Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

ENGLISH APPELLATE COURT DISMISSES APPEAL OF JUDGMENT DECLARING NO LIABILITY UNDER A CARGO LIABILITY REINSURANCE POLICY

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A judgment found that certain Lloyd’s reinsurers were not liable to cover the destruction of cargo on board a vessel that capsized in the Philippines during a Typhoon. The trial court relied on a typhoon warranty clause contained in both the reinsurance policy and the underlying insurance policy, which deemed the policy void if a vessel sailed out of port (1) “when there is a typhoon or storm warning at that port”; or (2) when the destination or intended route “may be within the possible path of the typhoon or storm announced at the port of sailing, port of destination or any intervening point.” The trial court had found that there was a typhoon or storm warning at the port of sailing, and that the vessel’s route was within the possible path of the typhoon or storm announced at the port.

On appeal, the cedent argued that the first condition of the typhoon warranty clause was not breached under a four-step analysis: (1) the reinsurance policy contained a follow the settlements clause, (2) which required the reinsurance coverage to be interpreted like the underlying insurance policy, (3) the insurance policy should be construed in accordance with what an experienced insured would have understood the storm notice to mean, and (4) in this case, the storm notice would not be understood by an experienced insured as a sufficient warning against embarking. The court rejected this argument, holding that the clause must be understood according to only its plain meaning, both with respect to the clause in the insurance policy and the parallel clause in the reinsurance policy, and here it was undisputed that a storm warning had been issued. The court also rejected the cedent’s contention that the intended path of the vessel would not have crossed the possible path of the typhoon, finding that it was proper for the trial court to determine that the intended route was within the typhoon’s path. Amlin Corporate Member Ltd. v. Oriental Assurance Corp., [2014] EWCA Civ 1135 (Royal Courts of Justice, July 8, 2014).

This post written by Michael Wolgin.

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NAIC EXECUTIVE COMMITTEE ADOPTS FRAMEWORK FOR CHANGES TO CAPTIVE RESERVE REQUIREMENTS

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NAIC’s Executive Committee met at NAIC’s annual meeting in Louisville, Kentucky on August 16 and 17, 2014. The Executive Committee furthered its action on reserve requirements for captive reinsurers (as reported here last year) and adopted the “XXX/AXXX Reinsurance Framework” which will guide development of proposed regulatory changes to the types of assets and securities required to meet statutory reserve requirements.

Arising from worries about potentially abusive use of captives creating a “shadow insurance industry (as reported here in 2012), the framework would, among other things, require ceding companies to disclose the assets backing their risk-based-capital (RBC) computations.

As noted in the Principle-Based Reserving (PBR) Implementation (EX) Task Force’s report to the Executive (EX) Committee, the framework:

  • addresses concerns regarding reserve financing transactions without encouraging such transactions to move off-shore. The changes would be prospective and apply to XXX term life insurance business and AXXX universal life with secondary guarantees.
  • requires the ceding company to collateralize a portion of the total statutory reserves with hard assets such as cash and securities, collateralize the remainder with other assets and forms of security identified as acceptable by regulators, disclose the assets and securities used; and hold an RBC cushion as required for other business.
  • will be codified through the Credit for Reinsurance Model Law, with the creation of a new model regulation.

The PBR subcommittee’s report is based on the June 4 Rector & Associates, Inc. report’s recommendations (a copy of which is available on the PBR taskforce’s website: http://www.naic.org/committees_ex_pbr_implementation_tf.htm).

This post written by John Pitblado.

