Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COLORADO AMENDS LAWS GOVERNING CREDIT FOR REINSURANCE AND RECEIVERSHIPS

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Colorado has amended its laws regarding credit for reinsurance and receiverships to conform to certain model acts adopted by the National Association of Insurance Commissioners (NAIC). House Bill 14-1315, conforms Colorado Revised Statutes 10-3-701 through 10-3-706 with the NAIC Credit for Reinsurance Model Act to establish criteria that the insurance commissioner is to use in certifying reinsurers, imposes requirements on ceding insurers to take certain steps to manage their concentration of risk, and imposes requirements upon the insolvency of a non-U.S. insurer or reinsurer that provides security to fund its U.S. obligations.

Furthermore, House Bill 14-1315 enacts Colorado Revised Statute 10-3-540.5 to specify the conditions under which insurance companies may offset their obligations to each other when an insurance company becomes insolvent. Colorado Revised Statute 10-3-540.5 adopts section 711 of the NAIC Insurer Receivership Model Act.

The Governor signed House Bill 14-1315 on May 31, 2014. The amendments to Colorado Revised Statutes 10-3-701 through 10-3-706 are effective January 1, 2015. Colorado Revised Statute 10-3-540.5 is effective August 6, 2014.

This post written by Kelly A. Cruz-Brown.

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APPELLATE COURT HOLDS THAT ARBITRATORS DID NOT ACT IN EXCESS OF THEIR AUTHORITY OR IN MANIFEST DISREGARD OF LAW IN DENYING MOTION TO VACATE AWARD

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The Ninth Circuit Court of Appeals affirmed a district court’s denial of a motion to vacate an arbitration award issued in a dispute between the Johnsons and Wetzel’s Pretzels, concerning the termination of a franchise agreement. The appellants, the Johnsons, challenge the award on grounds that the arbitrator exceeded his powers by enforcing provisions in the franchise agreement that required the Johnsons to assign their lease and property interests to the defendant. The Ninth Circuit denied the appellants’ claims, stating that the Johnsons were unable to show that the award was “irrational or exhibit[ed] a manifest disregard of law,” two of the limited grounds on which a federal court may vacate an arbitral award. Emphasizing the terms of the franchise agreement, the Court stated that the arbitrator acted within the scope of the agreement, which expressly provided for the assignment of the plaintiff’s lease and property interests upon termination of the agreement. Additionally, the Court indicated that the Johnsons were unable to offer convincing evidence that award exhibited a manifest disregard of law. Wetzel’s Pretzels, LLC v. Johnson, No. 12-56716 (10th Cir. Apr. 3, 2014).

This post written by Rollie Goss.

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APPELLATE COURTS ADDRESS JURISDICTION TO HEAR DISPUTES CONCERNING ARBITRATION

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Establishing that a federal court has jurisdiction to hear an arbitration dispute is not always easy. The Fourth Circuit recently affirmed the dismissal of an action seeking to vacate an arbitration award based upon lack of subject matter jurisdiction. Plaintiff attempted to show that the nexus between her claims and “commerce” fell within the realm of the FAA, and therefore there was a federal question under §1331. However, she failed to raise that argument below, so it was not properly before the court of appeal, and the Court found it to be unavailing in any event. Ball v. Stylecraft Homes, LLC, No. 13-1946 (4th Cir. Mar. 26, 2014)

The Eleventh Circuit affirmed the denial of a motion to remand for lack of jurisdiction. The issue was whether diversity jurisdiction was defeated because the action was a direct action against an insurer, defeating diversity jurisdiction under 28 U.S.C. §1332(c). The Court held that it was not a direct action, and affirmed the district court’s order compelling arbitration. Kong v. Allied Professional Insurance Company, No. 13-12305 (11th Cir. May 9, 2014)

This post written by Rollie Goss.

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COURT CONSTRUES DISPUTED INSURANCE POLICY LANGUAGE AND REQUIRES REINSURER TO FOLLOW THE SETTLEMENTS

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The case involved two facultative reinsurance contracts, each of which covered excess liability for similar umbrella liability insurance policies, and each of which contained a “follow the settlements” provision. After the insurer agreed to pay a percentage of the insured’s asbestos injury claims and defense expenses, the insurer began billing the reinsurer, but the reinsurer disputed liability. The reinsurer contended that it was not required to pay defense expenses in the same fashion as indemnity for one of the reinsurance certificates, arguing that the underlying insurance policy covered by that certificate lacked a reference to “defense expense” in the policy limit provision.

The court, however, rejected the reinsurer’s argument and entered summary judgment in favor of the insurer, finding that the reinsurer failed to demonstrate that the cedent was seeking coverage beyond the scope of the agreements. “It may be,” the court explained, “that defendant believes that defense expenses should not be included in the settlement because [the policy] does not use the phrase ‘defense expenses’ when defining the total limits of liability. However, … the provision does not affect the type of expenses that are covered, only the amount.” The court also considered two issues raised in later briefing: (1) whether the cedent proved the extent to which it exceeded the retention amounts; and (2) whether the cedent calculated prejudgment interest correctly, but reserved ruling on those issues, pending supplemental briefing. Employers Insurance Co. of Wausau v. R & Q Reinsurance Co., No. 13-cv-709 (USDC W.D. Wisc. May 16, 2014).

This post written by Michael Wolgin.

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CFTC ISSUES NO ACTION LETTER ON APPLICATION OF SWAP RULES TO LONGEVITY REINSURANCE TRANSACTION

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There has been considerable concern in the insurance and reinsurance industries that certain hedging and reinsurance activities that companies have engaged in for a number of years, particularly with respect to life insurance and annuity products, might be viewed as swaps under regulations implementing the swap regulation provisions of the Dodd-Frank Act, complicating those transactions and increasing their costs.  A division of the Commodity Futures Trading Commission recently issued a no-action letter indicating that it would not recommend that the Commission take enforcement action based upon the view that certain longevity risk reinsurance transactions are “swaps.”  This is the first time that the Commission has addressed whether a specific insurance transaction is covered by the swap rules.  The transaction at issue encompassed longevity and inflation risks from a pool of plan beneficiaries under a non-U.S. defined benefit pension plan.  The risks were the subject of longevity swap hedging transactions and reinsurance through a Bermuda domiciled cell insurance company.  The Dodd-Frank Act contains an insurance safe harbor provision, which was intended to provide a basis for finding that certain enumerated traditional insurance products and activities, including annuities and reinsurance, are not regulated swaps.  The no-action letter analyzes the described transaction and finds that it involves an insurance policy and a “traditional reinsurance contract,” which should not be characterized as a swap.  This no-action letter provides insight into how the CFTC views the insurance safe harbor provision of the Dodd-Frank Act.  CFTC Letter No. 14-67 (April 8, 2014).

This post written by Rollie Goss.

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