Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

REINSURER’S REQUEST TO BELATEDLY AMEND “IMPRECISE” PLEADING DENIED DUE TO LACK OF DILIGENCE

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Employers Reinsurance Corporation was denied a request to correct “imprecise” language in its answer and counterclaim in a suit brought against it by a medical malpractice insurer for failing to fund a settlement of a lawsuit against one of the malpractice insurer’s covered physicians. ERC’s answer included a defense of “setoff” for a sum that it had paid allegedly in error in connection with the underlying malpractice lawsuit. After the court’s deadline for amending pleadings expired, ERC sought to amend its answer to seek “recoupment” in addition to “setoff” in order “to make the terminology of its pleadings more precisely fit” the facts of the case. The court held that ERC’s belated attempt to make its answer more precise showed a “lack of diligence.” The court denied ERC’s proposed amendment for failure to show the requisite good cause. Ohio Insurance Co. v. Employers Reinsurance Corp., Case No. 2:08-cv-83 (USDC S.D. Ohio July 15, 2011).

This post written by Michael Wolgin.

COURT OKAYS “BATHTUB” ALLOCATION METHOD UNDER “FOLLOW THE FORTUNES” DOCTRINE

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Lexington Insurance Company participated in a tower of coverage for Dresser Industries, a manufacturer of asbestos-containing products that was forced into bankruptcy by the multi-billion dollar exposure it faced arising from product liability litigation against it. In the context of the bankruptcy proceeding, Dresser commenced an insurance coverage action against its various liability insurers. The several insurers named as defendants, including Lexington, ultimately participated in a global settlement, at a figure determined by an outside consultant hired by the group of settling insurers. For its part, Lexington utilized its own “bathtub” method of allocation to determine which of its policies would contribute to its share of the settlement, and in what amounts. By this method, each of its exposed policies were layered (as though in a bathtub) according to their layers of coverage, and those that were “underwater” given the settlement structure were tendered to their limits. Based on this analysis, Lexington paid out the limits under two particular $10,000,000 policies. As a participating reinsurer on these two policies, Clearwater denied Lexington’s claim under the theory that Lexington’s use of the “bathtub” methodology was contrary to the recommendations of the outside consultant that determined the ultimate global settlement. Lexington sued and the parties cross-moved for summary judgment on the issue. The Court found in favor of Lexington under the “follow the fortunes” doctrine, noting that there was nothing inherently unreasonable about Lexington’s chosen allocation method. Lexington Ins. Co. v. Clearwater Ins. Co., No. 09-0234C (Mass. Super. Ct. July 26, 2011).

This post written by John Pitblado.

MOTION TO COMPEL DEPOSITION TESTIMONY ON REINSURANCE TRANSACTION DENIED

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A federal magistrate judge denied plaintiff’s motion to compel deposition testimony regarding a transaction reinsuring defendant Unum’s individual disability block of business. Plaintiff brought suit alleging that Unum breached the parties’ insurance contract by refusing to pay him total disability benefits. Plaintiff moved to compel Unum’s deposition on, among other topics, Unum’s actuarial analysis of its transaction with Northwind reinsuring its individual disability block. In support of his motion, plaintiff cited a press release by Unum’s president stating that the Northwind reinsurance arrangement created capital for Unum’s business that could be deployed for other uses. Plaintiff argued that discovery of information regarding the deal was relevant because it might show how Unum was using money set aside for claims to create capital rather than to pay claims like plaintiff’s. The court denied plaintiff’s motion, holding that Unum’s capital management strategy was irrelevant to the case. Raab v. Unum Group, Case No. 2:10-cv-00186 (USDC S.D. Ohio Aug. 8, 2011).

This post written by Ben Seessel.

COURT ORDERS PARTIES TO SELECT ARBITRATORS WITH RELEVANT REINSURANCE EXPERIENCE

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Parties have been ordered to pick proper arbitrators in a reinsurance dispute. Safety National sued Lloyd’s over a dispute pertaining to the parties’ reinsurance agreements covering certain of Safety National’s underlying workers compensation liabilities. A stay was entered to allow the parties to arbitrate. After six months of wrangling over the naming of arbitrators, Lloyd’s moved to lift the stay for the limited purpose of having the court issue an order requiring that the parties select only arbitrators with workers compensation reinsurance experience, as Lloyd’s contended the contracts required – a position which Safety National contested. Citing the policy embodied in the FAA’s provisions authorizing court involvement in the selection of arbitrators to facilitate efficient arbitration, the court ruled for Lloyd’s. It lifted the stay and ordered that the parties select arbitrators with requisite workers compensation reinsurance experience. Safety National Cas. Corp. v. Certain Underwriters at Lloyd’s, London, NO. 02-cv-1146 (USDC M.D. La. Aug. 16, 2011).

This post written by John Pitblado.

FINANCIAL STABILITY OVERSIGHT COUNCIL ISSUES FIRST ANNUAL REPORT

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The Financial Stability Oversight Council (“FSOC”) has issued its first annual report. Established by the Dodd-Frank Act, the purposes of the FSOC are: (1) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (2) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure; and (3) to respond to emerging threats to the stability of the U.S. financial system. The initial annual report focuses on the establishment of the FSOC and its initial activities to restore stability and strength of the U.S. financial markets, especially in the areas of capital levels, leverage, liquidity, resolution plans, volatility, swaps, the mortgage market and systemic risk. The Report also identifies the increased role of foreign banks in the U.S. marketplace as a risk point, since such institutions are not subject to the same regulation as are U.S.-based institutions. There is concern that foreign banks are subject to less strict capital and other financial standards than are U.S. banks, but that the pending Basel III reforms will help to address such issues.

The Report does not mention reinsurance, and contains only passing references to the insurance market, stating that “[t]he traditional U.S. insurance market largely functioned without disruption in payments to consumers throughout the financial crisis and the recovery.” The Report does note the role of financial guaranty and mortgage insurance in markets and products which experienced stress in recent times. The insurance industry is discussed at pages 61-62, 73 and 140-41 of the Report, which notes that insurance companies generally have strengthened their balance sheets and improved their investment portfolios.

On July 26, 2011, the Senate Committee on Banking, Housing & Urban Affairs held a nomination hearing which included Roy Woodall, the President’s insurance appointee to the FSOC, as well as nominees for the chair of the FDIC and the Comptroller of the Currency. The vast majority of the questions during the hearing were directed to the FDIC and OCC nominees, with no critical questioning of Mr. Woodall. As of the writing of this post, the Committee has not voted on those nominations.

This post written by Rollie Goss.