Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

National Council of Insurance Legislators Calls upon Federal Reserve to Limit Examinations of State-Regulated Insurers

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The Dodd-Frank Act provided the Federal Reserve Board with limited authority over certain insurance holding companies with federally regulated banking subsidiaries, creating some tension with the general rule, embodied in the McCarran-Ferguson Act, that insurance is regulated at the state level. The National Council of Insurance Legislators (NCOIL) has issued a resolution critical of the Federal Reserve Board’s use of that authority, stating that, in exercising its limited authority over these entities, “the Federal Reserve Board has over-extended its examination powers by routinely requiring insurance companies to supply information and responses to inquiries of the sort in practice that are the province of” state insurance regulators, “on whose work Federal Reserve Board examiners are statutorily required” to rely. This, the NCOIL resolution states, “will most likely conflict with, the jurisdiction of State insurance regulators over solvency and market conduct regulation or, at best, will be duplicative.”

The NCOIL resolution further:

  • “calls upon the Federal Reserve Board to direct its examiners that the insurance operations of state-regulated insurers . . . are regulated by the individual states and that the Federal Reserve Board’s examinations are, to the fullest extent possible, to rely upon the examination reports and other work of state insurance regulators and not to duplicate and/or conflict with the states’ regulatory powers over the insurers’ market conduct or solvency”;
  • “encourages Congress to provide oversight and, if necessary, enact legislation to ensure” that the Federal Reserve Board abides by these limits; and
  • “calls upon the Federal Reserve Board to consult with, defer to, and rely on to the fullest extent possible, and to avoid, to the fullest extent possible, duplication of, the work of state insurance regulators on matters involving the regulation of insurance operations and solvency of insurers, regardless of the insurers’ affiliations with federally-regulated financial institutions.”

Resolution Asserting McCarran-Ferguson Reverse Preemption over the Supervision of Insurance Companies by the Federal Reserve Board and Its Examiners (Nat’l Council of Ins. Legislators, Dec. 8, 2018)

DC District Court Permits Vantage Commodities To File Amended Complaint And Denies Reinsurer Defendants’ Motion For Interlocutory Appeal

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The District Court for the District of Columbia issued an order denying a motion to reconsider its prior order allowing Vantage Commodities to file an amended complaint and denying the reinsurer defendants’ motion for interlocutory appeal. In the underlying decision, the court determined that, while Vantage had not stated a claim for breach of contract because it had failed to allege facts showing a contractual relationship, the complaint adequately stated claims for breach of implied contract, promissory estoppel, and unjust enrichment.

The court found that Vantage had alleged enough facts to survive a motion to dismiss, noting that the court was required to draw all reasonable inferences in Vantage’s favor at the motion to dismiss stage. That determination was limited to the specific allegations in Vantage’s amended complaint, and did not “create new law.”

The court refused to exercise its discretion to allow an interlocutory appeal of its non-final order, finding that the questions of law the reinsurers presented were “tied up in the specific facts of this case.” Furthermore, while the reinsurers argued that the court’s prior order “goes against the weight of authority in reinsurance law that an insured cannot maintain a direct action against a reinsurer,” they failed to cite any specific case law showing that the court’s order was in conflict with other authorities. The court concluded that the reinsurer defendants did not meet their burden of showing that the circumstances of this case justified a departure from the basic policy of postponing appellate review until after the entry of final judgment. For more information regarding this case, see our prior posts here and here.

Vantage Commodities Financial Services I, LLC v. Assured Risk Transfer PCC, LLC, Case No. 1:17-CV-01451 (USDC D.D.C. Jan. 17, 2019).

Court Confirms Arbitration Award In Reinsurance Dispute Involving Quota Share Retrocessional Agreement

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A court confirmed a final arbitration award in favor of Continental Insurance Company (as successor by merger to Continental Reinsurance Corporation) and against AXA Versicherung AG. Continental Re was a reinsurer of Continental Insurance. AXA, in turn, provided retrocessional reinsurance to Continental Re through a quota share retrocessional agreement. Several years into the agreement, AXA announced that it would no longer make retrocessional payments to Continental Insurance, reasoning that a Loss Portfolio Transfer Reinsurance Agreement (the “LPT Agreement”), which Continental Insurance had recently entered into with a third party, absolved AXA of its responsibility to continue making retrocessional payments. Continental Insurance objected, and the parties went to arbitration. At arbitration, the panel awarded Continental Insurance damages in the amount of $337,034 plus interest. Continental Insurance brought an action to confirm the award, which AXA did not oppose. The court confirmed the award, finding that Continental Insurance met the statutory requirements for confirmation under the Federal Arbitration Act.

