Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CALIFORNIA DOI AMENDS REGULATION OF REINSURANCE

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The California Department of Insurance (DOI) has adopted a set of amendments, effective January 1, 2018, to its regulations regarding reinsurance accounting, agreements and oversight. These changes were made to conform the regulations with the requirements of the federal Nonadmitted and Reinsurance Reform Act (NRRA), changes to the California Insurance Code, NAIC Model #787, and the practices of the DOI.

The amendments include several changes that clarify which regulations apply only to California domestic insurers versus which apply to both domestic and foreign (i.e., domiciled outside of California) insurers. This is a response to the preemption by the NRRA of certain state laws regarding reinsurance agreements when applied to nondomestic insurers. Among other things, the amendments make it clear that foreign insurers no longer have to file indemnity reinsurance transactions for commissioner approval. The amendments also include changes conforming the regulations to a 2013 change in the California Insurance Code that prevents the Commissioner from denying financial statement credit to a foreign ceding insurer if that credit is recognized by the ceding insurer’s domestic state and that state’s solvency requirement have been accredited by the NAIC or are substantially similar to the NAIC standards.

The largest additions made by the amendments adopt NAIC Model #787, which the NAIC created to establish uniform minimum standards for securing the obligations under captive reinsurance treaties and reserve financing arrangements. Model #787 is expected to become part of the NAIC’s accreditation standards within the next few years, and the adoption of its provisions in these regulations is intended to ensure that California will meet those accreditation standards whenever that occurs.

Additionally, in the section of the regulations providing that a domestic insurer must generally “retain at least 10% of direct premium written per line of business,” the amendments replace the phrase “per line of business” with “per reinsurance agreement,” as the Commissioner has historically exercised his discretion to apply this retention requirement to reinsurance agreements as a whole, which often include multiple lines of business. Further, the amendments remove all references to and requirements for “volume insurers,” a concept that no longer exists under California law.

Cal. Code Regs. tit. 10, §§ 2303 – 2303.29; Cal. Office of Administrative Law, 2017-1012-04 (Nov. 27, 2017); Cal. Dept. of Ins., Initial Statement of Reasons, Reinsurance Oversight, REG-2016-00024 (May 1, 2017)

This post written by Jason Brost.

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NEW YORK COURT OF APPEALS HOLDS THERE IS NO PRESUMPTION OF EXPENSE-INCLUSIVE CAPS IN LIABILITY LIMIT CLAUSES IN FACULTATIVE REINSURANCE CERTIFICATES

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The New York Court of Appeals recently answered in the negative a question certified to it by the U.S. Court of Appeals for the Second Circuit regarding prior precedent and whether per occurrence liability limits in facultative reinsurance contracts cap all obligations of the reinsurer, including for expenses such as defense costs. In doing so, the state’s highest court reiterated that general principles of contract construction apply to reinsurance contracts.

Specifically, the Second Circuit asked whether the New York Court of Appeals’ 2004 decision in Excess Ins. Co. v. Factory Mut. Ins. Co.:

“impose[d] either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?”

In the underlying Second Circuit case, the cedent (“Century”) billed its reinsurer (“Global”) over $82,000 in loss and over $244,000 in expenses for a particular claim, even though the certificate’s stated limit was $250,000. Citing Excess, Global argued the $250,000 limit operated as a cap on its ultimate reinsurance obligations, while Century argued the cap applied only to loss (indemnity) and that Global was still responsible to cover expenses in addition to the limit.

The court began its analysis with a detailed explanation of its decision in Excess. There, the court interpreted the limitations clause in a facultative reinsurance certificate to operate an expense-inclusive cap. In the decade-plus since the Excess decision, however, some courts have interpreted the ruling to mean that third-party defense costs incurred by a cedent are unambiguously or presumptively subject to the amount of the stated liability limits in such certificates.

Answering the certified question in the negative, the court rejected that Excess established such a per se rule on expense-inclusive caps. It distinguished the issues presented in Excess and in the underlying Second Circuit case, with the former addressing whether the reinsurance contract at issue’s limitations clause established a cap for both liability costs and expenses or merely liability costs. Specifically, the court noted, the Excess case read the limitations clause in context of the entirety of the reinsurance contract in line with general principles of contract construction. Additionally, the court distinguished Excess on the fact that the expenses incurred were in litigation between the insurer and its policyholder, not costs (such as third-party defense costs) the insurer was obligated to pay pursuant to the terms of the underlying contract itself. Thus, the court concluded that Excess did not address whether similar limitations clauses would require reinsurers cover third-party defense costs in excess of those limits.

The court “h[e]ld definitively” that Excess did not supersede the ordinary rules of contract interpretation that otherwise apply to reinsurance contracts. Thus, under the Court of Appeals holding, New York law does not impose a rule nor a presumption that a liability limitation clause automatically caps all obligations, including defense costs and other expenses, owed by a reinsurer without regard for the specific provisions in the reinsurance contract, and the court answered the Second Circuit’s question in the negative. Global Reinsurance Corp. of Am. v. Century Indem. Co., No. 124 (N.Y. Dec. 14, 2017).

This post written by Thaddeus Ewald .

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INSURER’S ATTEMPT TO SHIELD DOCUMENTS FROM DISCOVERY THROUGH ASSERTION OF THE MEDIATION PRIVILEGE AND A RELEVANCY OBJECTION IS UNAVAILING

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In a breach of contract and bad faith case emanating from an insurer’s refusal to settle an underlying case within policy limits, the insurer was unsuccessful in its attempt to protect documents from discovery by assertion of a “mediation privilege” and another set of documents related to reinsurance information via a relevancy objection. The court ruled that the documents did not qualify as “mediation documents” because the insurer was not a party to the underlying litigation, which was a “requirement under the plain meaning of the definition of ‘mediation document.’” The documents also did not qualify as “mediation communications” because they involved statements “made by a person present at the mediation outside the mediation session.” As such, in order to qualify, the communications must have either been made by the mediator, or to the mediator. They were not. Another set of documents containing statements “which were made by a person who may have been present at the mediation session to someone (not the mediator) outside the mediation session” also did not qualify for protection.

