Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THE U.S. AND THE EUROPEAN UNION SUCCESSFULLY COMPLETE NEGOTIATIONS FOR COVERED AGREEMENT

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As we previously reported in June 2016, the United States and the European Union were in discussions to enter into a Covered Agreement. The Dodd-Frank Act introduced Covered Agreements as a means for limited federal intrusion into the regulation of the business of insurance and reinsurance by the states. On January 13, 2017, the U.S. Department of Treasury and the Office of the U.S. Trade Representative announced that the negotiations between the United States and the European Union for a Covered Agreement were successfully completed. The text of the announcement can be found here.

Also, on January 13, 2017, the United States and the European Union released a joint statement announcing the successful negotiations. The statement noted that the Covered Agreement “will ensure ongoing robust insurance consumer protection and provide enhanced regulatory certainty for insurers and reinsurers operating in both the U.S. and the EU.”

The Covered Agreement covers three areas of prudential insurance oversight: 1) reinsurance; 2) group supervision; and 3) the exchange of insurance information between supervisors.  The Covered Agreement contains detailed provisions, which are summarized below.

  • Reinsurance collateral:  Covered Agreement is intended to enhance consumer protection and lead to the elimination of collateral for a ceding insurer to obtain credit for reinsurance and local presence requirements for EU and U.S. reinsurers operating in these markets.  To obtain this relief a reinsurer is required: (1) to maintain a stated minimum level of capital or surplus and a stated solvency ratio; (2) consent to jurisdiction in the ceding jurisdiction and the appointment of the supervisory authority of the ceding jurisdiction as an agent to accept service of process; (3) agree to pay any judgment obtained by the ceding insurer and provide 100% security for any final judgment liability it resists; (4) pay reinsurance claims promptly; and (5) confirm that it is not participating in a solvent scheme of arrangement and provide 100% collateral for the terms of any subsequent scheme.  States shall be encouraged to adapt their credit for reinsurance requirements to the Covered Agreement, and a determination will be made as to whether any state requirements are inconsistent and preempted within 60 months of the execution of the Covered Agreement.
  • Supervision:  U.S. and EU insurers operating in the other market will only be subject to worldwide prudential insurance group oversight by the supervisors in their home jurisdiction, including group governance, solvency, capital and a worldwide group Own Risk and Solvency Assessment.  Under the Agreement, supervisory authorities on both sides preserve the ability to request and obtain information about worldwide activities which could harm policyholders’ interests or financial stability in their territory.  This portion of the Covered Agreement is responsive to Congressional concerns that U.S. domiciled companies may be subjected to EU capital requirements.
  • Information exchange:  The Agreement also encourages insurance supervisory authorities in the United States and the EU to continue to exchange supervisory information on insurers and reinsurers that operate in the U.S. and EU markets. To support such information exchange, the Agreement includes model memorandum of understanding provisions.

The final legal text of the Covered Agreement was provided to Congress on January 13, 2017, in accordance with the Dodd-Frank Act. According to the statement, the European Union will also follow the necessary steps to also sign and formally conclude the Agreement.  If there are any surprises in this agreement it may be the extended length of time for the implementation of the collateral reform provisions and the lack of any explicit consideration of the Solvency II equivalence requirement.

This post written by Rollie Goss.
See our disclaimer.

COURT APPROVES DIRECT PAYMENT OF REINSURANCE TO INSURED IN RELIANCE INSURANCE COMPANY LIQUIDATION

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The court handling the liquidation of Reliance Insurance Company has approved an application for the direct payment of reinsurance proceeds by United Insurance Company to Reliance’s insured, Hoechst Celanese Corporation, with respect to certain workers compensation and employers liability policies issued to Hoechst for the policy periods of 1989 and 1990. The court found that United had unequivocally assumed Reliance’s direct coverage obligations to Hoechst, that Hoechst had consented to this direct payment and released Reliance for all related claims, and that permitting such direct payment complied with the Section 534 of Article V of the Pennsylvania Insurance Department Act of 1921, the court’s own guidelines for enforcement of the Act, and the applicable reinsurance agreement.

In re Reliance Insurance Company, No. 1 REL 2001 (Pa. Comm. Ct. Nov. 22, 2016 )

This post written by Jason Brost.

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COURT GRANTS MOTION COMPELLING 30(B)(6) DEPOSITION TESTIMONY ON REINSURANCE FROM INSURANCE COMPANY FOLLOWING LIQUIDATION

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In a discovery dispute following the liquidation of Western Insurance Company (“Western”), a Utah federal district court granted a motion to compel a 30(b)(6) deposition testimony regarding Western’s reinsurance agreements. Western objected to the discovery on the grounds that the subject Directors and Officers should have made reinsurance claims prior to liquidation, and the failure to do so resulted in millions of dollars lost for the company. The court granted the motion to compel based on that assertion, deeming the testimony regarding reinsurance agreements, payments, and settlements to be relevant to the Directors and Officers’ preparation of their defense to that assertion. The court stated that if no reinsurance proceeds were received by Western, the Directors and Officers were still allowed to verify that through deposition testimony, because had Western received any payments on claims, that might provide evidence of the value of those claims at the time of liquidation.