Continental Ins. Co. v. AXA Versicherung AG, Case No. 1:18-CV-07349-VEC (USDC S.D.N.Y. Jan. 2, 2019).

Subject Matter Jurisdiction Under Section 7 Of The FAA – The Diversity, “Amount In Controversy,” And “Place Of Sitting” Requirements

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Presented with an argument that the court lacked subject matter jurisdiction, the Southern District of New York clarified the diversity, amount in controversy, and “place of sitting” requirements under Section 7 of the FAA – which relates to compelling the attendance of witnesses at arbitration.

With regard to diversity, the court held that, when presented with a Section 7 petition to enforce arbitration summonses, the court need not “look through” the petition to the citizenship of the parties to the underlying arbitration, but rather, should look to the citizenship of the parties to the instant enforcement action, to determine whether diversity jurisdiction exists. The court distinguished a Section 7 petition from petitions brought under Section 4 and Section 10, where courts may look through the petition to determine federal question jurisdiction, but are not required to do so. The court noted that Section 7 petitions, unlike Section 4 and 10 petitions, involve different parties than those in the underlying arbitration.

As to the “amount in controversy” requirement, the court recited the well-established principle that the amount is measured by “the value of the object of the litigation.” “The amount in controversy is not necessarily the money judgment sought or recovered, but rather the value of the consequences which may result from the litigation.” The petitioner here sought at least $134 million in damages in the underlying arbitration. The court noted that, even if the documents responsive to the summons pertained to only a small fraction of the amount sought in the arbitration, the $75,000 amount in controversy requirement would nevertheless be satisfied.

Finally, regarding Section 7’s requirement that a party petition a United States district court “for the district in which such arbitrators, or a majority of them, are sitting,” the court refused to look to the arbitrators’ individual business addresses to determine the arbitrators’ “place of sitting.” Rather, the court looked to the location the arbitrators had selected for the Section 7 hearing. Furthermore, the court stated that the arbitrators are not restricted to a single location. Here, the arbitrators had summoned nonparties to appear for hearings in both New York and Philadelphia. Therefore, the court held that the Southern District of New York and the Eastern District of Pennsylvania were the arbitrators’ “place of sitting” for any contest of the respective Section 7 summonses.

Washington National Insurance Co. v. Obex Group, LLC, Case No. 18-CV-9693 (USDC S.D.N.Y. Jan. 18, 2019).

Fourth Circuit Holds Reinsurance Participation Agreement Is Insurance Contract Under Virginia Statute, Effectively Voiding Its Arbitration Clause

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On September 14, 2017, we reported on the Fourth Circuit’s reversal of a district court’s denial of a motion to compel arbitration, which found that a party was judicially estopped from arguing that a Reinsurance Participation Agreement (“RPA”) was not an insurance contract. (If the RPA is an insurance contract, its arbitration provision becomes invalid under state law.) Subsequent to that ruling, on remand, the district court held that the RPA is indeed an insurance contract and that the RPA’s arbitration clause is void.

The Fourth Circuit has now affirmed the district court. The circuit court explained that the RPA was part of a workers’ compensation insurance program that Appellee Minnieland Private Day School purchased from Appellant Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA) and its affiliated entities. Under this “EquityComp” program, the pooled companies provide workers’ compensation insurance coverage to employers and also mutually reinsure each other’s insurance business. A layer of reinsurance is also provided by AUCRA. AUCRA in turn enters into RPAs with EquityComp customers, under the terms of which each customer pays into a segregated “cell” or account that is then used to fund AUCRA’s liabilities. In this fashion, EquityComp customers participate in underwriting the risk of their own workers’ compensation insurance policies. Minneland sued AUCRA alleging that AUCRA was not authorized or licensed to act as an insurance company under Virginia law; that the RPA was an “insurance contract” and not a “reinsurance” agreement; and that AUCRA misrepresented the EquityComp program, and the RPA specifically, to circumvent Virginia insurance and workers’ compensation laws.

In affirming the denial of arbitration, the Fourth Circuit rejected AUCRA’s argument that the RPA was a standalone contract. Instead, the panel determined that the RPA was but one component of an integrated insurance sale because the documents, including the RPA, were intended to provide Minnieland with workers’ compensation insurance coverage.

Minnieland Private Day School v. Applied Underwriters Captive Risk Assurance Co. Inc., Case No. 17-2385 (4th Cir. Jan. 14, 2019).