Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

COURT TO REINSURER: “FOLLOW THE FORTUNES”

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“The Corporation shall reimburse the Reinsured or its legal representative promptly for loss against which indemnity is herein provided.” Is this a “follow the fortunes” clause in a reinsurance treaty? Undoubtedly, a federal district court answered on Mass Mutual’s (the cedent) motion for summary judgment against its reinsurer, Employers Reinsurance Corporation. “Nowhere in the Treaty does it state that ERC may question claims once those losses are incurred and paid.” The fact that ERC had a right of joint participation in adjusting the claims did not undermine this conclusion. Mass Mutual retained the right to be the final decision maker in all determinations. The court found additional support in the parties’ thirteen-year course of conduct, inasmuch as during most of that period ERC “consistently and continually” paid out claims without questioning Mass Mutual’s handling of those claims. The court found for Mass Mutual again on the question of whether ERC breached the treaty’s offset provision by withholding disputed reimbursements to Mass Mutual. The provision stated that the parties could offset loss or claim expenses due from one to the other; disputed sums did not count.

As a consolation prize, the court dismissed Mass Mutual’s counterclaim against ERC for violations of the Connecticut Unfair Trade Practices Act: “A simple breach of contract claim is not in and of itself a violation of CUTPA.” The court previously had dismissed other claims that Mass Mutual had asserted, including a claim for breach of fiduciary duty. (See April 24, 2007 post to this blog.) The court essentially brought the dispute down to a simple breach of contract dispute, which was determined based upon the follow the fortunes doctrine. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Company , Case No. 06-0188 (USDC W.D. Mo. Aug. 19, 2008).

This post written by Brian Perryman.

SPECIAL FOCUS: NAIC, FLORIDA AND NEW YORK REINSURANCE COLLATERAL PROPOSAL UPDATE

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The NAIC's Reinsurance Regulatory Modernization Framework is now the subject of an redlined exposure draft, with a short comment period open until September 5, 2008. Florida and New York also have reinsurance collateral-related proposals pending. Carlton Fields partner Anthony Cicchetti summarizes these proposals in a Special Focus feature. Read the article.

This post written by Rollie Goss.

EIGHTH CIRCUIT HOLDS THAT ACTION AGAINST FCIC SHOULD HAVE BEEN DISMISSED

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In 2001, American Growers Insurance Company (“Insurer”) filed an action in Iowa district court against Federal Crop Insurance Corporation (“FCIC”) alleging that the FCIC erred under 7 U.S.C. § 1508(j)(3) by adding prevented planting coverage to basic federal crop insurance policies without increasing the premium rate that the insurance company could charge. The district court granted summary judgment in favor of the FCIC for crop year 1996 and in favor of Insurer for crop year 1997, awarding it over $950,000 in damages. Both sides appealed.

The Eighth Circuit found that the indemnification requirement of 7 U.S.C. § 1508(j)(3), under which insurance providers that provide federal crop insurance may seek indemnification due to errors or omissions on the part of the FCIC, was intended to apply only where a crop insurer had been sued by a producer to recover on a claim for loss and not for errors in calculating premiums. Therefore the insurer did not have a cause of action and its claim should have been dismissed by the district court. American Growers Insurance was declared insolvent in 2005 and liquidated. Am. Growers Ins. Co. v. Federal Crop Ins. Corp., No. 07-1655, 07-1749 (8th Cir. July 15, 2008).

This post written by Lynn Hawkins.

UK COURT ADDRESSES INTERPRETATION OF REINSURANCE SLIP

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In Mopani Copper Mines PLC v. Millenium Underwriting Limited [2008] EWHC 1331 (Comm. June 16, 2008), the UK Commercial Court determined that under appropriate circumstances it could consider words deleted from a reinsurance slip during the negotiation of its terms in interpreting the scope of coverage ultimately agreed to. The court held that it also could consider the circumstances surrounding the making of the contract, the intention of the parties to the contract, and the terms of a prior agreement, but that it would not consider the content of prior negotiations, communications between the insured and its broker which were not communicated to the reinsurers, and the subjective views of the parties as to what they thought they had achieved. This opinion contains an interesting discussion of the factors considered by English courts in the interpretation of reinsurance slips, and should be read by any of our readers who face such issues, or who enter into slips which may be subject to interpretation under English legal principles.

This post written by Rollie Goss.