Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT EVALUATES THE DEFINITION OF “MATERIALITY” IN RESCISSION CLAIMS

by

In a case on which we previously reported, the Third Circuit recently evaluated the legal standard for determining materiality in a claim for rescission of an insurance contract.  The case involved a dispute between two reinsurers in which a federal court awarded the plaintiff $5.6 million based on breaches of the parties’ retrocession agreements.  The district court also entered summary judgment in the plaintiff’s favor on the rescission counterclaim.  The Third Circuit affirmed, ruling that the information plaintiff withheld was not material so as to amount to a breach of the duty of utmost good faith, approving the following definition of materiality under New York law: “A fact is material . . . if, had it been revealed, the insurer or reinsurer would either have not issued the policy or would have only at a higher premium.”  The Third Circuit rejected the other party’s broader definition of materiality – that information is material if it “likely” would have influenced the decision.

Munich Reinsurance Am., Inc. v. Am. Nat’l Ins. Co., No. 14-2045 (3rd Cir. Feb. 3, 2015)

This post written by Catherine Acree.

See our disclaimer.

INTERIM TRIA GUIDANCE ISSUED BY DEPARTMENT OF TREASURY

by

As previously reported, the Terrorism Risk Insurance Act (“TRIA” or the “Program”) was re-authorized and signed into law on January 12, 2015 (the “Reauthorization Act”).

On February 4, 2015, the Department of Treasury (“Treasury”) issued Interim Guidance Concerning the Terrorism Risk Insurance Act Reauthorization of 2015 (the “Interim Guidance”), which may be relied upon until superseded by amended regulations or additional guidance, to address implementation of the TRIA Reauthorization. The Interim Guidance addresses documentation of TRIA coverage, disclosures, and new offers of coverage.

Documentation

Recognizing that insurers may require additional time to provide disclosures and offers of coverage that comply to with state insurance rate and form laws, the Interim Guidance establishes an April 13, 2015 deadline for insurers to provide required disclosures and coverage offers.

Disclosures

The Interim Guidance provides the following advice concerning insurer disclosures:

  • National Association of Insurance Commissioner (NAIC) Model Disclosure Forms Nos. 1 and 2, as amended in 2015, are consistent with the disclosure requirements required under current TRIA regulations and the Reauthorization Act. Insurers may use these forms pursuant to Interim Section 50.17(c) of the Program regulations.
  • Insurers are no longer required to provide to a policyholder certain disclosures at the time of a policy’s purchase; however, insurers must provide such disclosures at the time of offer and renewal The timing of an insurer’s disclosures may conform with either subpart B of the Program’s regulations or Section 103(b)(2) of TRIA, as amended by the Reauthorization Act.
  • Insurers that offered coverage for insured losses prior to January 12, 2015, using the then-current NAIC Model Disclosure Form No. 1, NAIC Model Disclosure Form No. 2, or other disclosures consistent with Program regulations, are not required to provide a revised disclosure to the policyholder.
  • Disclosures on or after January 12, 2015 provided in connection with a new or mid-term offer of coverage for insured losses should be based on Program regulations and the Reauthorization Act.

New Offers of Coverage

The Interim Guidance expects an insurer to make a new offer of coverage for insured losses with respect to any in-force policy that does not provide coverage for insured losses, except where:

  • The policy incorporates a conditional exclusion or change of terms and conditions relating to coverage for insured losses and, because the Program is in effect, the insurer forbears effective January 1, 2015 (or as of the effective date of the policy, if later) on the exercise of the conditional exclusion or change in terms and conditions. The insurer should provide the policyholder written notice no later than April 13, 2015, of the insurer’s forbearance or written notice of the insurer’s withdrawal of any previous exercise of the conditional exclusion or change in terms and conditions. In the written notice, the insurer should state that the insurer’s forbearance or withdrawal, as applicable, is effective January 1, 2015 (or as of the effective date of the policy, if later); or
  • The policyholder declined coverage for insured losses, so long as the insurer’s offer did not materially differ in price from that which the insurer would have offered following enactment of the Reauthorization Act.

The Interim Guidance further advises that if a policyholder declined coverage for insured losses but the insurer’s offer materially differed in price from that which the insurer would have offered following enactment of the Reauthorization Act, then the insurer should consider making a new offer to that policyholder.

In response to the Reauthorization Act and the Interim Guidance, the NAIC developed a Model Bulletin to expedite communication of implementation issues concerning the Reauthorization Act. Several states, such as Alabama, Kentucky, Louisiana, Maryland, North Carolina, Oklahoma, Rhode Island, and Wyoming have issued the Model Bulletin tailored to existing state regulatory requirements for each jurisdiction. It is anticipated that additional jurisdictions will issue similar bulletins or memoranda concerning compliance with the Reauthorization Act.

