Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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ARBITRATION ROUND-UP – EXISTENCE OR VALIDITY OF AGREEMENT TO ARBITRATE

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The following recent cases analyzed whether the parties entered into a valid agreement to arbitrate and under what circumstances a court may consider that issue.

Dasher v. RBC Bank (U.S.A.), No. 13-10257 (11th Cir. Feb. 10, 2014) (affirming denial of motion to compel arbitration, finding absence of arbitration provision in agreement which superseded prior agreement, which included an arbitration provision, provided no evidence of the parties’ intent to arbitrate)

JP Morgan Chase Bank N.A. v. Bluegrass Powerboats, No. 2011-SC-000668-DG (Ky. Mar. 20, 2014) (affirming trial court’s order setting aside order compelling arbitration after the arbitrator had rendered a dispositive order, finding that because the arbitrator’s decision was not final, and because the evidence did not support the existence of an agreement to arbitrate, the trial court had the power to correct its prior erroneous ruling)

The Flowserve Corp. v. United States Fire Insurance Co., Case No. 2:14-cv-00676 (USDC D. N.J. May 7, 2014) (granting defendant’s motion to compel arbitration, finding that parties’ side agreement, which did not include an arbitration clause and which modified certain terms of the underlying settlement agreement which did include an arbitration clause, evidenced the parties’ agreement to arbitrate where side agreement provided that, except to the extent it modified the terms of the settlement agreement, all terms of the settlement agreement remained binding upon the parties)

Lakah v. UBS A.G., Case No. 1:07-cv-02799-MGC (USDC S.D.N.Y. March 20, 2014) (denying “what amounts to a summary judgment motion” that plaintiffs should be compelled to arbitrate on the basis of veil piercing and estoppels theories because there were issues of fact as to the making of the agreement for arbitration)

Bank of the Ozarks, Inc. v. Walker, 201 Ark. 223 (2014) (vacating appellate court’s reversal of trial court’s order denying motion to compel arbitration, and remanding matter to trial court, finding that trial court, which ruled that arbitration clause was unconscionable, must first determine whether a valid arbitration agreement existed and, if so, whether the dispute fell within the scope of the agreement)

This post written by Leonor Lagomasino.

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VERMONT AMENDS LAW GOVERNING CREDIT FOR REINSURANCE

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Vermont has amended its law governing how ceding insurers take credit for reinsurance within the state. The law, in part, implements new eligibility requirements for assuming insurers to be accredited reinsurers and requires ceding insurers to take certain steps to manage their concentration of risk. It also imposes certain requirements upon the insolvency of a non-U.S. insurer or reinsurer that provides security to fund its U.S. obligations. The Governor signed the act into law on May 9, 2014, and the amendments were effective upon passage. 8 V.S.A. Sec. 3634a.

This post written by Renee Schimkat.

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UTAH ISSUES BULLETIN REGULATING SURPLUS LINES INSURERS AND PRODUCERS

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On May 15, 2014, the Utah Insurance Department and Surplus Line Association of Utah issued Bulletin 2014-5 to all surplus lines insurers and surplus lines producers/brokers informing them of the following changes by the Utah legislature for policies issued or renewed in Utah after May 13, 2014:

  • Insurers who wish to audit a surplus lines policy must initiate the audit within six months after the expiration of the term for which the premium is paid and must complete the audit within three years after the surplus lines insurance transaction expires. The failure to meet either of these requirements will preclude the insurer from charging premiums in excess of the terms of the original policy.
  • A surplus lines insurer may not count as earned premium an amount in excess of 50% of the initial premium until the earlier of (1) the completion of the audit; or (2) the term for which the auditable policy was written has expired and the time to conduct an audit has passed.
  • If an audit is conducted, the insured is entitled to a refund if the actual exposure is less than the estimated exposure. The insured may request such an audit and the insurer will be bound by the insured’s statement of exposure, requiring refund of the excess portion of the premium, if the insurer does not conduct the audit as required by this law.
  • Alternatively, if the risk is determined to be greater than the initial estimate upon a timely audit, the insurer is entitled to additional premium.

These new laws apply to the extent they are not pre-empted by federal law.

This post written by Leonor Lagomasino.

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