Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Promissory Note Issued In Satisfaction of Unpaid Insurance Premiums Is Valid And Enforceable, Even If Allegedly Derived From Unapproved Reinsurance Agreement

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Plaintiff sells workers’ compensation insurance through its “EquityComp” program approved by New Jersey law. Defendant purchased an EquityComp policy. Unable to pay its insurance premiums, defendant executed a promissory note acknowledging its indebtedness and promising to pay plaintiff a stated amount in full settlement. Defendant made no payments toward the note, however, leading plaintiff to commence a lawsuit.

Defendant argued that the note was void as against public policy because it derived from a Reinsurance Participation Agreement (RPA) that was executed as part of the EquityComp program, but which was not itself approved by New Jersey regulators. According to defendant, plaintiff used the RPA to unlawfully circumvent state regulations governing policies issued with guaranteed versus loss-sensitive premiums. According to the court, however, the note was valid and enforceable regardless of whether it violated New Jersey insurance regulations. Citing Nebraska law, the court determined that the note was a distinct, unconditional agreement to “settle” a delinquent account. The court refused to “look behind” and nullify that agreement based on defendant’s allegations, particularly where there were no allegations of fraud or mistake in the issuance of the note.

Applied Underwriters, Inc. v. Top’s Personnel, Inc., No. 8:15-cv-00090-JMG-CRZ (USDC D. Neb. Aug. 2, 2018)

This post written by Alex Silverman.
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Federal Court in Puerto Rico Voids Marine Insurance Policy Based Upon Misrepresentation in Insurance Application

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QBE Seguros brought a successful action declaring a marine insurance policy was void ab initio under the doctrine of uberrimae fidei and the breach of the warranty of truthfulness in the application for insurance.

In Morales’ application for insurance, he did not include the fact that he had previously grounded a 40’ yacht and listed only two of the seven vessels that he had owned and operated when asked. Following an endorsement, Morales held hull insurance for a vessel named Making Waves, which sustained damage as a result of a fire. Thereafter, QBE rescinded the policy.

The Court first looked at uberrimae fidei, or the duty of utmost good faith, which requires the insurer to show that the insured misrepresented a material fact. Having determined Morales misrepresented his prior boating history and prior loss history on his application, the Court looked at whether such misrepresentation was material. “A fact is material if it can possibly influence the mind of a prudent and intelligent insurer in determining whether it will accept the risk.” QBE testified that prior loss history is an important factor to take into consideration when evaluating the risk posed by issuing a particular policy. The Court determined this information was material: “it is entirely logical that an insured’s loss history would affect their premiums and whether an insurance company would want to accept the risk of issuing them a policy.”

The Court then looked at whether the contract between the parties included a warranty of truthfulness, and if so, the insured’s misrepresentation of fact in that contract will also excuse the insurer from the policy contract. The insurance application stated the information provided therein is warranted by the applicant “to be true and correct in all respects.” The Court found the “warranty of truthfulness was material to the risk assumed by QBE in issuing the policy.” The Court rejected Morales’ affirmative defenses, finding that “Morales breached the warranty of truthfulness in the QBE Application and policy by failing to disclose his prior loss history and his prior boating experiences. His breach gives QBE the right to void the policy.”

The Court denied Morales’ counterclaims for breach of contract and consequential damages due to QBE’s bad-faith adjustment.

QBE Seguros v. Morales-Vázquez, No. 15-2091 (USDC D.P.R. Aug 7, 2018)

This post written by Nora A. Valenza-Frost.

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Special Focus: Follow the Fortunes Doctrine

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The follow the fortunes (or follow the settlements) doctrine has been an important part of many reinsurance relationships. This Special Focus article focuses on divergent case law as to whether the doctrine is purely a matter of contract, or whether it should be implied into every reinsurance contract, whether or not the contract refers to the doctrine.

This post written by Rollie Goss.
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Insurance Broker Must, at Its Own Expense, Produce Documents Requested by Subpoena Issued in Dispute Between Workers’ Compensation Insurer and Its Insureds

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A district judge in the Eastern District of California has ordered a third-party insurance broker to comply with a subpoena from defendants seeking documents related to that broker’s sale of defendant’s insurance policies to plaintiffs.

The order was entered in two lawsuits against Applied Underwriters, Inc. that have been consolidated for pre-trial purposes. In these lawsuits, Shasta Linen Supply Inc. and Pet Food Express Ltd. allege that Applied Underwriters used “an unfiled, void and illegal collateral agreement in the collection of excessive fees and expenses” in connection with workers’ compensation insurance. Applied Underwriters issued a subpoena to Relation Insurance Services, Inc., which was the insurance broker that sold the policies at issue. Relation objected to the subpoena on the basis that (1) it sought irrelevant information, (2) this information was available from plaintiffs, (3) the requested documents contained confidential, proprietary information, and (4) Applied Underwriters should be required to pay the costs of the production. The court rejected all four objections.

First, the court agreed with Applied Underwriters that information regarding the insurance brokerage work that Relation did for the plaintiffs was relevant to the question of plaintiffs’ reliance on Applied Underwriters’ allegedly fraudulent statements, as it could show what plaintiffs already knew about the market for insurance and competitive products. Second, the court found that Applied Discovery had already sought discovery from plaintiffs, and that the subpoena was meant to fill in gaps in plaintiffs’ productions. The court also emphasized that no rule required that party discovery be final before third-party discovery is issued. Third, the court found that a protective order entered in the matter would address Relation’s concerns regarding its confidential, proprietary information. Finally, the court found that $15,000—the amount that Relation estimated compliance with the subpoena would cost—was not a “significant expense” as is required for the cost shifting provision of Fed. R. Civ. P. 45(d)(2)(B)(ii) to apply, as Relation was a large company that had received approximately $400,000 in commissions from sales to the plaintiffs. Thus, the court ordered Relation to produce the requested documents and information at its own expense.

Shasta Linen Supply Inc. v. Applied Underwriters, Inc., No. 2:16-cv-00158 WBS AC, and Pet Food Express Ltd. v. Applied Underwriters, Inc., No. 2:16-cv-01211 WBS AC (June 14, 2018)

This post written by Jason Brost.

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Reinsurer Obtains Summary Judgment in Suit by Annuity Issuer

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Capitol Life Insurance Co. partially prevailed, and partially failed, its effort to overturn unfavorable grants of summary judgment in a recent dispute regarding an annuity policy written by Capitol. The present opinion arose from Capitol’s appeal of the trial court’s decision granting summary judgment in favor of the policyholder (“Newman”), third-party administrator MetLife, and summary judgment on behalf of Capitol’s reinsurer, AGL. On appeal, the Texas Court of Appeals reversed and remanded regarding summary judgment on Newman’s breach of contract claim, but affirmed summary judgment in favor of AGL and MetLife.

The court reversed summary judgment regarding Newman’s breach of contract claim and Capitol’s statute of limitations defense, remanding the case for further proceedings on that claim. The court affirmed the trial court’s grant of a “no-evidence summary judgment” as to Capitol’s breach of contract claim against AGL because Capitol did not provide “more than a scintilla of probative evidence” to show that Capitol had performed its obligations under the reinsurance agreement, an element of a breach of contract claim as to which Capitol bore the burden of proof. Likewise, the court upheld the grant of no-evidence summary judgment as to Capitol’s contract claim against MetLife. Capitol Life Ins. Co. v. Newman, Case No. 05-16-1476 (Tex. Civ. App. June 21, 2018).

This post written by Thaddeus Ewald .

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