This post written by Kelly A. Cruz-Brown.

See our disclaimer.

REINSURER FOUND PREJUDICED BY DISADVANTAGEOUS COMMUTATIONS RESULTING FROM CEDING INSURER’S LATE NOTICE

by

A legal dispute stemmed from Utica Mutual Insurance Company’s late notice of claim to Fireman’s Fund Insurance Company, Utica’s reinsurer. Although the parties’ facultative reinsurance certificate required Utica to provide prompt notice “of any occurrence or accident which appears likely to involve reinsurance,” Utica did not provide notice of its claim until 2008 after it entered into a settlement agreement with its own insured surrounding litigation which commenced in 1997. Fireman’s Fund argued that it was prejudiced by Utica’s late notice of its $35 million claim because Fireman’s Fund did not take the claim into account when it negotiated thirteen commutation agreements with retrocessionaires. According to Fireman’s Fund, the retrocessionaires would have been responsible for almost $20 million of the $35 million claim had Fireman’s Fund known of the claim because those claims would have been part of their negotiations. Utica maintained that the commutations were collateral matters which did not constitute prejudice and sought partial summary judgment on the issue of late notice. The court concluded that a reinsurer may be prejudiced by its ceding insurer’s late notice which caused it to make disadvantageous commutations. However, the reinsurer must prove that it suffered tangible loss. If it can do so, then the reinsurer is entitled to complete relief from its duty to indemnify and not merely for those damages caused by the prejudice. The court also denied Utica’s motion for partial summary judgment on Fireman’s Funds bad faith defense. Genuine issues of material fact existed as to whether Utica was grossly negligent or reckless in failing to provide prompt notice to Fireman’s Fund. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 6:09-CV-853 (USDC N.D.N.Y. Feb. 9, 2015).

This post written by Leonor Lagomasino.

See our disclaimer.

DELAWARE COURT ORDERS BANK TO TURN OVER $156 MILLION OF REINSURER’S ASSETS TO STATE INSURANCE COMMISSIONER

by

The Delaware Court of Chancery has denied U.S. Bank, N.A.’s request for an order establishing its right to retain cash and securities valued at $156 million and maintained by Freestone Insurance Company, a reinsurer now in receivership, in a custodial account at the Bank. When Freestone’s delinquency proceedings began, it maintained assets valued at $175 million with the Bank, which held the assets in trust to secure the insurer’s right to payment from Freestone (and others) as reinsurer. The Bank turned over only $19 million of the assets and moved for an order establishing its right to retain the rest, arguing it was entitled to keep the assets as security for potential indemnification claims and present and future expenses. The court denied the Bank’s motion, finding the Bank was not entitled to retain indefinitely assets valued at $156 million nor was it entitled to a security interest in those assets. Instead, the court ordered the Bank to turn over the $156 million to the Insurance Commissioner of the State of Delaware, allowing the Bank to keep only its current administrative fees to the extent incurred as of a date thirty days after the date the commissioner demanded the assets’ return. In the Matter of the Liquidation of Freestone Insurance Co., C.A. No. 9574-VCL (Del. Ch. Dec. 24, 2014).

This post written by Renee Schimkat.

See our disclaimer.

REINSURANCE-RELATED DISPUTE STAYED PENDING ARBITRATION DESPITE LATER EXECUTED SETTLEMENT AGREEMENT

by

Steadfast Insurance Company entered into a settlement agreement with its insured, Barton Malow Enterprises after agreeing to pay $15 million on Barton’s claim. The settlement included a complete release of all claims by Steadfast against Barton and its affiliates and subsidiaries. Thereafter, Steadfast discovered that it had purchased reinsurance covering a portion of the settlement proceeds under a reinsurance agreement with United Integrity. United denied the claim, arguing that Steadfast released United because United was in fact a wholly-owned subsidiary of Barton’s. Steadfast then served an arbitration demand on United pursuant to the arbitration clause in their reinsurance agreement. Barton and United responded by filing suit against Steadfast, which moved to stay the action pending arbitration. Barton and United opposed the motion for stay, arguing that the later-executed settlement agreement overrode the arbitration provision. The court disagreed and stayed the case pending arbitration. The arbitration provision was not superseded by the settlement agreement because the settlement agreement did not specifically preclude arbitration. Moreover, United’s claims fell within the scope of the arbitration provision; the claims implicated both sides’ rights and obligations under the reinsurance agreement. Finally, although Barton was not a party to the reinsurance agreement, the court found that judicial economy warranted staying Barton’s claims against Steadfast pending conclusion of the arbitration. Barton Malow Enterprises, Inc. v. Steadfast Insurance Co., No. 14-cv-7347 (USDC S.D.N.Y. Dec. 31, 2014).

This post written by Leonor Lagomasino.

See our disclaimer.