Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UPDATE: COURT SHOOTS DOWN ERC TWICE MORE

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On September 2, 2008, we reported that the District Court for the Western District of Missouri granted summary judgment against Employers Reinsurance Corporation, finding that their contract with Mass Mutual did, in fact, contain a clear “follow the fortunes” clause. ERC subsequently moved for the court to reconsider its ruling, or in the alternative, to certify the “follow the fortunes” issue for immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

The court ruled that ERC’s motion for reconsideration amounted to little more than a reassertion of its arguments on summary judgment. The court interpreted ERC’s motion as arguing that the court committed a manifest error of law simply because the court disagreed with ERC’s arguments. Noting that Fed. R. Civ. P. 60(b) did not list “manifest error of law” as a reason sufficient for reconsideration, the court denied ERC’s motion.

The court additionally denied ERC’s motion to certify the “follow the fortunes” issue for immediate interlocutory appeal, finding that it was an issue of interpretation of the contract, and not a pure question of law, which was required for an interlocutory appeal certification. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Co., Case No. 06-0188 (USDC W.D. Mo. Oct 23, 2008).

This post written by John Black.

UPDATE: COURT ENTERS DEFAULT JUDGMENT AWARDING COMPENSATORY DAMAGES PLUS INTEREST

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On December 20, 2007, we reported that claims arising out of allegedly purposeful undercapitalization of a captive reinsurer survived a motion to dismiss. Since that time, the plaintiff (rehabilitator for Frontier Insurance Co.) moved for entry of a declaratory judgment and an award of compensatory damages plus prejudgment interest by default.

The Southern District of California concluded that plaintiff met the standards for entry of a default judgment, adequately alleged both an enforceable contract and a breach of contract by ASIL (the captive reinsurer), and that the default was not due to excusable neglect. ASIL indicated to Frontier that it would “allow judgment to be entered by default and pay all the available funds to Frontier.” The court granted the motion for entry of default and entered a judgment finding ASIL liable to plaintiff for $577,966.33 in compensatory damages and $91,511.33 in prejudgment interest (calculated at 10% per annum). Mills v. Ramona Tire, Inc., Case No. 07-0052 (USDC S.D. Cal., Sept. 23, 2008).

This post written by John Black.

INSURANCE UNDERWRITER LACKED THIRD-PARTY BENEFICIARY STATUS UNDER REINSURANCE AGREEMENT; COUNTERCLAIMS DISMISSED

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TIG Insurance entered into an agreement with Titan Underwriting for Titan to act as managing general underwriter, soliciting and procuring stop-loss health and life insurance insureds for policies to be issued by TIG. Titan was also obligated to obtain reinsurance to cover the stop-loss policies issued by TIG. Chubb Re reinsured TIG, and TIG received a percentage of the ceding commission of the gross premiums ceded to the reinsurer, a portion of which Titan received as compensation. Subsequently, TIG terminated the stop-loss program and sued Titan for, among other things, breach of contract and fraud. TIG also sent a letter to state insurance commissioners requesting information that Titan refused to produce to TIG. In response, Titan counterclaimed for breach of the Chubb reinsurance agreement, tortious interference with a contract, tortious interference with its business relationships with policyholders, defamation and negligence. The trial court dismissed each of the counterclaims and the court of appeals affirmed the dismissal.

The appellate court found that Titan, which was not a party to the reinsurance agreement, could not sue in the capacity of a third-party beneficiary. Although Titan was entitled to receive a percentage of the ceding commission, the contract contained a provision disclaiming any intent to create a third-party beneficiary. The tortious interference with a contract claim failed because it was legally impossible for TIG to interfere with its own contract (the reinsurance agreement). The tortious interference with business relationships claim failed because Titan failed to establish that it had existing relationships with the policyholders, whose relationships were insurance policies with TIG. The defamation claim, which was based on TIG’s letter to the insurance commissioners, also failed since the letter was not alleged to contain statements that could be “reasonably construed to disgrace or injure Titan’s reputation in the community or subject Titan to public ridicule and contempt.” Finally, the negligence claim failed since Titan failed to establish, as it was required to do, that TIG owed Titan a duty of care. TIG Insurance Co. v. Titan Underwriting Managers, LLC, No. M2007-01977-COA-R3-CV (Tenn. Ct. App. Nov. 7, 2008).

