Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

MAGISTRATE JUDGE RECOMMENDS DENYING APPLICATION FOR $305M REINSURANCE JUDGMENT

by

A Magistrate Judge in the U.S. District Court for the Southern District of New York has recommended that a default judgment totaling more than $221 million be entered against the Islamic Republic of Iran and in favor of insurers who paid claims to their insureds for property damage, business interruption and other losses arising out of the terrorist attacks on 9/11. In doing so, however, the magistrate also recommended denying the insurers’ application for an additional $305 million reflecting payments made under reinsurance contracts.

The plaintiff-insurers argued that they were entitled to all amounts they were compelled to expend under applicable policies of insurance and reinsurance resulting from 9/11. The court concluded, however, that the insurers were only entitled to recover under the doctrine of subrogation.  The court explained that subrogation allows an insurer to “stand in the shoes” of its insured for purposes of seeking payment from third-parties whose wrongdoing caused the losses for which the insurer was obligated.

While finding that the insurers were subrogated to over $221 million in damages under direct insurance policies, the court recommended denying their application for over $305 million in losses incurred under reinsurance contracts with primary insurers that paid claims relating to 9/11. Noting that reinsurance contracts operate solely between the reinsurer and the reinsured primary insurer, the court stated that there is no contractual privity between a reinsurer and the policyholder who suffered the initial loss.  Because the damaged policyholders have no rights under the reinsurance contracts at issue, the magistrate judge found that plaintiffs, as reinsurers, have no subrogation rights as to the 9/11-related losses sustained by these policyholders.

In re Terrorist Attacks on September 11, 2001, Case No. 04-cv-05970 (USDC S.D.N.Y. Nov. 27, 2017).

This post written by Alex Silverman.
See our disclaimer.

NDNY JURY AWARDS $35M PLUS INTEREST FOR AMOUNTS DUE UNDER REINSURANCE CONTRACTS

by

Following a jury trial, Utica Mutual Insurance Company was awarded $35 million, plus interest ($29,092,191.78) on its claims against Fireman’s Fund Insurance Company to enforce the terms of the certificates of reinsurance issued by Fireman’s Fund to Utica. The Court, ruling on Utica’s Motion for Judgment on Partial Findings, dismissed Fireman’s Fund’s counterclaims for intentional and negligent misrepresentation. Post-trial motions are to be filed by December 29, 2017.

Utica Mut. Ins. Co. v. Fireman’s Fund Ins. Co., 6:09-CV-0853 (USDC N.D.N.Y. Dec. 15-16, 2017)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

VIRGINIA SUPREME COURT CONSIDERS TERMS OF ASSUMPTION REINSURANCE TRANSACTION IN DETERMINING OBLIGATIONS OF INSOLVENT INSURER

by

A group of Kentucky hospitals sought reimbursement for legal fees incurred in two lawsuits related to the insolvency of their insurer, Reciprocal of America (“ROA”). In the 1970s and 1980s, the hospitals created two trusts to provide the hospitals with workers’ compensation and employers’ liability coverage. In 1997, the trusts were merged into ROA, and ROA agreed to assume the trusts’ business liabilities and to indemnify the trusts and their member insureds, including the hospitals, “in defending [themselves] against any claim Damages arising from or connection with the Damages.”

In 2003, ROA was placed into receivership and was later found insolvent and ordered liquidated. This led to two judicial proceedings in which the hospitals were involved—one that they joined as claimants seeking to have ROA continue to pay worker’s compensation claims that ROA had assumed from the trusts, and one seeking a declaration that the Kentucky Insurance Guaranty Association (KIGA) was obligated to cover the hospitals’ claims that ROA had assumed but could not pay. After both matters were resolved, the hospitals filed claims with ROA’s Special Deputy Receiver for reimbursement of the legal fees and costs incurred in those matters under ROA’s indemnification obligations. The claim was denied, and the case ended up before the Virginia Supreme Court.

The court affirmed the denial of the hospitals’ claim. The court explained that the plain meaning of the phrase “defending against any claim” and the specific contractual definition of “Damages,” together support the characterization of the agreements as an assumption reinsurance transaction in which ROA stepped into the shoes of the trusts. ROA’s indemnity could rise no higher than the pre-merger obligations of the two trusts — for those were the only liabilities that ROA assumed, and thus the only “Damages” for which it was responsible to indemnify the trusts. This contractual definition of “Damages” necessarily excludes any obligation for ROA to indemnify the trusts and their member insureds for the legal fees and costs incurred in the underlying judicial proceedings. The court rejected the hospitals’ argument that ROA’s duty to pay for the expense of defending against claims covered the expense of asserting claims. While it may have been good legal strategy for the hospitals to proactively assert such claims, this did not turn the assertion of claims into the defense of claims covered by ROA’s indemnification agreement. Appalachian Regional Healthcare v. Cunningham, Case No. 161767 (Va. Nov. 22. 2017).

