Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

New Jersey Tax Court Finds That Companies for Which New Jersey is the Home State Must Pay Taxes on All Premiums Paid to Captive Insurers for U.S. Based Risks.

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A tax court judge in New Jersey has handed Johnson & Johnson (J&J), and likely other New Jersey-based businesses that operate captive insurers, a significant loss in an opinion interpreting the federal Nonadmitted and Reinsurance Reform Act (NRRA) and related changes to New Jersey law regarding taxes on insurance premiums.

For the last 10 years, New Jersey has imposed what the court called a self-procurement tax on insurance premiums paid to captive insurers, and J&J, which has its headquarters in New Jersey and pays significant premiums to a captive insurer, pays such taxes. Initially, those taxes were based only on the premiums paid for risks located in New Jersey. After the passage of the NRRA and certain related changes to New Jersey law, the New Jersey Department of Banking and Insurance took the position that J&J must pay taxes to New Jersey on all the premiums it paid its captive insurer for U.S. risks. J&J filed a claim challenging this interpretation and seeking a refund of almost $56 million, alleging that both the NRRA and the changes to New Jersey law applied only to surplus lines business, and not to self-procured insurance.

The court disagreed. The NRRA provides that “no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance.” This meant that New Jersey, which was previously able to tax premiums paid by out of state companies to nonadmitted insurers for risks located in New Jersey, could now only tax such premiums paid by businesses which New Jersey was their home state. The court rejected J&J’s argument, which was largely based on legislative history, that “nonadmitted insurance” as used in the NRRA does not include captive insurers. The court agreed with J&J, however, that the language of the changes to New Jersey law made it appear that only surplus lines insurance was covered by New Jersey’s adoption of the home state rule. And yet, after balancing what it called “the precise language” of the statute “against its true legislative intent,” the court found itself “convinced that the New Jersey Legislature intended to include self-procured insurance in the adoption of the Home State Rule because it intended to include all nonadmitted insurers, and not to limit it to only surplus lines.” This legislative intent thus trumped the “precise language,” and the court found that J&J must pay the tax on all premiums for risks located in the United States.

Johnson & Johnson v. Dir., Div. of Taxation & Comm’r, Docket No. 13502-2016 (June 15, 2018)

This post written by Jason Brost.

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Alaska Follows Other States in Adopting Law Based on Updates to NAIC Credit for Reinsurance Model Law

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On July 13, 2018 Alaska became the last state to incorporate amendments to the NAIC Credit for Reinsurance Model Law into its insurance code when Governor Bill Walker (I) signed House Bill 401 into law. As explained by the state Department of Commerce, Community, and Economic Development’s legislative analysis, the bill allows domestic ceding insurers to receive credit for reinsurance either as an asset or liability deduction based on the reinsured ceded so long as the assuming insurer satisfies certain requirements. The requirements provide alternate ways to qualify ceding insurers to receive such credit, including when the assuming insurers: are licensed to transact insurance or reinsurance business in Alaska; are accredited as reinsurers; are domiciled in states accredited by the NAIC; maintain trust funds in qualified U.S. financial institutions and satisfy related requirements; are certified as reinsurers in Alaska and secure obligations subject to additional requirements; and more. Furthermore, the law implements principle based reserving for policies and contracts issued on or after the valuation manual’s operative date. Pursuant to Alaska law the bill took effect immediately upon the Governor’s signature.

This post written by Thaddeus Ewald .

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Court Finds That Apparently Inconsistent Forum Selection Provisions Do Not Render Arbitration Agreement Unenforceable

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Plaintiff Fintech Fund, FLP filed an action in federal court in the Southern District of Texas asserting claims under the federal Defend Trade Secrets Act and the Computer Fraud and Abuse Act against Ralph Horne, a citizen of the United Kingdom and CEO of a company to which Fintech had licensed certain financial technology. Fintech claimed that Horne used that relationship to access Fintech’s confidential and proprietary information illegally. Horne moved to dismiss the action (1) for lack of personal jurisdiction and (2) for lack of subject matter jurisdiction and improper venue because the matter was subject to an arbitration agreement.

The court rejected Horne’s personal and subject matter jurisdiction arguments, finding that the court had specific jurisdiction over him based on telephone calls he made and emails he sent as part of his allegedly wrongful conduct to a Fintech partner in Texas, and that it had subject matter jurisdiction because Fintech’s claims were for federal statutory violations. Fintech was less successful on the question of venue, however.

