Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

STRIKE THREE: COURT DECLINES TO REWRITE ARBITRATION AGREEMENT TO PROVIDE METHODOLOGY FOR APPOINTMENT OF UMPIRE

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In 2009, the parties in this matter were ordered to proceed in arbitration, pursuant to the terms of an arbitration clause contained in an insurance policy which was the subject of the dispute. Each side selected a party-appointed arbitrator, but the two arbitrators were unable to reach agreement on an umpire. The arbitration agreement provided that if the party-arbitrators could not agree, then “either [arbitrator] or either of the parties may apply to the appointer for appointment of a third arbitrator.” The ‘appointer’ was further defined as the President of the Chartered Insurance Institute or the Vice President of the Institute if the President is unavailable.

Despite this language, the Petitioner in this case alleged that an ambiguity existed in the process and requested that the Court establish a method for the appointment of the third arbitrator. The Court declined to do so, finding that the agreement “set forth a clear method.” As such, the Court denied the motion and dismissed the matter sua sponte. R.A. Wilson & Assoc. v. Certain Interest Underwriters at Lloyd’s London, 10-cv-2232 (USDC EDNY May 26, 2010)

This post written by Lynn Hawkins.

COURT COMPELS DISCLOSURE OF REINSURANCE POLICY

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Federal Rule of Civil Procedure 26(a)(1) requires parties to disclose certain information at the outset of the case, including “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” Pursuant to this rule, a federal magistrate judge recently ordered the American Red Cross to disclose a copy of its reinsurance policy, which the Red Cross had resisted on grounds that the damages claimed in the suit would not reach the $1,000,000 threshold to trigger any potential reinsurance coverage. The Court granted the plaintiff’s motion to compel production of a copy of the entire reinsurance policy. The Court discredited Red Cross’s counsel’s valuation of the case based on certain factual allegations in the complaint as speculative, particularly given claims for punitive damages and attorneys fees, noting that even a remote possibility of exposure to a risk warrants disclosure of an applicable insurance policy. Hartman v. American Red Cross, 1:09-cv-01302 (USDC C.D. Ill. May 11, 2010).

This post written by John Pitblado.

‘FOLLOW THE SETTLEMENTS’ DOCTRINE DOES NOT SPARE AIG’S CLAIMS AGAINST ITS REINSURERS

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Various AIG entities filed an action against their reinsurers seeking a declaration of coverage for portions of a settlement AIG made in a coverage dispute with its insured, Monsanto Corporation. Monsanto faced extensive litigation in underlying chemical pollution cases against it, which it ultimately settled for approximately $600 million. AIG sought reinsurance coverage for portions of its payments to Monsanto. The reinsurers denied AIG’s claims on the basis that AIG’s payments to Monsanto were “ex gratia” and not covered under AIG’s policies, citing the pollution exclusion, exclusions for punitive damages, and allocation issues with other underlying insurers. In defending against the reinsurers’ motions for summary judgment, AIG raised the “follow the settlements” doctrine, which binds a reinsurer to a settlement agreed to by the ceding company if the underlying risk is “reasonably within the terms of the original policy” even if not technically covered. The court granted the reinsurers’ motions and dismissed AIG’s case. It found that, even affording AIG the greater leeway of the “follow the settlements” doctrine, the claims were not reasonably within the coverage of AIG’s underyling policies, and AIG, in entering into the settlement with Monsanto, failed to conduct a reasonable investigation of the Monsanto claims by glossing over critical coverage issues, unnecessarily exposing its reinsurers to non-covered claims. American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010).

This post written by John Pitblado.

FEDERAL AND STATE LEGISLATIVE AND REGULATORY UPDATE

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Following are selected Federal and/or State legislative and regulatory developments in the areas of reinsurance, captive insurance, and catastrophe funds:

Federal Reinsurance: H.R. 4944, Siding with America’s Patients Act was referred on April 30, 2010 to the Subcommittee on Health, Employment, Labor, and Pensions. The proposed bill, as it relates to reinsurance, amends the Internal Revenue Code to allow a tax credit for qualified health insurance costs to residents of a State that implements a high-risk pool, a reinsurance pool, or other risk-adjustment mechanism.

