make this determination.  For this reason, the Third Circuit affirmed the lower court’s determination. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275 (3d Cir. Jan. 5, 2016).

This post written by Zach Ludens.
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