Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL COURT CONFIRMS ARBITRATION AWARD IN DISPUTE BETWEEN REINSURER AND INSURERS BUT ORDERS ARBITRATION AWARD UNSEALED

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Reinsurer AXA and insurers New Hampshire Insurance Company, American Home Insurance Company, and National Union Fire Insurance Company arbitrated a dispute over reinsurance coverage of primary policies that had been underwritten by AIG’s Energy Division in 1996/1997 and 1997/1998. The arbitration was only commenced after years of contentious litigation over coverage-related issues. The arbitration panel issued an award, largely in favor of AXA. AXA petitioned to have the arbitration award confirmed under the FAA. The insurers stipulated to the award’s confirmation, but both sides asked the court to keep the award out of the public court record. When the award was filed with the Petition to confirm the award, the court granted the request of the parties to seal the award. In the order confirming the award, however, the court denied the request to keep the award sealed, without any discussion of the reasons for its change of position, and directed the clerk to unseal the award, which is now public. In re AXA Versicherung AG, Case No. 12-6009 (USDC S.D.N.Y. Sept. 6, 2012).

This post written by Ben Seessel.
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COURT DECLINES APPLICATION FOR PRE-AWARD SECURITY IN REINSURANCE ARBITRATION

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The defendant was the managing general agent for a book of reinsurance business for the plaintiff reinsurer. The parties disputed commission amounts owed by defendant to the plaintiff. Plaintiff initiated an arbitration seeking recoupment of approximately $2 million in commissions it claimed it was owed, as well as approximately $70,000 in other expenses arising from the dispute. An interim order in the arbitration established that plaintiff was owed the $70,000 portion of the claim, and the parties agreed to resolve the larger portion later, as they needed information to develop the claim. In the meantime, the plaintiff filed an application in district court seeking security from the defendant, pursuant to a Texas statute allowing for the posting of security in arbitrations. It sought security for the $70,000 already established by the interim award, as well as the $2 million it continued to seek in the arbitration. The Court denied both, arguing that plaintiff had not made out a case that is was likely to secure the $2 million award it sought, and that there was no basis to require security for the “de minimis” $70,000. General Fidelity Insurance Co. v. WFT Inc., 3-11-CV-0448 (USDC N.D. Tex. Oct. 15, 2012).

This post written by John Pitblado.

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PHILIPPINE INSURER IS NOT ENTITLED TO STAY OF LONDON REINSURERS’ DECLARATORY COVERAGE ACTION REGARDING VESSEL SINKING

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A consortium of London reinsurers are seeking a declaration from an English court regarding their duty to indemnify Philippine insurer Oriental Insurance Company for losses resulting from the sinking of a cargo passenger ship during Typhoon Frank in 2008. The sinking, which caused widespread outrage in the Philippines due to the vessel’s failure to heed storm warnings resulted in over 500 deaths and significant property loss. The reinsurance contract contained a “Typhoon Warranty,” which voided the policy if an otherwise covered vessel left port during a typhoon or storm warning. Oriental’s underlying policy with the ship owner contained a virtually identical clause. Oriental, facing massive claims and litigation in the Philippines, sought a stay of the proceedings initiated by the British reinsurers, arguing that their action was premature given the reinsurance contract’s “follow the fortunes” clause and significant unresolved claims pending in the Philippine courts. The lower court dismissed Oriental’s application for a stay, holding that such relief should only be granted in “rare and compelling circumstances,” which were not present. The appellate court dismissed the appeal with “little enthusiasm,” finding the lower court’s decision correct but noting its apparent “unfairness.” In particular, as one justice noted, the reinsurers’ action might force Oriental to assert in the London courts that the “Typhoon Warranty” did not apply, a position diametrically opposed to the one it would wish to take in defending ongoing and imminent coverage suits in the Philippines. Amlin Corp. Member Ltd. v. Oriental Assurance Corp., [2012] EWCA Civ. 1341 (Royal Courts of Justice, Queen Bench Division, Commercial Court Oct. 17, 2012).

This post written by Ben Seessel.
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COURT AFFIRMS JUDGMENT FOR REINSURER IN COMMUTATION DISPUTE

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Plaintiff, a reinsurer, and defendant, a holding company of several primary insurers, were parties to reinsurance agreements covering certain liabilities of the defendant’s member companies. In 2004, the parties entered into a commutation agreement. The agreement required the plaintiff to make a payment of $15,248,338 to the defendant “in full satisfaction of the Reinsurer’s past, present and future net liability” under the reinsurance agreements. Thereafter, the defendant continued to pay premiums under one set of the reinsurance agreements, and the plaintiff continued to make claims payments to the defendant under those agreements, despite the commutation. The plaintiff discovered its error in 2008, stopped claims payments and refused further premium. However, the defendant took the position that the commutation did not cover the agreements under which it continued to pay premiums and under which plaintiff had continued to pay claims. The plaintiff filed suit seeking a declaration that the subject agreements were covered by the commutation, and seeking recoupment of the approximately $500,000 in claims payments it believed it made in error from 2004 to 2008. The trial court granted judgment to the plaintiff, including the monetary relief, and the defendant appealed, arguing that the commutation agreement was ambiguous. The Connecticut Appellate Court disagreed, affirming the verdict in favor of the plaintiff. Trenwick America Reinsurance Corp. v. W.R. Berkley Corp., No. AC 33388 (Conn. App. Ct. Oct. 23, 2012).

This post written by John Pitblado.

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COURT APPLIES CONCEPCION AND REJECTS UNCONSCIONABILITY ARGUMENT

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On remand from the Supreme Court and the Second Circuit in light of AT&T Mobility v. Concepcion, a district court granted defendant’s motion to compel arbitration over plaintiff’s arguments that: 1) defendant could not compel arbitration because it was not a party to the contract containing the arbitration clause; and 2) the arbitration clause is unconscionable. Applying California law, the court held that the plaintiff was estopped from avoiding arbitration against the defendant because the defendant was the agent of a signatory to the contract and the plaintiff’s claims were intertwined with the contract that included the arbitration clause. Regarding the unconscionability issue, the court reasoned that even though Concepcion overruled the Discover Bank rule, it did not entirely do away with the unconscionability defense to arbitration agreements. Applying a California rule governing the unconscionability of all contracts, not just arbitration agreements, the court analyzed whether the arbitration clause was procedurally and substantively unconscionable and found that it was not. Fensterstock v. Education Finance Partners, Case No. 08-03622 (USDC S.D.N.Y. Aug. 30, 2012).

This post written by Abigail Kortz.

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