Western Ins. Co. v. Rottman, Case No. 13-436 (USDC D. Utah Dec. 28, 2016)

This post written by Thaddeus Ewald .

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COURT FINDS THAT ENRON’S FRAUD DOES NOT VOID CONTRACT ENTERED INTO WITH ENRON SUBSIDIARY

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A federal appellate court has upheld a district court order enforcing an arbitration award by the ICC against the Republic of Nigeria in favor of Enron Nigeria Power Holdings, Ltd. (“ENPH”), a former subsidiary of Enron International Corporation (“Enron”), for breach of a contract. Nigeria claimed that enforcing the contract was against public policy due to that fraud that became apparent when Enron collapsed in 2001. However, the court rejected this argument, noting that Enron was not a party to or mentioned in this contract.

The operative contract, agreed to in 1999, contemplated ENPH engaging in three phases of construction, but the dispute was limited to the second phase under which ENPH was to have built a power plant in Nigeria. ENPH made various efforts through 2005 to get Nigeria to move forward with the second phase of the contract, but Nigeria refused to do so, leading ENPH to take the matter to arbitration with the ICC.

Nigeria argued that the contract was void as against public policy because of false statements regarding Enron’s financial attributes made to Nigeria in order to induce Nigeria to enter the contract. The ICC found no clear evidence that these statements induced Nigeria to enter the contract, emphasizing that the contract contained no express or implied guarantees from Enron, which was not a party to nor required to do anything under the contract. Further, the ICC found that Enron’s accounting fraud had no connection to ENPH nor to the second phase of the contract. When Nigeria refuse to pay ENPH, ENPH successfully sought enforcement in federal court. On appeal, the court upheld the order granting enforcement of the award, noting the deference due to both the factual determinations and interpretations of the contract made by the ICC.

Despite finding in ENPH’s favor, the court rejected three arguments advanced by ENPH. First, ENPH argued that Nigeria had failed to identify a well-defined public policy, but the court found that enforcing a contract tainted by fraud was plainly against public policy. Second, ENPH argued that Nigeria contractually waived any right to challenge the award anywhere except London, where the arbitration was held, but the court found that a party cannot waive such a public policy argument, as that would effectively “elevat[e] the parties’ contractual choices above the fundamental need of the federal courts to protect their own integrity.” Third, the court rejected the argument that Nigeria forfeited the argument that ENPH should be held responsible for Enron’s fraud as its alter ego by not properly raising it before the district court, finding that a party cannot waive this sort of public policy argument that courts are bound to decide.

Enron Nigeria Power Holding, Ltd. v. Federal Republic of Nigeria, No. 15-7121 (D.C. Cir. Dec. 27, 2016)

This post written by Jason Brost.

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ELEVENTH CIRCUIT RESOLVES JURISDICTIONAL ISSUES REGARDING THE CONFIRMATION OF AN ARBITRATION AWARD

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The Eleventh Circuit recently held that a district court retained jurisdiction over a motion to confirm an arbitral award, even though the plaintiff had voluntarily dismissed its claims while the motion to confirm was pending.

After PTA-FLA and affiliated entities (“ClearTalk plaintiffs”) filed a series of lawsuits across multiple jurisdictions against ZTE USA, ZTE moved to compel arbitration and the disputes were addressed in a consolidated arbitration proceeding. The arbitration resulted in a zero dollar award for both sides meant to bind ZTE and the ClearTalk plaintiffs.

While ZTE’s motion to confirm the arbitral award was pending, PTA-FLA voluntarily dismissed its claims, but the district court confirmed the arbitral award based upon its supplemental jurisdiction to do so. The Eleventh Circuit affirmed, finding that the lower court’s diversity jurisdiction granted it power both to compel the arbitration and confirm the resulting award. It held that the zero dollar award did not destroy diversity jurisdiction because the amount in controversy was satisfied at the time the case was filed. Likewise, it decided that the voluntarily dismissal did not destroy diversity jurisdiction because the confirmation of an arbitral award is a collateral claim over which the district court had independent jurisdiction.

Furthermore, the Eleventh Circuit confirmed that the lower court had supplemental jurisdiction to confirm the award against those ClearTalk plaintiffs that were joined for the consolidated arbitration. In doing so, it confirmed that the exception to supplemental jurisdiction excluding claims by plaintiffs against parties added under certain Federal Rules applied only to the “original” plaintiffs, and not third-party, counter, or cross plaintiffs.

PTA-FLA, Inc. v. ZTE USA, Inc., No. 15-15159 (11th Cir. Dec. 15, 2016)

This post written by Thaddeus Ewald .

See our disclaimer.