Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

STATE AND FEDERAL LEGISLATIVE UPDATE

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Following are selected bills in the captive insurance area, plus one relating to catastrophe risk, that have now been adopted in the state legislatures:

• South Carolina has amended its captive insurance company law by enacting S. 323, which we previously reported, to make changes relating to incorporation, licensing, capitalization and other requirements. The bill was ratified on May 27, 2009, and it took effect when it was approved by the Governor on June 2, 2009.

• Missouri enacted House Bill No. 577 (mentioned in our May 8, 2009 post), which modifies various provisions of the state’s captive insurance company law and permits an association captive insurance company or an industrial insured captive insurance company to be organized as a reciprocal insurer. On May 29, 2009, the bill was delivered to the Governor for his signature.

• The Governor of Vermont, on May 27, 2009, signed S. 42 into law, which makes amendments to the captive provisions of the Vermont Code including, among other things, providing new captive formations a $7,500 tax credit and increasing state funding for captive regulation and examination.

• On June 1, 2009, the Texas legislature passed House Bill No. 4409, which includes provisions dealing with the reform and funding of the Texas Windstorm Insurance Association (TWIA), the state’s insurer of last resort for wind and hail coverage for certain coastal parts of the state. Among other things, the legislation provides for various layers of funding, including the imposition of certain insurance carrier assessments. Reinsurance to cover an assessment may be purchased at the insurer’s election subject to certain conditions. The bill has been delivered and is awaiting the Governor’s signature.

Congress has also recently introduced three bills relevant to reinsurance or catastrophe funds. These bills are as follows:

• H.R. 2555, 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. The bill has been referred to the Committee on Financial Services.

• H.R. 2571, proposes to streamline the regulation of nonadmitted insurance and reinsurance, and for other purposes. The principal provisions of the Act: (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.

• H.R. 2589, proposes to establish the Office of Public Finance in the Department of the Treasury to make available Federal reinsurance for insurers of tax-exempt municipal bonds. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on Ways and Means.

This post written by Karen Benson.

FRAUD CLAIM AGAINST PARTICIPANT IN REINSURANCE PROGRAM HELD TIME-BARRED

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A fraud claim asserted by the New York Superintendent of Insurance against a tire company was barred by the applicable California statute of limitations, since the “discovery rule” did not operate to save the claim. The plaintiff superintendent, in his capacity as rehabilitator of Frontier Insurance Company, alleged that Frontier entered into a reinsurance agreement with Automotive Services Insurance Limited in 1999. ASIL was a captive insurance agency set up by the president of the defendant tire company, Ramona Tire. Under this agreement, ASIL agreed to reinsure Frontier for insurance proceeds paid out by Frontier on policies for a group of independent tire dealers, including Ramona. The superintendent alleged that Ramona defrauded Frontier by purposefully undercapitalizing and underfunding ASIL so as to make it unable to comply with its contractual obligations to Frontier. A suit was filed in 2007. In its motion for summary judgment, Ramona argued that Frontier was on notice of ASIL’s undercapitalization from the moment it began negotiations on the reinsurance agreement. For example, Frontier investigated ASIL’s capitalization prior to approving the workers compensation program in which Ramona participated. This was held sufficient to trigger the discovery rule and run the three-year statute of limitations beginning in at least 2000. Accordingly, the fraud claims were time-barred. Mills v. Ramona Tire, Inc., Case No. 07-52 (USDC S.D. Cal. May 22, 2009).

This post written by Brian Perryman.

BREACH OF ORAL PROMISE TO SIGN REINSURANCE AGREEMENT DOES NOT REMOVE THE AGREEMENT FROM THE STATUTE OF FRAUDS’ SIGNING REQUIREMENT

