Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

REINSURANCE COMPANIES VICTORIOUS IN SECURITIES FRAUD CLASS ACTIONS ARISING OUT OF CAT LOSSES

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Two reinsurance companies have prevailed on motions to dismiss in shareholder securities law putative class actions over the restatements of loss levels from cat events, illustrating that the process of estimating cat losses accurately may be challenging, and that companies are not guarantors of the completeness and accuracy of that process. PXRE prevailed in a lawsuit alleging a scheme to understate losses arising out of a series of hurricanes that devastated the Gulf Coast in 2005, restating the amount of losses several times. Judge Sullivan granted PXRE’s motion to dismiss, finding that plaintiffs “failed to plead that defendants were reckless in not knowing about the flaws in PXRE’s calculation of its loss estimates.” In re PXRE Group, Ltd., Securities Litigation, No. 06 CIV 3410 (S.D.N.Y. March 5, 2009). Judge Sullivan issued an order in a similar individual case filed against PXRE implying that he will follow the same course in that action. Anegada Master Fund Ltd v. PXRE Group Ltd., No. 08 Civ 10584 (S.D.N.Y. March 5, 2009).

Quanta Capital Holdings Ltd. (“Quanta”) issued several estimated loss projections relating to Hurricanes Katrina and Rita that ranged from $42-$68.5 million, resulting in multiple rating downgrades, forcing Quanta to cease writing new insurance and reinsurance business and to sell its remaining insurance and reinsurance portfolios. Noting the conjectural nature of insurance reserves established for losses that have been incurred but not yet reported, the court ruled that the Complaint did not put forth sufficient factual allegations such that the court could plausibly find that the loss estimate included in the offering documents was a material untruth at the time it was made, especially since the adjusted estimate was based on a single business interruption claim. The district court also held that the Complaint did not meet applicable heightened pleading requirements, and that some of the claims failed because the $68.5 million preliminary loss estimate was protected by the “bespeaks caution” doctrine. Zirkin v. Quanta Capital Holdings Ltd., Case No. 07-851 (USDC S.D.N.Y. Jan. 22, 2009).

This post written by Rollie Goss.

RECENT REPORTS PROVIDE COMPREHENSIVE VIEW OF REINSURANCE INDUSTRY

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Readers may obtain a fairly comprehensive view of the global reinsurance industry from reading three reports:

This post written by Rollie Goss.

UK COURT DETERMINES THAT INSURED CAN GIVE EFFECTIVE NOTICE OF POTENTIAL CLAIMS FOR PROFESSIONAL NEGLIGENCE BY APPRISING INSURER OF GENERAL CIRCUMSTANCES THAT MIGHT LEAD TO SUCH CLAIMS

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In this action for declaratory relief, the UK Court of Appeal issued a judgment on the construction and application of notification provisions in a claims made policy, which may be of interest in interpreting similar provisions in reinsurance agreements. The court held that where a professional indemnity insurance policy required the insured to notify the insurers of potential claims against the insured “as soon as practicable,” the insured could satisfy this requirement by notifying the underwriters of circumstances which might give rise to claims for professional negligence, if made within the insured period, even if the notification of the claim itself was not given until after the policy period. However, notification of such circumstances given after the policy expired relating to new potential claims was not effective.

The essential issue was whether Kidsons gave the underwriters effective notification of the circumstances that might lead to subsequent claims for professional negligence within the policy period. The policy provided no details as to how a notification was to be made, other than that it must be in writing and given as soon as practicable after awareness of circumstances which might give rise to a claim. This was a factual issue, requiring an analysis of various letters and presentations. The court held that the “as soon as reasonably practicable” language was, in effect, a condition precedent in the claims-made policy. This result was not undone by another policy provision stating that “Where the assured’s breach of or non-compliance with any conditions of this Insurance has resulted in prejudice to the handling or settlement of any loss or claim the indemnity afforded . . . shall be reduced to such sum as in the underwriters’ opinion would have been payable by them in the absence of such prejudice.” Although the provision referred to “any conditions of this Insurance,” it did not in terms refer to – and therefore modify – conditions precedent. One Justice dissented, agreeing with the judge below that the letter relied upon as providing notice of the circumstances was incapable of constituting an effective notification because it was too nebulous. HLB Kidsons v. Lloyd’s Underwriters [2008] EWCA Civ 1206 (Ct. App. Nov. 5, 2008).

This post written by Brian Perryman.

COURTS CONFIRM ARBITRATION AWARDS WITH SOME DISCUSSION OF MANIFEST DISREGARD OF LAW DOCTRINE

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Courts have continued (with one exception) to confirm arbitration awards, with some discussion of the manifest disregard of law doctrine.

This post written by Rollie Goss.

REN RE FOUNDER AND FORMER CEO LIABLE FOR SECURITIES FRAUD

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The most recent development in the saga of Ren Re’s finite reinsurance story is a civil enforcement action by the SEC alleging federal securities fraud against Ren Re’s founder and former CEO and Chairman, James Stanard. After a bench trial, the court entered a detailed set of findings and conclusions, concluding that the accounting for one of the reinsurance transactions at issue had been fraudulent. The court found Stanard liable for violations of the anti-fraud provisions of Securities Act Section 17(a) and Exchange Act Section 10(b). The court also determined that Stanard violated Exchange Act Rule 13(a)-14, Rule 13b2-1 (Falsification of Accounting Records), Rule 13b2-2, 13(b)(5) and found Stanard liable for aiding and abetting liability for the above violations.

The court entered a final judgment permanently enjoining Stanard from future violations of the federal securities laws but did not bar him from serving as an officer or director of a public company in the future. The court ordered Stanard to pay $100,000 as a civil penalty. SEC v. Standard, Merritt & Cash, Case No. 06-7736 (USDC S.D.N.Y. Jan. 27, 2009).

This post written by John Black.