Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

DISTRICT COURT DENIES CHARTIS’ MOTION TO COMPEL ARBITRATION PENDING COURT HEARING AS TO WHETHER ARBITRATION IS MANDATORY

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On April 5, the US District Court for the District of Colorado granted in part and denied in part defendant American International Special Lines’ (now known as Chartis Specialty Insurance Company) Motion to Compel Arbitration, Stay Proceeding, and to Dismiss. The suit arises out of an insurance policy, containing an arbitration clause, relating to costs associated with a cleanup at Lowry Air Force Base in Colorado. The Court denied Chartis’ Motion to Compel Arbitration and to Stay the Proceedings, finding that language in the arbitration clause was ambiguous. Specifically, the Court found that the clause’s operative language (stating that a dispute “may be submitted” to arbitration and that any party “may commence such arbitration”) did not clearly establish whether arbitration was permissive or mandatory. Accordingly, if Chartis wishes to compel arbitration, it must carry its burden to establish that arbitration is mandatory through a factual determination on the issue by the court. Finally, the Court granted Chartis’ Motion to Dismiss on Lowry’s claim for breach of fiduciary duty, finding there was no fiduciary or quasi-fiduciary relationship between insured and insurer in a first-party context. Lowry Assumption, LLC v. Am. Int’l Specialty Lines Ins. Co., Case No. 10-02901 (D. Colo. Apr. 5, 2011).

This post written by John Black.

TWO MORE BERMUDA-BASED REINSURERS PERMITTED TO OPERATE IN FLORIDA WITH REDUCED COLLATERAL AS AN “ELIGIBLE REINSURER”

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The Florida Office of Insurance Regulation (FOIR) has approved two more Bermuda-based reinsurance companies, Aspen Insurance Ltd. and AXIS Specialty Ltd., to become an “eligible reinsurer” under Florida law and thereby operate in Florida’s property catastrophe reinsurance market with reduced collateral. Ceding insurance companies may now receive full credit on their financial statements for their Aspen or AXIS Specialty property catastrophe reinsurance ceded without full collateral. These approvals bring to fourteen the number of reinsurance companies approved under this program. In re Aspen Insurance Ltd., Case No. 117338-11-CO (FOIR May 6, 2011) and In re AXIS Specialty Ltd., Case No. 117743-11-CO (FOIR May 23, 2011).

This post written by Michael Wolgin.

INJUNCTION ISSUED TO PREVENT WRITING OR AMENDING REINSURANCE RISKS PURSUANT TO BINDING AUTHORITY PENDING ARBITRATION

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The US District Court for the Eastern District of New York recently adopted the US Magistrate’s Report and Recommendation, granting United Insurance Company’s Motion in Aid of Arbitration for a Preliminary Injunction. The dispute arose out of a Binding Authority Agreement (“BAA”) authorizing World Wide Re (formerly World Wide Management Consultants) to underwrite and bind reinsurance risks on UIC’s behalf subject to the underwriting guidelines. The BAA allows both parties to terminate the agreement immediately upon notice for cause, in the event that either party breaches the agreement. The BAA also provides for mandatory arbitration of all disputes. On February 28, 2001, UIC sent a Notice of Termination to World Wide asserting that it breached the agreement when it disregarded UIC’s specific instructions not to bind the risk related to Arcelor Mittal’s reinsurance. By letter dated March 3, World Wide responded, stating that it would continue to write business until an arbitration decision was rendered granting the relief sought. World Wide has since continued to bind risks on behalf of UIC. UIC subsequently filed the instant motion for a preliminary injunction.

The Magistrate issued a Report and Recommendation (adopted by the District Court) granting the motion. The Magistrate concluded that World Wide’s continued actions to continue binding risk on behalf of UIC constituted irreparable harm, and that UIC had demonstrated a likelihood of success on the merits. Accordingly, World Wide was enjoined from writing reinsurance risks on behalf of UIC or modifying or canceling existing risks. United Insurance Co. Ltd. v. Word Wide Web Re, Case No. 11-01177 (E.D. N.Y. Apr. 27, 2011).

This post written by John Black.

VACATUR OVER “FRAUD-ON-THE-PANEL” AFFIRMED BY APPELLATE COURT

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The Illinois Appellate Court affirmed a ruling vacating a reinsurance arbitration award as having been procured by fraud. Virginia Surety and Lloyds entered into two motor vehicle warranty contractual liability reinsurance agreements, one covering a period starting in 1996 and one in 1998. Virginia Surety demanded arbitration, contending that Lloyds wrongly refused to pay amounts owed on both treaties. The parties arbitrated, and, at the end of the proceeding, but prior to submission, the parties announced they had settled all disputes arising from the 1996 Treaty, each party to bear its own costs, and that they only needed a decision as to the dispute under the 1998 Treaty. The panel thereafter found in favor of Lloyds, relieving it of payment obligations, and directing it to return premiums under the 1998 Treaty. The panel also made an award of costs and expenses due to its finding of material misrepresentations on the part of Virginia Surety, and ordered Lloyds to submit billings for costs and fees. Lloyds submitted billings, under condition of confidentiality, and the panel enforced confidentiality against Virginia Surety, despite its attempts to seek to review the billings. The panel awarded Lloyds $2 million in costs and fees. Virginia Surety moved to vacate, arguing that the size of the costs and fees award indicated that Lloyds submitted billings relating to both the 1996 Treaty dispute and the 1998 Treaty dispute, which was a fraud perpetrated on the panel, because the parties had agreed that each would bear its own costs for the 1996 Treaty dispute. The court agreed, finding that Virginia Surety made the required showing for vacatur due to fraud, as Lloyds had in fact submitted billings pertaining to both disputes. Virginia Surety Co., Inc. v. Certain Underwriters at Lloyd’s, No. 09-CH-45355 (Ill. App. Ct. April 20, 2011).

This post written by John Pitblado.

IN ABSENCE OF A PRESCRIBED METHOD, A PARTY CAN CHOOSE ITS OWN REPLACEMENT ARBITRATOR

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The manner in which a replacement arbitrator is selected where the agreement is silent was resolved in a recent case. Northwestern National Insurance Company petitioned the court to appoint an ARIAS-certified replacement arbitrator for its reinsurer Insco, Ltd. Insco’s arbitrator had resigned three days before argument on Northwestern’s summary judgment motion amid allegations from both sides that the other’s arbitrator was improperly partial. The arbitration agreement provided that each party would select its own arbitrator and that a neutral umpire would be appointed; the agreement, however, did not supply a method for replacing an arbitrator. Shortly after Northwestern filed its petition, Insco appointed an ARIAS-certified arbitrator of its own choosing. The court denied Northwestern’s request. Although the court had the power to appoint an arbitrator under Section 5 of the FAA, allowing Insco to appoint a replacement was consistent with the terms of the reinsurance agreement and the underlying goals of arbitration. Northwestern National Insurance Co. v. INSCO, Ltd., Case No. 11 Civ. 1124 (USDC S.D.N.Y. May 12, 2011).

This post written by Ben Seessel.