This post written by Jason Brost.

See our disclaimer.

FRANCHISEES LOSE BID TO VACATE ARBITRATION AWARD ENFORCING NON-COMPETE CLAUSE DESPITE CLAIM THAT ARBITRATOR MANIFESTLY DISREGARDED THE LAW

by

A set of former franchisees are prohibited from violating the terms of a non-compete clause with franchisor Wild Bird Centers of America (“WBCA”) for two years after the Fourth Circuit recently upheld the denial of their petition to vacate an arbitration award imposing the injunction. The franchisees had continued to operate a Wild Bird Center store after their ten-year franchise agreement expired and they chose not to renew it. WBCA submitted the dispute to mandatory arbitration, and the arbitrator issued an injunction prohibiting the franchisees from violating the non-compete.

First, the franchisees argued the arbitrator manifestly disregarded the law, exceeded his powers, and failed to issue an award from the essence of the franchise agreement by applying the non-compete clause. The court rejected these claims as merely alleging the arbitrator misinterpreted the agreement. The non-compete clause’s language suggesting application “after termination” in contrast to a later section’s language suggesting application “[i]n the event of termination or expiration” of the franchise agreement was “at worst ambiguous” and “at best, support[ed] WBCA’s position.” Therefore, the arbitrator’s application “arguably” construed the contract sufficient to warrant confirmation.

Second, the franchisees claimed that, even if the non-compete clause applied, the arbitrator erred by extending the clause’s terms to two years because such an interpretation did not draw from the essence of the agreement. The court rejected these claims based on another case which held it reasonable to enforce compliance with a non-compete to include the total time which the aggrieved party was entitled to under the non-compete clause. Further, the franchisees failed to show the arbitrator acted from personal notions of right and wrong or disregarded the correct legal standards. Specifically, the court noted the limited nature of the injunction term and lack of demonstrated prejudice from the extension because the franchisees had yet to stop operating the competing business. The court affirmed the district court’s order confirming the award. Frye v. Wild Bird Ctrs. of Am., Inc., Case No. 17-1346 (4th Cir. Nov. 27, 2017).

This post written by Thaddeus Ewald .

See our disclaimer.

COURT FINDS STATE LAW BARRING INSURANCE ARBITRATIONS REVERSE-PREEMPTS FEDERAL ARBITRATION ACT

by

The case involved a dispute between the parties to a Reinsurance Participation Agreement (RPA). Defendants moved to compel arbitration, citing the Federal Arbitration Act and a provision in the RPA agreeing to resolve “[a]ll disputes arising with respect to any provision of this Agreement” in arbitration. However, the RPA also contained a choice of law provision providing that “[t]his Agreement shall be exclusively governed by and construed in accordance with the laws of Nebraska.” Plaintiffs argued that the Nebraska Uniform Arbitration Act (NUAA), which prohibits enforcement of an arbitration clause in any “agreement concerning or relating to an insurance policy,” made the arbitration provision unenforceable.

In most cases, the FAA would preempt a state law regarding arbitration, but the McCarran-Ferguson Act allows state laws “regulating the business of insurance” to preempt any federal statute that is not specifically related to the business of insurance and impairs a state insurance law. Defendants argued that the FAA preempts the NUAA and that the RPA requires all questions concerning construction or enforceability of the arbitration clause, including the applicability of the NUAA, to be decided by the arbitrator.

The court rejected defendants’ arguments, finding first that the question of whether the FAA preempts the NUAA is not a question of arbitrability that an arbitrator can decide. The court then determined that the FAA does not regulate the business of insurance, that the relevant portion of the NUAA was “enacted for the purpose of regulating the business of insurance,” and that application of the FAA would operate to impair the NUAA. Thus, all of the conditions set by the McCarran Ferguson Act for a state law to preempt the FAA were met. As a result, the court found that the NUAA rendered the arbitration clause in the RPA unenforceable and denied plaintiffs’ motion to compel arbitration. Citizens of Humanity v. Applied Underwriters, Inc., Case No. B276601 (Cal. Ct. App. Nov. 22, 2017).

This post written by Jason Brost.

See our disclaimer.