Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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INSURER DENIED REQUEST TO ENJOIN SPEEDY ARBITRATION PROCEEDING

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Policyholder Nero filed a putative class action lawsuit against American Family Insurance Company, alleging common law and statutory claims. American Family moved to dismiss, asserting that the claims were subject to mandatory arbitration, among other grounds. Shortly thereafter, on March 1, Nero notified American Family that an arbitration hearing would be commencing on March 5 in a different state and in front of a single arbitrator. American Family sought a temporary restraining order from the court enjoining the arbitration. American Family argued that it did not have sufficient time to prepare and, furthermore, that the location and designation of a single arbitrator was contrary to the terms of the arbitration provision in Nero’s insurance policy. It further argued that it would be irreparably harmed by having to “oppose confirmation of an unjust arbitration award” in a different jurisdiction. The court denied American Family’s request. The court stated that American Family’s contention that the arbitrator would not follow the proper procedure for selecting arbitrators was only speculative, and, furthermore, that FAA section 10(a)(3) permits vacatur where an arbitrator wrongfully refuses to postpone an arbitration hearing. Nero v. American Family Mut. Ins. Co., Case No. 11-02717 (USDC D. Colo. Mar. 2, 2012).

This post written by Ben Seessel.

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APPELLATE COURT REMANDS TO COMPEL ARBITRATION UNDER “DELEGATION PROVISION”

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Plaintiff sued her bank in Florida federal court for the manner in which she was charged overdraft fees. The bank moved to compel arbitration, but the district court found the agreement to arbitrate unconscionable and unenforceable. The bank appealed. After the Supreme Court decided AT&T Mobility LLC v. Concepcion, __ U.S. __, 131 S.Ct. 1740 (2011), the Eleventh Circuit reversed and remanded for consideration in light thereof. The district court again refused to compel arbitration, avoiding an unconscionability finding, but nevertheless finding that the dispute did not come within the scope of the arbitration agreement. The bank again appealed and the Eleventh Circuit again reversed, finding the threshold issue of whether the dispute is arbitrable to be explicitly reserved for the arbitrator under the so-called “delegation provision” in the parties’ contract, which states that “[a]ny issue regarding whether a particular dispute or controversy is . . . subject to arbitration will be decided by the arbitrator.” In re Checking Account Overdraft Litigation, No. 11-14282 (11th Cir. March 21, 2012).

This post written by John Pitblado.

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