Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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

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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

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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

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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.

AON RECEIVES FINANCIAL SERVICES AUTHORITY’S LARGEST FINANCIAL CRIME RELATED FINE TO DATE

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The UK’s Financial Services Authority has imposed a fine on Aon Limited of £5.25 million. FSA contended that Aon failed to take reasonable care to establish and maintain effective systems to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals. As a result, between January 2005 and September 2007, Aon failed to properly assess the risks involved in its dealings with firms and individuals in Bahrain, Bangladesh, Bulgaria, Burma, Indonesia and Vietnam who helped it win business. In total, the firm made suspicious payments amounting to approximately $7 million. This is the largest financial crime related fine imposed by the FSA to date. The FSA published a press release and a Final Notice relating to this fine.

This post written by Brian Perryman.

SECOND CIRCUIT: ARBITRATION CLASS ACTION BAN UNENFORCEABLE

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On a matter of first impression, the Second Circuit Court of Appeals considered the enforcement of a mandatory arbitration clause in a contract that also contained a “class action waiver” forbidding parties to the contract from pursuing class claims in the arbitral forum. Though the court declined to decide whether class action waiver provisions were void or enforceable per se, it concluded that the plaintiffs had demonstrated that the class action waiver provision at issue should not be enforced because it would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.

The court noted that although the Supreme Court has not squarely addressed this issue, it had implicitly recognized that a provision in an arbitration agreement is not per se unenforceable because the question of the validity of an arbitration clause which contained a class action ban was a matter for the arbitrator, not the court, to decide. The court found Green Tree Fin. Corp.v. Randolph, 531 U.S. 79 (2000) controlling to the extent that, based on the costs of individual litigation or arbitration, the agreement entailed more than a speculative risk that enforcement of the class action ban would deprive the plaintiffs of substantial rights under federal antitrust statutes. Further, the court found that, for all intents and purposes, the plaintiffs could only pursue their antitrust claims against American Express through the aggregation of individual claims either in class action litigation or in class arbitration. The court concluded that the class action waiver could not be enforced because the provision would effectively grant American Express de facto immunity from antitrust liability. The court noted by way of caveat that the ruling was in no way dependent on the “size” of any or all of the merchant plaintiffs; rather, it depended on a showing that the size of the recovery of any individual plaintiff would be too small to justify the expenditure of bringing an individual action. Finally, the court emphasized that this decision did not find all class action bans in arbitration agreements per se unenforceable. The case was remanded to the District Court for further proceedings. In re: American Express Merchants' Lit., No. 06-1871 (2d Cir. Jan. 30, 2009).

This post written by John Black.