Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Illinois Legislation Revises Laws Applicable to Captive Insurance Companies

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Illinois has adopted a bill that includes a number of revisions to its laws regarding captive insurance companies. These include, inter alia:

  •  changes to the types of risk that a captive insurance company may insure;
  • new requirements regarding minimum capital and surplus;
  • a new requirement that captive insurance companies include with their annual reports of financial condition a statement of actuarial opinion regarding the reasonableness of their losses and loss adjustment expense reserves;
  • a provision allowing captive insurance companies to make loans to affiliates with the prior approval of the Director of Insurance;
  • new notice requirements for reinsurance agreements;
  • a provision allowing captive insurance companies to accept risks from or cede risks to captive reinsurance pools or affiliated captive insurance companies with the prior approval of the Director of Insurance;
  • standards for the approval of captive reinsurance pools;
  • authority for the Director of Insurance to issue standards for risk management of controlled unaffiliated businesses;
  • rules regarding the issuance of dividends by captive insurance companies;
  • rule regarding credits allowed to ceding insurers for reinsurance;
  • reporting and certification requirements for assuming insurers regarding trust funds, capital and surplus requirements, and financial strength ratings;
  • a requirement that the Director of Insurance create and publish a list of jurisdictions with rules sufficient to allow assuming insurers licensed in those jurisdictions to be certified in Illinois and standards for determining the sufficiency of those rules.

These revisions went into effect immediately upon the adoption of the law on November 27, 2018.

2017 Illinois Senate Bill No. 1737, Illinois One Hundredth General Assembly – Second Regular Session

This post written by Jason Brost.

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D.C. Federal Court Permits Insured to Amend Complaint in Reinsurance Dispute Related to Credit Insurance Policy

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A District of Columbia federal court partially granted and partially denied a reinsured’s motion to amend its complaint in a dispute over a reinsurance agreement for a credit insurance policy. Assured Risk Transfer (“ART”) extended a credit insurance policy to Vantage. The policy was reinsured under a contract with the reinsurer defendants, which was placed through a broker, the Willis Defendants. ART denied a claim under the credit insurance policy made by Vantage, and Vantage won an arbitration award against ART based on the denial. Vantage sued ART, the Willis Defendants, and the reinsurers after the reinsurers declined to pay under ART’s reinsurance agreement, but the court dismissed for jurisdictional issues. Thereafter, Vantage moved to amend.

First, the court denied Vantage’s effort to amend its complaint regarding its breach of contract and accompanying declaratory judgment claims. Vantage’s proposed amended complaint alleges that the parties created a contractual relationship via credit insurance “binders” which purportedly confirmed that the underlying credit insurance policy was reinsured, but the court concluded such allegations were insufficient because insurance binders describing a reinsurance agreement do not create a binding contractual relationship with the Willis Defendants or reinsurers.

Second, the court accepted Vantage’s proposed amendments related to the breach of implied contract, promissory estoppel, and unjust enrichment claims. On the implied contract claim, the amendments sufficiently alleged that ART and the Willis Defendants acted as agents for the reinsurers by claiming ART facilitated the transaction and the reinsurers delegated their underwriting authority to ART. Additionally, the allegations that reinsurers’ agents gave the insurance binders to Vantage and the reinsurers knew ART was unable to pay Vantage’s loses without reinsurance led he court to conclude it was plausible the reinsurers knew Vantage expected the reinsurers to pay and agreed to that arrangement.

On the promissory estoppel claim, the court interpreted the reinsurers’ agents’ delivery of the binders as a sufficiently alleged “promise” to pay any losses according to the credit insurance policy terms. Furthermore, Vantage plausibly alleged reliance upon the promise and an agency relationship between ART, the Willis Defendants, and the reinsurers. On the unjust enrichment claim, the court found the amendments adequately pleaded that reinsurers indirectly benefited through receipt of premiums to allow the claim to proceed. The court noted that Vantage is unable to prevail on its unjust enrichment and promissory estoppel claims if it prevails on its implied contract claim, but allowed amendment to permit Vantage to pursue all three until a conflict arises.

Lastly, the court granted Vantage’s request for leave to attempt to serve the reinsurers, declined to require the D.C. Department of Insurance, Securities, and Banking to accept service on their behalf, and dismissed Vantage’s complaint as to ART as a defendant where Vantage failed to establish the necessity for ART to remain.

Vantage Commodities Fin. Servs. I, LLC v. Assured Risk Transfer PCC, LLC, Case No. 17-1451 (USDC D.D.C. Nov. 16, 2018).

This post written by Thaddeus Ewald .

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Florida Court Finds that Arbitration Agreement Broadening Judicial Review Violates Florida Public Policy

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In a lawsuit brought by a contractor against a subcontractor and its insurer, Florida’s Fourth District Court of Appeals found a provision in an arbitration agreement allowing for a broad ranging review of any arbitration award to be void as a matter of law and policy.

The subcontractor and insurer moved to compel arbitration under an agreement providing that on review of any award issued pursuant to that agreement, “the court shall be empowered to address on review any failure by the arbitrator(s) to properly apply Florida law to the dispute. To the extent the arbitrator(s) or the court fail to apply the law properly, the Award of the arbitrator(s) is subject to further review through the Florida appellate process.” This is, of course, a much broader judicial review than is normally permitted with respect to arbitration awards, and thus the contractor argued that the provision was void and that the entire arbitration agreement should be discarded.

