Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Virginia To License Domestic Insurers To Sell Surplus Lines Insurance

by

Virginia has amended its insurance law to allow the licensing of domestic insurers (i.e., insurers incorporated or organized under Virginia law) as “domestic surplus lines insurers” eligible to sell surplus lines insurance within the state.

In order to qualify for such a license, insurers must have a policyholder surplus of $15 million, and their board of directors must pass a resolution seeking this license. The law also provides that “a domestic surplus lines insurer shall be considered a nonadmitted insurer” as the term “nonadmitted insurer” is used in the Nonadmitted and Reinsurance Reform Act of 2010 (15 U.S.C. § 8201 et seq.). When issuing insurance to insureds whose home state is Virginia, such domestic surplus lines insurers will be subject to the same taxes and maintenance assessments as nonadmitted insurers from other states who sell such insurance within the state. They will also be exempt from laws regarding insurance rating plans, policy forms, policy cancellation and nonrenewal, and premium charged to the insured to the same extent as such nonadmitted insurers.

These changes will go into effect July 1, 2018.

2018 Virginia Senate Bill No. 542, Virginia 2018 Regular Session

This post written by Jason Brost.

See our disclaimer.

Michigan Amends Reinsurance Credit Statute To Conform To NAIC Model Law

by

On April 10, 2018 Michigan Governor Rick Snyder (R) signed Michigan Senate Bill 638 into law to amend the state’s insurance code to conform to the National Association of Insurance Commissioner (“NAIC”)’s model law on reinsurance regarding when ceding insurers may claim credit for reinsurance. The Michigan legislative staff has published an analysis of the bill. The Michigan Insurance Code previously authorized reinsurance credit where the reinsurance is ceded to a reinsurer authorized in Michigan or met one of three different sets of requirements. Senate Bill 638 amends those three requirements as follows:

  • Where the Code allows reinsurance credit if the reinsurer is accredited as a Michigan reinsurer, the bill removes a prohibition on receiving credit where the reinsurer’s accreditation was revoked, requires the reinsurer to bear the expense of the state’s examination of its books and records to gain accreditation, removes the specific surplus requirement of $20 million required for accreditation, and institutes instead a requirement that the reinsurer satisfy the state that it has “adequate financial capacity” to meet its reinsurance obligations.
  • Where the Code allows reinsurance credit if the reinsurer maintains a qualified trust fund for reinsurance claims payments, the bill adds provisions regarding single assuming insurers that permanently discontinue writing new business secured by the trust, changes the dates for various criteria of the trusts maintained by groups of underwriters, and adds requirements for groups of unincorporated underwriters under common administration.
  • The bill maintains the Code’s provisions for reinsurance credit if the insured risks are located in jurisdictions where reinsurance is required under local laws and regulations.

The bill also adds two new scenarios that qualify for reinsurance credit:

  • Where the reinsurer is domiciled in or entered through a state that employs standards regarding reinsurance credit “substantially similar” to Michigan’s standards, provided that the reinsurer maintains a surplus of $20 million and submits to Michigan’s books and records examination authority and bears the expense thereof.
  • Where the reinsurer has been certified as a certified reinsurer in Michigan and secures its obligations as provided in the bill and the Code, provided that it meets certain certification requirements.

Additionally, the bill adds provisions governing the suspension and revocation of accreditation and certification under the Code, requiring ceding insurers to manage reinsured assets in proportion to its business and diversify their reinsurance programs, and granting the state Director of Insurance and Financial Services authority to promulgate reinsurance regulations under the Administrative Procedure Act.

The bill takes effect July 9, 2018.

This post written by Thaddeus Ewald .

See our disclaimer.

Arbitrator’s Decision Not Based On Manifest Disregard Of The Law, But Challenge To That Decision Was Not So Meritless As To Warrant Sanctions

by

Jonathan Kessler brought a claim in arbitration against his former employer, Kent Building Services, after he was fired from his job as Kent’s president, asserting that he had not been fired for cause and was thus owed severance. The arbitrator determined that Kent breached Kessler’s contract by firing him without cause, a decision the arbitrator found was arbitrary and irrational and thus a breach of the implied covenant of good faith and fair dealing, and thus awarded him six month’s severance pay.

Kent challenged this award in federal court, arguing that the arbitrator’s decision on good faith and fair dealing demonstrated a manifest disregard of New York contract law. Kent based this argument on a New York trial court decision holding that termination of employment only breaches the implied covenant of good faith and fair dealing if it results from a “constitutionally impermissible purpose or [violates] statutory or decisional law,” something not shown during the arbitration. The court rejected this argument, finding that other case law makes it clear that unconstitutionality or illegality are “sufficient but not necessary” to support a claim based on the breach of the implied covenant of good faith and fair dealing. Further, the court found that the arbitrator applied the correct law in finding that Kent had discretion regarding whether to fire Kessler and that the irrational exercise of this discretion could support a breach of the implied covenant of good faith and fair dealing. The court therefore found that the arbitrator had not acted in manifest disregard of the law.

