In this Special Focus, Richard Euliss discusses the recent increased interest by the IRS in auditing small captive insurers.
This post written by Richard Euliss.
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COURT REMANDS ARBITRATION AWARD FOR FURTHER CLARIFICATION WHERE RATIONALE WAS NOT GIVEN
In a case involving a dispute over steel production to replace a portion of the Whitestone Bridge spanning New York City’s East River, a federal district court remanded an arbitration award back to the arbitrator. Under the parties’ arbitration agreement, the arbitrator was to issue a reasoned award. However, the arbitrator’s award was a two-page award with the “arbitrator merely list[ing] various categories of monetary damages without explanation as to how he calculated those figures or determined liability.” Under the Southern District of New York standard, a reasoned award is one where the arbitrator presents “something short of findings of fact and conclusions of law but more than a simple result. Where the award offered no more than the damages, the court found that this low standard was not met.
The court chose not to vacate the award, however. Noting that some courts have completely vacated the award where arbiters have ignored the arbitration agreement and exceeded their powers, the court found that the doctrine of functus officio (once the award is made, the duty is done) was inapplicable. Because the arbitrator never completed his duty, the court found that remand to do so was proper. Tully Const. Co. v. Canam Steel Corp., No. 1:13-cv-03037-PGG (USDC S.D.N.Y. Mar. 2, 2015).
This post written by Zach Ludens.
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COURT DISMISSES CHALLENGE OF FINRA ARBITRATION AWARD FOR LACK OF JURISDICTION
In a case involving a FINRA arbitration between investors and their financial advisor, Judge Anita S. Brody of the United States District Court for the Eastern District of Pennsylvania found that she did not have the jurisdiction to hear a challenge of the arbitration award. Though FINRA rules may be subject to heavy federal regulation and approval by the SEC, the court found that this was not enough to create a federal question to give the court jurisdiction over the challenge. Instead, the court found that under § 10 of the Federal Arbitration Act, review of an arbitration award with underlying federal questions does not in itself implicate a federal question sufficient for jurisdictional purposes. This is because where there is no merits review, “the substance of the underlying arbitration is generally irrelevant to a district court’s consideration of a motion to vacate.” Instead, the motion to vacate must raise a federal question on its face. The court further held that an argument of manifest disregard of federal law in such an instance was still heard as a claim under § 10 of the Federal Arbitration Act, which is “something of an anomaly in that it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.” Accordingly, the court dismissed the case for lack of subject-matter jurisdiction. Goldman v. Citigroup Global Markets Inc., No. 2:12-cv-04469-AB (USDC E.D. Pa. May 19, 2015).
This post written by Zach Ludens.
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SPECIAL FOCUS: CREDIT FOR REINSURANCE LAWS – 2015 LEGISLATIVE AND REGULATORY DEVELOPMENTS
During the first half of 2015, state legislatures and state insurance departments continued to revise state credit for reinsurance laws and regulations. The majority of these legislative and regulatory developments are due to states seeking to modernize their reinsurance laws and adopt the National Association of Insurance Commissioners’ (“NAIC”) Credit for Reinsurance Model Law. These changes are summarized below:
Arizona
House Bill 2352 approved by the Governor on March 30, 2015 and filed with the Secretary of State on March 31, 2015, amended Arizona Revised Statutes section 20-261.03 and created sections 20-261.05, 20-261.06, 20-261.07 and 20-261.08 to adopt the NAIC Credit for Reinsurance Model Law. House Bill 2352’s requirements for credit for reinsurance apply to all cessions after the effective date of the act under reinsurance agreements that have an inception, anniversary or renewal date that is not less than six months after the effective date of the act.
House Bill 2352 authorizes the Department of Insurance (the “Department”) to adopt rules to implement the credit for reinsurance provisions, including rules identifying the requirements for a jurisdiction to be considered a qualified jurisdiction by the director of the Department. However, the Department is exempt from the rulemaking requirements of title 41, chapter 6 Arizona Revised Statutes for two years after the effective date of House Bill 2352.
Arkansas
Senate Bill 881 (codified as Act 1223 of the 90th Regular Session and effective April 7, 2015) conforms Arkansas’ Credit for Reinsurance Law in Sections 23-62-305 through 23-62-308 to the NAIC Credit for Reinsurance Model Law, effective six months after the effective date of Senate Bill 881. Senate Bill 881 also adds Section 23-62-309, entitled “Applicability – Reinsurance Agreements,” to clarify that Sections 23-62-305 through 23-62-307 apply to any cession of a reinsurance agreement if that reinsurance agreement has an inception, anniversary, or renewal date not less than six months after the effective date of Senate Bill 881.
Colorado
The Colorado Department of Insurance (the “Department”) adopted 3 CCR 702-3, entitled “Credit for Reinsurance” effective January 1, 2015, which sets forth the rules and procedural requirements that the Commissioner deems necessary to carry out the provisions of Section 10-3-701 et. seq., C.R.S., regarding the conditions and circumstances under which a domestic insurer may reduce their liabilities, or establish an asset associated with risks reinsured. Regulation 3 CCR 702-3 is part of the Insurance’s efforts to update its regulations to ensure they meet NAIC accreditation requirements. It is anticipated that the Department will continue rulemaking for regarding life and health reinsurance agreements and property and casualty reinsurance programs later in 2015.
