Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

MISSOURI COURT HOLDS ARBITRATION CLAUSE IN INSURANCE CONTRACT UNENFORCEABLE AS AGAINST PUBLIC POLICY AND UNDER GOVERNING LAW

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A Missouri district court recently held a mandatory arbitration provision was unenforceable in an insurance coverage dispute after an electrician was injured on the job and won an uncontested judgment in state court against Solaris Power Services (“Solaris”). His employer was insured by Liberty Mutual and had excess insurance through AEGIS. The plaintiffs in the present case, including Solaris, sued both insurers and alleged they should have been additional insureds under both policies and their coverage claims were wrongly denied. AEGIS moved to stay the proceedings and compel arbitration pursuant to a mandatory arbitration provision in its excess insurance policy. The various parties disputed which state’s law applied. The court ultimately denied the motion, holding the mandatory arbitration provision was unenforceable.

First, the court concluded the arbitration clause was unenforceable as it contravened Missouri public policy. Missouri choice of law rules allow for the application of another state’s law as long as the law “is not contrary to a fundamental policy of Missouri.” Application of North Dakota law (as advocated for by AEGIS) or any other state’s law that would enforce the arbitration provision was inappropriate as it would contravene Missouri law prohibiting mandatory arbitration clauses in insurance contracts.

Next, the court concluded that even under a traditional choice of law analysis, the arbitration clause was still unenforceable. Missouri choice of law for insurance coverage disputes provides certain factors to consider in determining what law to apply, “[i]n the absence of effective choice of law by the parties.” Here, the court found the insurance policy contained an effective choice of law provision where it stated construction “in accordance with the laws of the jurisdiction in which the situation forming the basis for the controversy arose.” The accident’s location in Kansas therefore dictated Kansas law governed. Because arbitration provisions in insurance contracts are unenforceable under Kansas law, the court reached the same conclusion it previously did that the provision was unenforceable.

Simon v. Liberty Mut. Fire Ins. Co., Case No. 17-152 (W.D. Mo. Dec. 8, 2017).

This post written by Thaddeus Ewald .

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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.
See our disclaimer.