Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THE UNCERTAINTIES OF PROGNOSTICATIONS OF THE IMPACT OF HURRICANES HARVEY AND IRMA ON CATASTROPHE BONDS

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We have rarely provided our opinions or market commentaries in our Reinsurance Focus posts, preferring instead to provide our readers hopefully balanced analyses of court opinions, legislation, and regulations affecting the reinsurance market. Recent events, however, have caused us to make an exception to that practice. Much is being written about the extent to which catastrophe bonds (or traditional reinsurance) are “exposed” to or may be called upon to pay losses from Hurricanes Harvey and Irma, and the impact that those storms may have on the ILS market. Some reinsurance agreements use a parametric trigger, and the possible impact of a particular storm on such reinsurance facilities may be reasonably ascertainable in the relatively short term. For example, the Caribbean Catastrophe Risk Insurance Facility, which has developed parametric trigger policies covering wind risks to be backed by traditional reinsurance and capital markets, insuring member countries in the Caribbean, has already determined the amount of payouts on its parametric policies for Harvey and Irma, and has published a report on that issue. However, many of the catastrophe bonds covering wind risks have indemnity triggers, including those to which the Texas Windstorm Insurance Association (the Alamo series) and Florida’s Citizens Property Insurance Corporation (the Everglades series) ceded risks. Moreover, many catastrophe bonds are part of a reinsurance program or tower composed of different types of risk transfer, with different layers, some overlapping or parallel, different attachment points, and different limits.

With the exception of flood losses under the National Flood Insurance Program’s traditional reinsurance program, which does not include catastrophe bonds, few of the “analyses” in the press to date appear to have even attempted to take into account the specific factors that will determine whether, and the extent to which, a particular catastrophe bond or traditional reinsurance agreement is likely to respond to losses, including the trigger of the reinsurance coverage, the attachment point of the reinsurance, the limit of the reinsurance, the percentage of cover for a particular layer, the actual level of losses in the reinsurance program, other inuring reinsurance in the reinsurance program, whether the reinsurance is aggregate or occurrence based, and the extent to which the retention leading up to the attachment point of the reinsurance has been or will be eroded by losses. While one may say that all reinsurance in a tower is “exposed” to losses by any covered event, that is not meaningful without a factually informed analysis of the extent to which a particular catastrophe bond or reinsurance agreement is likely to be called upon to pay losses, given the damage caused by the event and the terms of the applicable reinsurance agreement.

The modeled level of losses from these storms suggested by various brokers and modeling companies are only estimates, and the fact that the modeled losses suggested by different sources conflict with each other and have changed over time is itself good evidence that such numbers are only preliminary estimates, based upon limited reliable data. Many catastrophe bonds frequently attach fairly high in a reinsurance tower, and if few cat bonds actually sustain losses from these two major storms, the impact upon the ILS market may be limited, or even positive. In addition, there has been a great influx of capital into the markets for traditional reinsurance for wind risks and catastrophe bonds over the past several years, and historically major hurricanes have frequently prompted the influx of additional capital.

The bottom line? Only time and accompanying loss development will permit a reasoned evaluation of the impact of Harvey and Irma on the reinsurance and cat bond markets or individual reinsurance agreements or catastrophe bonds.

This post written by Rollie Goss.
See our disclaimer.

LENDER-AFFILIATED CAPTIVE REINSURER OBTAINS DISMISSAL OF MORTGAGE INSURANCE LAWSUIT BROUGHT BY ILLINOIS DIRECTOR OF INSURANCE

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The suit arose out of an arrangement where lenders would refer borrowers to (now-defunct) Triad Guaranty Insurance Company (Triad) to obtain private mortgage insurance. The lender-affiliated captive insurance company would then reinsure the policies issued by Triad.  The Illinois Director of Insurance, who brought the suit on behalf of Triad, alleged that the captive insurer had (1) breached the reinsurance contract by failing to provide certain disclosures required by law, (2) breached the covenant of good faith and fair dealing by referring only the mortgages with the highest risk of default to Triad, (3) violated the Real Estate Settlement Procedures Act (RESPA) by accepting “kickbacks” in connection with the referral of business incident to a real estate settlement service, and (4) was unjustly enriched because the reinsurance premiums grossly exceeded the value of the reinsurance provided.

The court disagreed on all counts. The breach of contract claim failed because the reinsurance contract did not require that the disclosures at issue be provided; and even if the contract did require the disclosures, the Director failed to specify the damages that resulted from the alleged lack of disclosure.  Regarding the good faith and fair dealing count, the captive insurer did not breach the covenant because the contract did not contain any express provisions relating to the discretion the captive insurer allegedly failed to exercise in good faith.  Regarding the RESPA count, the  claim was time barred because it accrued years earlier at the time each underlying mortgage was executed, and not at the time each allegedly illegal “kickback” was made.  Finally, regarding the unjust enrichment count, the claim was precluded because a contract (the reinsurance agreement) governed the relationship between the parties.  Illinois ex rel Hammer v. Twin Rivers Ins. Co., Case No. 16-C-7371 (USDC N.D. Ill. July 5, 2017).

This post written by Benjamin E. Stearns.
See our disclaimer.

