Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

COURTS CONTINUE CONFIRMATION OF ARBITRATION AWARDS

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Since our last post on arbitration award confirmation/vacation, eight opinions of some note have been entered, all of which confirmed or declined to vacate arbitration awards. Many parties challenging awards continue to argue that they are in manifest disregard of law. The courts issuing the opinions reported in this post were reluctant to address the issue of whether the doctrine is viable after Hall Street Associates, and instead reviewed the awards and found that they were not in manifest disregard of law.

This post written by Rollie Goss.

CONVICTED FORMER EXECUTIVE OF GEN RE SENTENCED TO TWO YEARS IN PRISON IN FINITE REINSURANCE PROSECUTION

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The Court hearing the criminal finite reinsurance case reported on previously has sentenced a former Gen Re executive to 2 years in prison, followed by 2 years of supervised probation, and a $200,000 fine. This sentence is substantially below federal sentencing guidelines. The Court had entered a ruling on loss calculation, victim enhancement and restitution, finding that 36 levels of enhancement are appropriate under federal sentencing guidelines, but not ordering restitution, despite finding that more than 250 investors had sustained losses aggregating $544-597 million. A sentence imposed in accordance with such a finding might be a life sentence for many, if not all, of the convicted executives. The convicted executives have submitted Supplemental Sentencing memoranda. The supplemental sentencing memorandum submitted by the recently sentenced defendant may be read here.

This post written by Rollie Goss.