Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UNDISCLOSED CONTINGENT COMMISSION PROGRAM VIOLATES CONNECTICUT UNFAIR TRADE PRACTICES ACT

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The State of Connecticut brought an action pursuant to Connecticut’s Unfair Trade Practices Act against Acordia, Inc. alleging unfair trade practices that harmed a class of insurance companies. Acordia is an independent insurance agent and broker working through a contingent commission program called the Millennium Partnership Program, in which which five insurers (Travelers, The Hartford, Chubb, Atlantic Mutual and Sun Alliance) agreed to participate. The Connecticut Superior Court found that Acordia’s non-disclosure of the MPP to its clients constituted a conflict of interest in violation of its fiduciary obligations which in turn violated Connecticut’s Unfair Trade Practices Act. However, because the violation was predicated on 1999-2002 common law (and does not constitute a violation of public policy in 2010) the Court declined to issue an injunction. Acordia was, however, order to account for non-disclosed MPP based commissions for products purchased by consumers in the State of Connecticut. State of Connecticut v. Acordia, Inc., Case No. 074020455S (Conn. Super. Ct. Apr. 10, 2010).

This post written by John Black.

EXCESS INSURER’S REINSURER NOT LIABLE TO PRIMARY INSURER

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This case focused on whether the entire amount of a $3.2 million settlement of medical malpractice claims that was reached in an arbitration was covered by a primary insurance policy issued by Texas Farmers Insurance. The determining factor was whether the claim occurred during a policy period in which there was $5 million in primary coverage, or during a renewal period in which there was $1 million in primary coverage and $10 million in excess coverage. Lexington Insurance had issued a “following form” facultative reinsurance policy to the excess insurer.

The court held that the loss occurred while the $5 million limit was in effect. Even though Lexington had not provided reinsurance for that policy year, and never reinsured Texas Farmers, Texas Farmers sought to recover from Lexington, as reinsurer, based upon the “follow the settlements” doctrine. The District Court denied this recovery, holding that the doctrine did not apply, and the Court of Appeals agreed, finding that Lexington was not Texas Farmer’s reinsurer. Texas Farmers Insurance Co. v. Lexington Insurance Co., No. 08-55835 (9th Cir. May 21, 2010).

This post written by Brian Perryman.

ARBITRATOR TO DECIDE WHETHER ARBITRATION AGREEMENT’S BAN OF CLASS ACTIONS IS UNCONSCIONABLE

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In a dispute centered on retroactive credit card interest-rate increases, Mr. and Mrs. Puleo, on behalf of those similarly situated, appealed the District Court’s decision that the enforceability of an Arbitration Agreement’s ban on class actions was a question of arbitrability for the court to decide. The Puleos argued that the District Court should never have addressed the unconscionability of the class action waiver and instead should have left the issue to be decided by the arbitrator. The Third Circuit Court of Appeals, following the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 US 79, 84 (2002), concluded that the challenge to the class action waiver in the concededly valid arbitration agreement did not raise an issue of arbitrability, and thus should have been decided by the arbitrator. The Court reasoned that the parties’ agreement provided that all disputes should be arbitrated, and that this agreement included the claim that the agreement’s waiver of class arbitration was unconscionable. The Court noted that its decision was consistent with the Supreme Court’s recent opinion in Stolt-Nielsen S.A. v. AnimalFeeds, because it gave effect to the terms of the parties’ arbitration agreement. Puleo v. Chase Bank USA, N.A., Case No. 08-3837 (3d Cir. May 10, 2010).

This post written by John Black.

TRIAL COURT’S PREMATURE DISCHARGE OF BOND RELATING TO REINSURANCE AGREEMENT EXCUSES SURETY FROM PAYING ON BOND DEMAND

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Petitioner, Founders Insurance Company, sought a preliminary injunction to enjoin the respondents from drawing down on a $32,000,000 trust account created for their benefit under the parties’ reinsurance agreement pending the outcome of the arbitration of a dispute. The preliminary injunction was granted, and Founders posted a bond in the amount of $1.6 million as a condition for the injunction, which was fully secured by cash. Great American Insurance Company was the surety on the bond. The injunction was subsequently reversed on appeal. On remand, the trial court indicated on the record that it “vacated” the bond and, at the same time, also awarded respondents damages in the amount of $389,282.74 for lost income as a result of the improper injunction.

Relying on the trial court’s statement that the undertaking was vacated, Founders contacted Great American and requested the return of the cash collateral, and Great American released the collateral. Subsequently, respondents contacted Great American and demanded disbursement from the bond of the amount of lost income damages fixed by the trial court. Upon learning that the bond had been cancelled, respondents moved for an order resettling and clarifying the court’s earlier order. The court granted the motion to the extent of directing Founders to post another bond in the amount of $500,000. Respondents appealed the decision of the trial court ordering Founders to post the second bond rather than directing Great American to make immediate payment of the lost income, contending that the order “failed to adequately remedy the consequences of its ill considered statement that it was vacating the undertaking [the first bond].” The appellate court found that Great American had fulfilled its obligation as surety, since it had released the collateral relying in good faith upon the trial court’s “vacated” statement. Great American, therefore, could not be held liable on the first bond for respondents’ damages. Founders Insurance Co. Ltd. v. Everest National Insurance Co., Index No. 600523/07 (N.Y. App. Div. May 4, 2010).

This post written by Brian Perryman.

U.S. SUPREME COURT REQUESTS ADVICE FROM SOLICITOR GENERAL TO ASSIST IN CERT DECISION ON FAA CASE

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The United States Supreme Court has invited the U.S. Solicitor General to file a brief in an arbitration case in order to assist the Court in deciding whether to grant a petition for a writ of certiorari. The case, which is the subject of a December 7, 2009 Special Focus post in this blog, presents an FAA jurisdictional question with implications for an international treaty. Petitioners are seeking review of a Fifth Circuit decision, which held that the McCarren Ferguson Act of 1945 does not authorize state law to ‘reverse-preempt’ the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or its implementing legislation (Convention Act). The Court has asked the Solicitor General to offer the government’s views on whether the FAA is a federal law that seeks to regulate insurance, and thus overrides any conflicting state law on insurance regulation. Louisiana Safety Association of Timberman Self Insurers Fund v. Certain Underwriters at Lloyd’s London, No. 09-945.

This post written by Lynn Hawkins.