COURT AFFIRMS ARBITRATION AWARD, FINDING NO VIOLATION OF DUE PROCESS WHERE PARTY ELECTED NOT TO PRESENT CERTAIN EVIDENCE

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Wilson, a former salesperson for Oracle, had unsuccessfully appealed the amount of her commission through Oracle’s internal compensation review process. Wilson then submitted a claim for arbitration alleging breach of contract and breach of the covenant of good faith and fair dealing in processing her appeal.  Oracle filed a motion to dismiss, arguing that Wilson’s commission was subject to the Single Customer Provision in her contract and that her compensation was properly calculated in accordance with that provision. Wilson opposed oracle’s motion and made a cross-motion for a summary award, requesting that the arbitrator rule in her favor based on the undisputed facts.

At oral argument, the arbitrator asked Wilson questions, and Wilson answered, providing what Oracle characterized as unsworn testimony. Oracle also claimed that it did not receive any notice that the arbitrator was going to hear such testimony, but did not object to the questioning or cross-examine Wilson. Ultimately, the arbitrator issued the final award denying Oracle’s motion to dismiss and granting Wilson’s cross-motion for a summary award, awarding her the remaining balance of her commission prior to the application of the Single Customer Provision.  The arbitrator determined that the full pre-modified commission on the sale would not have given Wilson an “unplanned windfall” as contemplated in her contract.

The trial court denied Oracle’s motion to vacate the award, reaffirming the Second Circuit’s precedent that an arbitrator’s rationale for an award “need not be explained,” and that an award should be confirmed “if a ground for the arbitrator’s decision can be inferred from the facts of the case.” The court found no evidence in the record demonstrating that the arbitrator prevented Oracle from presenting pertinent and material evidence before a final award was issued. Specifically, the Court noted that Oracle expressly turned down an opportunity to object to the procedure the arbitrator proposed to follow and  determined that Oracle made a strategic decision not to rely on language aside from the Single Customer Provision.  The court determined that Oracle failed to identify any evidence that it would have presented, or why that evidence would have caused the arbitrator to resolve the dispute in its favor. Oracle Corp., v. Wilson, Case No. 17 Civ. 554 (USDC S.D.N.Y. Aug. 22, 2017).

This post written by Gail Jankowski.
See our disclaimer.

SEVENTH CIRCUIT AFFIRMS DISMISSAL OF POST-LIQUIDATION REINSURANCE CLAIM AS TIME-BARRED

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We previously posted on the trial court’s ruling addressing the statute of limitations in this case on June 23, 2016. By way of background, the underlying contract between the insurer and the reinsurer required the insurer to calculate the balances due to the respective parties and send statements to the reinsurer reflecting those balances on a quarterly basis.  The liquidator complied with this requirement for a number of years until it stopped without explanation.  Then, 15 years later, the liquidator sent the reinsurer a statement netting all of the balances purportedly due to the parties under the contract and a demand for $2 million.

The plaintiff assignee of the reinsurance balance (Pine Top) argued that the Illinois statute governing set-offs and counterclaims permitted the liquidator to ignore the underlying contractual provisions requiring quarterly statements and to instead wait until the end of the liquidation, at which point it would submit one bill netting all of the balances due to the parties. The Seventh Circuit disagreed. Although the court acknowledged a possible exception for cases where a liquidator proposes a time for netting and a judge approves that proposal after notice and a hearing, the opinion states that in the absence of such an agreement, the underlying contractual provisions continue to apply.  As a result, the liquidator’s demand for the balance due was barred by the statute of limitations.  Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 16-3499 (7th Cir. Aug. 7, 2017).

This post written by Benjamin E. Stearns.
See our disclaimer.

FIRST CIRCUIT UPHOLDS ARBITRATOR’S DENIAL OF ARBITRABILITY OF REINSURANCE AGREEMENT, FINDING NO MANIFEST DISREGARD OF THE LAW

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Mountain Valley Property, Inc (MVP) entered into a three-year reinsurance participation agreement with Applied Underwriters Captive Risk Assurance Co. Inc. (AUCRA), which contained a mandatory arbitration clause as well as a Nebraska choice-of-law clause.   Thereafter, MVP filed a complaint asserting breach of contract and various tort claims, alleging that the reinsurance was overpriced and imposed unlawful fees. After removal to federal court, AUCRA counterclaimed in the amount of the outstanding premiums.

The trial court referred the case to arbitration for a determination of arbitrability, whereupon the arbitrator decided that the case was not arbitrable. The arbitrator reasoned that the FAA, if applied to enforce the arbitration clause, would “invalidate, impair, or supersede” the Nebraska Uniform Arbitration Act (NUAA) by requiring the parties to an insurance-related contract to arbitrate — which is exactly what the NUAA forbids.  Therefore, the arbitrator concluded that the McCarran-Ferguson Act applied and the FAA was reverse-preempted by NUAA, which, in turn, precluded the case from being arbitrated as a matter of law.

The First Circuit, reviewing de novo, affirmed, finding no manifest disregard of the law in the arbitrator’s determination that the NUAA bans arbitration of insurance-related cases, regardless of the parties’ intent to arbitrate. Specifically, the First Circuit reasoned that the arbitrator’s decision was not “unfounded in reason and fact” or “based on reasoning so palpably faulty that no judge, or group of judges, ever could conceivably have made such a ruling.” Mountain Valley Property, Inc. v. Applied Risk Services., Inc., No. 16-2189 (1st Cir. July 13, 2017).

This post written by Gail Jankowski.
See our disclaimer.