Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THE BENFIELD GROUP FORECASTS A HARDENING IN THE GLOBAL REINSURANCE MARKET

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The Benfield Group’s October 2008 research report entitled “Global Reinsurance: Capital Consequences – Billion Dollar Question” analyzes the impact of the 2008 hurricane season, the credit crisis, and the financial concerns over XL Capital and AIG on the global reinsurance market. The report states that reinsurers were well prepared for the hurricane season, and, while Hurricane Ike will likely end up as being one of the five most costly insured catastrophe losses, Ike will not be a market changing event by itself. The report then predicts that the 2008 investment returns for most reinsurers will be negative due to the effects of the credit crisis despite the majority of assets being invested in high-quality, fixed-income securities. Finally, the report lists concerns with XL Capital’s recent issues with capital adequacy and investment losses and with AIG’s issues, which include the possibilities of S&P downgrading Transatlantic Holdings (of which AIG owns 59%) and business formerly ceded to AIG being placed in the open market. The predicted result of the combination of these factors is that prices in the global reinsurance market will increase in 2009.

This post written by Dan Crisp.

SECOND CIRCUIT VACATES DECISION GRANTING THE DISMISSAL OF CONTINGENT COMMISSION CLASS ACTION

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On October 14, 2004, the Office of the New York State Attorney General filed a lawsuit against Marsh, Inc. for the practice of accepting contingent commissions and cited a number of insurers, including The Hartford, in the complaint. The following day, Appellant Staehr filed his complaint against The Hartford on behalf of a putative class of shareholders. Staehr’s complaint alleged that shareholders were misled into investing in The Hartford based on the strength of its business, which was in part due to paying contingent commissions to brokers, which The Hartford failed to disclose. The district court found that the Plaintiffs’ claims were time-barred by the Sarbanes-Oxley two-year statute of limitations based on publicly available information that placed the Plaintiffs on inquiry notice in July of 2001.

On appeal, the main issue to be decided was whether the publicly available facts amounted to a “storm warning,” which triggered a duty to inquire and started the running of the limitation period. For a duty of inquiry to exist, the facts must “relate directly to the misrepresentations and omissions the Plaintiffs later allege in their action against the defendants,” analyzed under an objective standard. The Hartford contended that a duty to inquire arose based upon media reports, regulatory filings, and state court complaints. The circuit court determined that the media reports would not put an ordinary investor on notice because the reports primarily contained industry information, not information specific to The Hartford, the regulatory filings were not specific enough with respect to contingent commissions, and an unpublicized lawsuit containing similar allegations that was filed against subsidiaries of The Hartford in a California state court would not put an ordinary investor on notice. The Second Circuit vacated the decision granting the motion of dismiss as time-barred and remanded the case to the district court. Staehr v. The Hartford Financial Services Group, Inc., No. 06-3877-cv (2d Cir. Aug. 18, 2007).

This post written by Dan Crisp.

ARBITRATION AWARD ALLOWED TO BE FILED UNDER TEMPORARY SEAL

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A group of reinsurers successfully moved to file under temporary seal a final arbitration award and motion to dismiss for lack of subject matter jurisdiction in an action petitioning for confirmation of the arbitration award. The Respondent moved to dismiss, contending that the jurisdictional amount in controversy requirement was not satisfied, and sought to file the award under seal in support of its motion to dismiss. All parties had expressed the concern that filing the award as a matter of the public record would violate the arbitration panel’s confidentiality order. The court permitted the Respondent to “temporarily file” its motion to dismiss and the award under seal, pending a determination of the motion to dismiss. Follow the links to view the petition to confirm the arbitration award, the memorandum of law supporting the motion to file under seal, and the court’s order. American Bankers Insurance Co. of Florida v. National Casualty Co., Case No. 08-13522 (USDC E.D. Mich. Oct. 10, 2008).

This post written by Brian Perryman.

JUDICIAL REVIEW OF ARBITRATION AWARD IN POTENTIAL CLASS ARBITRATION DENIED AS UNRIPE

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Dealer Computer demanded arbitration of a contract dispute, and sought to arbitrate on a class basis. The arbitration panel issued a “Clause Construction Award,” which permitted the matter to proceed on a class basis. Respondent, DCS, moved to vacate the award as being in excess of the powers of the panel and in manifest disregard of law. The district court denied the motion, and DCS appealed. Rather than reach the merits of the appeal, the appellate court vacated the district court’s order and remanded with instructions to dismiss for lack of jurisdiction on ripeness grounds. The court determined that, because the attempt at class certification could ultimately fail, the potential harm to plaintiff might never occur. Moreover, even if a class were certified, plaintiff could still obtain judicial review of the certification decision through an interlocutory procedure permitted by the arbitration rules (the AAA Supplementary Rules for Class Arbitrations). Although it thus did not reach the merits, in what appears to be dicta, the Sixth Circuit stated in a footnote that a court “may also vacate an award on non-statutory grounds if the arbitration panel demonstrates a ‘manifest disregard of the law,’” citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), but also citing Hall Street Associates v. Mattel, Inc., 128 S. Ct. 1396 (2008), as contrary authority. Dealer Computer Services, Inc. v. Dub Herring Ford, Case No. 07-1819 (6th Cir. Nov. 18, 2008).

This post written by Brian Perryman.

COURT CONFIRMS ARBITRATION AWARD, BUT REVERSES PANEL’S DECISION TO REFUSE TO DISBAND

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KX Reinsurance Company (“KX”) arbitrated certain disputes with North Star Reinsurance Corporation (“North Star”) and General Reinsurance Company (“Gen Re”) (North Star and Gen Re had each initiated separate arbitral proceedings against KX, but all parties agreed to consolidate the proceedings as they involved interrelated issues). The arbitral panel ruled against KX on North Star’s and Gen Re’s contract claims, and awarded North Star and Gen Re interest and attorneys fees pursuant to the parties’ respective contracts. The Panel ruled in KX’s favor on North Star’s and Gen Re’s bad faith claims.

During the course of the proceedings, North Star and Gen Re also sought an interim order requiring KX to post security in the form of letters of credit pertaining to certain other potential future contract disputes. KX argued that letters of credit pertaining to potential future claims were beyond the scope of the arbitral submission. North Star and Gen Re argued that their respective submissions broadly included future potential claims. The panel ruled against KX and issued the interim order, which it later incorporated into the final award. It also included in the award an explicit retention of jurisdiction over potential future disputes. KX thereafter sought to confirm the award in the district court, except for that aspect of the final award which purported to allow the panel to retain jurisdiction over potential future disputes under the parties’ contracts, which it sought to vacate.

The district court ruled in KX’s favor, confirming the undisputed aspects of the final award, and vacating the panel’s decision to retain jurisdiction insofar as it exceeded the scope of the submission and was violative of KX’s right under its contracts with North Star and Gen Re to select an arbitrator of its choosing pertaining to any future disputes under the contracts. The Court noted that any contrary interpretation of that contractual right would create arbitral panels with unlimited jurisdiction over the course of the parties’ future contractual relations, a result not supported by the public policy underlying the Federal Arbitration Act. KX Reinsurance Co. v. North Star Reinsurance Corp., Case No. 08-7807 (USDC S.D.N.Y. Nov. 14, 2008).

This post written by John Pitblado.