The trial court granted the motion to compel arbitration, but the appellate court reversed, finding that the subject provision violated public policy as expressed in the Florida Arbitration Code. The Code limits a courts’ ability to vacate an arbitration award to a fairly narrow set of circumstances, such as when an arbitration award is “procured by corruption, fraud, or other undue means,” when there is “evident partiality,” corruption, or misconduct on the part of the arbitrator, or when the arbitrator exceeds the authority provided by the parties’ agreement. The Code also prohibits parties from waiving or agreeing to vary their right to seek judicial confirmation of awards or the grounds for vacating or modifying an arbitration award.
The court found that the Code clearly prohibited expansions of the scope of judicial review of arbitration awards and thus made the contested provision in the arbitration agreement unenforceable. Rather than finding that the arbitration agreement was unenforceable as a whole, however, the court remanded the matter to the trial court to determine whether this provision was severable, such that the arbitration agreement could be enforced with that provision removed.

National Millwork, Inc. v. ANF Group, Inc. and Liberty Mutual Insurance Company, No. 4D18-545 (4th DCA, Sep. 25, 2018)

This post written by Jason Brost.

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Shingled Out: Eleventh Circuit Binds Homeowners to Individual Arbitration Provisions Displayed on Roofing Shingle Packaging

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This case involved a twist on the classic “shrinkwrap” agreement. Here, plaintiff homeowners brought a putative class action seeking damages and declaratory relief on behalf of a class of building owners who had used Tamko shingles. In response, Tamko filed a motion to compel arbitration, contending that by unwrapping and retaining its shingles, the homeowners had accepted the terms of its purchase agreement and warranty which were both printed—in full—on the outside wrapper of every shingle package. Specifically, each package wrapper displayed the all-capped word “IMPORTANT” and warned the purchaser in all caps to “READ CAREFULLY BEFORE OPENING [THE] BUNDLE.” The warranty also contained a mandatory arbitration clause, which was similarly printed in capital letters on the outside of every shingle wrapper and specified that any action against Tamko must be arbitrated individually rather than as part of a consolidated or class action. The district court granted Tamko’s motion and dismissed the homeowners’ complaint, reasoning that the homeowners were bound to arbitrate because through their roofers, they had accepted the terms of Tamko’s purchase agreement, including its mandatory-arbitration provision.

On appeal, the Eleventh Circuit affirmed, finding that (1) Tamko’s packaging sufficed to convey a valid offer of contract terms; (2) unwrapping and retaining the shingles was an objectively reasonable means of accepting that offer; and (3) the homeowners’ grant of express authority to their roofers to buy and install shingles necessarily included the act of accepting purchase terms on the homeowners’ behalf. In so finding, the appellate panel reasoned that “[a]s in the shrinkwrap cases, Tamko’s packaging provided conspicuous notice of its offer—something a reasonable, objective person would understand as an invitation to contract.” The panel further stated that, as master of its offer, Tamko was “free to invite acceptance by specified conduct” and rejected the plaintiffs’ arguments that they never saw the shingle packaging and thus never had a reasonable opportunity to consider Tamko’s purchase terms. Instead, the panel found that “acceptance of Tamko’s purchase terms—arbitration clause and all—was incidental to, and reasonably necessary to accomplish, the homeowners’ express grant of agency authority to their roofers to purchase and install shingles” and therefore, notice of the terms printed on the shingle wrappers was properly imputed to the homeowners. Dye v. Tamko Bldg. Prods., Inc., Case No. 17-14052 (11th Cir. Nov. 2, 2018).

This post written by Gail Jankowski.

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Arbitration Award Against HGTV Designer Confirmed Due to Failure to Raise Fairness Objections During Arbitration

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The case involved an award in excess of $800,000 against a home designer and some affiliated companies for a renovation project that went bad. One of the affiliated companies brought an arbitration proceeding against the homeowners for nonpayment, and after appointment of the arbitrator, the homeowners sought to join the home designer pursuant to Construction Industry Arbitration Rules R-7.

The designer’s participation in the arbitration was limited. He did not file an answer to the homeowners’ claims against him and failed to appear at the hearing. After the arbitrator issued a final award holding the designer and other companies jointly and severally liable, the designer moved the federal district court for vacatur.

The district court held that, under the FAA, the appointment of the arbitrator prior to the designer’s participation in the arbitration did not result in a proceeding that was “not fundamentally fair,” distinguishing a case under the New York Convention that had held otherwise because the Convention specifically provides a defense based on “improper composition of the arbitral tribunal.” Under the FAA, the requirements for a “fundamentally fair hearing” are “notice, opportunity to be heard, and to present relevant and material evidence and argument before the decision makers, and that the decision makers are not infected with bias.” There was no indication that those requirements were not met here.

The Tenth Circuit confirmed the district court’s ruling, and denied the designer’s appeal on the additional ground that the designer failed to object to the arbitrator and failed to invoke CIAR R-7(c), which provides an opportunity for the arbitrator to “establish a process for selecting arbitrators for any ongoing or newly constituted case” after the joinder of additional parties. The designer’s failure to invoke CIAR R-7 was fatal to his claim to have been denied due process through the pre-joinder selection of the arbitrator. Gidding v. Fitz, No. 18-1106 (10th Cir. Nov. 6, 2018).

This post written by Benjamin E. Stearns.

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