Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CONNECTICUT SUPREME COURT DISMISSES APPEAL BY REINSURANCE BROKER ON PROCEDURAL GROUNDS

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Brown and Brown, Inc., an independent insurance and reinsurance broker, brought suit against Connecticut’s Attorney General in an attempt to resist the Attorney General’s subpoena seeking documents relating to an ongoing investigation into certain insurance practices under investigation for violation of the Connecticut Antitrust Act. Brown & Brown filed the action seeking to protect trade secrets and other confidential commercial and financial information. The trial court denied Brown & Brown’s motion for summary judgment, rejecting its claim that Connecticut General Statutes §35-42 allows a party to restrict disclosure of information to any person outside the Attorney General’s office.

Brown & Brown appealed the ruling, and the Attorney General’s office successfully sought transfer of the appeal to Connecticut’s Supreme Court. Finding that the trial court’s ruling denying summary judgment did not constitute a final judgment, the Court dismissed the appeal for lack of appellate jurisdiction, without addressing the merits of the parties’ arguments. Brown & Brown, Inc. v. Blumenthal, SC 17920, — A.2d — (Conn. 2008).

This post written by John Pitblado.

COURT ENFORCES PERSONAL GUARANTEE OF REINSURANCE CONTRACT AGAINST INSURED’S CHAIRMAN AND CEO

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Defendant, Centrix Financial, LLC (“Centrix”), sought default protection insurance (“DPI”) covering its “Portfolio Management Program” – a program it created to protect lenders of sub-prime auto loans which Centrix bundled – against the risk of deficiency loan balances and property damage connected with default repossessions. Having been informed by its prior DPI carrier of non-renewal, Centrix approached the plaintiffs, Everest National Insurance Company and Everest Reinsurance Company (“Everest”) to underwrite the risk. When Everest expressed reservation about reinsurance, Centrix’s Chairman and CEO, co-defendant Robert Sutton, offered, as part of a letter of intent memorialized between the parties in an integrated contract, to personally guarantee a reinsurance contract issued by Founders Insurance Company, Ltd. (“Founders”), a Bermuda-based company owned by Sutton.

Everest and Founders ultimately proceeded to arbitration as a result of losses, and the arbitration panel ordered Founders to post security in the amount of $70,000,000. Founders failed to comply with the order, and Everest thereafter looked to Sutton to satisfy his obligation to post the security. Sutton resisted, claiming the guarantee obligation was unenforceable as it was fraudulently induced and made under economic duress. Everest sued in federal court and moved for summary judgment. The court rejected Sutton’s defenses, finding that the economic duress he faced in the course of negotiating the various agreements with Everest was not of Everest’s making, and that Sutton’s fraudulent inducement claims, even if true, were barred under the parol evidence rule as the claims were contradicted by the terms of the integrated contract entered into by the parties. The court granted summary judgment in favor of Everest. Everest National Ins. Co. v. Sutton, Case No. 07-722 (USDC D.N.J., Aug. 13, 2008).

This post written by John Pitblado.

SIXTH CIRCUIT DISCUSSES WHETHER COURTS OR ARBITRATORS SHOULD DETERMINE CERTAIN ISSUES

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In 2005, Chronimed purchased DiCello’s retail pharmacy business. The purchase agreement contained an additional purchase price payment based on the business’ 2006 earnings before interest, taxes, depreciation and amortization. The agreement provided that if the parties disagreed as to the calculation, accounting firm KPMG would arbitrate the dispute. A dispute arose as to the calculation, and DiCello invoked the arbitration clause, alleging that the business underperformed due to Chronimed’s management practices. Chronimed disputed DiCello’s position, contending that DiCello had failed to contest the calculation in sufficient detail to invoke the arbitration clause. DiCello sued, and Chronimed moved to compel arbitration. The district court held that Chronimed had waived the right to arbitrate by its pre-litigation conduct.

On appeal, the issues revolved around whether the court or the arbitrator should determine certain issues, with guidance drawn from the Supreme Court's decision of Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). Not all courts have agreed as to the implementation of Howsam. The Sixth Circuit affirmed the holding that the court, rather than the arbitrator, should determine whether the dispute was within the arbitration clause, and agreed that the language of the broad arbitration clause encompassed the dispute. The Court further held that whether Chronimed failed to satisfy a contractual precondition to arbitration relating to the required documentation of the tax calculation was an issue for the arbitrator to decide. Finally, the Court held that the issue of whether Chronimed’s pre-litigation conduct waived the right to arbitrate was an issue for the court, not the arbitrator, and that the conduct here was not so “completely inconsistent” with the later arbitration demand as to constitute a waiver. The Court found that Chronimed’s conduct could be interpreted as a disagreement with DiCello’s position rather than a repudiation of arbitration as a process for resolving the dispute. JPD, Inc., et al. v. Chronimed Holdings, Inc., No. 07-4427 (6th Cir. Aug. 22 2008).

This post written by Dan Crisp.

MARSH REACHES SETTLEMENT AGREEMENT FOR CIVIL CLASS ACTION REGARIDNG CONTINGENT COMMISSIONS

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The Marsh & McLennan companies have reached a settlement agreement in a class action relating to allegations of improper “contingent commissions.” The proposed settlement is described in a Memorandum of Law in support of the preliminary approval of the proposed settlement. The court has entered an Order of preliminary approval, setting a a hearing on the final approval of the proposed settlement on December 15, 2008. The proposed settlement provides for a fund in the amount of $69 million, which will be distributed to class members. Marsh may use up to $5 million of the fund to resolve and settle claims of state officials representing policyholders who are potential members of the settlement class. In addition, Marsh may use up to $7 million of the fund to resolve and settle claims of individual plaintiffs in pending actions relating to the same matters that are at issue in the class action. Class counsel will apply to the court for fees and expenses of $14.5 million. In re Insurance Brokerage Antitrust Litigation, Case No. MDL 1663 (USDC D.N.J. Aug. 21, 2008).

This post written by Rollie Goss.

BERMUDA ADOPTS ENHANCED SOLVENCY AND DISCLOSURE RULES AND PROVIDES FOR SPECIAL PURPOSE VEHICLES

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With the adoption of the Insurance Investment Act of 2008, Bermuda has adopted risk-based capital adequacy standards for “high impact insurers” and instituted a structure which will be equivalent to those in Europe's Solvency II Directive. The requirements include enhanced financial statement disclosures for Bermuda's Class 4 insurers which comply with Generally Accepted Accounting Principles (GAAP), re-classification of the Class 3 insurance sector, with sub-categories based upon risk profiles, and a new category of Special Purpose Insurer, which is focused on fully collateralized special purpose vehicles that are established to conduct certain transactions, especially those related to asset-backed securitizations. One goal of this new classification is to make it less costly for SPVs to be established in Bermuda. A press release issued by the Bermuda Monetary Authority briefly summarizes the Act.

This post written by Rollie Goss.