However, the court rejected Kessler’s motion for sanctions under 28 U.S.C. § 1927 for filing a meritless petition to vacate. While the court disagreed with Kent’s argument regarding the requirements of good faith and fair dealing claims under New York law, it found that making argument was not unreasonable. Kessler had also argued that Kent had acted in bad faith when it included in its petition allegations of numerous failures by Kessler in his job performance while failing to mention that the arbitrator had specifically found that these failures were not the basis for Kent’s decision to fire Kessler. The court found that this should be interpreted as simply an attempt by Kent “to provide greater context for the parties’ employment dispute,” rather than a bad faith attempt to mislead the court. Finding no frivolous argument and no bad faith, the court declined to award sanctions.

Kent Building Services, LLC v. Kessler, 17-CV-3509 (JPO) (S.D.N.Y. Mar. 14, 2018)

This post written by Jason Brost.

See our disclaimer.

Minor Not Bound—Directly Or Indirectly—By Arbitration Agreement In Mother’s Credit Card Agreement

by

Last month the Seventh Circuit reversed a lower court order enforcing an arbitration agreement contained in cardholder agreement as applied against the minor daughter (“A.D.”) of the cardholder, rejecting the bank’s attempt to compel arbitration of the daughter’s Telephone Consumer Protection Act (“TCPA”) putative class action lawsuit. The trial court ruled A.D. was bound by the arbitration agreement as an “authorized user” of the card—where she, on at least one occasion, used the credit card to make a purchase as instructed by her mother—and was bound under the direct benefits estoppel theory.

First, the Seventh Circuit held A.D. was not bound by the cardholder agreement and its arbitration clause. The court emphasized the specific procedures in the cardholder agreement for designating authorized users which the parties did not follow: A.D.’s mother never notified the bank or paid an annual fee, the bank never issued a new card, and A.D. was not even old enough at the time to qualify as an authorized user. The court also found A.D. never manifested consent to be bound by the arbitration agreement, did not have legal capacity as a minor to enter into a contract, and actively disaffirmed consent by filing a lawsuit.

Second, the court concluded equitable estoppel was inapplicable and did not bind A.D. to the cardholder agreement. Any benefit A.D. received was derived from her relationship with her mother, not any relationship with the bank. Nor, the court held, did A.D.’s lawsuit center on rights or benefits under the cardholder agreement. The court rejected the bank’s argument that its affirmative defense based on A.D.’s mother’s consent qualified the case as one “relying” on the agreement because the bank, not A.D., bore the burden of establishing that defense. Simply put, A.D.’s lawsuit asserted rights under the TCPA and was therefore not premised on the cardholder agreement.

Because A.D. was not bound to the cardholder agreement directly as a signatory nor indirectly through estoppel, the court reversed and refused to compel arbitration.

A.D. v. Credit One Bank, N.A., No. 17-1486 (7th Cir. Mar. 22, 2018).

This post written by Thaddeus Ewald .

See our disclaimer.

Court Vacates Arbitration Award In Crop Insurance Dispute That Awarded Remedies Preempted By Federal Law

by

The plaintiff, a farming company, demanded arbitration against Diversified Crop Insurance Services over the nonpayment of federally reinsured claims. The plaintiff brought several claims under policies it had purchased from Diversified, to which Diversified denied coverage, due to a misstatement of the farm’s location and a separate clerical omission as to the number of acres covered, both of which were allegedly errors committed by Diversified’s agent. The arbitrator found for the plaintiff and trebled damages against Diversified.

When the plaintiff moved to confirm the award, the court considered whether the arbitrator exceeded her authority by basing her decision on extra-contractual state law remedies, which are preempted by federal law associated with Diversified’s reinsurance coverage from the Federal Crop Insurance Corporation. The court found that the arbitrator did exceed her authority by finding that “the farm was uninsured, and therefore not covered by the policy, yet award[ing] damages in negligence, breach of fiduciary duty, and constructive fraud because she attributed the lack of coverage to Diversified and its agents.” The court found further evidence of the arbitrator’s exceeding the scope of her authority in the fact that she trebled the awards under North Carolina’s Unfair and Deceptive Trade Practices Act. As such, the court vacated the award. Williamson Farm v. Diversified Crop Insurance Services, Case No. 5:17-CV-513-D (USDC E.D.N.C. Mar. 26, 2018).

This post written by Gail Jankowski.

See our disclaimer.