Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT: PENNSYLVANIA LAW PREEMPTED BY THE FAA

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The Third Circuit recently ruled that a Pennsylvania statute prohibiting an unregistered businesses from maintaining any “action or proceeding” in any court in the state interferes with the enforcement of arbitration awards and therefore is preempted by the Federal Arbitration Act. The plaintiff was a non-registered company, but the parties had agreed that the arbitration could proceed and be administered under the rules of the American Arbitration Association. The district court confirmed the arbitration award, and the Third Circuit affirmed, holding that the FAA preempted application of the law because it rendered the arbitration agreement unenforceable, noting that the intent of Congress in enacting the FAA was to promote arbitration. Therefore, the Pennsylvania statute, by barring any “action or proceeding,” interfered with the enforceability of the FAA and therefore was preempted.

The issue of state statutes interfering with the enforcement of arbitration awards has been a subject of Reinsurance Focus blogs numerous times. Particularly, courts have examined state statutes that require the posting of security before a non-admitted company may file suit in that state. We will continue to monitor case law addressing whether other courts find that the FAA pre-empts similar pre-pleading security statutes.

Generational Equity LLC v. Schomaker, No. 14-1291 (3d Cir. Feb. 23, 2015).

This post written by Catherine Acree.

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SOUTH DAKOTA REVISES STATUTES REGARDING REGULATION OF CAPTIVE INSURANCE COMPANIES

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House Bill 1180 (2015), signed into law February 27, 2015, amends Chapter 56-46 of the South Dakota Insurance Code, Captive Law, to allow the formation and regulation of agency captive insurance companies in South Dakota. As defined in House Bill 1180, an agency captive insurance company is either: i) an insurance company that is owned, controlled or under common ownership or control by an insurance agency, brokerage, or reinsurance intermediary that only insures the risks of insurance or annuity contracts placed by or through the agency, brokerage or reinsurance intermediary; or ii) owned or controlled by a producer of service contracts or warranties that only reinsures the contractual liability arising out of service contracts or warranties sold through such producer. An agency captive insurance company may be formed as in the same manner as a pure captive insurance company. An agency captive insurance company must comply with the following financial reporting requirements:

  • Submit annually no later than six months after the close of its financial year to the director a report of its financial condition using statutory accounting principles certified under oath by two of its officers. An agency captive insurance company may make written application for permission to file the annual report on a fiscal year end date that is consistent with its parent company’s fiscal year;
  • Provide a report of its financial condition audited by an independent certified public accountant every five years pursuant to Chapter 58-43 if it has annual direct premiums written of less than $2.5M dollars;
  • If an agency captive insurance company has $2.5M dollars or more of annual direct premiums written, it shall provide a report of its financial condition audited by an independent certified public accountant every three years pursuant to Chapter 58-43; and,
  • File an actuarial opinion following the year of operation and in connection with its audited statement of financial condition.

Regarding financial and business operations, an agency captive insurance company is not subject to any restrictions on allowable investments and may make a loan to its parent or affiliated entities. However, any investment that threatens the agency captive insurance company’s solvency or liquidity may be limited or prohibited by the Director of the Division of Insurance. Furthermore, loans to parents or affiliated entities of an agency captive insurance company is subject to prior approval by the Director of the Division of Insurance. Finally, an agency captive insurance company may enter into any arrangement to provide risk management services to a controlled unaffiliated business or an unaffiliated business; however, it may not accept any insurance risk from an unaffiliated business.

This post written by Kelly A. Cruz-Brown.

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REINSURANCE EXCLUSION BARS COVERAGE FOR BAD FAITH LAWSUIT

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A federal judge in North Carolina recently examined a reinsurance policy provision excluding loss “resulting from any claim for . . . any actual or alleged lack of good faith or unfair dealing in the handling of any claim or obligation under any insurance contract.” The case involved a request for coverage under a reinsurance policy for a lawsuit filed by a doctor against his medical malpractice carrier, the reinsured. The doctor, against whom an excess verdict had been entered, asserted a number of causes of action including bad faith refusal to settle within the policy limit. The reinsurer filed a motion for summary judgment arguing that there was no coverage for the doctor’s lawsuit based on the exclusion mentioned above because all potential loss resulted from the reinsured’s alleged lack of good faith in refusing to settle the underlying matter within the underlying policy limit. Applying North Carolina law, the court agreed with the reinsurer, concluding that all the causes of action alleged a single course of conduct involving a lack of good faith in refusing to settle within the limit. Because all potential loss “resulted from” and was “inextricably intertwined” with the bad faith allegations, the reinsurer had no duty to defend or indemnify.

Greenwich Ins. Co. v. Medical Mutual Ins. Co. of North Carolina, No. 5:14-cv-295 (USDC E.D.N.C. Jan. 27, 2015).

This post written by Catherine Acree.

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CFPB ISSUES ARBITRATION STUDY – POSSIBLE IMPACT ON REINSURANCE UNCLEAR

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The Consumer Financial Protection Bureau has issued a study that is critical of arbitration in the context of consumer claims, contenting that arbitration “restricts” the rights and remedies of consumers by limiting or prohibiting class actions.  For a summary of the study and links to the study and a summary fact sheet, visit our Class Action blog. It may be questionable whether the CFPB has given appropriate consideration to the various United States Supreme Court and federal Court of Appeals opinions concerning the enforceability of arbitration agreements under the Federal Arbitration Act, and it will be interesting to see how this CFPB’s arbitration-related pronouncements develop. Since the CFPB’s principal focus is on consumer issues, it remains to be seen if and how its activities in this area may affect the resolution of reinsurance disputes.

This post written by Rollie Goss.

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REINSURER PLACED UNDER ORDER OF REHABILITATION

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An Illinois circuit court entered an agreed order of rehabilitation against a reinsurer, Millers Classified Insurance Company, following a complaint for rehabilitation filed by the Illinois Department of Insurance. Millers Classified’s board of directors had passed a corporate resolution on December 16, 2014 agreeing to the entry of the order of rehabilitation. The effect of the order was to create an estate comprising of all of the company’s assets and liabilities to be managed by an appointed rehabilitator. The order specifically allowed all policies where Millers Classified was the ceding company to remain in place subject to further review. All policies where Millers Classified was the assuming or retrocessional reinsurer were cancelled on a cut-off basis effective upon the order’s entry. State of Illinois ex. rel. Stephens v. Millers Classified Insurance Co., Case No. 2015CH (Ill. Cir. Ct. Jan. 20, 2015).

This post written by Leonor Lagomasino.

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