Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UK COURT OF APPEALS DELIVERS SPLIT DECISION ON REINSURANCE AVOIDANCE

by

The UK Court of Appeals has entered a decision dealing with reinsurance avoidance issues which may be of interest to US practitioners due to the similarity of avoidance standards in the UK and the US. On October 31, 2007 we reported on a decision of the UK Commercial Court, Queen’s Bench Division, avoiding two facultative reinsurance agreements due to misrepresentations by the placing broker as to the amount of deductibles required for ceded risks. The UK Court of Appeals has agreed that the initial reinsurance agreement (covering risks from July 1, 1996 through June 30, 1997, extended by endorsement through January 31, 1998) should be avoided, but has decided that the second reinsurance agreement (covering risks from February 1, 1998 through January 31, 1999) should not be avoided. The representation at issue was made prior to the placement of the first reinsurance agreement, and stated that “[a]s a matter of principle they [the cedents] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.”

The Commercial Court characterized this statement as a statement of “current policy,” which continued to be effective through the placement of the second reinsurance agreement. There was testimony that this was the policy and practice of the cedents up to the placement of the first reinsurance agreement, but that due to market conditions it was not possible to continue this practice after July 1996. The Court of Appeals stated that the claim of avoidance was based upon an alleged misrepresentation, not upon an asserted failure to disclose, and that to be actionable: (1) a statement must be a representation of existing fact, not of future fact or opinion; and (2) that a representation as to expectation or belief is not actionable if it is made in good faith. The first point is similar to the elements of fraud claims in many US jurisdictions.

The Court of Appeal held that the alleged representation was a statement of intention that was a representation of existing fact prior to July 1996, and that it was a material misrepresentation. The Court found that since the extension of the first reinsurance agreement for an additional seven months was an amendment to an existing contract, rather than a new contract, the reinsurance was avoided through January 31, 1998. The Court stated that the representation was not continuing in nature 19 months after it had been made, rather that it “relates to the time when it is made ….” The Court therefore held that the alleged misrepresentation was not a basis to avoid the second reinsurance agreement. Although not stated, the fact that there was testimony that the market conditions made it impossible for the cedents to maintain a policy or practice of maintaining deductibles at the levels represented after July 1996 supports this conclusion. The Court of Appeals was careful to state that it had not been contended that the cedents were under an obligation to disclose the level of deductibles intended to be written with respect to the second reinsurance agreement, leaving open the question of whether avoidance could be based upon a failure to disclose as opposed to an affirmative misrepresentation. Limit No. 2 Limited v. Axa Versicherung AG [2008] EWCA 1231 (Ct.App. Nov. 12, 2008).

This post written by Rollie Goss.

FEDERAL APPEALS COURT AFFIRMS DISMISSAL OF CLAIMS BY CONSTRUCTION COMPANY AGAINST ITS INSOLVENT INSURER’S REINSURER

by

We previously posted on July 24, 2007 about a case brought by Jurupa Valley Spectrum, LLC (“Jurupa”) against its insurer’s reinsurer, National Indemnity Company (“NICO”). NICO reinsured Frontier Insurance Company, which was declared insolvent, and against whom Jurupa had an outstanding claim under a surety bond which Frontier issued to Jurupa. The case was dismissed by a New York federal court.

On February 4, 2009, the Second Circuit Court of Appeals affirmed the decision, agreeing with the trial court that (1) the contract between Frontier and NICO did not contemplate direct action by Frontier’s insureds against NICO; (2) the contract could not fairly be read to contain a “cut through” provision, as the contract made clear that all rights against the reinsurer inhered only with the insurer; and (3) the contract did not violate of a New York statute, which requires reinsurance contracts to contain “cut through” provisions when an insurer issues a surety bond in an amount exceeding ten percent of its surplus, because at the time of issuance of the surety bond, Frontier’s surplus exceeded ten percent of the value of Jurupa’s bond. Jurupa Valley Spectrum, LLC v. National Indemnity Co., No. 07-3211 (2d Cir. Feb. 4, 2009).

This post written by John Pitblado.

