Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

PRELIMINARY APPROVAL GRANTED FOR CLASS SETTLEMENT INVOLVING ALLEGED UNDERREPORTING OF WORKERS COMPENSATION PREMIUMS

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We have previously reported on the class action lawsuit by members of the National Worker’s Compensation Reinsurance Pool (the “Pool”) against AIG for alleged “fraudulent underreporting of workers compensation premiums for the purpose of reducing its share of the residual workers compensation market – and consequently increasing the residual market costs of the other members of the [Pool].” The amount allegedly underreported by AIG was estimated at approximately $2.1 billion. Subject to “some minor modifications” to the class notice and settlement agreement, the district court has granted preliminarily approval to a class settlement between AIG and certain members of the Pool that intervened in the case. Factors militating in favor of settlement approval included: that the strength of plaintiffs’ case compared to the settlement offer was “within a reasonable range,” that the likely complexity, length and expense of trial weighed heavily in favor of the settlement’s fairness, and that the amount of opposition to the settlement was minimal thus far. The highlights of the settlement include A $450 million settlement award to the class, $146 million in penalties, back taxes, and assessments payable to certain states, and a reformation of AIG’s methodology for reporting workers compensation premiums. The settlement has also been approved by the insurance commissioners of all 50 states and the District of Columbia. American International Group, Inc. v. ACE INA Holdings, Inc., Case No. 07-02898 (USDC N.D. Ill. July 26, 2011).

This post written by Michael Wolgin.

NO MANIFEST DISREGARD OF THE LAW FOR AWARD REINSTATING UNION EMPLOYEE WHO VIOLATED COMPANY RULES

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The Tenth Circuit Court of Appeals recently affirmed the denial of a motion to vacate an arbitration award that reinstated a union-member employee who had been terminated by the employer ostensibly for “just cause.” In holding that the arbitrator did not commit a “manifest disregard of the law” and that the award drew its essence from the governing collective bargaining agreement, the court found that the arbitrator could conclude that: (1) the employee was not terminated for “just cause,” an undefined term in the CBA, notwithstanding the employee’s violation of company rules; (2) the violation was “forgivable,” and (3) the employee should be placed on probation (a “last chance agreement”), notwithstanding that such a remedy was not provided in the CBA. Chevron Mining Inc. v. United Mine Workers of America Local 1307, No. 10-8074 (10th Cir. Aug. 12, 2011).

This post written by Michael Wolgin.

ARBITRATOR’S UNDISCLOSED RELATIONSHIP WITH COUNSEL RESULTS IN VACATION OF AWARD

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Recently, a Texas Court of Appeals issued a ruling on an appeal from an order confirming a $22 million arbitration award in a partnership dispute. The appellants argued on appeal that their rights were prejudiced by the evident partiality of the arbitrator because the arbitrator failed to disclose his personal and professional relationship with appellee’s counsel. The court, assessing all contacts between the individuals, found this argument persuasive, noting that the standard for disclosing such relationships reflects the determination that courts should not involve themselves in evaluations of partiality that are better left to the parties. The court found that the relationship between the arbitrator (a US Magistrate Judge) and the appellee’s counsel (a former US District Court clerk) stretched for years and that the social relationship had business overtones. Accordingly, the court concluded that the arbitrator’s duty of disclosure had been triggered and the failure to disclose the relationship constituted evident partiality. The court reversed the confirmation award and judgment, vacated the award, and remanded for further proceedings. Karlseng v. Cooke, No. 05-09-01002 (Tex. Ct. App. June 28, 2011).

This post written by John Black.

UK FSA ASSESSES WILLIS LIMITED LARGEST BRIBERY FINE EVER

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The UK Financial Services Authority handed down its largest ever fine relating to bribery in late July. The FSA issued a final notice fining Willis Limited £6.895 for failures in its anti-bribery and corruption systems and controls, concluding that Willis’ systems allowed for an unacceptable level of risk that overseas third party payments could be used for corrupt purposes. Over the course of 4 years, Willis made a series of payments to overseas third parties to assist in winning business from overseas clients. The FSA, however, also concluded that the misconduct on the part of Willis was not deliberate or reckless. Willis was given 14 days from the issuance of the penalty to remit payment. FINANCIAL SERVICES AUTHORITY, FSA/PN/066/2011 (U.K. July 21, 2011).

This post written by John Black.