Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT VACATES ARBITRAL AWARD FINDING IT “COMPLETELY IRRATIONAL” AND IN MANIFEST DISREGARD OF LAW

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Platinum Underwriters Bermuda, Ltd. reinsured PMA Capital Ins. Co., under a reinsurance agreement that contained a “deficit carry forward” provision. The parties disputed how certain deficits were to be calculated under the provision and arbitrated the claim. The arbitral panel awarded PMA $6,000,000, but eliminated the “deficit carry forward” provision from the contract, which provision ran to the benefit of Platinum. Both parties sought to vacate or modify the award. The court found the panel’s decision “completely irrational” – even under the broad grant of authority provided to the panel under the contract’s “Honorable Engagement Clause” – as the deficit carry forward provision was part of the essence of the contract and could not be written out of it. Moreover, the court saw no justification for the $6,000,000 award, other than as an equally irrational attempt to “compensate” Platinum for the elimination of the deficit carry forward provision. The Court granted PMA’s application to vacate the award, finding that an arbitration award that is not drawn from the essence of the contract is completely irrational, and therefore, in manifest disregard of the law. PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., No. 09-84 (USDC E.D. Pa. Sept. 15, 2009).

This post written by John Pitblado.

LEGISLATIVE AND REGULATORY UPDATE

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FEDERAL LEGISLATIVE UPDATE

On September 9, 2009, the U.S. House of Representatives passed unanimously H.R. 2571, the Nonadmitted and Reinsurance Reform Act (bill text and bill summary), by voice vote. As previously reported in our June 9, 2009 post, this legislation seeks to streamline the regulation of non-admitted insurance and reinsurance.

The principal provisions of the legislation: (1) regulate premium taxes for nonadmitted insurance; (2) provide that the placement of nonadmitted insurance shall be subject to regulation solely by the insured’s home state; (3) limit the ability of a state to establish eligibility requirements for US domiciled nonadmitted insurers that vary from the Non-Admitted Insurance Model Act; (4) require a GAO study of the nonadmitted insurance market; (5) regulate the extent to which a state may not recognize credit for reinsurance for an insurer’s ceded risk; (6) partially pre-empt the extraterritorial application of the law of a state to a ceding insurer not domiciled in that state; and (7) provide that in most circumstances a state that is the domicile of a reinsurer shall be solely responsible for regulating its financial solvency. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on the Judiciary.

The legislation was received in the Senate and referred to the Committee on Banking, Housing, and Urban Affairs on September 10, 2009.

STATE REGULATORY UPDATE

The Oregon Division of Insurance (DOI) adopted temporary rule OAR 836-012-0331 (rule text and rulemaking order) on the treatment of reinsurance reserve credits or assets under agreements prior to November 9, 1995. The temporary rule replaces OAR 836-012-0330, which, according to the DOI, was apparently repealed in error. The repeal of that rule removed the prohibition of an insurer reporting reserve credits or assets established with respect to existing reinsurance agreements entered into prior to the effective date of the Life and Health Reinsurance Agreements Model Regulation (OAR 836-012-0300 to 836-012-0330). According to the DOI, the repeal violated the Reinsurance Ceded accreditation standard, Part A, 10(m).

In order to remain accredited, the DOI was required to adopt the temporary rule. The temporary rule provides that any reserve credits or assets established with respect to reinsurance agreements entered into prior to November 9, 1995 that would not be entitled to recognition under the provisions of OAR 836-012-0300 to 836-012-0330 must be reduced to zero for purposes of the insurer’s annual statement filing. The temporary rule is effective July 9, 2009 through December 24, 2009.

This post written by Karen Benson.

NO JUMPING THE GUN ON DISCOVERY: MOTION TO COMPEL REINSURANCE AGREEMENT DENIED

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The plaintiff, Dartmouth Hitchcock Medical Center, moved to compel the defendant, CHG Medical Staffing, to produce a reinsurance agreement between CHG and CNA. In support of its motion, Dartmouth represented that the court had ordered CHG to produce insurance policies during a hearing in a related case. CHG refused to produce the agreement on the ground that discovery has not yet begun, citing the automatic discovery moratorium imposed by Federal Rule of Civil Procedure 26(d). Dartmouth argued in its Motion to Compel Production of Documents that CHG is in violation of the “intent and spirit of this Court’s Order, if not the letter.” The court found in favor of CHG, noting that because the parties agreed that the court did not order production of the reinsurance agreement, CHG’s refusal to produce it did not violate an existing court order and that discovery would progress in accordance with the Federal Rules. Dartmouth Hitchcock Medical Center v. Cross Country Travcorps, Inc., Case No. 09-160 (USDC D.N.H. July 31, 2009).

This post written by Brian Perryman.

EASTERN DISTRICT OF NEW YORK DENIES MOTION TO AMEND: HOLDS CLAIM WOULD BE FUTILE

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On August 24, 2009, the Eastern District of New York ruled on plaintiff Callon Petroleum’s motion to amend its complaint by adding a statutory claim for punitive damages based on defendant National Indemnity’s bad faith failure to make a timely payment following the submission of the bond claim in the action. This action arose out of a judgment Callon obtained against its reinsurer Frontier Insurance Company in the form of a surety bond Frontier issued to Wood Energy Corporation. Defendant moved to dismiss plaintiff’s claims since it was not a party to the surety bond. The motion to dismiss was granted in part and denied in part, and over a year and a half later plaintiff moved to include the statutory claim.

Applying New York’s “center of gravity/grouping of contacts analysis,” the court concluded that New York law should be applied. The court noted that the reinsurance contract was negotiated and entered in New York, the place of performance was New York, and one of the contracting parties (Frontier) is domiciled in New York. Additionally, the arbitration clause in the contract requires all arbitration to take place in New York. Having determined that New York law should apply, the court denied the motion to amend, holding that the claim would be futile under New York law. Callon Petroleum Co. v. Nat’l Indem. Co., Case No. 06-CV-0573, (E.D. N.Y. Aug. 24, 2009).

This post written by John Black.

DISTRICT COURT FINDS CONTRACTING PARTIES IN PRIVITY, DISMISSES THIRD PARTY COMPLAINT

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In the latest development of Guaranteed Trust Life’s (“GTL”) suit for reinsurance benefits from First Student Programs, the Northern District of Illinois granted in full third party defendant American United Life’s (“AUL”) motion to dismiss. After previously granting in part and denying in part AUL’s motion to dismiss, the court invited the parties to readdress the issues of res judicata. In fully granting AUL’s motion in the instant order, the court determined that, even though First Student Programs was not a party to the arbitration between GTL and AUL, it was in privity with GTL. The court concluded that because the two companies’ claims against AUL arose out of the same alleged breach of contract, were based on the same legal and factual arguments, and rested on a contractual relationship between the two companies, Illinois’ privity test was met. Accordingly, First Student Programs’ claim agasint AUL was precluded by the arbitration award against AUL. Guarantee Trust Life Ins. v. First Student Programs, LLC, Case No. 05 C 1261 (N.D. Ill Sept. 9, 2009).

This post written by John Black.