Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DISMISSES CLAIM AGAINST AIG FOR BREACH OF REINSURNACE CONTRACTS

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Reinsurer Transatlantic Reinsurance Company sued AIG and certain of its subsidiaries for a declaration that they breached various provisions of reinsurance certificates by transferring their risk under asbestos liability policies to another insurer. The court dismissed the claim against AIG, holding that it was undisputed that AIG itself was not a signatory to the reinsurance certificates at issue, and that the complaint failed to allege that AIG, as an “alter ego,” dominated and controlled the actions of the signatory AIG subsidiaries. The court was not persuaded into finding AIG liable by the contention that AIG was the party responsible for making the decision to transfer the insurance risk. The court explained that “TransRe’s allegations that AIG’s ‘de-risking’ strategy interfered with the Insureds’ abilities to meet their obligations under their contracts with TransRe do not permit this court to find that AIG has made a sham of the corporate formalities of the Insurers, as required to establish alter-ego liability.” Transatlantic Reinsurance Co. v. American International Group, Inc., et al., Case No. 152812/2013 (N.Y. Sup. Ct. Feb. 7, 2014).

This post written by Michael Wolgin.

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COURT REFUSES DISCOVERY OF COMMUNICATIONS WITH REINSURERS BECAUSE POLICY TERM WAS NOT AMBIGUOUS

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Reinsurance communications were held not discoverable in a commercial coverage dispute. By way of background, PBM Products, LLC sued its competitors, Mead Johnson Nutrition Company and Mead Johnson & Company, for allegedly engaging in a false advertising campaign against formulas manufactured by PBM. On November 10, 2009, PBM won a $13.5 million judgment. Mead Johnson had a commercial general liability policy issued by National Union Fire Insurance Company and a commercial umbrella liability policy issued by Lexington Insurance Company. After the verdict, National Union filed a declaratory judgment action based on untimely notice and because the damages imposed by the jury were not covered under the policy. Mead Johnson counterclaimed against National Union and Lexington for breach of contract and seeking a declaration that Mead Johnson was entitled to coverage. The Court entered summary judgment on the issue of late notice in favor of the Insurers. Mead Johnson appealed and the Seventh Circuit reversed summary judgment because there had been no factual development concerning the issue of harm.

On remand, the district court revisited a pending discovery dispute. The magistrate judge had earlier granted Mead Johnson’s request with respect to: (1) the underwriting files; (2) communications between the insurers’ reinsurers; (3) the number of times Paul Hastings was retained by the insurers to defend “personal and advertising injury” claims during the relevant time period; and (4) the insurers’ manuals or marketing materials. Specifically with regard to the reinsurance communications, the court found that because the term “personal and advertising injury” was not ambiguous, communications with reinsurers regarding the meaning of claim terms were irrelevant. National Union Fire Insurance Co. of Pittsburgh, PA. v. Mead Johnson & Co., Case No. 3:11-CV-00015-RLY-WGH (USDC S.D. Ind. Mar. 10, 2014).

AMBIGUITIES IN REINSURANCE BROKER AGREEMENT PRECLUDE SUMMARY JUDGMENT

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A federal district court in Arkansas recently examined provisions of a Broker Authorization Agreement between a reinsurance broker (Global Risk) and a ceding insurer (Aetna). In denying cross-motions for summary judgment on the broker’s breach of contract claim, the court concluded that the agreement contained arguably contradictory provisions regarding who was responsible for paying the broker. One provision expressly placed the responsibility for payment of the broker’s services with the reinsurer (not a party to the Broker Authorization Agreement), while a separate provision addressed Global Risk’s entitlement to be compensated in the event that the agreement was terminated or the reinsurance portfolio was transferred. The court concluded that the agreement was ambiguous because “[i]f [the ceding insurer] had no responsibility to compensate [the reinsurance broker], then these latter provisions would be meaningless. That they are included in the contract between [the reinsurance broker] and [the ceding insurer] suggests that [the ceding insurer] has an obligation to compensate [the reinsurance broker].” Global Risk Intermediary, LLC v. Aetna Global Benefits Ltd., Case No. 4:13-CV-0133 (USDC W.D. Ark. Mar. 12, 2014).

This post written by Catherine Acree.

