Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NORTH CAROLINA APPELLATE COURT: LEX LOCI DELICTI CONTROLS ON CHOICE OF LAW FOR NEGLIGENT AUDIT CLAIMS

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Reinsurer Harco National Ins. Co. entered into a “fronting” agreement with Capital Bonding Corporation, a now-defunct bail and immigration bond issuer, relying in part on an audit performed by the defendant accounting firm, Grant Thornton, LLP. When Capital Bonding ceased making payments and became insolvent, the North Carolina Department of Insurance seized assets from Harco, which ultimately paid $15 million for the forfeited bonds. Harco sued Grant Thornton in North Carolina state court alleging its audit was negligently performed and misled Harco into entering into the agreement with Capital Bonding. Grant Thornton asserted it was entitled to summary judgment under Illinois law, which it claimed was controlling. The trial court disagreed, holding that – based on a choice of law rule it devised itself – Pennsylvania law controlled, and denied summary judgment. On appeal, the Appellate Court reversed in part, noting that the lex loci deliciti rule governed, but nonetheless affirmed the denial of summary judgment, as it held that North Carolina, and not Illinois, law controlled. Harco National Ins. Co. v. Grant Thornton, LLP, No. 05-CVS-2500 (N.C. App. Ct. September 7, 2010).

This post written by John Pitblado.

ARBITRATION COMPELLED FOR COMMUTATION COMPUTATION DISPUTE

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Greenlight Reinsurance, Ltd. reinsured Medicus Ins. Co. under a stop-loss reinsurance contract covering a certain portion of Medicus’s medical professional liability insurance risks. Medicus terminated the contract according to its termination provisions. Greenlight asserted, and Medicus disputed, that those provisions require a commutation payment or “break up fee,” which Medicus refused to pay. Greenlight demanded arbitration and Medicus thereafter filed suit. After failing to respond to Greenlight’s motion to compel arbitration, which was granted, Medicus sought reconsideration. The Court upheld its decision compelling arbitration, noting that the dispute inarguably arose under the contract, and that the FAA required a broad rendering of the arbitration provision as covering all such disputes. Medicus Ins. Co. v. Greenlight Reinsurance, Ltd., Case No. 10-00277 (USDC W.D. Tex Je. 24, 2010). Reconsideration has been denied.

This post written by John Pitblado.

COURT DISMISSES MUNICH RE’S CLAIM FOR BREACH OF THE DUTY OF UTMOST GOOD FAITH

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In a suit regarding a health insurer’s alleged over-billing of its reinsurer, Munich Re, the federal district court for the Northern District of Illinois dismissed Munich Re’s counterclaim for breach of the duty of utmost good faith. The court based the dismissal on the fact that, under Illinois law, the duty of utmost good faith is simply a “tool of construction in deciding whether a party has breached the governing reinsurance treaties,” and not a basis for an independent cause of action. The court further explained that Illinois has recognized an independent cause of action for breach of the duty of utmost good faith only in cases involving an insurer’s obligations to settle with a third-party who has sued the policyholder. Under that scenario, an independent bad faith cause of action is needed because an insurance policy does not sufficiently govern the insurer’s duty to settle. That is not the case in other insurance contexts, such as reinsurance, where the reinsurance treaty sufficiently governs the parties’ relationship. Guarantee Trust Life Ins. Co. v. Insurers Administrative Corp., Case No. 09-5129 (USDC N.D. Ill. Sept. 24, 2010).

This post written by Michael Wolgin.

COURT DENIES MOTION TO RECONSIDER CONFIRMATION OF ARBITRATION AWARD

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Following a denial of its motion to vacate an adverse arbitration award, plaintiffs ABS Financial Services submitted a Motion for Reconsideration requesting that the US District Court for the District of New Jersey reverse its prior ruling and judgment. In its earlier decision, the Court had confirmed the arbitration award even though it contained errors of law because it determined that the the award was supported “by at least some of the evidence in the record and was an arguably reasonable construction of the parties’ contracts.” Noting the extremely difficult standard of review for motions for reconsideration, the Court denied the instant Motion, holding that it had not committed a clear error or manifestly disregarded the law in its prior ruling and judgment. ABS Brokerage Servs., LLC v. Penson Fin. Servs., Inc., Case No. 09-04590 (D. N.J. Aug. 16, 2010).

This post written by John Black.

US DISTRICT COURT DENIES MOTION TO DISMISS “PARALLEL” REINSURANCE CASE

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Guarantee Life filed an Illinois state action seeking a declaration that an unexecuted 2006 reinsurance agreement with American Medical and Life was null and void. Despite numerous problems in its dealings with American (such as the state action), Guarantee Life entered another reinsurance agreement with American in 2008. No surprisingly, the 2008 agreement led to litigation. Guarantee Life filed a federal suit against American alleging breach of the 2008 agreement and violations of the Illinois Insurance Code. Because of the pendency of the Illinois state action, American moved to dismiss the federal complaint asking the court to abstain from hearing the case.

The United States District Court for the Northern District of Illinois denied American’s motion to dismiss finding that although the state and federal cases were parallel, abstention was not appropriate. The Court held that American failed to demonstrate the “clearest of justifications” or anything “extraordinary” that would overcome its “virtually unflagging” obligation to exercise its jurisdiction. Guarantee Trust Life Ins. Co. v. American Medical & Life Ins. Co., Case No. 01-02125 (USDC N.D. Ill. Sept. 15, 2010).

This post written by John Black.