Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

INCORPORATION OF AAA RULES “CLEARLY AND UNMISTAKABLY” DELEGATES QUESTIONS OF ARBITRABILITY TO ARBITRATOR

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In a putative class action for denial of employment benefits brought by security contractors against their hiring firm, Blackwater Security Consulting, the court found that the governing agreements delegated the issue of arbitrability to an arbitrator and compelled arbitration. The contractors contended that the agreements contained no such delegation, but the court disagreed, finding that that the agreements’ incorporation of the AAA rules was sufficient to “clearly and unmistakably” submit arbitrability to an arbitrator. The court also found that the contractors’ challenge to the validity of the AAA clause based on fraud and duress failed “because it does not specifically address the delegation agreement itself as required by” the Supreme Court’s 2010 Rent-A-Center decision. The court further found that the contractors’ challenge based on mistake and unconsionability, “fails on the merits as a matter of law.” The contractors contended that they mistakenly believed that the agreements they signed did not contain arbitration provisions. This type of mistake, however, “about the nature of the contract and its contents—is not a mistake about an ‘existing or past fact’ that could satisfy” the law. As to unconscionability, the contractors argued that the shifting of attorneys’ fees and expenses from the firm to them was unfair, but the court rejected this argument as defective under Concepcion and other precedent. Mercadante v. XE Services, LLC, Case No. 1:11-cv-01044 (USDC D.D.C. Jan. 15, 2015).

This post written by Michael Wolgin.

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IRS PROPOSES REGULATIONS DIRECTED TO “PASSIVE” HEDGE FUND FOREIGN INSURANCE ENTITIES

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On April 24, 2015, the Internal Revenue Service proposed regulations directed to “situations in which a hedge fund establishes a purported foreign reinsurance company in order to defer and reduce the tax that otherwise would be due with respect to investment income.” The IRS proposed regulations designed to clarify its applicable tax rules, by attempting to define exceptions to “passive income” from foreign insurance companies. Such income (earned from investments) is taxed at higher rates than income from insurance business, which is taxed only when it is realized, and at lower capital gains rates. The proposed regulations seek to clarify when investment income earned by a foreign insurance company is derived in the “active conduct” of an “insurance business,” and thus whether it qualifies for the passive income exception.

The proposal provides that “insurance business” means “the business activity of issuing insurance and annuity contracts and the reinsuring of risks underwritten by insurance companies, together with those investment activities and administrative services that are required to support or are substantially related to insurance and annuity contracts issued or reinsured by the foreign insurance company.” The proposed regulations “do not set forth a method to determine the portion of assets held to meet obligations under insurance and annuity contracts.” The IRS requests comments by July 23, 2015, “on appropriate methodologies for determining the extent to which assets are held to meet obligations under insurance and annuity contracts.”

This post written by Michael Wolgin.

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VOLUNTARY-INVOLUNTARY RULE IMPLICATED IN REMOVAL PROCEEDING

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In late April, a district court in New York granted plaintiff Utica Mutual Insurance Company’s (“Utica”) motion to remand, implicating the voluntary-involuntary removal rule. Utica originally filed a breach of contract lawsuit against defendant American Re-Insurance Company (“American”). The lawsuit also named as co-defendant, Transatlantic Reinsurance Company (“Transatlantic”), a corporation domiciled and with a principal place of business in New York. American was initially unable to remove the case to federal court due to lack of diversity among the co-defendants.

A New York state court severed the claims against American and Transatlantic, thereby eliminating the diversity impediment for removal. Utica argued that “removability can only be created by Utica’s voluntary conduct,” and not by the court’s involuntary severance order. American argued that the voluntary-involuntary rule’s fraudulent misjoinder exception applied, as Transatlantic was improperly joined. The court found—citing second circuit precedent—that an action was not removable when non-diverse parties were made diverse by a court’s involuntary severance order. The voluntary-involuntary rule was designed to “protect against the possibility that a party might secure a reversal on appeal in state court of the non-diverse party’s dismissal, producing renewed lack of complete diversity in the state court action….in order to be removable, be one which could have been brought in federal court in the first instance.” The case turned on whether the order was final, and not simply voluntary.

