Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CEDENT IS NOT REQUIRED TO MINIMIZE ITS REINSURANCE RECOVERY IN ORDER FOR THE “FOLLOW THE FORTUNES” DOCTRINE TO APPLY

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On December 9, 2014 and August 20, 2015, we reported on the reinsurance dispute between Utica Mutual Insurance Company and Clearwater Insurance Company. In a recent ruling, the court rejected Clearwater’s argument that the follow the fortunes doctrine did not apply and that Clearwater was relieved of its obligations under the subject reinsurance contract. Clearwater contended that Utica unreasonably and in bad faith shifted all of its liabilities to its umbrella policies to maximize reinsurance recovery. As an alternative basis to avoid liability, Clearwater also argued that Utica billed it for items for which it was not entitled to recover.

In rejecting Clearwater’s arguments, the court explained that while the follow the fortunes doctrine requires the cedent to align its interests with its reinsurer, in order to show bad faith, Clearwater was required to establish an “extraordinary showing of a disingenuous or dishonest failure” and that the cedent acted with gross negligence or recklessness. The court found that Clearwater could not make such a showing. The Court noted that Utica did not have any fiduciary duty to place Clearwater’s interests above its own nor minimize its reinsurance recovery in order to avoid bad faith. And the Court summarily dismissed Clearwater’s argument that some of the billings were not covered by the reinsurance, ruling that if the payment was arguably within the scope of the insurance policy, then it was within the reinsurance. Utica Mutual Insurance Co. v. Clearwater Insurance Co., Case No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2016).

This post written by Barry Weissman.

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IRS REVOKES RULING THAT IMPOSED EXCISE TAX ON WHOLLY FOREIGN REINSURANCE TRANSACTIONS

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The Internal Revenue Service recently revoked a 2008 ruling that a 1% excise tax under section 4371(3) of the Internal Revenue Code applied to “reinsurance premiums paid by one foreign insurer or reinsurer to another.” The IRS’s shift came in the wake of the D.C. Circuit’s opinion in Validus Reinsurance, Ltd. v. United States, 786 F.3d 1039 (D.C. Cir. 2015).

In Validus, a foreign reinsurer filed claims for refund of excise taxes imposed on premiums paid to a foreign retrocessionaire. The United States argued that such reinsurance policies were within the excise tax’s scope because the risks ultimately underlying the multiple levels of reinsurance were situated within the United States. The taxpayer countered that the statute’s plain language applied only to reinsurance, not retrocession coverage. After extensive analysis of the statute’s plain language and legislative history, the D.C. Circuit concluded that the statute was ambiguous. To resolve the controversy, the court resorted to the presumption against extraterritorial application of U.S. laws. The court ruled that the excise tax did not apply because the transaction was a “wholly foreign retrocession[].”

Going forward, therefore, a foreign insurer who pays reinsurance premiums to another foreign insurer likely will not have to pay the excise tax under section 4371(3) of the Internal Revenue Code, though the IRS has noted some narrow exceptions. Moreover, any foreign insurers who have paid such taxes within the statute of limitations should consider contacting counsel about the prospect of claims for refund. IRS Rev. Ruling 2016-03.

This post written by Richard Euliss.

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PENNSYLVANIA FEDERAL COURT CONFIRMS ARBITRATION AWARD IN FAVOR OF PHILADELPHIA UNION SOCCER TEAM IN WRONGFUL TERMINATION SUIT WITH FORMER COACH

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A Pennsylvania federal court recently confirmed an arbitrator’s decision in a wrongful termination suit which held in favor of the Philadelphia Union soccer team, finding it did not violate former head coach Piotr Nowak’s contractual rights when the team fired him in 2012.

In the order confirming the award, and denying Nowak’s motion to vacate it, the court noted that a federal court’s review of an arbitration award “gives extreme deference” to the arbitrator’s decision and does not “second guess but instead presume[s] the reasoned award is enforceable”.

