Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CONNECTICUT AND MAINE ISSUE STATE REGULATORY PRONOUNCEMENTS

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The Connecticut Insurance Department recently issued a Bulletin (Number FS-4AR-08) relating to the 2008 and 2009 financial filing requirements by accredited reinsurers.

The Maine Bureau of Insurance (the “Bureau”) issued a Bulletin (Number 351) addressing the repeal by referendum of Parts D through F of “An Act To Continue Maine's Leadership in Covering the Uninsured” (the “Act”). Part A of the Act established a reinsurance program for individual health insurance, but the Bureau concluded that the reinsurance program and related provisions could not be implemented because the funding provision and its revenue sources were repealed by the referendum and no other sources of funds have been allocated or identified.

This post written by Dan Crisp.

DISTRICT COURT DENIES MOTION TO STAY ARBITRATION PROCEEDINGS IN STATE COURT

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Petitioners brought two Financial Industry Regulatory Authority (“FINRA”) arbitration actions against the Respondents, their former employer and a former supervisor, asserting a multitude of claims. The Respondents filed counterclaims. The FINRA panel consolidated all claims and counterclaims into one action. The panel later granted the Respondents’ motion for summary judgment, dismissed Petitioners’ claims in their entirety, and scheduled subsequent hearings for Respondents’ counterclaims. Petitioners then filed a petition in state court to vacate the panel’s decision, but the court stayed the petition pending final resolution of the action. When the FINRA panel issued the final arbitration award requiring one Petitioner to pay eighty percent of Respondents’ attorney fees and costs incurred, the Petitioners filed an amended petition to vacate the award in state court. Respondents in turn filed a motion to confirm the arbitration award. Days later, Petitioners filed a petition to vacate in the federal court. Petitioners then filed an ex parte motion to stay the Respondents from proceeding in state court pending the federal petition to vacate for manifest disregard of the law.

In support of their motion to stay, Petitioners argued an exception to the Anti-Injunction Act applied that allowed the district court to stay the state court proceedings because a stay was necessary in aid of the jurisdiction of the district court to review the federal petition to vacate. Citing the Supreme Court case of Atlantic Coast Line R.R., the district court explained that the exception does not apply unless such relief is necessary so as to prevent the serious impairment of the federal court’s flexibility and authority to decide the case. The existence of a parallel action in state court does not satisfy the level of impairment necessary to permit injunctive relief under the exception. The district court concluded that the requested injunctive relief was not necessary in aid of its jurisdiction and was prohibited by the Anti-Injunction Act. Holland v. Wachovia Securities, LLC, Case No. 08-1772 (USDC S.D. Cal. December 3, 2008).

This post written by Dan Crisp.

TEXAS COURT OF APPEALS REMANDS REINSURANCE-RELATED DISPUTE WITHOUT OPINION ON THE MERITS DUE TO PERCEIVED ABUSE OF INTERLOCUTORY APPEAL PROCESS

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Clark & Co. was a managing general agent for high risk automobile policies, and serviced the policies pursuant to a General Agency Agreement. A St. Paul affiliate reinsured the risks. Disputes arose with respect to the policies and the GA Agreement, and Clark’s withdrawal of almost a million dollars from a premium trust account. There were a series of amendments to claims and counterclaims, and changes to which affiliates of the parties were named in the lawsuit. In the latest round of these disputes, the trial court struck Clark’s amended claims and severed St. Paul’s counterclaims, for prosecution in a separate case. The Court of Appeal reversed the severance order and remanded with instructions to consolidate the claims once again. The Court found that the severance was in violation of the Texas Rules of Civil Procedure, and was ordered by the trial court for the improper purpose of obtaining an advisory opinion from the Court of Appeals, essentially doing an end run around the Texas requirements for an interlocutory appeal. Clark & Co. v. St. Paul Fire & Marine Ins. Co., No. 05-07-1097 (Tex. Ct. App. Oct. 21, 2008).

This post written by Rollie Goss.

SENATE COMMITTEE CONSIDERING BILL TO DENY DEDUCTIONS FOR CERTAIN REINSURANCE PREMIUMS

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The Committee on Finance of the United States Senate has made available for public comment a draft bill which would amend the Internal Revenue Code to disallow the deduction of excess non-taxed reinsurance premiums paid to affiliates with respect to United States risks. There is no published comment period. The Committee’s staff has prepared a “technical explanation” of the draft, which includes an analysis of the present tax rules for insurance companies and reinsurance as well as an analysis of the proposed changes to the tax code. In an October 8, 2008 post, we profiled a similar bill introduced in the House, H.R. 6969. Opposition to the proposed tax changes has been submitted by the CEA, the European insurance and reinsurance federation.

This post written by Rollie Goss.

PLAINTIFFS MUST ALLEGE CHARGE INFLATION TO HAVE STANDING TO CHALLENGE PRIVATE MORTGAGE REINSURANCE ARRANGEMENT UNDER THE FEDERAL REAL ESTATE SETTLEMENT PROCEDURES ACT

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The named plaintiffs in this putative class action alleged that their private mortgage insurance policies were subject to captive reinsurance arrangements with Balboa Reinsurance. Under this arrangement, it was alleged, the primary insurer ceded a percentage of the mortgage insurance premiums paid by borrowers to Balboa in exchange for assuming a portion of the primary insurer’s risk, but that the risk assumed by Balboa was not commensurate with the premiums it received. Plaintiffs further alleged that these excessive reinsurance premiums were disguised kickbacks paid to Balboa’s parent company, Countrywide, in exchange for Countrywide’s referral of its mortgage business to Balboa. It was claimed that this arrangement violates the federal Real Estate Settlement Procedures Act, which prohibits kickbacks and fee splitting for settlement charges for services rendered in connection with home mortgage loans.

Defendants moved to dismiss, initially arguing the case was subject to the Burford abstention doctrine, which requires that a federal court sitting in equity not interfere with the proceedings or orders of state administrative agencies. This argument was rejected because the plaintiffs sought money damages in addition to equitable relief. Defendants further argued that plaintiffs lacked Article III standing to sue, since the rates they paid were filed with the Pennsylvania Department of Insurance, so plaintiffs paid only the legal rate they could have paid for mortgage insurance. The court noted, however, that plaintiffs contended they had standing to sue for a RESPA violation even if the kickback arrangement had not increased their rates. Although the court recognized “considerable disagreement” among the federal courts on the issue, it ultimately sided with the courts that have held that where a plaintiff has not been overcharged because of any illegal kickback or fee splitting, RESPA’s provisions do not authorize a plaintiff to sue for damages. The case was dismissed for lack of subject matter jurisdiction. The court entered an opinion and a separate order. A notice of appeal to the Third Circuit was filed on October 27, 2008. Alston v. Countrywide Financial Corp., Case No. 07 CV 3508 (USDC E.D. Pa. Sept. 29, 2008).

This post written by Brian Perryman.