Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

BREACH OF UBERRIMAE FIDEA – THE UTMOST DUTY OF GOOD FAITH – AFFIRMED BY SECOND CIRCUIT

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The Second Circuit recently addressed the issue doctrine of uberrimae fidea. St. Paul Fire & Marine Insurance brought suit against Matrix Posh, LLC, its insured under a policy of marine insurance, seeking to have the policy declared void ab initio due to Matrix’s alleged misrepresentations about pre-existing damage to the insured vessel. The trial court granted summary judgment and the Second Circuit affirmed. The Second Circuit held that the determination of whether the misrepresentations were material hinged not on the extent of the damage to the vessel (Matrix claimed after the fact that the damage was minor), but on whether the misrepresentation that there was no damage, precluded St. Paul from the opportunity to investigate the risk itself, prior to acceptance. This violated Matrix’s duty of utmost good faith and the policy was therefore void. St. Paul Fire & Marine Insurance Co. v. Matrix Posh, LLC, No. 12-2045-CV (2d Cir. Jan. 16 2013).

This post written by John Pitblado.

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SECOND CIRCUIT HOLDS THAT FEDERAL COMMON LAW DEFINES WHAT “ARBITRATION” MEANS UNDER THE FAA

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Recently, the Second Circuit definitively held that federal common law, not state law, provides the meaning of “arbitration” under the Federal Arbitration Act. In the case, Bakoss and Lloyds entered into a disability insurance certificate which constituted a contract. The contract provided that each party would select its own physician to determine whether the insured was totally disabled and, in the case, the two physicians disagreed; a third physician chosen by the two would make a binding determination as to disability. After coverage was denied, Bakoss filed suit in state court. Lloyds removed the case asserting federal jurisdiction under the FAA and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which, unlike the FAA, provides an independent basis for federal jurisdiction.

The trial court looked to federal case law in determining that the dispute resolution provision regarding total disability constituted an arbitration agreement and thus held that it had jurisdiction to adjudicate the dispute over coverage under the Convention and FAA. The trial court also granted summary judgment on the merits to Lloyds. Bakoss appealed, arguing that the dispute resolution procedure was not an arbitration agreement under state law. The Second Circuit affirmed, holding that “arbitration” under the FAA is defined by federal common law; it also affirmed the grant of summary judgment to Lloyds on the merits. As discussed in the opinion, some federal courts of appeal have held that state law supplies the definition of “arbitration” and others apply federal law. Bakoss v. Certain Underwriters at Lloyds of London, No. 11-4371 (2d. Cir. Jan. 23, 2013).

This post written by Ben Seessel.

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COURT DENIES MOTION TO DISMISS WHERE DEFENDANT RETROCEDED RESERVES HELD ON VEHICLE SERVICE CONTRACTS

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Operators of vehicle dealerships filed suit alleging breach of contract, conversion, breach of fiduciary duty, and money had and received against an administrator of vehicle service contracts that the plaintiff dealerships had sold to customers in connection with vehicle sales. Plaintiffs complained that defendants had improperly retroceded funds that had been reserved as reinsurance for payments to be made under the vehicle services contracts. The court denied defendant’s motion to dismiss, holding that plaintiffs had stated a plausible claim for relief that the administrator had breached reinsurance agreements that were neither attached to the complaint nor to defendant’s motion to dismiss. The court also held that the economic loss rule did not bar plaintiffs’ conversion and breach of fiduciary duty claim because there was a possibility that plaintiffs could establish with certain (undescribed) facts that a fiduciary relationship existed between the parties. Hoffpauir v. Interstate National Dealer Services, Inc., Case No. A-12-CA-263 LY (USDC W.D. Tex. Jan. 24, 2013).

This post written by Ben Seessel.

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REINSURER WINS $16.5 MILLION VERDICT ON TORTIOUS INTERFERENCE CLAIMS AGAINST AUTO INSURER AND AGENTS

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Lincoln General Insurance Company entered into certain quota share reinsurance agreements with U.S. Auto Insurance Services. It brought suit in 2007 for alleged unpaid premium. The parties entered into a settlement agreement, requiring the parties to enter new reinsurance agreements, provide partial security for the risks defendant sought to transfer, fund costs of investigations of underlying claims, and pay $1.5 million to Lincoln General. In 2010, Lincoln General again brought suit, against U.S. Auto and its agents/guarantors, alleging that the defendants breached the settlement agreement. The latter suit alleged, among other things, that the defendants tortiously interfered with, and aided and abetted the breach of, the reinsurance agreements and other related agreements, by submitting fraudulent claims and making misrepresentations. After a four-day bench trial in early January 2013, the Court found for Lincoln, and ordered the defendants, jointly and severally, to pay Lincoln $16.5 million on the tortious interference claim. The Court also found in Lincoln’s favor on the defendants’ counterclaims. Lincoln General Insurance Co. v. U.S. Auto Insurance Services, Inc., No. 3:10-cv-2307 (N.D. Tex. Jan. 25, 2013).

This post written by John Pitblado.

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CLASS SETTLEMENT AND ATTORNEYS’ FEES APPROVED IN ACTION INVOLVING CAPTIVE REINSURANCE

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After more than four years of litigation, a class action suit brought against Washington Mutual comes to a close with an unopposed class settlement in the amount of $4 million, which includes $1.2 million for attorneys’ fees and litigation costs. The class action involved allegations that defendants received kickbacks from private mortgage insurers to whom they referred borrowers that exceeded the value of reinsurance services provided by defendants to those insurers. The Eastern District of Pennsylvania determined that class settlement was fair and reasonable because continued litigation would be complex, expensive, and lengthy since formal discovery would still need to be completed. The court also concluded that plaintiffs ran the risk of losing on summary judgment or at trial because resolving the issue of whether the reinsurance agreements adequately transferred risk to the defendants would depend on a battle of the experts. Finally, the court reasoned that there was a strong likelihood a class would not be certified outside of settlement because the defendants had potentially viable defenses that could not adequately be litigated on a class-wide basis. The court approved the class settlement and the award of attorney’s fees and costs in separate orders. Alexander v. Washington Mutual, Inc., Case No. 07-4426 (E.D. Pa. Dec. 4, 2012).

This post written by Abigail Kortz.

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