Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

TREATY TIP: CLARITY IN REINSURANCE CONTRACTS

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It is important that all contracts accurately and clearly set forth the agreements of the parties to the contract. One of the most critical parts of any reinsurance agreement is specifying the scope of the risks transferred pursuant to the agreement. In a Treaty Tip, Rollie Goss discusses a recent case which was filed due to perceived uncertainty with respect to the contractual loss limit of facultative reinsurance certificates. Treaty Tip: The Mutual Benefits of Clear Reinsurance Limits.

This post written by Rollie Goss.

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CALIFORNIA COURT ISSUES MIXED RULING ON CROSS-MOTIONS IN SUIT SEEKING POLICY RESCISSION

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A California federal district court granted in part and denied in part various motions involving Star Insurance’s action seeking to rescind an insurance policy based upon certain alleged material misrepresentations concerning the nature of the insured’s business. The insured, Sunwest Metals, Inc., incurred substantial damage to its property following an arson fire. After Star advanced certain benefits to Sunwest, Star sued to rescind the policy based upon certain alleged misrepresentations which Sunwest, through its agent, made on the insurance application which underreported the percentage of income from Sunwest’s recycling business. The parties did not dispute that the misrepresentations were false. In defense, Sunwest argued the misrepresentations were unintentional and not material. Sunwest counterclaimed against Star and cross-claimed against its agent as well as against Star’s surplus lines broker, G. J. Sullivan. The parties cross-moved for judgment.

First, the court denied Sunwest’s motion for judgment on the pleadings, rejecting Sunwest’s argument that Star was required to plead and prove that Sunwest’s intentionally mispresented the income from its recycling operations on the aapplication. As a matter of law, California law allows an insurer to rescind a policy based upon an insured’s negligent or intentional concealment or misrepresentation of a material fact.

Next, the court denied in part Star’s motion for summary judgment. Sunwest raised genuine issues of material fact as to whether Star had inquiry notice of the misrepresentations. Specifically, Star’s underwriters had seen Sunwest’s website which prominently displayed Sunwest’s recycling business and reviewed a report which should have put it on notice to further investigate Sunwest’s annual revenue breakdown. Moreover, because a genuine issue of material fact existed as to when Star should have been on notice of Sunwest’s actual income, the court determined that genuine issues of material fact also existed as to whether or not Star waived the misrepresentation by allegedly unduly delaying its rescission. While it agreed with Sunwest that genuine issues of material fact existed as to inquiry notice and waiver, the court found as a matter of law that the misrepresentations were indeed material.

Finally, the Court granted Sullivan’s motion for summary judgment. The parties did not dispute Sullivan acted as Star’s agent. The issue became whether Sullivan acted in a capacity as a dual agent which could have given rise to a cause of action by Sunwest against Sullivan. The court rejected Sunwest’s argument, finding that a reasonable jury could only conclude that Sullivan was not a dual agent. Star Insurance Co. v. Sunwest Metals, Inc., Case No. SACV 13-1930 DOC(DFMx) (C.D. Cal. Dec. 29, 2014).

This post written by Leonor Lagomasino.

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FIFTH CIRCUIT DISMISSES FOR LACK OF APPELLATE JURISDICTION APPEAL OF ORDER COMPELLING ARBITRATION

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The Fifth Circuit Court of Appeals has dismissed, for lack of appellate jurisdiction, a district court order granting a motion to compel arbitration filed by Certain Underwriters of Lloyds of London and several other insurance companies. The Fifth Circuit held that the district court’s order was not a final, appealable order within the meaning of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the Federal Arbitration Act. The district court had granted the motion after finding the insurance contract at issue contained a clear and unambiguous arbitration clause, and had then stayed the case and closed it for administrative purposes. The Fifth Circuit found the district court’s order and administrative closure lacked the finality necessary for appellate jurisdiction, noting a “clear distinction” between final orders dismissing cases after compelling arbitration and interlocutory orders staying and administratively closing cases pending arbitration. The district court’s order was deemed to be the latter and the appeal was therefore dismissed. Southwestern Electric Power Co. v. Certain Underwriters at Lloyds of London, No. 13-31130 (5th Cir. Nov. 24, 2014).

This post written by Renee Schimkat.

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COURT APPROVES $7 MILLION SETTLEMENT AGREEMENT WITH REINSURER IN RELIANCE INSURANCE COMPANY’S LIQUIDATION

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A Pennsylvania court overseeing Reliance Insurance Company’s liquidation proceedings approved the settlement agreement between Reliance and XL Reinsurance Company. The agreement allowed the liquidator to terminate and commute the obligations between Reliance and XL under the parties’ reinsurance agreement, such that the estate would receive a $7,248,830 economic benefit. In re Reliance Insurance Company in Liquidation, 1 REL 2001 (Pa. Commw. Ct. Oct. 2, 2014).

This post written by Leonor Lagomasino.

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U.K. COURT APPROVES INSURANCE BUSINESS TRANSFER SCHEME

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A court in the United Kingdom has approved the transfer of the entire long-term insurance business of Prudential Annuities Limited (PAL) to The Prudential Assurance Company Limited (PAC). The transfer’s purpose was to simplify the corporate structure of Prudential UK’s business, improve the flexibility and efficiency of capital management, and facilitate Prudential’s response to regulatory developments. The transfer affected approximately 134,000 contracts of long-term insurance business, all non-profit pension policies, and approximately 90,000 policyholders. Regulators did not object to the transfer and an independent expert and three actuaries all supported it.

PAL was already an asset of the PAC fund to which its business was transferred and, since 2012, the vast majority of PAL’s business had been reinsured by that fund. The court found that the reinsurance arrangements for the transfer significantly restricted the ability of the PAC fund to “walk away” from PAL and agreed with the independent expert that there would be no adverse change to either PAL or PAC policyholders from the transfer. Finding that all requirements of the Financial Services and Markets Act 2000 had been met, the court sanctioned the transfer of business. In the Matter of Prudential Annuities Ltd., [2014] EWHC 4770 (Ch.) (High Courts of Justice (Chancery Division) Cos. Ct.) Nov. 13, 2014).

This post written by Renee Schimkat.

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