Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

TENNESSEE DISTRICT COURT ORDERS DISCOVERY OF REINSURANCE AGREEMENTS, BUT DENIES DISCOVERY OF REINSURANCE-RELATED COMMUNICATIONS, OTHER SIMILAR CLAIMS FILES, CLAIMS-HANDLING AND UNDERWRITING MANUALS AND ESTABLISHMENT OF RESERVES

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Plaintiffs sought coverage from the insurer Defendants for a $212.5 million dollar settlement of a claim of violation of the False Claims Act relating to errors and omissions in underwriting and origination of HUD mortgage loans. Defendants disclaimed coverage in part, stating the claim is “interrelated” to an earlier “claim” and thus barred under a later policy, and that Plaintiffs failed to timely notify Defendants of the claim. Plaintiffs sought discovery, and Defendants objected The Court largely agreed with Defendants, denying Plaintiffs’ requests for:

  • Other Similar Claims Files: although the parties should not be allowed to withhold extrinsic evidence during discovery while they wait for the Court to make a determination of ambiguity in the insurance contract, each claim is fact specific – involving different policy language and facts – and would not aid the Court in interpreting the policy language or Plaintiffs’ bad faith claims. Additionally, affidavits from each insurer reflected production would be unduly burdensome and disproportionate.
  • Claims-Handling & Underwriting Manuals of Excess Insurers: the interpretation of the excess policies depends upon interpretation of the primary policy, thus, any definition of “claim” or “interrelated” in the claims-handling manuals of the excess insurers are irrelevant. Further, what the excess insurers’ underwriting departments knew regarding the earlier “claim” is neither notice under the policies, nor relevant to interpretation of the terms “claim” and “interrelated claims.”
  • Reinsurance Communications: although the law on the discoverability of reinsurance communications is unclear, such communications are irrelevant to determining the intent of the parties to the primary insurance contract, or to Plaintiffs’ claim of bad faith.
  • Reserves: although courts are divided on the discoverability of reserves, the Court’s prior precedent held such information was a business decision and thus irrelevant to Plaintiffs’ claims.

The only discovery Defendants were compelled to produce were reinsurance agreements pursuant to Fed.R.Civ.P. 26 (a)(1)(A)(iv).

First Horizon Nat’l. Corp., et al. v. Houston Casualty Co., et al., 2:15-cv-02235 (USDC W.D. Tenn. Oct. 5, 2016).

This post written by Nora A. Valenza-Frost.
See our disclaimer.

NEVADA FEDERAL COURT AFFIRMS ARBITRATION AWARD

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The background of this case is as follows. Lift Equipment Certification Co., a heavy equipment manufacturer, was contracted by Lawrence Leasing Corp., a shipping company to redesign one of Lawrence’s cranes. The deal fell through, and the parties proceeded to arbitration. The arbitrator awarded both parties significant sums of money. However, plaintiff Lift believed that defendant Lawrence received too much in the arbitration award, and that it received too little. Thus, it moved in federal court in Nevada for the arbitration award to be vacated, and Lawrence cross-moved for the award to be confirmed.

The Nevada federal court noted that its review of arbitration awards is limited, and that plaintiff Lift faced a “heavy burden to prove by clear and convincing evidence that the arbitrator intentionally disregarded obvious legal principles” or that the decision is “utterly without support in the record.” The court then held that plaintiff Lift failed to prove by clear and convincing evidence that the arbitrator “manifestly disregarded the law” or that the award was “arbitrary and capricious.” Thus, the court denied Lift’s motion to vacate the arbitration award, and granted Lawrence’s cross motion to confirm the arbitration award. However, the court declined defendant Lawrence’s request for legal fees since plaintiff’s claims were “far from frivolous.”

Lift Equipment Certification Co., Inc. v. Lawrence Leasing Corp., No. 2:15-CV-01987-JAD-GWF (USDC D. Nev. Sept. 23, 2016)

This post written by Jeanne Kohler.

See our disclaimer.

FIO ANNUAL REPORT ON THE INSURANCE INDUSTRY

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In September, the Federal Insurance Office (“FIO”) issued its Annual Report on the Insurance Industry for 2015, including its “outlook” for 2016 based upon results reported through June 30, 2016.

For 2015, the U.S. insurance industry, both life and health and property and casualty “reported another year in a run of solid financial performance, and, in the aggregate, remained in sound financial condition.” FIO notes the continued effects of low interest rates are exacerbated as life insurers are challenged in constructing investment portfolios that properly match liabilities and a decline in the sale of annuity products.

State insurance regulators have improved standards applicable to life insurers ceding to captive reinsurers, “but additional work is needed to develop a consistent oversight regime aimed at improving the transparency and solvency of captive life reinsurers.” In January 2016, state insurance regulators adopted amendments to the Credit for Reinsurance Model Law “that would provide states with the authority to implement regulations relating to a captive framework, as well as regulations applicable to reinsurance captives outside the scope of the captive framework.”