As Utica’s severance order appeal was not yet final, a requirement under the voluntary-involuntary rule, the district court remanded the case back to the New York State Supreme Court. The court noted that American’s fraudulent misjoinder claim was “time barred” as defendants failed to file within thirty days after receipt. The court also noted that American understood “Utica’s motivation for joining Transatlantic and [American] as defendants in the same action,” an admission that went against their claim for fraudulent misjoinder.

Utica Mutual Ins. Co. v. American Re-Ins. Co., No. 6:14-CV-1558 (USDC N.D.N.Y. Apr. 27, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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OHIO PROPOSED RULE REGARDING ALTERNATIVE RESERVE METHODOLOGY FOR SPECIAL PURPOSE CAPTIVES

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The Ohio Department of Insurance has proposed a new rule, Rule 3901-11-05 (the “Proposed Rule”), to establish a process and method that allow a special purpose financial insurance company captive (a “SPFIC Captive”) to request the use of an alternative reserve methodology other than that found in the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual.

The Proposed Rule requires a request to use an alternative principle-based valuation method to be accompanied by a written actuarial opinion that is signed by the appointed actuary for the SPFIC Captive and the ceding insurer. The Proposed Rule prescribes certain criteria for the alternative reserve methodology being requested:

  • Must be a principle-based valuation method that uses one or more methods or one or more assumptions proposed by the SPFIC Captive.
  • Must address all material risks associated with the contracts being valued and their supporting assets and determined capable of materially affecting the valuation of its obligations with respect to the risks assumed. Examples of risks to be included in the principle-based valuation method include but are not limited to risks associated with policyholder behavior, such as lapse and utilization risk, mortality risk, interest rate risk, asset default risk, separate account fund performance, and the risk related to the performance of indices for contractual guarantees.
  • Must be consistent with current actuarial standards of practice.
  • Must consider the risk factors, risk analysis methods, and models that are incorporated in the SPFIC Captive’s overall risk assessment process. The overall risk assessment process may include, but is not limited to, asset adequacy testing, GAAP analysis, internal capital evaluation process and internal risk management and solvency assessments.
  • Must incorporate appropriate margins for uncertainty and/or adverse deviation for any assumptions not stochastically modeled.

The SPFIC Captive is required to provide any information the superintendent may require to assess the proposed alternative methodology. If an alternative methodology is approved by the superintendent, then the SPFIC Captive must use the alternative methodology until, and unless, the superintendent approves an another alternative method. Finally, upon the superintendent’s request, the SPFIC Captive is required to secure the affirmation of an independent qualified actuary that the alternative methodology complies with the criteria set forth in the Proposed Rule. The independent qualified actuary must be approved by the department and provide a written actuarial opinion detailing their affirmation and a report supporting that opinion to the superintendent. The independent qualified actuary report must comply with division (E)(3) of section 3964.03 of the Ohio Revised Code.

This post written by Kelly A. Cruz-Brown.
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DISTRICT COURT DISMISSES BREACH OF CONTRACT CLAIM, ALLOWS BREACH OF DUTY OF UTMOST GOOD FAITH CLAIM IN REINSURANCE DISPUTE

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The District Court for the Middle District of Florida recently held that defendant First American Title Insurance Company (“First American”) could maintain its breach of the utmost duty of good faith counterclaim against plaintiff Old Republic National Title Insurance Company (“Old Republic”), but that it could not countersue Old Republic for breach of contract. First American alleged that Old Republic breached the Reinsurance Agreement (“Agreement”) the parties shared by 1) paying First American under a reservation of rights to assert claims against First American, 2) disputing Old Republic’s obligation to pay First American, and 3) improperly trying to claw back the $3.8 million payment. The court held that First American’s claims were insufficient because the Agreement did not explicitly prohibit Old Republic’s actions, a necessary basis for a breach of contract claim. The court did, however, find sufficient First American’s claim that Old Republic breached the utmost duty of good faith. As the court noted, “generously construing First American’s allegations under this count in conjunction with its claim that Old Republic breached the Reinsurance Agreement by failing to pay its share of defense costs,” the pleaded facts for First American’s “utmost good faith” claim were sufficient to survive the motion to dismiss stage.

Old Republic Nat. Title Ins. Co. v. First American Title Ins. Co., No. 8:15-cv-126-T-30EAJ, 2015 WL 1530611 (USDC M.D. Fla. Apr. 6, 2015)

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

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