In the motion to vacate the award, Nowak claimed that the arbitrator was biased and made factual judgments from what Nowak claimed was hearsay evidence in testimony by witnesses. However, the court found that the record revealed that the arbitrator did not misapply the law, noting that the award itself highlighted sufficient independent evidence supporting the arbitrator’s conclusions, including witness testimony from former players, a trainer and Nowak himself. It also found that the award, supported by ample record evidence, was not completely irrational. Finally, the court found that there was no evidence of bias or impartiality on the part of the arbitrator. Thus, because Nowak did not establish any ground for vacatur, the court denied the motion to vacate and granted the motion to confirm the arbitration award.

Piotr Nowak v. Pennsylvania Professional Soccer, LLC, et al., No. 12-4165 (E.D. Pa. Jan. 11, 2016).

This post written by Jeanne Kohler.

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WASHINGTON ADOPTS NEW RULES REGARDING CREDIT FOR REINSURANCE

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The Office of the Insurance Commissioner for Washington State recently adopted rules that amend the existing Credit for Reinsurance rules within the state. In addition, that office adopted new rules to conform Washington’s rules regarding credit for reinsurance to the NAIC Credit for Reinsurance Model Regulation and amendments made by the 2015 legislative session to the credit for reinsurance laws. The new rules went into effect on January 2, 2016.

Washington Insurance Commissioner Matter No. R 2015-09.

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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NEW YORK FEDERAL BANKRUPTCY COURT FINDS INSURANCE INSOLVENCY PROCEEDING DOES NOT “REVERSE – PREEMPT” BANKRUPTCY COURT JURISDICTION

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In a recent adversary proceeding in the chapter 11 case involving Ames Department Stores, Inc. (“Ames”), Lumbermens Mutual Casualty Company (“Lumbermen’s”) argued that under the McCarran-Ferguson Act, the issues in dispute between it and Ames should be decided in Illinois state court as part of Lumbermens’ insolvency proceedings.

The procedural history and the issues in the case between Ames and Lumbermens can be found here. In short, Ames filed a Chapter 11 bankruptcy in New York in 2001. In 2006, a dispute between Lumbermens and Ames commenced, which centered around the ownership of an approximate $8 million trust account. By 2012, Lumbermens entered state rehabilitation proceedings in Illinois. Lumbermens’ rehabilitator challenged the bankruptcy court’s jurisdiction over the adversary proceeding in New York federal court, arguing for the issues to be addressed in Illinois state court as part of Lumbermens’ ongoing insolvency proceeding. The court granted the rehabilitator’s motion to withdraw reference, and requested a report and recommendation on Lumbermens’ jurisdictional motion from a New York federal bankruptcy court.

The New York bankruptcy court first found that it had authority to hear all the claims at issue. Next, it determined whether the McCarran-Ferguson Act applied to “reverse – preempt” federal law. The court utilized a three part analysis to determine whether the McCarran-Ferguson Act applies and whether a federal statute can be reverse preempted by a state law. First, the court considered whether the Bankruptcy Code, the federal law at issue, specifically relates to the business of insurance, and concluded that it does not. Next, the court considered whether the state law at issue relates to the business of insurance, finding that the Illinois statute, relegating jurisdiction to the Illinois state court, was to ensure orderly and predictable liquidations of insurance companies. Thus, the court found that the state law at issue was enacted for the purpose of regulating the business of insurance. Finally, with respect to the third prong, whether allowing the case to proceed in federal bankruptcy court would “impair, invalidate, or supersede” Illinois state law, the court found that the bankruptcy court’s jurisdiction would not contravene Illinois law in any meaningful way, because any bankruptcy court judgment would remain subject to the priority scheme of the Illinois insurance insolvency proceeding. Therefore, the court held that hearing the adversary proceeding in federal bankruptcy court would not impair, invalidate or supersede Illinois insurance law, and thus, found that the Bankruptcy Code was not reverse – preempted by McCarran-Ferguson.

In re Ames Department Stores Inc., et al., No. 01-42217 (REG) (Bankr. S.D.N.Y. Dec. 7, 2015).

This post written by Jeanne Kohler.

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