Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DENIES MOTIONS TO DISMISS PUTATIVE CLASS ACTION ALLEGING UNLAWFUL REINSURANCE ARRANGEMENT

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A federal court in Pennsylvania denied defendants’ motion to dismiss in a putative class action based on purported mortgage services fraud. Defendants Fifth Third Bank, Fifth Third Mortgage Company, Fifth Third Mortgage Insurance Reinsurance Company, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation argued that plaintiffs’ claims were untimely because they were brought outside the Real Estate Settlement and Procedures Act’s one-year limitations period. Plaintiffs sufficiently pled facts to equitably toll the statute of limitations. The operative complaint, for instance, alleged that none of the disclosures, correspondence, or monthly billing statements that plaintiffs received from either their mortgagee or their primary mortgage insurers advised plaintiffs that a portion of their monthly mortgage payments were financing reinsurance premiums or indicated that mortgages were actually reinsured. The court further found that the complaint pled a RESPA violation plausible on its face. The allegations described that the primary mortgage insurers purportedly remitted kickbacks, dressed up as reinsurance premiums, in exchange for a steady stream of primary mortgage insurance business. In support of their allegation that no real risk was transferred between the primary mortgage insurers and the captive reinsurers, plaintiffs pointed to the terms of the reinsurance contracts, which they argued provided no recourse to the primary mortgage insurers in the event that the reinsurers did not maintain adequate reserves to pay claims. Plaintiffs also argued that the claims paid by the reinsurers were low dollar amounts compared to the premiums. Manners v. Fifth Third Bank, Case No. 2:12-cv-00442 (USDC W.D. Pa. Feb. 5, 2014).

This post written by Samantha Lemery.

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ONLY ARBITRATOR, NOT FEDERAL COURT, CAN DETERMINE PRECLUSIVE EFFECT OF CONFIRMED ARBITRATION AWARD

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In a case of first impression in the First Circuit, Employers Insurance Company of Wausau and National Casualty Company (“Wausau”), two of three reinsurers under identical agreements with OneBeacon American Insurance Co. (“OneBeacon”), petitioned a federal court for a declaration that a prior arbitration award between One Beacon and the third reinsurer had preclusive effect over OneBeacon’s subsequent demand for arbitration against Wausau. The district court dismissed the action, agreeing with OneBeacon that a determination of the preclusive effect of the arbitration award itself was arbitrable. On appeal, Wausau argued that because the federal court confirmed the prior arbitration award, thus affording that award the same “force and effect” as any other federal court judgment pursuant 9 U.S.C. §13, then only the federal court could determine its preclusive effect. The First Circuit rejected this argument, noting that an arbitration award is distinct from the federal judgment confirming the award. Because a federal court’s review of an arbitration award does not include a review of the merits or legal basis of the award, which would be required in order to determine its preclusive effect, the First Circuit concluded that such a determination fell outside the purview of the federal court. Employers Insurance Company of Wausau and National Casualty Company v. OneBeacon American Insurance Co., et. al., Case No. 13-1913 (1st Cir. Feb. 26, 2014).

This post written by Leonor Lagomasino.

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CEDING REINSURER’S DISCLOSURE DEFICIENCIES INSUFFICIENT TO SUPPORT RETROCESSIONAIRE’S RESCISSION CLAIM

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A federal district court recently made findings of fact and conclusions of law following a nine-day bench trial upholding a ceding reinsurer’s right to receive certain payments from a retrocessionaire under two retrocession agreements, and rejecting the retrocessionaire’s counterclaim for rescission. The plaintiff, Munich Reinsurance America, Inc., was the ceding reinsurer who contended that its own reinsurer, the retrocessionaire defendant American National Insurance Company, failed to pay certain claims submitted. ANICO countered that the retrocession agreements should be rescinded due to material disclosure deficiencies during the underwriting process and improper claims-handling procedures. The parties also disagreed regarding the payment of certain claims based on the agreement’s wording.

