Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

California Appeals Court Upholds Summary Judgment Against Insured’s Attempt To Pierce Insurer’s Corporate Veil

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A California state appellate court recently upheld summary judgment in favor of an insurer in a dispute about the value of fine art paintings over the insured’s attempts to pierce the insurer’s corporate veil. In the course of litigation against XL Specialty and related entities, the Hollanders alleged that XL Capital, the insurer’s parent company, operated as the alter ego of the other entities and operated as a single enterprise. The trial court had previously denied several defendants’ motion for summary judgment on the alter ego, agency, and related liability theories, but those defendants renewed their motion on the grounds that new facts had arisen. Specifically, there was new information concerning XL Specialty’s assets which allegedly doomed the Hollanders’ ability to prove the insurer was incapable of paying a judgment; proof which would satisfy the “inequitable result” element required to pierce the corporate. After the trial court’s initial grant of the renewed motion was appealed and remanded on other grounds, the trial court again granted the motion and this appeal followed.

In its second review of the case, the appellate court affirmed the grant of summary judgment. First, the court found the Hollanders failed to present sufficient evidence (through proper expert witness testimony) that XL Specialty’s assets were inadequate to satisfy a potential judgment or to support their claims for emotional distress and punitive damages. It concluded the expert testimony proffered was “only unsupported and unexplained conjecture” about XL Specialty’s solvency. Even less sufficient were the Hollanders’ claims for emotional distress, supported by “absolutely no evidence,” and punitive damages, a discretionary award for which the lack of evidence fell far short of the clear and convincing evidence required.

Second, the court upheld the decision regarding the agency theory because the Hollanders failed to prove that XL Capital dominated and controlled the activity of its subsidiaries. The Hollanders showed the various defendants shared an employee, but that showing alone was insufficient to prove agency of XL Capital where there was no evidence about other employees, the senior leadership of the companies, or the shared employee inappropriately mixing roles for the respective companies. The Hollanders attempted to demonstrate shared profits and losses by highlighting reinsurance agreements, but failed to show any of the defendants were members or parties to the reinsurance pooling and quota share agreements. Finally, the fact that the defendants shared administrative service agreements did not show agency where there was no right to control or any demonstrated impact by the agreements on day-to-day management of the companies.

Thus, the court affirmed the summary judgment as to the alter ego/single enterprise and agency theories of liability because the Hollanders failed to present triable issues of fact on the legal elements of those theories.

Hollander v. XL Capital, Ltd., Case No. B276621 (Cal. App. Ct. May 1, 2018).

This post written by Thaddeus Ewald .

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Idaho, South Carolina, and Tennessee Update Credit for Reinsurance Laws

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South Carolina and Tennessee updated their respective credit for reinsurance statutes consistent with NAIC Credit for Reinsurance Model Law 785. Idaho and Tennessee adopted the NAIC Credit for Reinsurance Model Regulation 786. Among other changes, the updated model law and regulation set incremental collateral requirements for reinsurance ceded to alien reinsurers in order for a cedent to recognize a reduction in its liabilities for the amount ceded. Previously, the reinsurance ceded to alien reinsurers was required to be secured by 100% collateral. Idaho Credit for Reinsurance Rules no. 18-01-75 issued Mar. 28, 2018 (rules) (redline of proposed rules); South Carolina H.B. 4656 eff. May 3, 2018 (bill) (redline); Tennessee H.B. 1808 eff. Jan. 1, 2019 (bill) (summary); Tennessee Regs. Chapter 0780-01-63 eff. May 31, 2018 (regulation and redline).

This post written by Michael Wolgin.
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Update On Amendments To State Captive Insurance Laws

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South Carolina

South Carolina passed new legislation making numerous and streamlining changes to its captive insurance law. Included in the changes are: modified capital and surplus requirements, a new definition of a captive’s principal place of business, and new oversight, reporting, and examination rules and requirements. (S.C. H.B. 4675 eff. May 18, 2018).

