Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SUIT BASED ON REINSURERS’ FAILURE TO MAINTAIN REINSURED’S REQUIRED RESERVES SURVIVES DISMISSAL

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In a suit between a life insurer, Security Life Insurance Company of America, and producer-owned reinsurance companies (PORCs) and their organizer/administrator, Southwest Reinsure, Inc. (SRI), Security Life’s complaint that SRI and the PORCs (SRI Defendants) failed to maintain a trust account containing Security Life’s required reserves largely survived dismissal. The parties had entered into a number of agreements, including various reinsurance agreements between Security Life and the PORCs, and an agreement between Security Life and SRI whereby the latter would administer the insurance covered by the reinsurance agreements. Under the reinsurance agreements, if Security Life’s reserves account was deficient, the PORCs would pay Security Life a fee equal to an amount needed to satisfy the deficiency. When a deficiency arose, SRI arranged for a letter of credit in lieu of the fee, and subsequently, the creation of a trust account. The trust agreement gave Security Life control over disposition of the trust and required the trustee to keep Security Life informed about trust activity. Without Security Life’s knowledge, SRI allegedly transferred the trust to another bank, and ultimately depleted the account. Security Life alleged that it consequently could not use the account to meet its statutory capital requirements, prompting the instant suit against the SRI Defendants for breach of contract, breach of fiduciary duties, fraud and conversion, among other counts.

Security Life’s breach of contract claim survived dismissal in the face of the SRI Defendants’ argument that Security Life did not either “charge a fee” or “terminate the agreement,” which were the only two actions contemplated by the relevant reinsurance agreement. The court found that factual questions arose regarding whether the agreement was modified pursuant to the parties’ course of dealing, namely, that in lieu of charging fees, the parties would use letters of credit and a trust account. Security Life’s alleged damages based on risk of “adverse regulatory action” or downgraded rating were not too speculative to defeat the contract claim. As to the fiduciary duty count, the court found it also survived dismissal, as “the complex relationships between and among Security Life, SRI, and the reinsurers call into [] question the arm’s length nature of the various agreements between the parties.” Security Life’s fraud claims also survived dismissal. Security Life’s claim for conversion failed, however, because Security Life did not allege that it had an immediate right to possess the funds in the trust account. Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., Case No. 11-1358 (USDC D. Minn. Dec. 20, 2011).

This post written by Michael Wolgin.

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REINSURANCE DISPUTE AGAINST UK REINSURERS DISMISSED FOR LACK OF PERSONAL JURISDICTION

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An action for breach of contract and declaratory relief arising from “fronting” insurance arrangements and reinsurance contracts (some dating to the late 1960s) between Employers’ Liability Assurance Corp. (“ELAC,” a predecessor of OneBeacon) and a series of “Moving Party” reinsurers has fallen by the wayside. The moving party reinsurers filed a motion to dismiss for lack of personal jurisdiction, or alternatively, under the doctrine of forum non conveniens. The court granted the motion, finding that the reinsurers – based in the UK – did not transact business in Massachusetts under the Commonwealth’s long-arm statute, nor did they have the requisite minimum contacts consistent with due process under the federal Constitution. The court found that a separate insurance broker and not the reinsurers had contacted ELAC regarding the contracts. The reinsurers were likewise not party to the contracts, and those agreements to which they were parties were negotiated and entered into in London. Further, no moving party reinsurer had any contact with any Massachusetts entity after 1993, thus failing the “continuous and systematic” contacts standard. OneBeacon America Insurance Co. v. Argonaut Insurance Co., No. 09-5085 (Mass. Super. Ct. Nov. 9, 2011).

This post written by John Black.