Delaware
Regulation 1003 relating to Credit for Reinsurance (formerly Regulation 79) was amended effective January 11, 2015 for NAIC accreditation requirements.
District of Columbia
On March 11, 2015, District of Columbia Bill 20-0537 (“DC B 20-0537”), entitled the “Insurance Holding Company and Credit for Reinsurance Modernization Amendment Act of 2014” became effective. The District’s Law on Credit for Reinsurance Act of 1993 was amended to modernize reinsurance regulation, in coordination with the Nonadmitted and Reinsurance Reform Act of 2010 to establish requirements to regulate reinsurers, to grant, suspend, and revoke the accreditations of United States-based reinsurers and certifications of non-United States-based reinsurers for which credit for reinsurance will be allowed, to establish and publish a list of qualified non-United States domiciliary jurisdictions of assuming insurers, and to receive notice from, and monitor the concentration of risks of, ceding insurers.
Florida
The Florida Office of Insurance Regulation (“FOIR”) has initiated rulemaking to amend Rule 69O-144.005, entitled “Credit for Reinsurance” and Rule 69O-114.007, entitled “Credit for Reinsurance from Eligible Reinsurers” to conform with the NAIC Credit for Reinsurance Model Law for accreditation purposes. Proposed changes include:• Replacing references of “eligible reinsurer” with “certified reinsurer”;
- Clarifying and expanding the documentation required to be filed with the FOIR for an insurer to obtain and maintain the status of a certified reinsurer;
- Clarifying process and regulatory responsibilities when the certified reinsurer’s financial condition changes;
- Clarifying disclosure requirements of the OIR when it receives an application from a reinsurer;
- Adding reinsurance concentration disclosure requirements; and
- Adding language that would allow the trusteed surplus of trusteed reinsurers to drop below $20 million if the trusteed reinsurer is no longer underwriting new business and demonstrates that surplus below $20 million was warranted.
During the rulemaking process, the OIR has filed notices of change to the proposed rules to address comments from the Joint Administrative Procedures Commission (“JAPC”) to reconsider clarification of standards and guidelines for the exercise of OIR’s judgment in determining that a certified insurer was unable or unwilling to meet its contractual obligations. A final public hearing on the proposed rule before the Financial Services Commission is scheduled for June 23, 2015.
Massachusetts
House Bill 4326, effective April 2, 2015, amends provisions of Massachusetts General Laws 175:20A regarding accreditation of assuming reinsurers. House Bill 4326 sets forth requirements concerning eligibility for certification, minimum capital and surplus requirements, certification application requirements, and criteria for the assignment of ratings to certified reinsurers by the Commissioner.
Nebraska
Legislative Bill 298 (“LB 298”) updates Nebraska’s statutes related to credit for reinsurance by reflecting the most recent version of the NAIC Credit for Reinsurance Model Law. LB 298 amends section 44-416.06, which establishes when credit for reinsurance is allowed and addresses concentration of risk. LB 292 also addresses:
- Accredited reinsurers and clarifies what a reinsurer must demonstrate to the Director to become accredited.
- Reinsurance ceded to an assuming reinsurer that maintains a trust in a qualified United States financial institution and situations when a principal regulator of the trust may allow for a reduction in the required trust surplus.
- A new category of allowable credit for reinsurance from a certified reinsurer.
- Associations of incorporated or individual unincorporated underwriters becoming certified reinsurers.
- Assignment by the Director of a rating for each certified reinsurer and requires the director to publish a list of certified reinsurers and their ratings. A certified reinsurer is obligated to secure obligations at a level consistent with its rating as specified in rules and regulations. The bill provides direction to the certified reinsurer on how to secure its obligations in a variety of situations.
- NAIC certified reinsurers and inactive certified reinsurers.
- The process of the Director to suspend or revoke a reinsurer’s accreditation or certification. A reinsurer has a right to a hearing. It also addresses the credit for reinsurance after a suspension or revocation.
- Concentration of risk by requiring a ceding insurer to take steps to manage its reinsurance recoverables proportionate to its own book of business and requires a ceding insurer to diversify its reinsurance program by placing duties to report to the Director when the amount of reinsurance in one reinsurer or group of affiliated reinsurers meets certain thresholds.
Finally, LB 292 amends section 44-416.07 by clarifying the securities the Director of Insurance may approve to secure obligations. LB 292 was approved by the Governor on March 12, 2015 and becomes effective 90 days after the adjournment of the Nebraska legislature, which occurred on May 29, 2015.
Nevada
Senate Bill 67 (SB 67), effective July 1, 2015, adopts various NAIC model laws and acts, including the NAIC Credit for Reinsurance Model Law. Specifically, SB 67 requires:
- The Commissioner to assign a rating to each certified reinsurer, giving due consideration to the financial strength ratings that have been assigned by rating agencies deemed acceptable to the Commissioner pursuant to regulation. The Commissioner shall publish a list of all certified reinsurers and their ratings.
