Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FURTHER RULINGS IN FINITE REINSURANCE CRIMINAL ACTION

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AIG’s former vice-president of reinsurance has been sentenced in the criminal finite reinsurance prosecution to four years imprisonment, and fined $200,000. The court also has entered a Final Order of Forfeiture, in the amount of $5 million jointly and severally for all defendants. Gen Re has paid the $5 million amount in full. Perhaps more significantly, defendant Ferguson has appealed his conviction, and the government has appealed his sentence. The appeal means that the issue of the criminalization of the underlying disputed reinsurance contracting will be addressed by the Second Circuit.

This post written by Rollie Goss.

NAIC EXECUTIVE COMMITTEE REJECTS WORKING GROUP’S PROPOSALS

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On Tuesday, January 27, 2009, this author attended the NAIC Capital and Surplus Relief Working Group public hearing in Washington, D.C. The Working Group met to discuss its draft recommendations on nine insurance industry proposals offered by the ACLI designed to provide capital and surplus relief on life insurers’ December 31, 2008 statutory financial statements. One proposal offered by ACLI requested that regulators allow insurers to utilize the 2001 CSO Preferred Mortality Tables for contracts based on the 2001 CSO Mortality Table and issued prior to the January 1, 2007 effective date on which the Mortality Tables were set to become applicable. The Technical Group assigned to consider this proposal expressed concern that some companies may already be addressing the overly conservative reserves through a questionable reinsurance accounting practice. The Technical Group recommended that Insurance Commissioners consider requiring companies to demonstrate that they have not used such reinsurance accounting practices before allowing the company to utilize the new Mortality Tables. Another proposal related to collateral for reinsurance transactions. After spirited discussion among regulators, industry representatives, and consumer advocates, the Working Group formally approved each of its prior draft recommendations and forwarded its recommendations to the NAIC Plenary Body.

On Thursday, January 29, the NAIC Executive Committee held a teleconference vote on the proposals forwarded by the Capital and Surplus Relief Working Group. The Executive Committee, in a near unanimous vote, rejected the Working Group’s recommendations noting that neither the ACLI nor any insurance company provided sufficient information to justify enacting these proposals on an emergency basis.

The Executive Committee concluded that NAIC Working and Technical groups should continue to provide feedback and guidance during the current financial crisis. The Committee commented that companies should continue to work with their state regulators to maintain sufficient capital, and that the NAIC was open to considering these issues again in the future. Read the NAIC's release on the action..

This post written by John Black.

MANIFEST DISREGARD OF LAW OPINION POSSIBLY EN ROUTE TO SUPREME COURT

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Last October, the Supreme Court vacated the Ninth Circuit's opinion in Comedy Club, Inc. v. Improv West Associates, and remanded the case for further consideration in light of Hall Street Associates. In the vacated opinion, the Ninth Circuit had vacated an arbitration award, finding that the arbitrator had acted in manifest disregard of law. On remand, the Appellee filed an initial brief, the Appellant filed a responsive brief, and the Appellee filed a reply brief. The case is now fully briefed. As of this writing, oral argument had not been scheduled. We will continue to monitor this case, which may provide authoritative guidance as to whether the manifest disregard of law doctrine survived the Supreme Court's Hall Street Associates opinion.

This post written by Rollie Goss.

ARBITRATION AWARDS CONFIRMED DESPITE SOME CREATIVE CHALLENGES

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Courts have continued to confirm arbitration awards in the face of a variety of challenges:

  • Manifest disregard of law: Grain v. Trinity Health, No. 08-1410 (6th Cir. Dec. 24, 2008) (manifest disregard is not a basis for modifying an award, only potentially for vacating an award – appellant sought a doubling of the award amount based upon manifest disregard and evident miscalculation); Martin Marietta Materials, Inc. v. Bank of Oklahoma, No. 07-6422 (6th Cir. Dec. 17, 2008) (arbitrator not exceed his powers; no manifest disregard of law demonstrated – the Court assumed that the doctrine survived Hall Street Associates, noting a conflict on that issue between the First and Second Circuits); Donato-Young v. Wachovia Securities, LLC, Case No. 08-1557 (USDC S.D. Cal. Jan. 5, 2009) (not in manifest disregard of law – not mention Hall Street).
  • Arbitrators acted in excess of their authority: This basic for vacating an award seems often to be a guise for a disagreement with the merits of the arbitration decision. Donato-Young (cannot show that the arbitration award was in excess of authority because the award was not reasoned); Martin Marietta; Associated Int’l. Insur. Co. v. Montenegro Re, Ltd., No. B203064 (Cal. Ct. App. Dec. 22, 2008) (interpretation of reinsurance agreement); Dealer Computer Services, Inc. v. Hammonasset Ford Lincoln-Mercury, Inc., Case No. 08-1865 (USDC S.D. Tex. Dec. 22, 2008); Vandenavond v. i2Technologies, Inc., Case No. 08-1000 (USDC N.D. Tex. Dec. 19, 2008) (permissible for arbitrator to decide breach of contract claim on provision of contract other than those argued by parties).
  • Doctrine of functus officio: In a case interpreting American Arbitration Association Rule 47, which governs modification of a final award, the First Circuit reversed a decision of a district judge which adopted the recommendation of a magistrate judge that an award that purported to “clarify” an earlier award be vacated, on the basis that the arbitrator did not retain authority to modify the substance of the prior award. The Court of Appeal held that there was a “latent ambiguity” in the prior award, and that the later award properly “clarified” the prior award. Eastern Seaboard Constr. Co. v. Gray Constr., Inc., No. 08-1679 (1st Cir. Dec. 31, 2008) (see May 1, 2008 post to this blog relating to the magistrate judge’s recommendation).
  • Procedural claims: Scott v. Amaregal, Inc., Case No. 08-219 (USDC N.D. Tex. Jan. 5, 2009) (not have to address each claim specifically if state that there is no liability); AAMCO Transmissions, Inc. v. Rizvi, Case No. 08-151 (USDC ED. Pa. Dec. 17, 2008) (no notice problem where arbitration notice sent to business and one partner hid the notice from the other); New Jersey Regional Council of Carpenters v. Maximum Constr., LLC, Case No. 08-2942 (USDC D.N.J. Dec. 5, 2008) (absence of counsel for one party from a second arbitration hearing not a basis for vacating an award) (opinion and separate Order).

This post written by Rollie Goss.

SECURITIES FRAUD CLASS ACTION AGAINST MBIA NOT OVER YET?

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In a March 8, 2007 post, we covered the district court dismissal of a securities fraud class action against MBIA as time-barred. The plaintiffs alleged that MBIA’s financial statements were materially misstated because MBIA had booked proceeds from a series of retroactive reinsurance agreements as income when these agreements were actually loans. The district court determined that the plaintiffs were on inquiry notice of the alleged fraud for more than two years prior to commencing the action and granted MBIA’s motion to dismiss. On appeal, the Second Circuit affirmed the dismissal of the case as time-barred, interpreted the dismissal to be without prejudice, and remanded the matter to the district court. Prior to the district court’s order of dismissal, the plaintiffs had sought leave to file an amended complaint. The circuit court’s ruling allows the plaintiffs to file their amended complaint, which likely will have to allege diversity jurisdiction and state law claims with a longer statute of limitation period. City of Pontiac General Employees’ Retirement System v. MBIA, Inc., Case No. 07-1117-cv (2d Cir. Nov. 12, 2008).

This post written by Dan Crisp.