Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

APPELLATE COURT HOLDS THAT SELF-INSURER GROUP IS ENTITLED TO COVERAGE THROUGH STATE INSURANCE GUARANTY ASSOCIATION

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The Louisiana Safety Association of Timbermen – Self Insurers Fund (the “Fund”) is a self-insurance group formed by member companies as a means of securing workers compensation coverage for their employees. In 1998, the Fund obtained statutorily required excess coverage from Reliance Indemnity Company, and in 2001 Reliance became insolvent. The Fund filed proofs of claim against Reliance with the Louisiana Insurance Guaranty Association (“LIGA”). LIGA denied the claims, asserting that the Fund was an insurer and the excess coverage was reinsurance, thus removing the claims from coverage by LIGA under the terms of governing state statutes. The fund brought suit to establish coverage for all past and future claims.

The trial court granted summary judgment to the Fund. The Louisiana Appellate Court affirmed, citing the terms of applicable workers compensation and insurance guaranty association statutes to support its determination that the excess coverage the Fund obtained was not “reinsurance” as that term is used under applicable statutes and that the Fund is not an “insurer” causing it to become statutorily exempt from coverage through LIGA. The Court also rejected LIGA’s argument that a statutory exclusion of coverage to any self-insured corporation with a net worth above $25,000,000 should apply to the Fund’s member companies in the aggregate. The court found that the member companies were not “affiliates” of one another as the term is used in the statute and thus held that their net worth should not be aggregated for purposes of the statutory exclusion. Louisiana Safety Assoc. of Timbermen – Self Insurers Fund v. Louisiana Ins. Guaranty Assoc., No. 43,615–CA (La. Ct. App. Dec. 3, 2008).

This post written by John Pitblado.

NEW YORK INSURANCE DEPARTMENT PROPOSES CHANGES TO REINSURANCE CREDIT REGULATION

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The New York Insurance Department has proposed a revision to Regulation No. 20 (121 NYCRR 125) – Credit for Reinsurance from Unauthorized Insurers. The Department has published a summary of the proposed amendment, and the Notice of Proposed Rule Making notes that comments will be accepted until 45 days after the publication of the Notice. We have confirmed with the Department that the comment period closes February 9, 2009. The amendment proposes to apply principle-based credit risk management standards to all licensed ceded insurers, and provides an alternative credit for reinsurance ceded to unauthorized reinsurers, which adjusts the credit that the ceding insurer may take on its financial statement based upon the financial strength of the unauthorized assuming reinsurer. The financial strength determination is based upon ratings by Standard & Poor’s, Moody’s Investor Services, Fitch Ratings, A.M. Best Company or any other rating agency recognized by the Securities Valuation Office of the NAIC.

This post written by Rollie Goss.

LEGISLATIVE UPDATE

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The following reinsurance-related legislation was recently proposed in federal and state legislative bodies:

  • On January 6, 2009, Senator John Kerry introduced S. 79, a bill to amend the Social Security Act to establish a federal reinsurance program for catastrophic health care costs proposing, among other things, to establish within the Department of Health and Human Services an office to be known as the “Office of Federal Reinsurance.” The bill was referred to the Committee on Finance.
  • That same day, Representative Ginny Brown-Waite of Florida introduced H.R. 83, to establish a program to provide reinsurance “for state natural catastrophe insurance programs to help the United States better prepare for and protect its citizens against the ravages of natural catastrophes, to encourage and promote mitigation and prevention for, and recovery and rebuilding from such catastrophes, and to better assist in the financial recover from such catastrophes.” The bill was referred to the Committee on Financial Services.
  • A bill has been introduced into the North Dakota Senate to amend and reenact portions of N.D. Code § 26.1-06.1-31, which deals with reductions in amounts recoverable by liquidators from reinsurers.
  • The Montana State Auditor requested House Bill No. 161, which was introduced to the Montana legislature to revise captive insurance laws, authorize the Insurance Commissioner to waive RBC reports for captive risk retention groups, clarify collection of the premium tax, change the calculation of the tax on direct premiums, and expand the scope of laws applicable to captive insurance companies.

This post written by Brian Perryman.

THIRD CIRCUIT AFFIRMS ENFORCEMENT OF ARBITRATION AWARD

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United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union (“United”) brought an action in the Western District of Pennsylvania to enforce an arbitration award directing Neville Chemical Company to reinstate and make whole an employee it had improperly discharged. This appeal followed the District Court’s Orders granting United’s motion for summary judgment and ordering Neville to pay damages including back pay.

The Third Circuit held that because Neville failed to raise the argument of that the employee was physically unable to work during the arbitration, it had waived the physical limitations defense to the enforcement of the arbitration award. The Third Circuit cited its previous decision in United Food and Chemical Workers Union Local 1776 v. Excel Corp., 470 F.3d 143 (3d Cir. 2006) noting that “‘the long-established federal policy of settling disputes by arbitration would be seriously undermined if parties kept available information from the arbitrator and then attempted to use the information as a defense to compliance with an adverse award.’” The Court further noted that the argument had not been timely raised under Pennsylvania law and that the back-pay damages imposed by the District Court did not amount to a second opportunity to receive unemployment compensation. United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union v. Neville Chemical Co., No. 07-3554 (3d. Cir. Oct. 30, 2008).

This post written by John Black.

COURT CONFIRMS REINSURANCE ARBITRATION AWARD, REJECTING NUMEROUS PROCEDURAL CHALLENGES

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When a dispute arose over the allocation and payment of losses under a reinsurance agreement pursuant to which Global International Reinsurance Company agreed to reinsure TIG Insurance Company, the parties took their dispute to arbitration. An arbitrator granted TIG’s motion for partial summary judgment, finding that Global had released its right to audit and dispute certain claims. The dispute arose out of transactions and claims which had been the subject of a prior arbitration and settlement agreement. The parties disagreed as to their current claim audit rights and payment obligations under the reinsurance agreement and the prior settlement agreement. The arbitrator granted partial summary judgment based upon an interpretation of the various agreements and the prior arbitration award, after four hours of oral argument but no evidentiary hearing.

Global sought the vacation of the award, contending that it had been denied a fundamentally fair hearing because the arbitrator had refused to hear evidence, disregarded the standards of summary judgment, and resolved material factual disputes without discovery or an evidentiary hearing, in violation of the standards contained in Section 10(a)(3) of the Federal Arbitration Act. The district court confirmed the award, noting: (1) that the settlement agreement gave the arbitrator the authority to resolve “any dispute” arising from or relating to the settlement agreement and other agreements; (2) that arbitrators have “great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings;” and (3) that a court has very narrow authority to vacate arbitration awards, even if it disagrees with the merits of the arbitrator’s decision, so long as there is a “barely colorable justification for the outcome reached.” The court found that the arbitrator had acted within the scope of the authority delegated by the very broad provision and within the scope of his broad authority to manage the arbitration process. This opinion illustrates the expansive authority that arbitrators have to manage and conclude arbitrations. Global Int’l. Reinsur. Co. v. TIG Insur. Co., Case No. 08-7338 (USDC S.D.N.Y. Jan. 20, 2009).

This post written by Rollie Goss.