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COURT GRANTS MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS IN RESPA CLASS ACTION REGARDING PRIVATE MORTGAGE INSURANCE

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We have previously reported on a case styled Munoz v. PHH Corp., one of similar suits alleging putative class actions under the Real Estate Settlement Procedures Act arising from purported “sham” reinsurance transfers covering private mortgage insurance. Defendants in that case filed a motion for partial judgment on the pleadings asserting that plaintiff-intervenor, and all others similarly situated, failed to plead sufficient facts to state a claim for application of equitable tolling and/or equitable estoppel to the one-year statute of limitations for alleged violations of the Act. The court granted defendants’ motion for equitable tolling and equitable estoppel/fraudulent concealment pleadings. The loan document disclosures adequately placed plaintiff on notice of her claim and that she failed to allege extraordinary circumstances that prevented her from timely filing. In particular, the disclosures explained the requirement of mortgage insurance, the purpose of the mortgage insurance, the borrower’s rights and responsibilities under mortgage insurance, and the potential occurrence of captive insurance. The court also found that plaintiff failed to plead an act of concealment separate and apart from an underlying RESPA claim. The court, however, is allowing plaintiff one opportunity to file and serve an amended complaint to cure deficiencies within 20 days from date of the court’s order. Munoz v. PHH Corp., No. 1:08-CV-0759 (USDC E.D. Cal. Aug. 11, 2014).

This post written by Kelly A. Cruz-Brown.

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RESPA CLASS ACTION ALLEGING “CAPTIVE REINSURANCE SCHEME” ALLOWED TO PROCEED

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A Pennsylvania federal court recently denied a motion to dismiss a putative class action lawsuit in which homeowners claim violations of the Real Estate Settlement Procedures Act of 1974 based on an alleged “captive reinsurance scheme” related to private mortgage insurance.

The plaintiffs allege that between January 2006 and December 2008, they obtained residential mortgage loans from National City Mortgage (“National City”), which contracted with certain primary insurers to provide private mortgage insurance. These insurers subsequently reinsured with National City’s captive reinsurer, National City Mortgage Insurance Company, Inc. (“NCMIC”), pursuant to a captive reinsurance arrangement. Under this arrangement, the primary insurers paid NCMIC a portion of the borrowers’ insurance premiums in exchange for NCMIC assuming some of the primary insurers’ risk. The plaintiffs claim this reinsurance arrangement violated RESPA’s prohibition on kickbacks because premium payments from the primary insurers to NCMIC were made in return for National City’s referral of business. According to the plaintiffs, this arrangement also violated RESPA’s prohibition on fee-splitting because it was only sham reinsurance. They allege that NCMIC provided no service in return for the portion of the insurance premiums it accepted.

Defendants moved to dismiss the complaint for failure to state a claim, making a variety of arguments. The district court denied the motion, finding that the plaintiffs were entitled to equitable tolling due to alleged fraudulent concealment by the defendants and had set out facts sufficient to meet the federal pleading standards for a violation of RESPA and unjust enrichment. White v. PNC Financial Services Group, Case No. 11-7928 (USDC E.D. Pa., August 18, 2014).

This post written by Catherine Acree.

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MARYLAND ADOPTS CREDIT FOR REINSURANCE REGULATIONS

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The Maryland Insurance Commissioner adopted regulations regarding Credit for Reinsurance effective August 18, 2014. The regulations will implement changes made to Title 5, Subtitle 9 of the Maryland Insurance Article, and are based upon recent amendments to model law and regulation developed by the National Association of Insurance Commissioners entitled “Credit for Reinsurance Model Law” (No. 785) and “Credit for Reinsurance Model Regulation” (No. 786), respectively. The regulations provide standards for a licensed ceding insurer to receive credit for reinsurance ceded to a certified reinsurer as a reduction of collateral requirements and include provisions that establish: 1) eligibility requirements to be considered for certification as a certified reinsurer; 2) eligibility requirements of a jurisdiction in which an assuming insurer may be domiciled to be considered a qualified jurisdiction; 3) eligibility requirements to be considered for approval as an accredited reinsurer; 4) a rating method to be used in the certification process; and, 5) a sliding scale with the level of required collateral varying from 0% to 100% of ceded liabilities based on the certified reinsurer’s rating.

This post written by Kelly A. Cruz-Brown.

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