State Reinsurance: New Jersey A2670, the Reinsurance and Surplus Lines Stimulus and Enhancement Act, was introduced on May 13, 2010. The proposed bill provides incentives for surplus lines insurers and reinsurers that are financially sound to do business in New Jersey. It establishes a process, under the oversight of the Commissioner of Banking and Insurance, for a domestic insurer with policyholder surplus in excess of $15 million to be designated as a domestic surplus lines insurer. Under this designation, a domestic surplus lines insurer could only insure New Jersey risks procured from a surplus lines producer in accordance with the provisions of the surplus lines law. A domestic surplus lines insurer could not issue policies of private passenger automobile insurance, workers’ compensation or workers’ occupational disease insurance. Additionally, the proposed bill permits the Commissioner in his discretion to allow credit for reinsurance if the reinsurance is ceded to an assuming insurer that holds surplus or the equivalent in excess of $250 million. In determining whether credit should be allowed, the Commissioner shall consider certain requirements enumerated in the proposed bill, which largely relate to the adequacy of the regulatory authority in the insurer’s domiciliary jurisdiction. An identical bill, S2010, was introduced in the New Jersey Senate.

The Office of General Counsel of the New York Insurance Department on March 5, 2010 issued Opinion 10-03-02, which addressed two questions on the prior approval of reinsurance agreements. The first question addressed was whether “insurance in force,” as those words are used in New York Insurance Law § 1308(e)(1)(A), mean all of the in-force policies issued by an insurer, or a sub-class thereof, such as in-force policies that are reinsured and cover risks located in New York. According to the Opinion, insurance in force means all of the in-force policies issued by an insurer, regardless of whether the policies are reinsured or cover risks located in New York. The second question, which was answered in the affirmative, addressed whether a property/casualty insurer should submit to the Superintendent of Insurance its proposed reinsurance agreement to reinsure all, or almost all, of its motor vehicle lessor/creditor gap insurance policies through an insurer that is not authorized to do business as an insurer in New York.

State Captive Insurance: On May 6, 2010, a bill (A2360) that seeks to create a captive insurance market in New Jersey was reported out of the Assembly Financial Institutions and Insurance Committee favorably with committee amendments. The proposed bill, as amended, permits a captive insurance company to be licensed by the New Jersey Department of Banking and Insurance to do business in the State in any of the lines of insurance in subtitle 3 of Title 17 of the Revised Statutes or Title 17B of the New Jersey Statutes, generally including contracts or policies of life insurance, health insurance, annuities, indemnity, property and casualty, fidelity, guaranty and title insurance, and reinsurance, provided the captive meets certain requirements relating to formation, capital and surplus, examination, local office presence, ability to meet policy obligations, payment of certain fees and taxes, and annual reporting. The proposed bill would regulate captive insurers, association captive insurers, sponsored captive insurers, and industrial insured captive insurers. Among other things, the proposed bill would create a Captive Insurance Regulation and Supervision Fund to provide the financial means for the Commissioner to administer the bill’s requirements. A companion bill, S168, was introduced in the New Jersey Senate.

Federal Catastrophe Funds: H.R. 2555, the Homeowners’ Defense Act of 2009, (mentioned in our June 9, 2009 posting) was ordered on April 27, 2010 to be reported to the House, as amended, with a favorable recommendation by a record vote of 39 yeas and 26 nays. The bill proposes to establish a program to provide Federal support for State-sponsored insurance programs to help homeowners prepare for and recover from the damages caused by natural catastrophes, to encourage mitigation and prevention for such catastrophes, to promote the use of private market capital as a means to insure against such catastrophes, to expedite the payment of claims and better assist in the financial recovery from such catastrophes.

This post written by Karen Benson.

UK Court Determines that Arbitrators Correctly Applied US, UK Law

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In a dispute stemming from various reinsurance claims arising from the Claimant’s participation in an excess of loss reinsurance program which protected the Respondent’s casualty book of business, IRA Brasil Resseguros challenged an arbitration panel’s ruling in favor of CX Reinsurance Company before the UK High Court of Justice, Queen’s Bench Division. Mr. Justice Burton granted leave to hear four issues on appeal: (1) the standard of proof required for a reinsured to prove his case under a “double proviso” follows settlements clause; (2) the correct approach to considering the question of proof of loss under such a follow settlements clause; (3) what proof is required in relation to a “losses occurring during” clause; and (4) the test for whether a loss was a loss “arising out of an event.” The court, after considering and applying both UK precedent (for issues 1 and 2) and US case law (for issues 3 and 4) determined that the arbitrators had correctly applied applicable law and dismissed the appeal accordingly. IRB Brasil Resseguros SA v. CX Reinsurance Co. Ltd., Case No. 2010 Folio 12 (Q.B. May 7, 2010).

This post written by John Black.