- Sets forth the criteria a certified reinsurer must secure obligations assumed from U.S. ceding insurers at a level consistent with its rating, as specified in regulations promulgated by the Commissioner.
Texas
Senate Bill 1093, signed into law and effective September 1, 2015, amends Sections 492.104(b) and 493.104(b) of the Texas Insurance Code to remove the criteria that securities be readily marketable over a national exchange and have a maturity date of not later than one year to be acceptable as security for the payment of reinsurance obligations for life, health, and accident insurance companies and related entities or for property and casualty insurers, as applicable.
Vermont
The Vermont Department of Financial Regulation published proposed rules for Regulation 97-3 (Revised) Credit for Reinsurance (“Proposed Rule 15P006”) on January 28, 2015. Proposed Rule 15P006 sets forth rules and procedural requirements under which a domestic insurance company may take credit for insurance ceded to a reinsurer. It also imposes new notice requirements on ceding insurers regarding concentration of risk, and requires inclusion of certain clauses in the reinsurance agreement for ceding insurers to receive credit for reinsurance. A public hearing on Proposed Rule 15P006 was held on February 27, 2015. The deadline for public comment on Proposed Rule 15P006 was March 6, 2015.
Washington
House Bill 1077, effective July 24, 2015, revises the statutes regarding when a Washington domestic insurer may take credit for reinsurance ceded to another insurance company by adding the categories of an accredited reinsurer and a certified reinsurer. The bill requires the Commissioner to register assuming insurers meeting certain requirements either as an accredited assuming insurer or certified assuming insurer. House Bill 1077 provides the option that an insurance company may become an accredited reinsurer by filing certain information with the Commissioner. House Bill 1077 provides the option that the Commissioner may certify an insurance company as an eligible reinsurer by meeting certain requirements and filing information with the Commissioner. The Commissioner must create and publish a list of qualified jurisdictions under which an assuming insurer is licensed and domiciled is eligible to be considered for certification by the Commissioner. House Bill 1077 requires the Commissioner to assign a rating to each certified reinsurer and then publish a list of all certified reinsurers and their ratings. Finally, the Commissioner is authorized to engage in rulemaking to implement House Bill 1077.
Wisconsin
The Office of the Commissioner of Insurance published a statement of scope for a proposed rule to modernize Chapter Ins. 52 Wis. Adm. Code so that it aligns with the Nonadmitted and Reinsurance Reform Act of 2010 and the more recent amendments to the NAIC Credit for Reinsurance Model Law from which Wisconsin’s regulation is based.
The proposed amendments will allow the use of certified reinsurers. Reinsurers would be certified by the Commissioner at different levels based on their financial strength ratings. The collateral requirements for certified reinsurers would differ based on the reinsurer’s certification level. Reinsurers with a higher level of certification would have lower collateral requirements than are traditionally required to be credited. Reinsurers certified at lower levels would have the same collateral requirements as current law to be credited. By making these revisions, Wisconsin would modernize its reinsurance provisions and these changes would be consistent with changes made or in the process of being made in other states.
Conclusion
Insurers and reinsurers will continue to face an evolving regulatory landscape concerning state credit for reinsurance laws as more states continue to amend their statutes and engage in rulemaking to implements those statutory changes.
This post written by Kelly A. Cruz-Brown.
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WHEN $16.5 MILLION IS NOT ENOUGH: INSURER AND REINSURER BATTLE OVER FRONTING ARRANGEMENT
Lincoln General Insurance Company (“Lincoln”) appealed a district court judgment, despite it having won a $16.5 million dollar tortious interference verdict, to the Fifth Circuit Court of Appeals. Lincoln alleged that the district court erred in dismissing various claims before the trial began, including: breach of contract, breach of fiduciary duty, conversion, and derivative liability.
The lawsuit arose from a fronting arrangement whereby Lincoln reinsured 100% of State and County Insurance Company’s (“State”) liabilities. According to the suit, U.S. Auto Insurance Services (“US Auto”) served as general agent to State. For this arrangement, Lincoln expected to receive 10% of premium payments. The rest of expected premium payments were to be divided between US Auto for management services in conjunction with payments to policyholders. Despite paying out less than anticipated for filed claims, Lincoln claimed it lost millions of dollars.
In a morass of procedural history spanning six years, the Fifth Circuit Court reversed the district court’s refusal to alter its judgment to include a breach of contract claim against U.S. Auto. The Fifth Circuit Court also reversed the dismissal of a tortious interference claim against Jim Maxwell. Jim and Doug Maxwell were co-owners of a business that became the recipient of $50 million dollars from US Auto. The Fifth Circuit Court noted that even if one included the more rigorous “active participation” element to tortious interface–a debatable position in Texas—Jim Maxwell’s conduct was tortious. Defendants attempted to skirt this issue altogether by alleging that the tortious interference award was barred by a two-year statute of limitations. The Fifth Circuit Court disagreed, noting that Lincoln filed the action before the limitations period had run out as they “did not and could not have” reasonably known about the facts comprising the tortious interference claim until US Auto became insolvent.
Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Serv., Inc., No: 13-10589 (5th Cir. May, 18, 2015)
This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.
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