Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL LEGISLATION REINTRODUCED AIMED AT TAXING FOREIGN REINSURANCE AFFILATE INCOME

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H. R. 2054 was introduced on May 20, 2013, and referred to the Ways and Means Committee. The bill would disallow the deduction for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates “to prevent the avoidance of tax by insurance companies through reinsurance with non-taxed affiliates.” Co-sponsored by Representatives Neal and Pascrell, the bill would amend the Internal Revenue Code of 1986. There are a number of excepted risks, but generally, the bill states that such “income shall be subject to tax under this subchapter to the same extent and in the same manner as if such income were the income of a domestic insurance company.” The amendment to the IRC would apply to taxable years beginning after December 31, 2013. Similar bills have been introduced in the past, but did not find their way to passage. See, for example, our previous posts concerning a prior versions of this proposal in 2009 and 2008.

This post written by John Pitblado.

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SECOND CIRCUIT VACATES ORDER DENYING PETITION TO CONFIRM INTERNATIONAL ARBITRATION AWARD

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VRG Linhas Aereas, a subsidiary of GOL Linhas Aereas, initiated an arbitration administered by the International Court of Arbitration for the International Chamber of Commerce (ICC) against MatlinPatterson, a New York private equity firm. The dispute concerned the calculation of the price for VRG in VRG’s purchase from two of MatlinPatterson’s affiliates. MattlinPatterson argued before the ICC arbitration panel that it was not a party to any arbitration agreement because it had not signed the purchase agreement—it had only signed an addendum. The arbitral tribunal disagreed, holding that MatlinPatterson was bound to arbirate and, furthermore, sided with VRG on the merits of the dispute.

VRG petitioned to confirm the award in federal district court. The district court denied the petition on the basis that, even if MatlinPatterson had agreed to arbitrate certain disputes, the arbitration agreement clearly did not extend to VRG’s purchase price. The Second Circuit vacated the district court’s order. It held the district court erred by failing to make the threshold determination whether the arbitrators or the court should decide the issue of arbitrability before interpreting the arbitration clause. The court held that, under Supreme Court precedent, if the parties clearly and unmistakably had agreed to arbitrate, then the decision as to arbitrability was properly for the arbitrators and the award should be confirmed. VRG Aeras S.A. v. Matlin Patterson Global Opportunities Partners II L.P., No. 12-593-cv (2d Cir. June 3, 2013).

This post written by Ben Seessel.

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INSURER’S MOTION TO DISMISS DENIED DUE TO EQUITABLE TOLLING

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United Guaranty sought reconsideration of its motion to dismiss, which the Court denied in part due to Plaintiffs’ successful equitable tolling argument. United Guaranty again argued that equitable tolling was inappropriate as Plaintiffs “did not sufficiently allege that United Guaranty committed an act of fraudulent concealment that prevented him from discovering his claim during the limitation period.” Broome, one of the original plaintiffs, obtained a mortgage from First Horizon. First Horizon then selected United Guaranty to act as Broome’s insurer. United Guaranty in turn then selected FT Reinsurance, a subsidiary of First Horizon, to provide reinsurance. Broome alleges this relationship represented a “captive reinsurance scheme,” with referral payments used to circumvent the kickback prohibitions of the Real Estate Settlement Procedures Act (“RESPA.”)

Once again, the Court found that Broome’s allegations were sufficient under the doctrine of equitable tolling, and therefore, the one-year statute of limitations did not bar his claim. The Court noted that the extent of cooperation between the bank, insurer, and reinsurance companies, while currently unknown, are better left to discovery. The Court also denied United Guaranty’s motion to certify the February 27, 2013 Order for immediate appeal as the previous court order did not represent a controlling question of law. Barlee v. First Horizon National Corp., Case No. 12-3045 (USDC E.D. Pa. April 4, 2013).

This post written by Rollie Goss.

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SUMMARY JUDGMENT GRANTED FOR REINSURER DUE TO LACK OF PRIVITY WITH DIRECT INSURED

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Plaintiff Backups Plus Computer Services, LLC (Backups) owned hard drives which failed. Plaintiff GF&C Holding Company (GF&C) was a client of Backups and stored its data on Backup’s servers. After the failure of the hard drives, Backups and GF&C both submitted claims to Harford Casualty Insurance Company (Hartford), which had issued policies to both companies. Hartford submitted a claim to its reinsurer, Hartford Steam Boiler Inspection & Insurance Company (HSB). HSB then engaged an independent analyst, LWG, to examine the hard drives and determine the cause of the failure. LWG determined that the damage was the result of normal wear and tear, not a covered risk under the policy. HSB advised Hartford that it would not pay a claim under the reinsurance agreement, and Hartford denied the claims submitted by Backups and GF&C.

Plaintiffs sued both Hartford and HSB. The district court granted the reinsurer’s motion for summary judgment on all claims. The court noted that plaintiffs’ counsel acknowledged at oral argument that there was no privity between the plaintiffs and the reinsurer. Consequently, there was no contract that could be breached and no implied covenant of good faith and fair dealing or bad faith. GF&C Holding Co. v. Hartford Casualty Insurance Co., Case No. 11-236 (USDC D. Idaho March 15, 2013).

This post written by Rollie Goss.

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IF AT FIRST YOU DON’T SUCCEED: INSURER ESTOPPED FROM COMPELLING ARBITRATION WITH MAGELLAN REINSURANCE

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Withdrawing its earlier opinion on rehearing, the Texas Court of Appeals held that New Hampshire Insurance Company (“New Hampshire”) is judicially estopped from compelling arbitration, therefore affirming the trial courts order denying New Hampshire’s motion to compel. The dispute centers on New Hampshire and Magellan Reinsurance Company’s (“Magellan”) Reinsurance Agreement (“agreement.”) Under this agreement, Magellan agreed to assume 100% of New Hampshire’s obligations for automobile insurance policies in return for the premiums paid under those policies. New Hampshire alleges that Magellan owes 1.4 million dollars to replenish an existing trust account, now emptied. New Hampshire filed suit in Turks and Caicos Island (“TCI”) to “wind up” Magellan’s business and also filed suit in Texas and New York.

The TCI Court found that New Hampshire was not a creditor of Magellan and therefore could not wind up Magellan’s business. Later that year, New Hampshire moved to compel arbitration, for which Magellan had initially argued for at the onset of the TCI litigation. The Court found that New Hampshire’s motion to compel arbitration had numerous inconsistencies with their previous arguments made to courts in TCI and New York. The Court held (consistent with its withdrawn opinion) that New Hampshire was estopped from seeking to arbitrate Magellan’s claims. New Hampshire Insurance Co. v. Magellan Reinsurance Co., No. 02-12-00196-CV (Tex, Ct. App. May 2, 2013).

This post written by Rollie Goss.

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