With respect to the counterclaim for rescission, the court agreed with ANICO that Munich had failed to fully disclose information relating to Munich’s own evaluation of the primary insurer’s program (such as Munich’s internal calculations of its estimated loss ratios), but nevertheless concluded that the counterclaim failed because the deficiencies in reporting were not material. There was a lack of evidence that ANICO’s underwriters would have acted differently if the information about the primary insurer’s program had been disclosed. ANICO’s underwriter testified that she considered Munich’s internal calculations to be material to her underwriting process, but the court did not find the testimony to be credible, noting that the underwriting procedures and forms could be completed without such information. Moreover, ANICO had failed to show that it was objectively reasonable for Munich to have believed that its own loss ratios were material to the retrocessionaire’s underwriting. The court also rejected ANICO’s claim for rescission based on Munich’s alleged improper claims-handling practices, finding no willful violation of Munich’s obligations under the agreements and concluding that ANICO waived such a claim by failing to timely raise it. Finally, applying New York law, the court concluded that late notice of the claim did not relieve ANICO of its obligations to pay under the agreements. Munich Reinsurance America, Inc. v. American National Insurance Co., Case No. 09-6435 (FLW) (USDC D.N.J. Feb. 27, 2014).

This post written by Catherine Acree.

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FOREIGN ARBITRATION AWARD CONFIRMED UNDER INTERNATIONAL TREATY

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A federal U.S. district court recently confirmed a foreign arbitration award obtained by a Belizean telecommunications company against the Government of Belize in arbitral proceedings held before a tribunal appointed by the London Court of International Arbitration (“LCIA”). Factually, the case involved agreements between the company and Belize, wherein the company paid money in exchange for certain tax benefits and investment return guarantees associated with its telecommunications improvement plan. When Belize later refused to comply with the agreements, the company (i) requested arbitration before the LCIA, pursuant to the agreements, (ii) won declaratory and monetary relief upon Belize’s default, and (iii) assigned the monetary portion of the award to Belize Social Development, a British Virgin Island organization. Legally, the court first held that the arbitration award was governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) (of which the Federal Arbitration Act is a codification) because England (where the arbitration took place) and the United States are both parties to the Convention. The court emphasized that, under the Convention, it should confirm the foreign award absent a finding that an enumerated exception to enforcement specified in the Convention applies. The court methodically deconstructed and denied Belize’s procedural arguments, including lack of subject-matter jurisdiction, lack of standing, forum non conveniens, international comity, and failure to join a required party under F.R.C.P. 19, and then turned to the exceptions to the Convention proffered by Belize, again ruling in favor of the company. The Convention arguments revolved around the following: (i) failure to produce copies of the arbitral award and accommodation agreements (Art. IV(1)); (ii) invalidity of accommodation agreements (Art. V(1)(a)); (iii) inappropriateness of arbitration (Arts. V(1)(c) and V(2)(a)); (iv) suspension of the award by a “competent authority” (Art. V(1)(e)); and (v) public policy (Art. V(2)(b)). None of these arguments was found to be meritorious, and the court confirmed the arbitral award. Belize Social Development Ltd. v. Government of Belize, Case No. 09-2170 (RJL) (D.D.C. Dec. 11, 2013).

This post written by Kyle Whitehead.

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FEDERAL POLICY FAVORING ARBITRATION TRUMPS CHOICE-OF-LAW CLAUSE

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When an arrangement to jointly design health insurance products went sour, the product company (“PBG”) brought breach of contract and tort claims against its insurance agents. Acknowledging an existing arbitration agreement, PBG admitted that the contract claims should be arbitrated, but tried to keep the tort claims alive in the judicial system based on an Iowa choice-of law provision. PBG argued that the provision evinced the parties’ intent that an Iowa statute carving out tort claims from valid arbitration clauses should apply. Finding no ambiguity in the arbitration agreement that would allow for consideration of extrinsic evidence like the Iowa statute, and relying on the strong federal policy favoring arbitration, the court disagreed and ordered all claims, contract and tort, to arbitration. Pinnacle Benefits Group, LLC v. American Republic Insurance Company, Case No. 1:13CV186 (M.D.N.C. Dec. 13, 2013).

This post written by Abigail Kortz.

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