This post written by Brian Perryman.

ARBITRATION AWARD CONFIRMATION DECISIONS

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Courts continue to confirm arbitration awards at a very high rate:

  • In this reinsurance matter, the court determined that whether to award post-judgment interest on an award, and at what rate, was for the court, not an arbitration panel, to decide, even if the issue was addressed in the reinsurance agreement., The court determined to award post-judgment interest at the statutory rate, since the contract did not clearly displace that rate, and to award attorneys’ fees as provided for in the agreement. Newmont U.S.A. Limited v. Ins. Co. of N. A., Case No. 06-1178 (USDC D. Col. Sept. 19, 2008).
  • The court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Rothstein, Case No. 08-373 (USDC S.D. N.Y. Sept. 29, 2008) confirmed an award, rejecting a contention that the award was in manifest disregard of law, without any discussion of the Hall Street Associates opinion.
  • The court confirmed an award under a collective bargaining agreement in Bemis Co., Inc. v. Graphic Communication Union Local No. 735-S, Case No. 07-1307 (USDC M.D. Pa. Sept. 15, 2008), finding that the arbitrator had reasonably interpreted the agreement with no arbitrator bias.
  • In The Householder Group v. Caughran, Case No. 07-316 (USDC E.D. Tex. Sept. 17, 2008), the court limited its consideration of a request to vacate an award to the statutory factors in the Federal Arbitration Act, pursuant to Hall Street Associates, and confirmed the award, in the face of what amounted to evidentiary and procedural challenges, some of which had not even been raised during the arbitration hearing.
  • A Magistrate Judge recommended confirmation of an award in Int’l. Brotherhood of Elec. Workers v. Firstenergy Generation Corp., Case No. 07-304 (USDC W.D. Pa. Aug. 22, 2008), on the basis that the award drew its essence from the agreement, which the arbitrator interpreted. The district judge overruled objections to the recommendation, confirming the award.
  • An award against an individual in his personal capacity, who signed an agreement in a representative capacity, was vacated in Millmaker v. Bruso, Case No. 07-3837 (USDC S.D. Tex. Oct. 9, 2008). The court noted that Hall Street Associates pout the continued viability of the manifest disregard of law doctrine in doubt, but that there had been no manifest disregard in this case. The court also upheld an award of attorneys’ fees pursuant to the terms of the contract.

This post written by Rollie Goss.

REINSURED’S CONSTITUTIONAL TAKINGS CLAIM AGAINST UNITED STATES DISMISSED FOR FAILURE TO ALLEGE LOSS OF ACTUAL “PROPERTY”

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We previously posted on March 17, 2008 about a bankruptcy judgment in favor of a reinsured, Acceptance Insurance Companies, Inc. (“Acceptance”), which sought to be excused from the payment of $9 million in premium owed to its reinsurer for the remaining term of a five year contract because it had ceased writing the underlying crop insurance which was the subject of the reinsurance contract. As we posted, a bankruptcy appellate panel of the US Court of Appeals for the Eighth Circuit reversed the judgment, finding that Acceptance’s failure to continue writing the underlying risk did not excuse it from its premium obligation to the reinsurer.

Separately, Acceptance had also filed suit in the Federal Court of Claims, seeking money damages against the United States on the theory that it was forced to stop writing its crop insurance business, which had become worthless due to the unwarranted regulatory action of the U.S. Department of Agriculture Risk Management Agency (“RMA”). In particular, Acceptance alleged that an RMA Administrator improperly rejected a deal requiring his regulatory approval, by which Acceptance had proposed to sell its crop insurance business to an interested third party. Acceptance alleged that the subsequent failure of the deal caused the loss of all value of its crop insurance business, which loss constituted an unwarranted governmental taking of its property under the Fifth Amendment. The United States moved to dismiss Acceptance’s claim for failure to state a legally cognizable cause of action. The court granted the government’s motion, distinguishing the taking of “property” from government action which merely has the effect of interfering with or frustrating the performance of a contract. The court found that, despite regulatory action which allegedly rendered the property worthless, Acceptance nevertheless retained possession of the business, and thus lost no “property” as that term is construed under applicable Fifth Amendment takings jurisprudence. Acceptance Insurance Companies, Inc. v. United States, No. 03-2794 (Fed. Cl. Sept. 25, 2008).

This post written by John Pitblado.