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DISTRICT COURT DECLINES TO CONSOLIDATE DISPUTES ARISING OUT OF TWO REINSURANCE CONTRACTS

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Plaintiff Georgia Casualty & Surety Company entered into two reinsurance contracts with Defendant Excalibur Reinsurance Corporation, formerly known as PMA Capital Insurance Company. Both reinsurance contracts contained arbitration clauses. The First Excess Reinsurance Contract contained a choice of law provision but no forum selection clause, and the Second Excess Reinsurance Contract contained a forum selection clause but no choice of law provision. In 2006, Douglas Asphalt Company sued Applied Technical Services, Inc., a Georgia Casualty insured. Applied was found liable. While that judgment was on appeal, a high-low agreement was entered, which guaranteed that Georgia Casualty would pay Applied no less than $3 million and no more than $12 million. Thereafter, the Eleventh Circuit vacated the judgment against Applied. Georgia Casualty claimed that it was owed $1,418,708 under the two reinsurance contracts. In response, Excalibur argued that Georgia Casualty promised to seek malpractice damages against defense counsel for Applied and that this lawsuit would be a prerequisite to determining Excalibur’s liability. Additionally, Excalibur claimed that it did not consent to the high-low agreement. Georgia Casualty demanded arbitration of Excalibur’s alleged breach of the reinsurance contracts. Excalibur demanded arbitration on a counterclaim for unpaid premiums. Excalibur refused to consolidate the arbitration of all claims under both reinsurance contracts and requested that the arbitrators stay the arbitration pending the resolution of the malpractice claims. Georgia Casualty claimed this was a delay tactic and sued Excalibur.

The court found that if the Federal Arbitration Act or a state arbitration act lacking a statutory consolidation provision applied, then a court may consolidate arbitration only if the contracts expressly permit. Alternatively, if a state arbitration act that allows courts to impose consolidation regardless of the contracts’ terms governs the contracts, then a court may order consolidation where the statutory requirements are satisfied. Because the Second Excess Reinsurance Contract lacked a choice of law provision, it was governed by the FAA. Thus, the court could not order consolidation. Because the court could not order consolidation, it also could not designate a forum for that consolidated arbitration. With respect to a potential stay, the court believed it had to tread carefully to not violate the principle that, in determining whether a dispute is arbitrable, a court should not rule on the merits of the underlying claims. The court could not order the arbitrators not to stay the arbitration pending any potential malpractice recovery. The court also could not delve into the contract to determine if the contract required Excalibur to post security (in response to Georgia Casualty’s claim that Excalibur was delaying the proceedings). Georgia Casualty & Surety Co. v. Excalibur Reinsurance Corp., Case No. 1:13-CV-00456-JEC (USDC N.D. Ga. Mar. 13, 2014).

COURT ORDERS PRE-PLEADING SECURITY POSTED IN REINSURANCE DISPUTES

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Excalibur Reinsurance provided reinsurance to Travelers Indemnity.  Disputes arose and Travelers filed two lawsuits against Excalibur in United States District Court in Connecticut.  Travelers moved to require Excalibur to post pre-pleading security pursuant to Conn. Gen. Stat. section 38a-27(a).  The statute requires that unauthorized insurers post security.  Excalibur contended that the statute did not apply for three separate reasons: (1) it was authorized in Connecticut when the reinsurance agreements were entered into, although it later cancelled that authorization; (2) the reinsurance agreement was not issued and delivered in Connecticut; and (3) the reinsurance agreements contain a New York choice of law provision.  The courts disagreed, and granted the motions for security.  The statute provides a remedy with respect to insurers which are not authorized at the time that they make a filing in Connecticut courts, rather than when the insurance agreement was entered into.  The courts found that while the statutes provided an exemption for non-Connecticut direct insurance, the statutory exemption did not apply to reinsurance.  Finally, the courts found that the pre-pleading security statute was procedural, not substantive, under the Erie doctrine, resulting in the choice-of-law clause not applying.  Excalibur therefore was required to post security in one case in the amount of $824,591 and in an amount yet to be determined in the other case.  Travelers Indemnity Co. v. Excalibur Reinsurance Corp., Case Nos. 11-1209 and 12-1793 (USDC D. Conn. Mar.11 and 17, 2014).

This post written by Rollie Goss.

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