Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

TENTH CIRCUIT CONFIRMS ARBITRATION AWARD, RULES ARBITRATORS IMPARTIAL

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We have previously reported on the ongoing litigation between Legacy Trading Co. and defendant Robert Hoffman. Recently, Legacy Trading appealed to the Tenth Circuit the District Court’s order denying their motion to vacate an arbitration award and granting Hoffman’s motion for confirmation. Hoffman cross appealed the denial of his request for attorneys’ fees. The Tenth Circuit affirmed the order confirming the award, dismissing Legacy Trading’s frivolous argument that it had not agreed to arbitrate. The Court noted that as a member of NASD, Legacy Trading was subject to arbitration and, in addition, it had signed an agreement in this case agreeing to arbitration. The Court concluded that there was insufficient evidence to suggest that the arbitrators were evidently partial, that Legacy Trading was denied a fair hearing, or that the arbitrators had manifestly disregarded the law. On the last point, the Court noted that Legacy Trading had failed to include the entire transcript as evidence of manifest disregard, and thus had failed to carry the burden of persuasion. The Court also rejected Legacy Trading and co-plaintiff Mark Uselton’s public policy argument.

Regarding Hoffman’s cross appeal, the Tenth Circuit ruled that because the District Court had not explained its decision to deny the request for fees, the issue should be reversed and remanded. Legacy Trading Co. Ltd. v. Hoffman, Case No. 09-6007 (10th Cir. Jan. 29, 2010).

This post written by John Black.

SCOTTISH COURT BREATHES NEW LIFE INTO PETITION TO APPROVE SOLVENT SCHEME OF ARRANGEMENT

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The Scottish Court of Session, Inner House, has reversed a ruling of its Outer House refusing to approve a scheme of arrangement under the U.K. Companies Act of 2006.

A scheme of arrangement is a reorganization device through which a company may compromise its creditors’ claims with the approval of at least three-quarters of its creditors. A scheme of arrangement generally involves three stages. First, there must be a judicial application for an order summoning a meeting of creditors. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Finally, if the scheme is approved at the meeting, there must be a further application to the court for sanction of the arrangement.

In Petition of Scottish Lion Insurance Company, Scottish Lion, in runoff since late 1994, proposed in 2008 a scheme of arrangement to terminate exposures under short- and long-tail policies. The scheme was opposed by U.S.-based creditors insured under general liability or general aviation insurance policies with Scottish Lion. The Outer House declined to approve the scheme, concluding that sanctioning the scheme smacked of “unreasonableness” to minority creditors, and asking rhetorically, “where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?” The Inner House disagreed. Although the court acknowledged that insureds who were being required to accept current estimated values in lieu of their contingent claims may “possibly with other arguments, win the day,” it concluded that such circumstance alone was not so overwhelming a factor against the sanction. The case was remitted to the Outer House for further proceedings.

This post written by Brian Perryman.

STATE LEGISLATIVE UPDATE

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Following are selected bills in the captive insurance and reinsurance areas that have been recently introduced in the state legislatures:

• H.B. 314 proposes to amend Delaware’s captive insurance company laws by adding two new forms of captive insurance companies, “agency captive insurance companies” and “branch captive insurance companies,” to those that can currently be licensed in Delaware. In an agency captive structure, the insurance risk on policies is reinsured to the agency captive, thereby allowing the agents or brokers that placed the policies to share in the profits or losses attributable to these policies. Branch captive insurance companies are divisions of offshore captives that establish a business unit onshore. These new forms of captive insurance companies are intended to enhance the economic development potential of Delaware’s captive insurance laws. The bill also makes a technical change to the delinquency provisions applicable to sponsored captive insurance companies. The bill was introduced in the Delaware House of Representatives on January 26, 2010, and it was assigned on the same day to the Economic Development/Banking/Insurance/Commerce Committee. The following day the bill was reported out of committee favorably in the Delaware House of Representatives.

• H.B. 305 proposes to amend Maryland’s domestic reinsurance law requirements for various purposes, including: (i) specifying an assessment fee payable by specified domestic reinsures to the Maryland Insurance Commissioner; (ii) exempting domestic reinsurers from a requirement to have an office in the State; (iii) requiring domestic reinsurers to keep specified assets in the State; and (iv) authorizing domestic reinsurers to keep their general ledger account records outside the State under specified circumstances. The bill was introduced in the Maryland House of Representatives on January 27, 2010.

This post written by Karen Benson.

COURT RULES NEBRASKA ARBITRATION LAW REVERSE-PREEMPTS THE FEDERAL ARBITRATION ACT PURSUANT TO THE MCCARRAN-FERGUSON ACT

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Along with an insurance policy, the parties previously entered into an administration agreement that obligated the defendant to reimburse the plaintiff for claims made under extended warranty contracts. The plaintiff brought suit in state court over the alleged failure to pay reimbursement requests. The defendant removed and then sought to compel arbitration and stay proceedings pursuant to the arbitration provision in the administration agreement. However, this agreement was to be interpreted in accordance with Nebraska law, and the Nebraska Uniform Arbitration Act (“NUAA”) exempts from arbitration any agreement that concerns or relates to an insurance policy. In denying the defendant’s motion to compel arbitration and stay proceedings, the court ruled that the NUAA reverse-preempted the Federal Arbitration Act (“FAA”) pursuant to the McCarran-Ferguson Act, finding that the NUAA was enacted for the purpose of regulating the business of insurance and would be invalidated, impaired or superseded by the FAA. The Court therefore denied the motion to compel arbitration, finding that the Nebraska statute prevailed over the FAA. Datacor, Inc. v. Heritage Warranty Ins. Risk Retention Group, Inc., Case No. 09-1123 (USDC E.D. Mo. Dec. 16, 2009).

This post written by Dan Crisp.

TEXAS APPELLATE COURT REVERSES ORDER IN FAVOR OF TEXAS DEPARTMENT OF INSURANCE CONCERNING INTERPRETATION OF REINSURANCE REPORTING OBLIGATIONS

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The Texas Insurance Department (“Department”) determined that American National Ins. Co. and other insurance companies were incorrect when they reported stop-loss insurance policies that they sold to self-funded employee benefit plans as reinsurance instead of direct insurance. The Companies disagreed, and brought the matter to court. The trial court granted the Department’s motion for summary judgment, agreeing with the Department that self-funded plans are not insurers under Texas law. The Companies appealed, and the Appellate Court reversed. It found that by selling the stop-loss policies at issue in this case to self-funded benefits plans and reporting their sale to the Department as a sale of assumed reinsurance, the Companies did not violate those provisions of the Texas Insurance Code cited by the Department. The Court filed an Order with instructions to enter judgment in favor of Companies on the issue. American National Ins. Co. v. Texas Dept. of Insurance, No. 03-08-00535-CV (Tex. App. Ct. Dec. 16, 2009).

This post written by John Pitblado.