Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

RHODE ISLAND DIVISION OF INSURANCE AMENDS CREDIT FOR REINSURANCE REGULATION

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Effective September 2, 2014, Insurance Regulation 59 entitled “Credit for Reinsurance” is amended to update the regulation to the current version of the National Association of Insurance Commissioners (NAIC) Model Regulation and to make changes necessitated by amendment of Rhode Island’s Credit for Reinsurance Act, R.I. Gen Laws § 27-1.1-1 et seq.

The amendments to Insurance Regulation 59 also include the adoption of Forms CR-1, entitled “Certificate of Certified Reinsurer,” CR-F parts 1 and 2 entitled “Assumed Reinsurance as of December 31, Current Year” and “Ceded Reinsurance as of December 31, Current Year,” and CR-S entitled “Reinsurance Assumed Life Insurance, Annuities, Deposit Funds and Other Liabilities Without Life or Disability Contingencies, and Related Benefits Listed by Reinsured Company as of December 31, Current Year.”

This post written by Kelly A. Cruz-Brown.

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NEW YORK FEDERAL COURT ALLOWS ATTORNEY DISQUALIFICATION CLAIM TO PROCEED

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A New York federal court recently denied a motion to dismiss a claim filed by two reinsurers, Employers Insurance Company of Wausau and National Casualty Company. The claim sought a declaration disqualifying Hunton & Williams as counsel for their reinsured, Utica Mutual Insurance Company, in a subsequent arbitration dispute concerning the reinsurers’ obligations for the amounts paid in an underlying settlement. Hunton & Williams had represented Utica in negotiating the underlying settlement and in litigating coverage issues against Utica’s insured. The reinsurers argued that, in the underlying litigation, Utica had a “common interest” with its reinsurers to minimize the liability to Utica’s insured; therefore, the Hunton & Williams attorneys, in effect, represented the reinsurers’ interests in the underlying litigation. The reinsurers argued that the rules of professional conduct prohibit the attorneys from representing Utica in the subsequent arbitration because such representation was adverse to them. The district court concluded that the reinsurers had stated a valid claim to disqualify the attorneys based on the rules governing concurrent and successive representation, noting that even if the reinsurers were not the clients of Hunton & Williams in the “traditional sense,” an inquiry into the potential conflict was still warranted. The court also found that the reinsurers had plausibly alleged that the “witness-advocate” rule may apply in the case because the attorneys may be called as witnesses in the arbitration proceeding to testify concerning the reasonableness of the underlying settlement.

Utica Mutual Ins. Co. v. Employers ins. Co. of Wausau and Nat’l Cas. Co., No. 6:12-CV-1293 (USDC N.D. N.Y. Sep. 22, 2014).

This post written by Catherine Acree.

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ARBITRATION CLAUSE FOUND UNENFORCEABLE IN SERVICE CONTRACT ACTION

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Reversing the lower court, the Supreme Court of New Jersey found an arbitration provision in a service contract was unenforceable because it failed to notify the consumer clearly and unambiguously that, by entering into the agreement, the consumer was waiving the right to seek relief in a court of law. In this case, the arbitration clause stated that either party may submit any dispute “to binding arbitration”; that “the parties shall agree on a single arbitrator to resolve the dispute”; and that the arbitrator’s decision “shall be final and may be entered into judgment in any court of competent jurisdiction.” Basing its decision on the principle that an effective waiver requires a party to have full knowledge of his legal rights and intent to surrender those rights, the court found that the arbitration provision at issue failed to explain that the plaintiff was waiving her right to seek relief in court, what arbitration is, or how arbitration is different from a proceeding in a court of law. Patricia Atalese v. U.S. Legal Services Group, A-64-12 (072314) (N.J. Sept. 23, 2014).

This post written by Leonor Lagomasino.

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FEDERAL LAW GOVERNING FOREIGN RISK RETENTION GROUPS PREEMPTS STATE LAW THAT PROHIBITS MANDATORY ARBITRATION CLAUSES IN INSURANCE POLICIES

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The Nebraska Supreme Court has held that Nebraska’s statute prohibiting mandatory arbitration clauses in insurance policies is preempted by the Liability Risk Retention Act of 1986 (LRRA). At issue was a professional liability insurance policy from Allied Professionals Insurance Company, a risk retention group incorporated in Arizona and registered with the Nebraska Department of Insurance as a foreign risk retention group. When a dispute arose between the policyholder and Allied, the policyholder filed an action seeking a declaration that Allied was obligated to provide coverage for an underlying civil suit pending against him. Allied moved to compel arbitration pursuant to the policy’s mandatory arbitration clause, which required binding arbitration of any dispute concerning the policy. The lower court rejected Allied’s argument that the Nebraska statute was preempted by federal law and concluded that the arbitration clause was neither valid nor enforceable. It therefore denied Allied’s motion to compel arbitration.

Nebraska’s Supreme Court reversed, finding that while the Federal Arbitration Act did not preempt Nebraska’s law, the LRRA did. The LRRA provides, in part, that a foreign risk retention group is exempt from any state law that would “regulate, directly or indirectly, the operation of a risk retention group.” Nebraska’s prohibition of arbitration clauses in insurance policies “regulates the operation of a risk retention group” within the meaning of the LRRA. As a result, the arbitration clause in the Allied policy was not prohibited by state statute, but was a valid and enforceable clause compelling arbitration. Speece v. Allied Professionals Insurance Co., 289 Neb. 75 (Neb. Sept. 19, 2014).

This post written by Renee Schimkat.

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REINSURER NOT ALLOWED TO INTERVENE IN ACTION INVOLVING CEDENT’S RISK

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The United States District Court for the Southern District of New York denied a reinsurer’s motion to intervene in an interpleader action in which Battenkill Insurance Company argued it had an 85% interest in the funds at stake in an action involving a dispute over distribution of funds from a residential mortgage-backed securitization trust. Battenkill reinsured 85% of the risk under certain policies issued by one of the defendants in the interpleader action, Assured Guaranty Municipal Corp. Wales, LLC, one of the other defendants, counterclaimed against Wells Fargo, an interpleading plaintiff, arguing Wells Fargo misinterpreted the trust provisions and argued that Assured should be ordered to repay $47.7 million, plus interest, of the disputed distributions which Wells Fargo had held in escrow as a result of the dispute and then interplead. Because Battenkill would be required to reinsure 85% of the amounts which Assured would have to repay, Battenkill sought to intervene.

The court rejected the motion to intervene, reasoning that Assured would also lose a significant amount of money if it did not prevail, despite holding a smaller interest in the amount at stake, such that Battenkill and Assured had identical interests in the litigation. Assured would therefore adequately protect Battenkill’s interest and Battenkill thus did not have a right to intervene in the litigation. The court also rejected Battenkill’s argument that it should be allowed to intervene so that it could litigate the interpretation of the reinsurance agreement between it and Assured. Because the reinsurance agreement was not at issue in the in the interpleader action, Battenkill’s intervention would unnecessarily complicate the litigation and introduce immaterial issues to the trust’s interpretation. Wells Fargo Bank, NA v. Wales, LLC, et. al., 13 Civ. 6781 (PPG) (USDC S.D.N.Y. Sept. 19, 2014).

This post written by Leonor Lagomasino.

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