Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FACT QUESTIONS PREVENT SUMMARY JUDGMENT IN INDEMNITY ACTION BY ACQUIRER OF REINSURER OF AIRPLANES INVOLVED IN 9/11 ATTACK

by

An acquirer of a reinsurance company sued the former parent company of the reinsurer under the relevant stock purchase agreement (SPA) for indemnification of $13.1 million in “losses” allegedly owed in connection with reinsurance contracts that covered the airplanes that were involved in the attack on the World Trade Center on 9/11. The acquirer contended that the reinsurer misrepresented the extent of its 9/11 liabilities by setting its reserves based on one “terrorism” event under the governing contracts, rather than a higher liability for two “hijacking” attacks. The acquirer argued that the reinsurer was required to reserve for two attacks because the cedents had done so, and because the reinsurer had received broker advices for two losses. The court denied the parties’ cross-motions for summary judgment, holding that factual questions existed as to whether the reinsurer’s alleged fraud constitutes a “loss” under the SPA, and if it does, whether the “loss” was caused by the falsity of the reinsurer’s misrepresentations. The court’s findings included: (1) that the SPA’s provisions providing indemnity for “loss” were ambiguous, such that the court could not determine whether indemnity was limited to only amounts paid in excess of the reinsurer’s reserves; and (2) that conflicting testimony of the parties’ experts as to whether the reinsurer misrepresented that its reserving practices complied with “U.S. generally accepted actuarial standards” created disputed issues of fact. The court also held that benefit of the bargain damages were not available under the SPA, which contained broad waivers of “all causes of action related to the transactions contemplated” by the agreement, and of consequential, indirect, and incidental damages. WT Holdings, Inc. v. Argonaut Group, Inc., Case No. 600925/2009 (N.Y. Sup. Ct. July 10, 2012).

This post written by Michael Wolgin.

See our disclaimer.

COURT HOLDS THAT UNDERWRITER CONVERTED PREMIUM THAT IT FAILED TO REMIT TO INSURER

by

Everest Reinsurance Company entered into an agreement with International Aerospace Insurance Services, Inc. (“Inter-Aero”) whereby Inter-Aero would underwrite space and aviation risks, submit premium to Everest, less commission, and, in addition, share in a percentage of Everest’s profit from the business Inter-Aero generated. A dispute arose regarding Inter-Aero’s entitlement to profit sharing. Inter-Aero responded by withholding a substantial purported “profit share payment” from premiums due to Everest. Everest filed an action in federal court claiming conversion and breach of fiduciary duty. The court granted Everest’s motion for summary judgment, holding that Inter-Aero converted the portion of premiums that it withheld and that it must remit them to Everest. It denied Everest’s motion on its breach of fiduciary duty claim as duplicative of the conversion count. Everest Reinsurance Co. v. International Aerospace Insurance Services, Inc., Case No. 3:11-cv-05332 (USDC D.N.J. Aug. 22, 2012).

This post written by Ben Seessel.

See our disclaimer.

Court Compels Arbitration of Contract Claims, but not Tort Claims Arising From Commutation

by

Plaintiff Repwest Insurance Company, as cedent, entered into an excess workers compensation quota share agreement with various reinsurers, including Conestoga Casualty Insurance Company and the defendant, Preatorian Insurance Company. Praetorian later entered into a commutation agreement with Conestoga, whereby Conestoga took on Praetorian’s portion of the risk involving Repwest. Repwest was not informed of the commutation until after the fact. Repwest sued, arguing that the quota share agreement required assent from Repwest for such a commutation agreement. Praetorian moved to compel arbitration. Repwest argued in response that its claims did not “arise under” the quota share agreement, and therefore were not subject to arbitration under that contract. The court disagreed and granted Praetorian’s motion to compel arbitration, finding that the claims did arise from the quota share agreement, and that Praetorian did not waive its right to arbitration. The court, however, limited the claims that could be submitted to arbitration, finding that tort claims for misrepresentation and fraudulent inducement were outside the scope of the agreement. Repwest Insurance Co. v. Praetorian Insurance Co., Case No. CV 12-0369-PHX-JAT (USDC D. Ariz. Aug. 28, 2012).

This post written by John Pitblado.

See our disclaimer.

THIRD CIRCUIT HOLDS THAT REINSURER CAN DENY COVERAGE BASED ON LATE NOTICE EVEN ABSENT PREJUDICE

by

A dispute arose when Pacific Employers Insurance Company demanded payment from Global Reinsurance Corporation of America under a facultative reinsurance contract. The contract reinsured part of Pacific’s exposure on an excess risk policy issued to a manufacturing company. It contained a provision requiring Pacific to “promptly provide the Reinsurer with a definitive statement of loss on any claim.” Pacific learned of the underlying insured’s exposure to significant asbestos litigation in 2001 but did not notify Global until 2008.

The district court, applying what it predicted Pennsylvania law to be, held that Global could not refuse coverage based on late notice absent evidence of prejudice, which Global had failed to proffer. The Third Circuit reversed, applying New York law, which holds that a reinsurance company can deny coverage based on late notice, even in the absence of prejudice. The Third Circuit noted, in dicta, that it could discern two reasons why a reinsurer would want to promptly receive a DSOL on a potentially serious claim: (1) to appropriately reserve, and (2) to exercise its contractual right to participate in the defense of the underlying claims. Pacific Employers Insurance Co. v. Global Reinsurance Corp. of America, Nos. 11-3234 & 11-3262 (3d Cir. September 7, 2012).

This post written by Ben Seessel.

See our disclaimer.

Court Grants Summary Judgment to Reinsurer on Claims Brought by Underwriting Agent

by

Acumen Re Management Corporation brought suit against General Security National Insurance Company, claiming that General improperly entered into commutation agreements with insurers with respect to accounts for which Acumen was receiving, and expected to continue receiving, premium commissions, based on the parties’ agency contracts. General denied that it breached those agreements. The parties cross-moved for summary judgment. Acumen’s motion was denied outright. General’s motion was granted in part and denied in part. It was granted with respect to each of Acumen’s three claims that (1) Acumen was damaged by General’s failure to provide quarterly reports; (2) Acumen was damaged by General’s failure to consult Acumen prior to entering into the commutation agreements; and (3) Acumen was damaged by General’s improper calculation of commutation loss allocation and contingency commission allocation. As to the first issue, Acumen waived its contractual right to receive quarterly reports by failing to require them over a period of several years. As to the second claim, while General failed to consult Acumen on commutation settlements with reinsurers through whose business Acumen was receiving contingent commissions, the contract only required such consultation in situations inapplicable to the dispute. Finally, as to the third claim, the court also agreed that General properly computed the commutation loss allocation and contingency commission allocation. The court, however, denied General’s motion on Acumen’s additional claim that it was damaged by General’s improper use of erroneous data in calculating the contingent commission, finding genuine issues of material fact as to whether General’s calculation relied on erroneous data. Acumen Re Management Corp. v. General Security National Insurance Co., Case No. 09-CV-01796 (USDC S.D.N.Y. Sept. 7, 2012)

This post written by John Pitblado.

See our disclaimer.