Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT AFFIRMS VACATING ARBITRATION AWARD, WHICH WAS THE “ESSENCE OF MANIFEST DISREGARD”

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The Third Circuit Court of Appeals affirmed a ruling vacating an arbitration award in an employment dispute involving a collective bargaining agreement (“CBA”). Armstrong County Hospital unilaterally instituted a smoking ban on its property. Its employees’ union disputed that policy, and sought arbitration of the dispute. The arbitrator ruled in favor of the union, finding that the policy unfairly altered the past practice of allowing smoking in designated areas, which was a working condition expected by employees, and which could not be altered unilaterally. The Hospital moved to vacate the award in federal court, on grounds that the arbitrator failed to address key language in the CBA stating that the Hospital’s management rights to institute policy unilaterally was “specifically not limited by existing or ‘prior practices.’” The district court agreed with the Hospital and vacated the award, finding it the “essence of manifest disregard.” The Third Circuit, citing the constraint on courts to “exceedingly narrow” review of such arbitration awards, nevertheless affirmed, finding the arbitrator’s award effectively rewrote the parties’ agreement. Armstrong County Memorial Hospital v. United Steel, Paper and Forestry, Rubber, Mfg. Energy, Allied Industrial and Service Workers Int’l Union, No. 10-2495 (3d Cir. March 14, 2011).

This post written by John Pitblado.

CLASS ACTION SETTLEMENT PRELIMINARILY APPROVED IN REINSURANCE KICKBACK SCHEME INVOLVING COUNTRYWIDE MORTGAGE LENDER

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A court has granted preliminary approval to a nationwide class action settlement in an action brought by homebuyers against Countrywide Financial Corporation, Countrywide Home Loans and Balboa Reinsurance Company for alleged violations of the Real Estate Settlement Procedures Act. Plaintiffs alleged that defendants engaged in a scheme where a portion of mortgage insurance premiums that mortgage insurers ceded to Countrywide’s affiliated reinsurer, Balboa, were “disguised kickbacks paid for the referral of primary mortgage insurance business.” The court conditionally certified a class defined as: “all borrowers with residential mortgage loans closed on or after December 22, 2005 through December 31, 2008 that were reinsured by Balboa or its subsidiaries, excluding borrowers with residential mortgage loans originated by Countrywide Home Loan’s Correspondence Lending Division or otherwise purchased on the secondary market.” The settlement relief includes payments from a settlement fund of up to $34 million. Payments for class members will be determined based on “an analysis of the number of private mortgage insurance payments made” by each class member. The settlement also includes an award of attorney’s fees and expenses for plaintiffs’ counsel, not to exceed 27.5% of the $34 million settlement fund. A hearing on whether to grant final approval to the settlement is currently set for July 29, 2011. Alston v. Countrywide Financial Corp., Case No. 2:07-cv-03508 (USDC E.D. Pa. March 22, 2011).

This post written by Michael Wolgin.

REINSURANCE LAWSUIT VOLUNTARILY DISMISSED

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On August 24, 2010, we reported that Folksamerica Reinsurance (n/k/a White Mountains Reinsurance) had been given 60 days to perfect service against Constructora Del Litoral in an action arising out of Constructora’s alleged failure to indemnify Folksamerica for sums paid in connection with reinsuring surety bonds issued for a construction project in Ecuador. In the latest development, the parties agreed to a joint stipulation of dismissal of the action with prejudice, although Folksamerica will not be precluded from pursuing claims against the defendants in Ecuador. The district court entered an order dismissing the case on February 25, 2011. Folksamerica Reinsurance Co. v. Constructora Del Litoral, S.A., Case No. 10-20560 (S.D. Fla. Feb. 25, 2011).

This post written by John Black.

BRITISH COURT APPROVES TRANSFER OF REINSURANCE FROM SOMPO JAPAN TO TRANSFERCOM LTD.

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A justice of the UK Companies Court, Chancery Division, recently approved over the objections of policyholder Axa Corporate Solutions Assurance, a scheme under Part 7 of the UK Financial Services & Markets Act 2000 for the transfer of certain insurance business from Sompo Japan Insurance Inc. to Transfercom Ltd. The scheme involved a transfer of predominantly reinsurance contracts made between 1981 and 2003. The contracts suffered from exposure to the September 11, 2001 terrorist attacks and an airplane crash that occurred later that year, and were in run-off since 2003. In sanctioning the scheme, the justice relied heavily on an expert report and determined that the scheme would be fair to the companies’ respective shareholders and the various underlying policyholders. The justice considered, among other factors, the composition of the business to be transferred, the strength of Transfercom and its parent company, National Indemnity Company, the manner in which Transfercom would fund the run-off of the business, and the overall impact on the security of the underlying policyholders that would result from the transfer. In the Matter of Sompo Japan Insurance Inc., [2011] EWHC 260 (Cos. Ct. Feb. 16, 2011).

This post written by Michael Wolgin.

REINSURANCE DOES NOT FALL WITHIN FLORIDA’S COLLATERAL SOURCE RULE

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Cross-motions for summary judgment were denied in Nova Casualty’s federal legal malpractice action against Robert Santa Lucia, which involved the question of whether reinsurance falls within the collateral source rule. Mr. Santa Lucia had been hired to defend Nova’s insured in a personal injury suit brought in Florida state court. In the underlying action, the state court set aside a “high-low” agreement, which led to a million dollar settlement. Thereafter, Nova alleged that Mr. Santa Lucia negligently advised Nova in the negotiation and form of the high-low agreement and ultimate settlement. During the relevant times, Nova had two reinsurance contracts with GMAC Re providing reinsurance immunity. After the settlement, Nova provided GMAC with the required proof of loss and was indemnified for the entire amount above its retention.

Nova and Santa Lucia each filed motions for summary judgment, which were denied. Nova argued that Mr. Santa Lucia’s payment defense was prohibited under Florida’s collateral source rule. The court disagreed, noting that reinsurance was not listed among the collateral sources covered under the statute. Likewise, the court found unpersuasive Mr. Santa Lucia’s argument that GMAC was the real party in interest. The reinsurance contracts stated that GMAC has no right to reimbursement unless Nova succeeds in a claim related to the loss. Nova Casualty Co. v. Santa Lucia, Case No. 09-1351 (M.D. Fla. Mar. 10, 2011).

This post written by John Black.