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ACE Capital Title Reinsurance Company (“ACE”) proposed a joint venture for insurance and reinsurance with Olympic Holding Company, L.L.C., (“Olympic”), but, before signing any agreements, ACE backed out of the venture, and Olympic brought suit. The trial court granted summary judgment for ACE on the breach-of-contract and breach-of-fiduciary-duty claims, but the appellate court reversed, finding that ACE should be equitably estopped from using the statute of frauds as an affirmative defense and that parties to an implied joint venture may incur fiduciary obligations. In reversing the appellate court’s judgment and remanding the action to the trial court, the Ohio Supreme Court held that: (1) the breach of oral promise to sign an agreement did not remove the statute of frauds’ signing requirement, and, thus, promissory estoppel may not be used to bar the statute of frauds; (2) the agreement was unenforceable; and (3) no fiduciary duties were imposed on the parties. Finally, the Ohio Supreme Court stated that Olympic’s claim for reliance damages, still pending in state court, was an adequate remedy to recover damages from relying on an allegedly false promise. Olympic Holding Co., L.L.C., v. ACE Ltd., No. 2009-2057 (Ohio May 7, 2009).

This post written by Dan Crisp.

SUMMARY JUDGMENT AGAINST SWISS RE REVERSED BY THIRD CIRCUIT COURT OF APPEALS

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As we reported on September 18, 2007, a federal court granted summary judgment to Airport Industrial Park, doing business as P.E.C. Contracting Engineers (“PEC”), as against Swiss Reinsurance America Corp. (“Swiss Re”), the reinsurer of a party with whom PEC contracted on a government construction project, which contracting included a general indemnity agreement (“GIA”). Swiss Re appealed, and the Third Circuit Court of Appeals held in its favor, reversing the trial court and remanding for further proceedings. First, the Circuit Court held that Swiss Re was unambiguously an intended beneficiary of the GIA, as “reinsurers” were explicitly mentioned therein, along with other “affiliates” of the reinsured. Second, the Court held that, even if the GIA was unambiguous, Pennsylvania law nonetheless allows a court to look to the parties’ custom and usage in interpreting a contract’s terms. It then cited material disputes of fact (and a less-than-complete factual record) with regard to the parties’ competing interpretations of the contract vis-à-vis the underlying parties’ custom and usage. Swiss Reinsurance America Corp. v. Airport Industrial Park, Inc., d/b/a P.E.C. Contracting Engineers, No. 07-3749 (3d Cir. May 5, 2009).

This post written by John Pitblado.

TWO RECENT CASES ADDRESS REVERSE-PREEMPTION UNDER THE MCCARRAN-FERGUSON ACT

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On March 15, 2007, we reported on an Oklahoma district court’s denial of a motion to compel arbitration, finding that an Oklahoma statute prohibiting enforcement of arbitration clauses in insurance contracts controlled pursuant to the McCarran-Ferguson Act. Soon thereafter, the Oklahoma legislature amended the statute excepting reinsurance contracts from the prohibition. On appeal, despite the legislature not specifying whether the amendment would apply retroactively, the Tenth Circuit found that the statute itself was retroactive by its express terms and as interpreted by the Oklahoma Supreme Court, and, after acknowledging that arbitration agreements are contrary to Oklahoma public policy, the Tenth Circuit then found that specific legislative approval rendered the agreements valid and enforceable. Mid-Continent Cas. Co. v. Gen. Reins. Corp., No. 07-5050 (10th Cir. May 22, 2009).

Theodore L. Kessner (“Kessner”), appointed as the Special Deputy Liquidator of an insolvent insurer, filed an action in Nebraska state court seeking to recover on a reinsurance policy issued by One Beacon Insurance Company, which removed the action to federal court based on diversity jurisdiction. Kessner then moved to remand, arguing that the McCarran-Ferguson Act reverse-preempted the federal removal statute. In the Report and Recommendation, the Magistrate Judge concluded that the matters at issue related to the business of insurance and that a proceeding in the district court would likely invalidate, impair or supersede the Nebraska insurer liquidation statutes utilized in the state liquidation proceeding, requiring remand. A short, two paragraph opinion by the District Judge adopted the Magistrate Judge’s Report and Recommendation, with a colorful conclusion that “intervention by a federal court could screw up the comprehensive scheme Nebraska has set up to deal with matters like this one. Federal law has a bias against such meddling.” Kessner v. One Beacon Ins. Co., Case No. 09-3003 (USDC D. Neb. Apr. 20, 2009).

This post written by Dan Crisp.