Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FORMER GENERAL RE SENIOR VP SENTENCED TO A YEAR AND A DAY

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On March 4, 2009, former General Reinsurance Senior Vice President Christopher Garand was sentenced to prison time, following his conviction for his involvement in a scheme to manipulate AIG's financial statements through finite reinsurance transactions. Mr. Garand was sentenced to one-year and one-day of jail time, two years of probation, a $150,000 fine and a Special Assessment of $1,000. Mr. Garand was ordered to surrender on April 22, 2009. Christian Milton (former VP of reinsurance for AIG), Ronald Ferguson (Gen Re's former CEO), Elizabeth Monrad (Gen Re's former CFO) and Robert Graham (former Gen Re senior VP and assistant general counsel) were also convicted in the scam. U.S. v. Garand, Case No. 06-CR-137 (USDC D.Conn. Mar. 4, 2009).

This post written by John Black.

AIG DIRECTORS FACING MASSIVE SUIT

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In a recent opinion, the Delaware Court of Chancery ruled on several motions to dismiss in the AIG Consolidated Derivative Litigation. The case, brought by stockholders of AIG and the company itself, alleged numerous claims against AIG top executives arising out of finite reinsurance transactions. Specifically, the allegations involved action by AIG insiders to misstate AIG's financial performance in order to deceive investors into believing that AIG was more prosperous than it really was. The single largest act of decption alleged involved a fraudulent $500 million reinsurance transaction in which various AIG insiders staged an elaborate artificial transaction with Gen Re Corporation. The AIG “Inner Circle Defendants” is comprised of AIG CEO Maurice R. Greenberg, CFO Howard I. Smith, Vice Chairman Edward E. Matthews, and Vice Chairman Thomas R. Tizzio. The stockholders asserted additional causes of action against former AIG employees and PriceWaterhouseCooper, AIG’s auditor. Virtually every defendant has moved for dismissal.

In a 104-page opinion, the Court dismissed the stockholders’ “due care” claim against defendant Tizzio, but otherwise denied all motions to dismiss as to defendants Greenberg, Matthews, and Tizzio finding that the amended complaint sufficiently stated an actionable claim. However, the Court determined that under Delaware law, it did not have a basis for personal jurisdiction over the former employee defendants and dismissed the claims against them without prejudice. Finally, the court ruled that New York law immunized PriceWaterhouseCooper from suit, and dismissed all claims against the auditor without prejudice. Am. Int’l Group, Inc. Consolidated Derivative Litigation, Case No. 769-VCS (Del. Ct. Chanc. Feb. 10, 2009).

This post written by John Black.

REINSURANCE GUARANTORS’ APPEAL DISMISSED FOR LACK OF APPELLATE JURISDICTION

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The Third Circuit has determined it lacked jurisdiction to hear the appeal of parties disputing their obligations in connection with certain reinsurance guarantees. In a breach of contract action, an insurer (Everest) alleged that certain guarantors failed to fulfill their obligations following the reinsurer’s (Founders) refusal to pay over $76 million to Everest under a reinsurance agreement. The guarantors filed counterclaims, in part seeking a declaration that no monies are due and owing under the guarantees because Everest unnecessarily reimbursed lenders for certain claims. In connection with a separate arbitration between Everest and Founders, an arbitral panel ordered Founders to post $70 million in favor of Everest as security. Founders failed to comply. Everest then moved for partial summary judgment in the lawsuit, seeking an order requiring the guarantors to satisfy Founders’s obligation to post security. Everest also moved to dismiss the counterclaims. The district court granted Everest’s motion for partial summary judgment and granted, in part, Everest’s motion to dismiss.

The appellate court found it lacked jurisdiction to hear the appeal on the one remaining counterclaim and on Everest's breach of contract claim, as there was no final order being appealed from, and because the district court’s award was merely one for the payment of money, and not an injunction (which would have accorded the guarantors the right to an interlocutory appeal). The appeal was dismissed. Everest Nat'l Ins. Co. v. Sutton, No. 08-4643 (3d Cir. Apr. 7, 2009).

This post written by Brian Perryman.

SPECIAL FOCUS: FEDERAL REGULATORY MODERNIZATION PROPOSALS

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There have been many proposals floated for the “modernization” of the regulation of various sectors of the financial services industry. What are the implications of such proposals for the reinsurance industry? In a SPECIAL FOCUS feature, Rollie Goss, blogmaster and chair of a Task Force formed by Carlton Fields to monitor federal regulatory proposals which may affect its clients, discusses generally the major proposals to date which may affect the reinsurance industry. Many of the proposals made to date remain in a fairly conceptual stage, but a few now are progressing to the stage of proposed Congressional bills. The documents discussed in this short paper include:

For additional Special Focus items, see the new sidebar box with quick links to selected Special Focus items.

This post written by Rollie Goss.

ASSIGNEE OF REINSURANCE CLAIMS NOT EXEMPT FROM ARBITRATION

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Plaintiff, the assignee of remaining reinsurance claims possessed by the estate of the insolvent insurer, originally brought an action against the defendants in state court, but the defendants removed to federal district court by alleging that the New York Convention (the “Convention”) and the Federal Arbitration Act governed the arbitration clauses in the excess-of-loss reinsurance contracts. Plaintiff then moved to remand and defendants moved to stay the action and compel arbitration. In granting the defendants’ motion, the district court ruled that the parties’ dispute was encompassed by the arbitration clauses and thus fell under the Convention, the liquidator’s right not to be compelled to arbitrate was not assigned to the plaintiff, and the service-of-suit clauses in the reinsurance contracts did not constitute a waiver of the defendants’ right to removal. B.D. Cooke & Partners Ltd. v. Certain Underwriters at Lloyds, London, Case No. 08-3435 (USDC S.D.N.Y. Mar. 31, 2009).

This post written by Dan Crisp.