By 2016, a total of 42 state legislatures have enacted a new reserving methodology called “Principles Based Reserving” (PBR), which relies upon an insurer’s individualized risk modeling and analysis techniques. The three-year implementation period of PBR will begin on January 1, 2017.

The report also discusses cybersecurity issues relevant to the insurance sector, including the Cybersecurity Information Sharing Act, as well as the current state of the cyber risk insurance market and common products offered by a number of insurers.

On April 1, 2016, the U.S. Department of Treasury issued a notice of proposed rulemaking to implement changes to the Terrorism Risk Insurance Program (“TRIP”) required by the TRIP Reauthorization Act, and FIO continues to consider comments received in developing a final rule. Per the report, “TRIP remains an important mechanism in ensuring that terrorism risk insurance remains available and generally affordable in the United States.”

Lastly, FIO notes its continued work at the International Association of Insurance Supervisors with other member jurisdictions, spanning nearly 140 countries, in the development of international standards for the supervision of insurance.

For the full text of the report, click here.

Annual Report on the Insurance Industry, Federal Insurance Office, U.S. Department of the Treasury (Sept. 2016)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

STRUCTURE OF CFPB FOUND TO BE UNCONSTITUTIONAL BUT AGENCY SURVIVES WITH CUT TO DIRECTOR’S POWER

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The DC Circuit Court of Appeals recently held that the single-director structure of the Consumer Financial Protection Bureau (“CFPB”) was unconstitutional, and gave the President the authority to fire the director at will in order to provide a check on the CFPB’s expansive power.

The background of the case can be found here. PHH, a mortgage lender, was the subject of a CFPB enforcement action regarding allegations that it referred consumers to mortgage insurers who then purchased reinsurance from a PHH subsidiary. The captive reinsurance agreements, according to the CFPB, were an illegal kickback scheme and violated the Real Estate Settlement Procedures Act (“RESPA”) that resulted in a $109 million order against PHH. PHH sought to vacate the order. In its appeal, PHH argued that the CFPB, an independent agency headed by a single Director, violates Article II of the Constitution.

The D.C. Circuit agreed with PHH that the single-director structure given to the CFPB by Congress in the 2010 Dodd-Frank Act left the CFPB’s top official without any check on its authority as the director could only be fired by the President for cause. However, rather than dismantling the CFPB, the Court determined that giving the President the authority to fire the director at will would address the question of accountability at the CFPB. In this regard, the Court stated: “The president is a check on and accountable for the actions of those executive agencies, and the President now will be a check on and accountable for the actions of the CFPB as well.”

The Court also found that the CFPB violated PHH’s due process rights by applying a retroactive penalty against PHH, finding that its captive reinsurance agreements violated RESPA. First, the Court noted that the CFPB had reinterpreted RESPA, a rule it inherited from the U.S. Department of Housing and Urban Development (“HUD”), in a way that invalidated HUD’s previous interpretation. HUD’s interpretation was that captive reinsurance arrangements were lawful “as long as the mortgage insurer paid no more than reasonable market value to the reinsurer for reinsurance actually furnished.” According to the Court, “[r]etroactivity — in particular, a new agency interpretation that is retroactively applied to proscribe past conduct — contravenes the bedrock due process principle that the people should have fair notice of what conduct is prohibited.” The D.C. Circuit also found that the CFPB was wrong in asserting that it could bring an administrative case beyond the three-year statute of limitations provided under RESPA. Noting that the CFPB could theoretically bring an action for a violation that occurred a century ago, the Court noted that “[w]e need not wait for an enforcement action 100 years after the fact. This court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.”

Thus, the D.C. Circuit vacated the CFPB’s order and remanded for the CFPB to determine whether consistent with RESPA’s three year statute of limitations, the mortgage insurers paid more than reasonable market value for the reinsurance to PHH’s captive reinsurer. PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177, (D.C. Cir. Oct. 11, 2016).

This post written by Jeanne Kohler.

See our disclaimer.

NINTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION FOR LACK OF FEDERAL JURISDICTION

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The Ninth Circuit affirmed a district court’s dismissal of a plaintiff’s RICO claim, and thus found the district court lacked independent federal jurisdiction to compel arbitration of the dispute under the Federal Arbitration Act (“FAA”). Specifically, the Ninth Circuit agreed with the district court that the plaintiff failed to properly allege any predicate acts for a cognizable RICO claim against the defendant. As that claim was the plaintiff’s only basis for federal jurisdiction, the court found it lacked jurisdiction to compel arbitration under the FAA, which requires a party so moving to demonstrate that the court has an independent basis for federal jurisdiction.

Estate of Clark v. Horwich, No. 12-17064 (9th Cir. Sept. 23, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

See our disclaimer.