Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

U.K. COURT CONSTRUES PARTIES’ INTENT IN CREATING REINSURANCE CONTRACT AGAINST REINSURER

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Allianz Insurance Company of Egypt (“Allianz”) sued its reinsurer, Aigaion Insurance Company S.A. (“Aigaion”), for US $675,000 arising from the constructive loss of the oceangoing vessel “Ocean Dirk,” one of several scheduled ships under the reinsurance contract. Aigaion denied liability for the claim on the theory that the parties never arrived at consensus over the terms of the reinsurance contract, and thus it was null and void ab initio.

Allianz countered with evidence of communications by and between Allianz, Aigaion, and the intermediary broker who placed the risk, Chedid & Associates Ltd. (“Chedid”). The court held that these communications, consisting mainly of e-mail correspondence, indicated that the parties clearly intended for Aigaion to be bound as Allianz’s reinsurer for certain risks covered by Allianz’s underlying insurance. Aigaion took the position that the communications reflected a continued intent on the part of both parties to negotiate certain terms of the contract, even after the reinsurance contract had issued, but that the parties failed to reach consensus sufficient to create a contract. The court found in Allianz’s favor, noting that the communications reflected a resort to certain shorthand understood in the industry, and that Aigaion clearly communicated its intent to be bound by those terms with the same understanding as had Allianz, at the latest by a date certain which may have post-dated the contract, but nonetheless pre-dated the loss. The Court entered judgment in favor of Allianz for the net premium due. Allianz Insurance Company of Egypt v. Aigaion Insurance Company S.A. [2008] EWHC 1127 (Queen’s Bench Div. Comm. June 2, 2008).

This post written by John Pitblado.

STATE LEGISLATIVE/REGULATORY UPDATE

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The following is an update on what has recently transpired in the state legislatures and insurance departments relating to reinsurance:

  • On October 2, 2008, the New Jersey Consumer Catastrophe Preparedness and Protection Act was introduced in the state Senate (Bill No. 2089). This Act would establish the New Jersey Catastrophe Fund, and cites instability in global reinsurance markets leading to an increase in reinsurance costs as one of the reasons for creating this fund.

  • The New York Insurance Department issued a circular letter declaring the department’s position and expectations on the topic of contract certainty in all reinsurance contracts. Circular Letter No. 20 (2008).

  • On the topic of assumption reinsurance, the New York Insurance Department issued an Office of General Counsel opinion stating that the insured’s consent must be obtained to effectuate a transfer of the contract and that state insurance law does not require foreign insurers’ assumption reinsurance transactions (save for life insurers) to be filed with the state insurance department. OGC Op. No. 08-07015.

  • Florida implemented a paragraph within their state statutes that permits the commissioner to allow credit for reinsurance without full collateral for transactions involving assuming insurers that do not meet statutory requirements. 69O-144.007 (effective 10/29/2008)

This post written by Dan Crisp.

SECOND CIRCUIT HOLDS THAT MANIFEST DISREGARD OF LAW DOCTRINE SURVIVES HALL STREET ASSOCIATES

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The Second Circuit Court of Appeals has held that the manifest disregard of law standard is a judicial gloss on the specific grounds for vacature of arbitration awards enumerated in section 10 of the Federal Arbitration Act, and remains a valid ground for vacating arbitration awards after the Supreme Court's Hall Street Associates decision. The issue in this case was whether class arbitration was appropriate under an arbitration agreement which was silent on that issue. It was undisputed that this was a question for the arbitrator to initially decide, and that it was a question of contract interpretation. The arbitrator allowed class arbitration, but the District Court found that decision to be in manifest disregard of law. The Second Circuit, noting the very narrow scope of the manifest disregard of law doctrine, disagreed, and remanded with directions that the District Court deny the request to vacate the arbitration award. Stolt-Nielsen SA v. AnimalFeeds Int'l. Corp., No. 06-3474 (2d Cir. Nov. 4, 2008). This decision further develops the conflict in court decisions as to whether the manifest disregard of law doctrine remains viable.

This post written by Rollie Goss.