Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT GRANTS, DENIES SUMMARY JUDGMENT IN TRAVEL REINSURANCE ACTION

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Liberty Travel (and affiliated travel and leisure companies) and Travel Re-Insurance filed cross-motions for summary judgment on a dispute related in part to reinsurance of travel insurance products sold by Liberty to its customers. Liberty and Travel Re’s relationship was complex, and involved both reinsurance and direct insurance. Among other things, Travel Re contracted with Liberty to be its exclusive provider of travel insurance products. Essentially, Travel Re provided reinsurance on travel products, and would also collect “Salvage” from Liberty, meaning the excess money collected when a travel supplier did not issue a cancellation penalty or issued a credit or reimbursement to Liberty following a customer’s trip cancellation. After some time, Liberty sought to end the parties’ exclusive arrangement, and Travel Re filed suit.

The United States District Court for the District of New Jersey granted in part Liberty’s motion for summary judgment. The court ruled that (a) Liberty was not liable for damages unforeseeable at the time the contract was entered; (b) the existence of a valid contract barred Travel Re’s claim for unjust enrichment; and (c) Travel Re’s breach of the implied covenant of good faith and fair dealing should be dismissed as duplicative of the breach of contract claim. The court, however, denied summary judgment as to the breach of contract and also ruled that material issues of fact remained as to whether Travel Re mitigated damages. Finally, the court denied Travel Re’s motion for summary judgment on the exclusivity provision, finding issues of fact as to who was to blame for the failure to engage in a joint determination of reasonable competitiveness under the contract. Travel Re-Insurance Partners, Ltd. v. Liberty Travel, Inc., No. 09-CV-5033 (D. N.J. May 9, 2012).

This post written by John Black.

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REINSURER PERMITTED TO REFUSE CONSENT TO NEW BOND OFFERING DESPITE INSURED’S COMPLIANCE WITH “ADDITIONAL DEBT TEST”

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A hospital sued its bond insurer and reinsurer for losses incurred pre-paying certain debt before learning that the insurers would refuse to consent to the hospital’s plan to procure additional debt to fund a new facility. The hospital contended that the underlying policy implicitly required the insurer and reinsurer to provide consent to additional loans if the hospital complied with the policy’s “additional debt test” standards, with which the hospital allegedly complied. The court disagreed and dismissed the case, holding that the policy provided an unqualified right to the insurers to withhold consent. The consent provisions were unconditional on their face and, moreover, contained in a section of the policy separate from the debt test provisions. The court further held that the hospital’s allegations of improper motives on the part of the insurers should be dismissed, where the insurers purportedly withheld consent to conduct diligence on what was to be a $350 million bond offering deal. Woman’s Hospital Foundation v. National Public Finance Guarantee Corp., Case No. 11-cv-00014 (USDC M.D. La. Mar. 20, 2012).

This post written by Michael Wolgin.

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MODIFICATION OF REINSURANCE AGREEMENT BY REINSURER AND AGENT WITHOUT INSURER’S CONSENT UPHELD WHERE IT DID NOT EFFECT INSURER

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Arch Reinsurance Company entered into a three-party agreement with a homeowners insurer and insurance agent, Underwriters Service Agency, under which Arch agreed to reinsure all of the risk associated with the underlying insurance policies, and Underwriters agreed to accept commissions based on the extent of the losses taken on the policies. During the agreement’s term, an Arch representative, who subsequently resigned, agreed with Underwriters to amend the reinsurance agreement to raise the minimum commission available to Underwriters by “capping” Arch’s reinsurance at a specified amount of loss.

When Arch’s chairman belatedly learned of the amendment, he unsuccessfully attempted to revoke it, and then sued Underwriters, contending that the amendment was void for want of the cedent insurer’s consent. After a jury verdict was entered in Underwriters’s favor, the appellate court affirmed, holding the reinsurance agreement could be amended even without the consent of the cedent insurer. Despite language in the agreement and state law requiring the insurer’s consent, the court held that a modification could stand if it did not materially affect the cedent insurer. Arch’s apparent agreement to “cap” the insurer’s reinsurance coverage notwithstanding, an indemnity provision in Underwriters’s agency agreement could be construed to permit the insurer to continue to seek unlimited reinsurance coverage from Arch, who could then, in turn, seek indemnity from Underwriters for losses above the cap. The insurer’s status quo was preserved, the amendment would not shift any risk back to the insurer, and the modification would stand. Arch Reinsurance Co. v. Underwriters Service Agency, Inc., Case No. 02-10-00365-CV (Tex. Ct. App. Apr. 26, 2012).

This post written by Michael Wolgin.

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INSURER PREVAILS ON CONTRIBUTION CLAIMS

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Land O’ Lakes, a member-owned agricultural cooperative, acquired a property in Oklahoma that was later designated by the EPA as a “Superfund” clean-up site. In or about 2001, the EPA notified Land O’ Lakes that it was a Potentially Responsible Party (“PRP”) for the clean-up costs, and demanded $8.9 million. Land O’ Lakes notified its insurers, who declined coverage. In or about 2008, the EPA sent a renewed notice to Land O’ Lakes, demanding more than $20 million in additional clean-up costs. Land O’ Lakes again turned to its insurers and all declined coverage. Land O’ Lakes sued and all issues were raised via cross motions for summary judgment, with all parties seeking judgment in their favor. While the majority of this opinion addresses the direct claims by Land O’ Lakes against its insurers, the Court granted summary judgment to White Mountains Reinsurance on contribution claims asserted against it by Travelers Indemnity and Employers Insurance Company of Wausau. Summary judgment was predicated upon alternative grounds, the most basic of which was that although Travelers and Wausau breached their duty to defend Land O’ Lakes, that claim, upon which the claim of contribution was based, was barred by the statute of limitation. Land O’ Lakes, Inc. v. Employers Mut. Liability Ins. Co. of Wisconsin, Case No. 09-CV-0693, (USDC D. Minn. Mar. 6, 2012).

This post written by John Pitblado.

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APPELLATE DIVISION HOLDS THAT TRIABLE ISSUES EXIST IN NEW YORK AG’S CASE AGAINST FORMER AIG EXECUTIVES CONCERNING GEN RE FINITE REINSURANCE TRANSACTION

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After settling with AIG for $1 billion, the New York Attorney General remains in pursuit of two former AIG executives—former CEO Maurice “Hank” Greenberg and former CFO Howard Smith—in connection with their alleged roles in a finite reinsurance transaction between AIG and Gen Re and a transaction between AIG and Capco Reinsurance Company, an offshore shell company that AIG allegedly used to disguise unfavorable loss ratios from the investing public. The appellate court affirmed the denial of defendants’ motion for summary judgment on the AG’s claims, which are brought under New York’s Martin Act and Executive Law section 62(12). The appellate court held that the claims are not preempted by federal securities laws and that triable issues exist based on the record evidence. The court also reversed the trial court’s grant of summary judgment to the AG on liability with respect to the Capco transaction. State of New York v. Greenberg, No. 401720/05 (N.Y. App. Div. May 8, 2012).

This post written by Ben Seessel.

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