LIFE INSURERS LOOK TO STATES FOR CAPTIAL AND RESERVE RELIEF AFTER NAIC REJECTS INDUSTRY-WIDE RELIEF

by

In the aftermath of the NAIC vote rejecting the requests of the American Council of Life Insurers for industry-wide capital and reserve relief, individual companies have applied to their domiciliary regulators for relief. Some state insurance departments have used permitted practice rules to allow companies temporary relief. For example, the Iowa Department, in Bulletin 09-01, has adopted a modified practice of accounting for deferred taxes which has provided relief to at least ten companies. The Ohio Department has adopted three bulletins, 2009-02, 2009-03 and 2009-04, which provide relief through three different accounting practices. These changes reportedly will provide relief to 20 companies. Connecticut and Indiana have also provided relief to companies domiciled in their state. It is unclear what the impact will be if states approve different and potentially conflicting practices.

This post written by Rollie Goss.

COURTS CONTINUE TO REJECT FAIRLY ROUTINE OBJECTIONS TO ARBITRATION AWARDS

by

Courts have continued to confirm arbitration awards. Recent decisions include one that characterizes the manifest disregard of law doctrine in the Seventh Circuit as being part of the statutory ground relating to the scope of the arbitrators’ authority.

  • Manifest disregard of law: Doerflein v. Pruco Securities, LLC, Case No. 07-738 (USDC S.D.In. Jan 30, 2009) (confirming award, rejecting challenges to how arbitration was conducted and manifest disregard of law; states that manifest disregard of law is an example of an arbitrator exceeding his/her authority under the FAA).

This post written by Rollie Goss.

AVOIDANCE AVOIDED BY REINSURER

by

Legion Insurance Company provided casualty insurance to businesses in the United States, including a Workers Compensation Act cover. This cover comprised two sections: Section A gave cover for statutory benefits in respect of death or bodily injury arising from an accident at work, and Section B gave cover for payments in respect of an employer’s fault based liability for an accident, killing or injuring an employee. This business was part of what was known as the “Mainframe Account.” In 1998, Hannover Re underwrote some excess of loss reinsurance policies giving cover to Legion for its liabilities in respect of business allocated to the Mainframe Account. By four excess of loss retrocession contracts, Syndicate 53 at Lloyd’s was a retrocessionaire of some of the Mainframe Accounts. One Ian Crane was the Syndicate’s active underwriter. Three of the four retrocessions included Hannover as reinsured. The retrocessions were limited to Section A of the cover.

The Syndicate avoided as against Hannover. During the ensuing trial, the Syndicate’s claims focused on nondisclosure by Hannover of underwriting and claims audits which it had conducted of Legion; misrepresentation and nondisclosure concerning the “comparative strictness of the underwriting requirements for the Mainframe Account”; and misrepresentation and nondisclosure concerning Legion’s underwriting practices (specifically, it was alleged that Legion had underwritten by reference to an “underwriting box” and had not used actual loss histories to calculate expected losses). In response, Hannover principally argued that the underwriting audits were not relevant and that the Syndicate’s criticism of Legion’s loss rating approach was not material since Crane had ample information with which to form his own judgment. Further, the claims audits did not reveal any serious problems relating to a Mainframe carve-out renewal proposal.

The court found that the underwriting and claims audits contained serious issues that were known to Hannover, and that Crane had not been able to consider these audits. Nonetheless, the 1998 carve-out renewal proposals described Legion’s loss rating approach, so Crane was in an equally good position as Hannover to form his own judgment about Legion’s loss rating practice. Regarding the nondisclosed claims audits, it was found that they described Legion’s practices as average, so this would not affect the judgment of a prudent underwriter. Regarding the allegation of the “comparative strictness of the underwriting requirements for the Mainframe Account,” the court found that these requirements had been explained to Crane. Finally, regarding the allegation on the use by Legion of an underwriting box was rejected as failing to understand how the box actually worked: Legion’s underwriters would individually underwrite each new piece of business going into the program and that business had to have enough experience to qualify it for the Mainframe Account, so Legion was providing cover to individual insureds by reference to their actual loss histories. The requirements for use of the underwriting box were consistent with the actual loss histories. Moreover, Crane was informed of the underwriting box in a November 1998 discussion. Thus, the Syndicate was not entitled, as against Hannover, to avoid the 1998 Mainframe carve-outs. Crane v. Hannover Ruckversicherungs-Aktiengesellschaft [2008] EWHC 3165 (Q.B. Comm. Div. Dec. 19, 2008).

This post written by Brian Perryman.