Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

ENGLISH HIGH COURT RULES THAT EQUITAS MAY USE ACTUARIAL MODELING TO RECOVER LONDON MARKET EXCESS OF LOSS SPIRAL LOSSES

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This dispute concerns indemnity for losses stemming from the Exxon Valdez oil spill in 1989 and the loss of aircraft at the Kuwait International Airport when Iraq invaded Kuwait in 1990. Equitas Ltd. (“Equitas”), as the assignee of the rights of Lloyd’s syndicates, brought claims against R&Q Reinsurance Company Ltd. (“R&Q”) under reinsurance contracts written by R&Q within the London Market Excess of Loss spiral. Equitas argued that recoverable losses were capable of being proved, Equitas had succeeded in proving these losses to a standard of the balance of probabilities through the use of actuarial modeling, and, therefore, Equitas was entitled to recovery. R&Q argued against any recovery unless Equitas could prove contract by contract, at each level of the spiral, that the sums claimed were properly due. The High Court sided with Equitas, ruling that how Equitas proved losses was one of fact or evidence. Equitas was not required to prove losses contract by contract at each level of the spiral. The High Court next ruled that actuarial modeling, although imperfect, was an acceptable solution to prove properly recoverable losses incurred by the syndicates. Equitas Ltd. v. R&Q Reins. Co. Ltd., [2009] EWHC 2787 (Comm. Ct. Nov. 11, 2009).

This post written by Dan Crisp.

FEDERAL LEGISLATIVE UPDATE – IRAN SANCTIONS

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A recent bill passed by the U.S. House of Representatives that expands U.S. economic sanctions targeted at Iran’s refined petroleum resources could have significant implications for the insurance and reinsurance industry. H.R. 2194, the Iran Refine Petroleum Sanctions Act (bill text and bill summary), which was passed on December 15, 2009 by a vote of 412-12, amends the Iran Sanctions Act of 1996 to expand sanctions against persons and entities who, with actual knowledge, provide Iran with refined petroleum resources or engage in activities that contribute to Iran’s ability to import such resources. The expanded sanctions include underwriting, insuring, reinsuring, financing or brokering any such activity. Because U.S. trade sanctions already prohibit U.S. persons and entities, including insurers and reinsurers, from doing business with Iran, the legislation appears to be targeted at foreign individuals and entities.

The Act establishes additional sanctions prohibiting specified foreign exchange, banking, and property transactions. Among other things, the Act grants the President waiver authority, and directs the President to report to the appropriate Congressional committees every six months regarding any person or entity that has violated the Act. After passing the House, the Act was referred on December 16, 2009 to the Senate Committee on Banking, Housing, and Urban Affairs.

This post written by Karen Benson.

NINTH CIRCUIT FINDS REVISED CLASS ACTION BAN IN ARBITRATION AGREEMENT UNCONSCIONABLE

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The Ninth Circuit Court of Appeals held that a “new twist” on the previously addressed issue of when an arbitration provision barring aggregation of individual claims is unconscionable did not command a new result. Plaintiffs brought a class action suit in California federal court against AT&T Mobility, LLC, alleging that they were unfairly charged sales tax on the retail price of a new phone that had been offered as “free” with the sign-up of new service. AT&T demanded that the claims be submitted to individual arbitration, as per the arbitration provision of the provider agreement. The plaintiffs pointed to a previous Ninth Circuit decision, Shoyer v. Cingular Wireless Services, Inc., (9th Cir. 2007), which held that a similar arbitration provision was unconscionable in part because it tended to prevent plaintiffs from suing on individual claims due to the disproportionate legal expense of doing so vis-à-vis the small amount of damages at issue. The class action procedure, the Court held in Shoyer, is designed to avoid this problem. However, AT&T’s arbitration clause contained a provision requiring the company to pay $7,500 to any claimant who won an arbitration award in excess of AT&T’s last offer, in order to provide financial incentive for claimants to bring individual claims and to address the inequity identified by the Court in Shoyer. Nevertheless, the Ninth Circuit was not convinced that this new language cured the defect of tending to prevent individual claims from being vindicated, due to the small amount of damages. The Court additionally held that the FAA does not trump California contract law on unconscionability. Laster v. AT&T Mobility, LLC, No. 08-56394 (9th Cir. Oct. 27, 2009).

This post written by John Pitblado.

DISTRICT COURT DENIES SUMMARY JUDGMENT IN OLSON, FINDS REINSURER HAD RIGHT TO SEEK REVIEW

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In the latest development in the Olsen v. United States case, the US District Court for the Eastern District of Washington issued an Order denying Plaintiffs’ Motion for Partial Summary Judgment. Following a complicated procedural history involving a number of arbitration decisions which were ultimately vacated, Plaintiffs initiated the instant action challenging under the APA the National Appeals Division’s resolution of Plaintiffs’ claims for payment of their crop insurance. Plaintiffs asserted two primary arguments: (1) Reinsurer FCIC had no legal right to revise claim determinations made under a private contract of insurance that FCIC was not a party to; and (2) NAD lacked jurisdiction over the issue of whether Plaintiffs had been overpaid by AGIC. The District Court denied Plaintiffs’ Motion, finding that the insurance contract granted FCIC authority to revise the claim and that administrative review of Plaintiffs’ claims by the NAD was appropriate. Olson v. United States, Case No. 08-5012 (USDC E.D. Wash. Sept. 30, 2009).

This post written by John Black.

NO INTERLOCUTORY APPEALS IN REINSURANCE FRAUDULENT CONVEYANCE CASE

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In an ongoing fraudulent conveyance dispute, the district court denied cross-motions for certificates of interlocutory appeals of summary judgment orders against the plaintiff rehabilitator of an insurance company and one of the two defendants. We previously reported on the court’s denial of cross-motions for reconsideration of the summary judgment orders in a July 22, 2009 post. The rehabilitator sought to appeal the order finding there was no evidence that payments made to the reinsurer were “disproportionately small” or not the result of arms-length negotiations. The court denied this motion principally on the grounds that it would embroil the appellate court in a fact-intensive analysis. The defendant’s cross-motion also was denied. It sought an appeal of whether it was a direct or initial transferee under fraudulent conveyance law. Noting that courts usually do not allow interlocutory appeals of denials of summary judgment, the court found there were disputed issues of fact that would be better determined by a jury before proceeding to an appeal. Mills v. Everest Reinsurance Co., Case No. 05-8928 (USDC S.D.N.Y. October 28, 2009).

This post written by Brian Perryman.