Vermont

Last year Vermont passed House Bill 85, authorizing the formation of agency captive insurers owned by insurance agencies, among other changes. Effective March 8, 2018, Vermont enacted House Bill 694, making various amendments to the captive insurance laws, including standardizing the due dates for annual reporting and premium taxes, designating the Commissioner of Financial Regulation as the agent for service of process for branch captive insurers, and further amending the governance standards for risk retention groups. (VT H.B. 85 eff. May 1, 2017) & (VT H.B. 694 eff. March 8, 2018).

Connecticut

Connecticut passed Senate Bill 377 joining Vermont in authorizing the formation of agency captive insurers owned or controlled by licensed insurance agents or producers. (CT S.B. 377 eff. July 1, 2018).

This post written by Michael Wolgin.

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Multi-Million Russian Mall Investment Dispute Remains In Limbo As Ninth Circuit Vacates Turnover Order Requiring Release Of Assets Held In Lichtenstein Trust

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In a matter between Petitioner Vitaly Smagin and Respondent Ashot Yegiazaryan, the London Court of International Arbitration awarded Smagin about $72 million in damages plus about $20 million in interest and fees. A U.S. district court then confirmed the award. Yegiazaryan then appealed to the Ninth Circuit, taking issue with (1) an order of attorneys’ fees against him; (2) a post-judgment injunction against him, freezing some $115 million in assets; and (3) a turnover order against him regarding a Liechtenstein trust that is now the subject of ongoing proceedings in Liechtenstein courts.

With respect to the grant of attorney’s fees, the Ninth Circuit vacated the award as an abuse of discretion, finding that the district court granted Smagin’s request for attorney’s fees without entering any finding on bad faith. With regard to the injunction resulting in the freezing of Yegiazaryan’s assets, however, the Ninth Circuit upheld the decision, reasoning that the district court identified a clear, case-specific risk that Yegiazaryan might evade the court’s jurisdiction or contravene its judgment by funneling assets through a “reshuffled deck of shell companies and bank accounts across the Caribbean, Cyprus, Monaco, Liechtenstein, or whatever other amicable havens he finds.” Regarding the turnover order, which commanded Yegiazaryan to turn over assets of a Liechtenstein trust, the Ninth Circuit vacated the order as premature. The Ninth Circuit reasoned that its decision was guided by the principles of “adjudicatory comity,” that is, “discretion of a national court to decline to exercise jurisdiction over a case before it when that case is pending in a foreign court with proper jurisdiction.” Smagin v. Yegiazaryan, Case No. 17-56467 (9th Cir. May 18, 2018).

This post written by Gail Jankowski.

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Court Applies Arbitration And Continued Performance Provisions Of One Contract To A Separate Performance Guaranty Agreement

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This lawsuit centered around a contract providing a guaranty of performance in connection with an underlying broadband network access contract. The underlying contract called for binding arbitration of any disputes and required the parties “to continue performing their respective obligations under the Agreement … while the dispute is being resolved.” The guaranty did not contain the same “continuing performance” clause, but it did include a clause incorporating “all other provisions [of the underlying agreement] relating to dispute resolution or arbitration.” The guarantor argued that the “continued performance” clause of the underlying contract only imposed an obligation on its subsidiary, the party to the underlying contract. But, according to the court, “this argument makes no sense.” “[W]hen the parties to the Guaranty agree that they incorporate a clause saying that the ‘Parties agree to perform their respective obligations under the Agreement … while a dispute is being resolved,’ then that incorporation plainly means that the parties to the incorporating contract (i.e., the Guaranty) agree to perform their obligations under that contract pending resolution of any dispute. Otherwise, the incorporation would do no work.” As such, the guaranty’s incorporation of “all other provisions relating to dispute resolution or arbitration” subjected the guarantor to the underlying contract’s continuing performance obligations pending resolution of the dispute. Axia Netmedia Corp. v. Massachusetts Tech. Park Corp., Case No. 17-1607 (1st Cir. Apr. 25, 2018)

This post written by Benjamin E. Stearns.

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