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UK COURT PERMITS EXPERT TO TESTIFY IN REINSURANCE MATTER AGAINST LLOYD’S SYNDICATE THAT PREVIOUSLY RETAINED HIM ON SIMILAR ISSUE

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An English court recently refused to enjoin an expert witness from giving testimony against a Lloyd’s syndicate, despite that expert’s previous employment by the syndicate in an arbitration over similar issues with a different party. The subject of the expert’s testimony in this case related to the extent of coverage for losses arising from the 9/11 terrorist attacks under a reinsurance “Interlocking Clause” provision. Although the expert’s previous testimony on behalf of the syndicate did not involve the Interlocking Clause, the interpretation of that clause did arise in private meetings wherein the expert expressed disagreement with the syndicate’s interpretation. Subsequently, the syndicate’s opponent in the instant case employed the expert to give testimony on the Interlocking Clause. After the arbitration tribunal denied the syndicate’s request to exclude the expert, the syndicate sought injunctive relief from the court. The court rejected the syndicate’s argument that the expert unfairly possessed confidential information, including the syndicate’s potential cross-examination strategy. The court explained that there was no evidence that the expert had misused confidential information thus far, and that the expert’s alleged inability to recall details of the syndicate’s meetings rendered it unlikely that the expert would do so in the future. To the extent the syndicate lost the element of surprise with respect to its cross-examination strategy, the court was “not persuaded that the loss of such a forensic advantage amounts to damage which justifies the grant of an injunction which would interfere with the tribunal’s management of the arbitration.” A Lloyd’s Syndicate v. X, [2011] EWHC 2487 (Q.B. Comm. Ct. Oct. 3, 2011).

This post written by Michael Wolgin.

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NINTH CIRCUIT CONFIRMS ARBITRATION AWARD IN FAVOR OF IRAN’S MINISTRY OF DEFENSE

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The US Court of Appeals for the Ninth Circuit recently issued an opinion determining that an arbitration award of the International Court of Arbitration of the International Chamber of Commerce (“ICC”) in favor of the Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran was not “contrary to the public policy” of the United States under the New York Convention. The Court of Appeals agreed with the position of the United States as amicus curiae that confirmation of the award did not violate any public policy of the United States. The Ninth Circuit noted that there was a strong presumption in favor of foreign arbitration awards and that US relations with Iran were heavily regulated. The Court of Appeals noted that there was an inherent difference between an arbitration award and a “payment” which would be prohibited under existing sanctions law related to Iran. Furthermore, the Ninth Circuit declined to refuse to confirm the award as it could be authorized by the US government’s issuance of a specific license. The Court of Appeals concluded that Cubic’s argument that the ICC award was not yet binding on the parties was without merit. The Ninth Circuit also held that the district court’s judgment is a “money judgment” subject to post-judgment interest, and that a district court had discretion to award pre-judgment interest and attorney’s fees in an action to confirm an award under the New York Convention. The Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Sys., Inc., No. 98-01165 (9th Cir. Dec. 15, 2011).

This post written by John Black.

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FOURTH CIRCUIT CONFIRMS AWARD CERTIFYING NATIONWIDE CLASS ARBITRATION OF CLAIMS ALLEGING VIOLATIONS OF STATE CONSUMER PROTECTION LAW

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The Fourth Circuit Court of Appeals confirmed an arbitration award certifying a nationwide class of plaintiffs alleging violations of Maryland’s Consumer Protection Act. The underlying dispute concerns a debt management program run by defendants. The arbitrator held that Maryland’s consumer protection law could be applied to a nationwide class of plaintiffs based on a choice of law provision in the parties’ debt management agreements. The arbitrator reached this conclusion notwithstanding that no plaintiff resided in Maryland and the Maryland consumer protection law extends only to Maryland residents. The district court confirmed the award. The Fourth Circuit affirmed, holding that the arbitrator did not exceed his powers in construing the choice of law provision in the parties’ contracts to determine that the Maryland consumer protection law applied. The court also held that the arbitrator did not manifestly disregard the law in finding that the Maryland residency requirement did not apply based on the language of the choice of law provision in the parties’ contracts. Amerix Corp. v. Jones, No. 09-2174 (4th Cir. Dec. 9, 2011).

This post written by Ben Seessel.

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