With regard to the reinsurance documents, the court stated that there is “no absolute exclusion of reinsurance information.” Rather, discovery of such information may be allowed in the context of claims for bad faith involving an insurer’s failure to settle in order to “equalize the knowledge of both parties and give the plaintiff ‘assurance that there can be recovery in the event of a favorable verdict to justify the time, effort and expense of preparing for trial.’” The fact that such information may be discoverable, however, does not guarantee that it will be admissible at trial.

Subsequent to the ruling described above, the court denied a motion for reconsideration, finding that it had not committed an error of law. The court “reiterate[d] that it considers the mediation privilege a very important privilege in jurisprudence; however, for the Court to stretch the mediation privilege beyond its plain meaning and ambit of protection, in fact, would undercut the privilege itself and exceed this Court’s power and authority.” Golon, Inc. v. Selective Ins. Co. of the Southeast, Case No. 17-cv-0819 (W.D. Pa. Dec. 7, 2017 and Dec. 14, 2017).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT: UNCONSCIONABILITY ARGUMENTS DIRECTED SOLELY AT CLASS ACTION WAIVER PROVISIONS IN ARBITRATION AGREEMENTS ARE FORECLOSED BY CONCEPCION

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Utilizing a “sweeping reading of Concepcion,” as characterized by the concurring opinion, the Ninth Circuit has ruled that arguments that “a class action waiver, by itself, is unconscionable under state law or that an arbitration agreement is unconscionable solely because it contains a class action waiver” are expressly foreclosed by AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011). The plaintiff did not challenge the district court’s decision to compel arbitration, but rather the decision to compel arbitration on an individual basis, arguing that the relevant agreement’s class action waiver provision was unconscionable under Nevada law.

The majority stated that, while Concepcion foreclosed the plaintiff’s unconscionability argument because it was directed only at the class action waiver provision, Concepcion “does not foreclose application of state unconscionability doctrines to arbitration agreements generally.” Were the plaintiff to contend that “the entire arbitration agreement – or any aspect of it other than the class action waiver – is unconscionable,” then his argument would be viable. However, such was not the case here. Carter v. Rent-A-Center, Inc., Case No. 16-15835 (9th Cir. Dec. 12, 2017).

This post written by Benjamin E. Stearns.
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ELEVENTH CIRCUIT FINDS NO MANIFEST DISREGARD OF THE LAW AND UPHOLDS ORDER CONFIRMING ARBITRATION AWARD IN LICENSING DISPUTE

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The case involved a dispute between the owner of the Cabbage Patch Kids brand and related intellectual property (“CPK”), and licensee JAKKS Pacific, Inc., which had an exclusive license to use the brand and intellectual property between 2012 and 2014. Prior to the end of the license agreement, CPK selected a new licensee, Wicked Cool Toys, to manufacture and sell Cabbage Patch Kids dolls and products beginning in 2015. To that end, CPK and Wicked Cool Toys entered into a deal memorandum on May 30, 2014 whereby CPK permitted Wicked Cool Toys to immediately begin the process of creating and promoting a new line of dolls. Shortly thereafter, JAKKS asserted that CPK had breached its exclusive license and stopped paying royalties due under the agreement. CPK responded by filing suit in a federal court in Georgia seeking an order compelling arbitration and confirmation of any arbitration award.

At issue during arbitration was the meaning of a provision in the license agreement reserving to CPK the right to “engage, during the 365-day period prior to the termination or expiration of [the agreements], in the negotiation, with potential licensees (including competitors of Licensee), of one or more license agreements granting licenses with respect to” the products covered by JAKKS’s exclusive license, “to become effective upon the expiration or earlier termination of [the agreements].” JAKKS argued that, under that provision, CPK could only “negotiate” with potential licensees in 2014, and was prohibited from actually reaching an agreement with a new licensee or doing anything else to make it possible for a new licensee to actually launch a new line of Cabbage Patch Kids products in 2015. The arbitrator concluded that this provision, particularly the word “negotiate,” was ambiguous in light of the circumstances, and that “it was the intention of the parties” that CPK and Wicked Cool Toys “could do what they did in order to transition into the manufacture and launch in 2015 of a new seasonal line of [Cabbage Patch Kids] products, without the de facto creation of a ‘gap’ of about one year.” The arbitrator therefore awarded CPK the royalties withheld by JAKKS and the court confirmed the award.

On appeal, JAKKS moved to vacate the award and argued under both Georgia law and the FAA that the arbitrator manifestly disregarded the law and exceeded his authority. The Eleventh Circuit disagreed and affirmed the district court’s confirmation of the award. The court found that the arbitrator did not manifestly disregard the law by considering the commercial context of the relevant market when determining whether the license agreement provision allowing CPK to engage in the negotiation of a new license agreement in 2014 was ambiguous. In addition, the court held that because “the subject of the arbitration proceeding was the parties’ dispute about the construction, meaning, or enforceability of certain terms” of the license agreement, the arbitrator did not overstep his authority by deciding the meaning of the provision at issue. The court also rejected JAKKS’ argument that the arbitrator violated the FAA and held that the arbitrator was interpreting, rather than modifying, the relevant provision because it was ambiguous on its face. Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., Case No. 17-11513 (11th Cir. Nov. 17, 2017).

This post written by Gail Jankowski.
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