Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DECLINES TO SEAL CONFIDENTIAL REINSURANCE PROVISIONS

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A New York federal court declined to seal portions of a reinsurance agreement at the request of intervening reinsurer Battenkill Insurance Co., LLC (“Battenkill”). Battenkill intervened in an interpleader action brought by Wells Fargo Bank regarding the respective of rights of the various defendants to certain trust proceeds. Battenkill sought to introduce its reinsurance agreement with one of the defendants, and moved to have the agreement sealed due to, what the Court deemed to be “boilerplate” concerns about confidential, proprietary information. The Court held that redacting the agreement as requested would eliminate key, relevant terms pertinent to Battenkill’s substantive grounds for intervention, and might also preclude objecting parties from relying on further redacted portions in any response thereto. It therefore held that Battenkill had not met the high threshold necessary to sealing. Wells Fargo Bank, N.A. v. Wales LLC, No. 13-Civ-6781 (USDC S.D.N.Y. Jan. 27, 2014)

This post written by John Pitblado.

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JUDGE SURVIVES RECUSAL EFFORTS IN CASE AGAINST HANK GREENBERG ALLEGING FRAUDULENT REINSURANCE TRANSACTIONS

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A New York appellate court affirmed the denial of Maurice “Hank” Greenberg’s and former AIG CFO Howard Smith’s motion to recuse the trial judge in a case charging the two with fraudulent reinsurance transactions designed to conceal AIG’s negative financial results. The court found that the trial judge’s “comments at oral argument on the recusal motion and purported improprieties at various proceedings,” did not “demonstrate that the court improperly exercised its discretion in denying defendant’s motion for recusal.” The court explained that, while the judge “at times may have been irritated with defense counsel and the prolonged litigation, it cannot be said that his comments, alone or in the aggregate, caused his impartiality to be reasonably questioned.” The court further found to be persuasive the fact that “defendants did not move for recusal until recently, after the court had ruled against them on summary judgment motions, after years of litigation before it.” People v. Greenberg, Case No. 2014 NY Slip Op 00621 (N.Y. Ct. App. Feb. 4, 2014).

This post written by Michael Wolgin.

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CFPB ANNOUNCES ACTION AGAINST PHH CORPORATION FOR ALLEGED REINSURANCE PRACTICES

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The Consumer Financial Protection Bureau issued a press release on January 29, 2014, announcing that it has initiated an administrative proceeding against PHH Corporation and its affiliates arising from an alleged mortgage insurance “kickback” scheme. CFPB claims that when PHH initiated mortgages requiring mortgage insurance (typically, where the buyer cannot put up a 20 percent downpayment), it referred the consumers to mortgage insurers with which PHH partnered, in exchange for the insurers then purchasing reinsurance from PHH’s subsidiaries. The CFPB claims this violated the Real Estate Settlement Procedures Act and unfairly increased the cost of borrowing for consumers. The CFPB’s Notice of Charges will be available on the CFPB website after February 12, 2014.

This post written by John Pitblado.

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COURT ANALYZES MEANING OF “TREATY REINSURANCE” IN DENYING DISMISSAL OF REINSURER’S AFFIRMATIVE DEFENSES

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Insurers sued their reinsurer for breach of certain facultative reinsurance certificates when the reinsurer ceased paying claims made for underlying losses under excess liability coverage for asbestos-related personal injuries. The reinsurer defended its decision to stop paying claims by contending that the insurers violated the reinsurance certificates when they transferred losses to another company; warranties in the reinsurance certificates provided that the insurers would “retain for [their] own account, subject to treaty reinsurance only, if any, the amount specified on the face of” the certificates. The insurers moved to dismiss this defense, arguing that they did not breach the certificates because their transfer of liability constituted a purchase of “treaty reinsurance,” and thus met the stated exception in the warranties. The court rejected the insurers’ argument, holding that “treaty reinsurance is obtained in advance of actual coverage,” and here, it was undisputed that the transfer took place “some 30 years” after the insurer wrote the policies and after the losses occurred. The court also rejected a number of other arguments made by the insurers with respect to other defenses, with two exceptions: (1) that the insurers were correct that the defense of failure to settle promptly was without merit in light of the reinsurer’s duty to follow the settlements of the insurers, and (2) that the reinsurer’s uberrima fides defense was duplicative of the reinsurer’s breach of contract defense, and was therefore due to be dismissed. The court also denied a motion for summary judgment filed by one insurer, which attempted to argue that the reinsurer was liable as a matter of law under the doctrines of waiver and account stated. Granite State Insurance Co. v. Transatlantic Reinsurance Co., Case No. 652506/2012 (N.Y. Sup. Ct. Dec. 23, 2013).

This post written by Michael Wolgin.

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BACK TO INTERPRETATION BASICS: CONDITIONS PRECEDENT, PRESUMPTIONS, AND CHOICE OF LAW

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The Eastern District of New York recently adopted the recommendation of a magistrate judge to grant a defendant-insurer’s motion to stay adjudication and compel arbitration, whilst also providing a refresher course in arbitration clause interpretation principles. First, the court dissected the arbitration clause’s condition precedent, holding that a provision requiring arbitration following the request of either party is a mandatory arbitration clause. The requirement that a dispute be submitted to arbitration within thirty days of such request “merely sets a time limit for commencement of an arbitration proceeding.” Moreover, whether a condition precedent has been satisfied is a procedural question presumptively for an arbitrator to decide, not a substantive question, such as whether the clause applies to a particular type of controversy, for a judge. Second, the court held that whether the motion to compel complied with applicable arbitration rules was inapplicable because those rules “do not come into play until an order is entered compelling arbitration or the parties agree to do so.” Third, noting the presumption of arbitrability, the court distinguished Second Circuit case law addressing an instance where a subsequent agreement to adjudicate created ambiguity in the parties’ intentions, and held that, here, “there is no subsequent agreement that abrogates th[e] agreement to arbitrate.” Lastly, the court analyzed a New York choice-of-law provision to determine the arbitrability of a punitive damages claim, holding that the provision should be read to encompass substantive principles that New York would apply, not special rules in New York that may limit the authority of arbitrators with respect to claims such as punitive damages. MQDC, Inc. v. Steadfast Ins. Co., Case No. 12-CV-1424 (ERK) (MDG) (E.D.N.Y. Dec. 6, 2013).

This post written by Kyle Whitehead.

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