Fintech argued that the dispute was not arbitrable because the arbitration agreement was unenforceable and the claims at issue were not covered by it. Fintech said there was no meeting of the minds as to arbitration, as the relevant contract contained an irreconcilable internal inconsistency; the arbitration provision said that all claims against Horne and his company would be resolved by “arbitration under the London Court of International Arbitration (‘LCIA’) Rules,” while a choice of law provision in the same contract said that the courts of England and Wales would have exclusive jurisdiction over such claims. The court found that this apparent inconsistency could be resolved by interpreting them to require that any non-arbitrable claims and disputes regarding arbitrability be brought before courts in England or Wales, while any arbitrable claims must be submitted for arbitration in London. In either case, the agreed upon forum was in the United Kingdom, not the Southern District of Texas. Finding no justification for refusing to enforce the parties agreed upon forum, the court dismissed the action, leaving the question of arbitrability to be decided, if necessary, by a court in England or Wales. Fintech filed its notice of appeal on the same day that the district court entered its order.

Fintech Fund, FLP v. Horne, Civil Action No. H-18-1125 (S.D. Tex. July 6, 2018)

This post written by Jason Brost.

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New York Federal Court Awards Damages for Reinsurance Payments in Lawsuit Against Iran Related to September 11 Attacks

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The Southern District of New York recently granted a motion for damages by insurance plaintiffs in a multidistrict litigation case against Iran stemming from the September 11, 2001 terrorist attacks. The court previously entered a default judgment against Iran and tasked a magistrate judge with calculating damages. The present opinion stemmed from plaintiff’s objections to the magistrate’s recommendations that plaintiffs could not recover reinsurance payments made related to the attacks and that prejudgment interest began to accrue on the individual dates of payment of each claim for which plaintiffs sought damages.

First, the court agreed with plaintiffs and awarded damages for the reinsurance payments at issue. Plaintiffs objected to the magistrate’s recommendation because another case in the MDL had previously awarded damages for reinsurance payments (constituting law of the case) and that, contrary to the magistrate’s logic, their subrogation rights did not depend on contractual privity. The Southern District side-stepped the issue of whether the “law of the case” doctrine applied by concluding equitable subrogation, a doctrine sounding in equity rather than contract, does not require contractual privity under New York law. While not officially deciding the law of the case issue, the court in dicta noted the existence of a D.C. federal case allowing recovery for reinsurance payments on an unrelated terrorist attack and that the magistrate provided no basis for distinguishing the present case from the previously decided MDL case.

Second, the court determined that the date of the September 11 terrorist attacks was the appropriate benchmark for when prejudgment interest should start accruing. New York law provides that damages for losses arising in the state incurred at various times may trigger interest either at the date of each loss individually or upon a “single reasonable intermediate date.” Instead of triggering interest accrual for each loss based on the date each claim was paid, the court affixed all prejudgment interest to begin accruing on September 11, 2001 to promote consistency in the MDL cases and avoid complex calculations. As to losses arising outside of New York, the court likewise exercised its broad discretion to select September 11, 2001—the date of the underlying terrorist attack and the date selected for New York losses—to be the date from which prejudgment interest is to be calculated for non-New York losses.

In re Terrorist Attacks on Sept. 11, 2001, Case No. 03-MDL-1570 (USDC S.D.N.Y. June 25, 2018).

This post written by Thaddeus Ewald .

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Rhode Island Amends Laws to Permit Voluntary Restructuring of Insurers Using Protected Cells with Commissioner Approval

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Rhode Island has amended its laws related to voluntary restructuring of insurers and protected cell companies to allow for domestic insurance companies to enter into a voluntary restructuring, including the use of a protected cell, with the approval of the commissioner. The law now defines voluntary restructuring as “the act of reorganizing the legal ownership, operational, governance, or other structures of a solvent insurer, for the purpose of enhancing organization and maximizing efficiencies, and shall include the transfer of assets and liabilities to or from an insurer, or the protected cell of an insurer pursuant to an insurance business transfer plan. A voluntary restructuring under this chapter may be approved by the commissioner only if, in the commissioner’s opinion, it would have no material adverse impact on the insurer’s policyholders, reinsureds, or claimants of policies subject to the restructuring.” R.I. H8163A (eff. July 2, 2018).

This post written by Michael Wolgin.

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