Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

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.