Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DENIES PETITION FOR ORDER CONFIRMING FINAL ARBITRATION AWARD AND ENTRY OF JUDGMENT

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In First State Ins. Co. v. Nationwide Mutual Ins. Co., No. 13-cv-11322-IT (U.S.D.C. D. Mass. Oct. 21, 2014), a petition for an order to confirm a final arbitration award and entry of judgment was denied.  The court determined that although labeled a “Final Award,” the arbitration panel expressed no intention to resolve all claims submitted in the demands for arbitration.  Instead, the award focused on the plaintiff’s motion regarding contract interpretation, which directed the parties back to the panel with a proposed schedule leading to a hearing on remaining matters.  Moreover, although the panel proceeded to address the issues in phases, the parties did not jointly agree to bifurcation of the arbitration. Rather the record in the case showed that the defendant objected to bifurcation of the issues at an organizational meeting with plaintiff and the panel when it argued that the panel should consider all of the issues before it at the same time.

This post written by John Pitblado.

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SEVENTH CIRCUIT DECLINES TO REQUIRE PRE-PLEADING SECURITY FROM URUGUAY’S STATE-OWNED REINSURER AND REFUSES TO COMPEL ARBITRATION

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The Plaintiff, Pine Top Receivables of Illinois, LLC brought an action in Illinois federal court against Banco de Seguros del Estado, an entity wholly owned by Uruguay. Pine Top claimed that Banco de Seguros owed Pine Top $2,352,464.08 under certain reinsurance contracts. Pine Top’s complaint sought to compel arbitration, and alternately sought entry of judgment for breach of contract. Banco Seguros answered the complaint, and Pine Top moved to strike the answer for failure to post pre-pleading security as required under Illinois’s unauthorized foreign insurer statute, § 215 ILCS 5/123(5).

The trial court held, and the Seventh Circuit affirmed on interlocutory appeal, that Banco Seguros was not required to post security, following Second Circuit precedent which held that an attachment of any sort (like pre-judgment security) was violative of the broad grant of immunity to foreign governments afforded by the Foreign Sovereign Immunities Act.

The Seventh Circuit also affirmed the trial court’s ruling denying Pine Top’s motion to compel arbitration, finding that Pine Top’s rights under the reinsurance contracts, which had been assigned to it by the Liquidator of the defunct primary insurer that originally entered into the agreements with Banco Seguros, were limited to the collections of certain debts, but it was not assigned all rights and duties under the treaties, and thus was not assigned the right to arbitrate. Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 13–1364 (7th Cir. Nov. 7, 2014)

This post written by John Pitblado.

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COURT REFUSES TO SEAL “SUBSTANTIVE RULINGS” IN ARBITRATION AWARD

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A federal court in Michigan was recently presented with a motion to seal the briefing associated with a motion to confirm an arbitration award. The arbitration concerned a reinsurance dispute and had been conducted pursuant to a confidentiality agreement that required the final award and any court submissions be kept confidential. Noting the “long-established legal tradition of public access to court documents,” the court ordered that only limited portions of the Final Award should be sealed – those that identified non-parties. The court refused to seal other portions of the award, rejecting the argument that public filing of the award’s “substantive rulings” could harm the reinsurer’s financial interests. The reinsurer argued that other reinsureds could cite to the blanket pronouncements in the Final Award to support their claims, despite the confidential nature of the arbitration. The court ruled that unlike situations where the arbitration award contains confidential business data or trade secrets and therefore is properly sealed, the request to seal the Final Award in this case was made merely to prevent unhelpful portions of the Final Award from becoming public in an effort to avoid future litigation. The court cited Sixth Circuit precedent holding a party’s interest in shielding prejudicial information from public view, standing alone, cannot justify the sealing of that information.  Amerisure Mut. Ins. Co. v. Everest Reinsurance Co., No. 14-CV-13060, 2014 WL 5481107 (E.D. Mich. Oct. 29, 2014).

This post written by Catherine Acree.

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COURT DENIES MOTION TO COMPEL PRODUCTION OF DOCUMENTS RELATING TO REINSURANCE COVERAGE

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A federal district court has denied that part of an insured’s motion seeking to compel the insurer to produce all documents relating to its reinsurance coverage. The court ordered the production of the reinsurance agreements themselves, but found the request for all other reinsurance information was “plainly too broad.” The court also recognized the possible application of the common interest doctrine to the communications between the insurer and its reinsurer to support the denial. As to the other documents sought, the court granted that part of the motion seeking documents relating to certain drafting history of the insurance policy at issue, but denied the remaining part of the motion to compel, which sought documents ranging from the insurer’s personnel files for all personnel involved in the claim to the insurer’s loss reserve information. Harleysville Lake States Ins. Co. v. Lancor Equities, Ltd., No. 13-CV-6391 (USDC N.D. Ill. Oct. 31, 2014).

This post written by Renee Schimkat.

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UNITED STATES TAX COURT RULES ON CAPTIVE INSURANCE ARRANGEMENT

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In 2003 and 2004, the Internal Revenue Service disallowed deductions taken by SHI Group, a subsidiary of the Swedish company Securitas AB, for insurance expenses related to a captive insurance arrangement established by Securitas AB. SHI Group, which maintained an office in California, petitioned the disallowance of these deductions in the United States Tax Court. The Internal Revenue Code permits deductions for insurance premiums as business expenses. Although the insurance premiums may be deductible, amounts placed in reserve as self-insurance are not and can only be deducted at the time the loss for which the reserve was established is actually incurred. While neither the Code nor the regulations define insurance, courts have looked primarily to four critieria in deciding whether an arrangement constitutes insurance for income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risk of loss to the insurer; and (4) the arrangement must be insurance in the commonly accepted sense. Based on the complicated facts before it, the Tax Court determined that the captive arrangement at issue constituted insurance, allowing deductions for the related expenses. Securitas Holding, Inc. v. Commissioner, No. 21206-10, T.C. Memo 2014-225 (U.S.T.C. Oct. 29, 2014).

This post written by Leonor Lagomasino.

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