Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SECOND CIRCUIT REJECTS MANIFEST DISREGARD ARGUMENTS

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The Second Circuit has summarily affirmed a district court’s denial of a petition to vacate an arbitration award, and granted the cross-petition to confirm. We noted in our December 15, 2010 post that the Southern District of New York confirmed the award to Bayou Funds, a group of bankrupt entities which had been run as a massive Ponzi scheme. The district court ruled that the arbitrator did not manifestly disregard the law, even though he did not explicate the reasons for his ruling. Goldman Sachs, Bayou Funds’ clearing broker, continued to argue on appeal that the award must be vacated because it was rendered in manifest disregard of the law. After confirming that the manifest disregard doctrine remains viable in the Second Circuit, the appeals court rejected, among other things, Goldman’s arguments that it was not an “initial transferee” under the Bankruptcy Code’s § 550(a), and that the panel manifestly disregarded the law in concluding that it was. A district court decision in a different case supported Bayou Funds’ position and, although the Second Circuit declined to expressly endorse that earlier decision, it was enough to hold there was no manifest disregard. Goldman Sachs Execution & Clearing L.P. v. The Official Unsecured Creditors’ Committee of Bayou Group, LLC, No. 10-5049 (2d Cir. July 3, 2012).

This post written by Brian Perryman.

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SECOND CIRCUIT FINDS NO DIRECT ACTION RIGHT AGAINST REINSURER

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The Second Circuit handed down a summary order affirming the dismissal of Callon Petroleum’s complaint in a reinsurance dispute against National Indemnity. The court found that because the reinsurance agreement made clear that third parties had no rights under the agreement, Callon did not have a right of action against National Indemnity. Thus, this case did not qualify for New York state’s exception (in cases where the agreement contains a “cut through” provision) to the general rule that, as contracts of indemnity, reinsurance agreements give the original assured no right of action against the reinsurer. The court also affirmed the denial of Callon’s request to amend its complaint. Callon Petroleum Co. v. National Indemnity Co., No. 11-241 (2d Cir. July 3, 2012).

This post written by John Black.

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COURT ORDERS PRODUCTION OF REINSURANCE AND RESERVE INFORMATION IN INSURANCE CLAIM SUIT, FINDING INFORMATION RELEVANT AND NOT SUBJECT TO THE COMMON INTEREST PRIVILEGE

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In an insurance coverage case arising out of the sinking and salvage of a dry dock, the insured sought the production of documents concerning reinsurance purchased by its insurer, from the procurement of the reinsurance through the claim submitted to the reinsurer. The insurer resisted production based upon two grounds: (1) relevance; and (2) the common interest privilege, claiming that it and its reinsurer had “a joint legal interest in the outcome of the litigation ….” The insured contended that the reinsurance documents were discoverable and potentially relevant in that the insurer had contended that the insured had fraudulently failed to disclose certain information to it about the dry dock, and the facts considered by the reinsurer in pricing the reinsurance might reveal that the information allegedly not disclosed was in fact known to the insurer. Accepting this argument, the court found the reinsurance file, including information concerning reserves, to be relevant and discoverable.

The court held that the common interest doctrine requires a two-part showing: (1) a common legal, rather than solely commercial, interest; and (2) an exchange of privileged information made in the course of formulating a common legal strategy, with an understanding that the communication would be in furtherance of a shared legal interest. The first element requires an oral or written agreement “embodying a cooperative and common enterprise towards an identical legal strategy.” Finding that the mere status of insurer-reinsurer did not establish these elements, and the fact of the reinsurer merely turning its file over to the insurer was insufficient, the court analyzed the facts and determined that neither of these two elements of the common interest privilege had been satisfied. Accordingly, it ordered the production of the reinsurance information. In a separate order, the court deferred other discovery issues not related to reinsurance to a later hearing. Fireman’s Fund Insurance Company v. Great American Insurance Company of New York, Case No. 10-1653 (USDC SDNY July 3, 2012).

This post written by Rollie Goss.

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FOURTH CIRCUIT: STATE STATUTE DOES NOT REVERSE PREEMPT FEDERAL LAW

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The Fourth Circuit issued an opinion “preserving the United States’ ability to speak with one voice” in regulating foreign arbitrations. ESAB Group argued that a South Carolina statute “reverse preempts” federal law pursuant to the McCarran-Ferguson Act which is directed at protecting state insurance regulation by implied preemption by federal domestic commerce legislation. In particular, the Court of Appeals considered whether McCarran-Ferguson applied such that state law can reverse preempt federal law to invalidate a foreign arbitration agreement mandating dispute resolution before Swedish tribunals. The court concluded that the federal government articulated a uniform policy in favor of enforcing agreements to arbitrate internationally (through a treaty and its enacting regulations) even when a contrary result would be forthcoming in a domestic context. Thus, insurance disputes were not exempted from the treaty, which controlled. In addition, the Court of Appeals held that the district court properly exercised personal jurisdiction over Zurich Insurance, and that the court was within its rights to remand nonarbitrable claims to state court. ESAB Group, Inc. v. Zurich Insurance PLC, No. 11-1243 (4th Cir. July 9, 2012).

This post written by John Black.

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REINSURANCE ARTICLES OF INTEREST

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AM Best recently published its yearly financial review on the global reinsurance market. AM Best noted the resilience of reinsurers, pointing out that economic volatility and catastrophic loss events combined to create an approximate $110 billion loss for the reinsurance market in 2011. Nevertheless, the report noted that “reinsurance capacity remained ample despite the magnitude of losses and unrelenting headwinds.” In fact, reinsurers ended the year at approximately the same level of capital as they started.

In addition, the International Who’s Who of Insurance and Reinsurance Lawyers brought together two leading practitioners—Peter Mann of Clayton Utz, Australia and Laura Foggan of Wiley Rein LLP, Washington DC—for a roundtable to discuss key issues for the industry. In particular, the attorneys explained that recent legislative and regulatory changes in both Australia and the US have somewhat altered the playing field. The panel also discussed areas of possible growth for the industry as well as areas that have become hotbeds for litigation.

This post written by John Black.

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