Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURTS CONFIRM ARBITRATION AWARDS, RULING ON CLAIMS OF MANIFEST DISREGARD OF LAW

by

Four recent opinions confirmed arbitration awards, in part rejecting claims that the award was in manifest disregard of law. In three of the cases, there was no discussion of the impact of the Supreme Court’s Hall Street Associates opinion on the manifest disregard of law doctrine.

  • A district court has confirmed an arbitration award which adjudicated claims relating to underwriting fees allegedly owed in connection with a municipal bond transaction, holding that the arbitrators: (1) properly found an oral agreement subject to arbitration; (2) reasonably concluded that the arbitration was commenced timely; (3) afforded the parties a fundamentally fair hearing by considering all evidence offered; and (4) did not manifestly disregard the law. The court did not discuss Hall Street Associates. Finally, the court found that an award that was not a reasoned award was not arbitrary and capricious. Grigsby & Associates, Inc. v. M Securities Investment, Inc., Case No. 06-23-35 (USDC S.D. Fla. July 30, 2008).

  • In an action concerning the collection on a promissory note, a court has confirmed an award over claims that it was in manifest disregard of law, except to vacate it to the extent that the award provided for pre-judgment interest, which was clearly contrary to “controlling Tennessee law.” There is no discussion of Hall Street Associates. Hicks v. The Cadle Co., Case No. 04-2616 (USDC D. Col. July 23, 2008).

  • In Remote Solution Co. v. FGH Liquidating Corp., Case No. 06-4 (USDC D. Del. July 31, 2008), the court confirmed an award, finding no manifest disregard of law (without discussing Hall Street Associates), and that the arbitrator did not exceed his authority by awarding attorneys’ fees pursuant to a contractual provision. The agreement called for a reasoned award, and the arbitrator provided a very brief one paragraph “tentative ruling,” with an offer to provide a more detailed award if requested. The court found this to be sufficient, in part because no one requested a more detailed award.

  • In Supreme Oil Co. v. Abondolo, Case No. 07-6479 (USDC S.D.N.Y. July 31, 2008), an arbitration of ERISA and Labor-Management Relations Act (“LMRA”) claims, the court held that the manifest disregard of law doctrine was not a basis to vacate an award under the FAA after Hall Street Associates, but that it was unclear whether the doctrine survived with respect to claims under the LMRA. The court declined to reach that issue, however, based upon its finding that the facts before it did not demonstrate manifest disregard of law.

This post written by Rollie Goss.

CASE UPDATE: COURT REFUSES TO CERTIFY CLASS AGAINST MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION

by

In a September 19, 2007 posting, this blog reported that a district court allowed a case against Directors of Mississippi Windstorm Underwriters Association (MWUA) to proceed on the theory that the directors breached a fiduciary duty to their members by failing to secure sufficient reinsurance to cover the 2004 and 2005 hurricane seasons.

Recently, the same court denied plaintiffs’ motion for class certification. Plaintiffs sought certification of a class of over 100 insurance company members and alleged claims for breach of fiduciary duty, negligence, and declaratory judgment. As the court explained, the “lynchpin of the plaintiffs’ argument for class certification is that the Board’s decision regarding the amount of reinsurance to purchase allegedly was tainted by self-dealing, in that the Board members had a financial incentive to under-reinsure the MWUA’s risks.” The defendants responded by stating that the plaintiffs’ self-dealing theory was based on their erroneous assertion of how the costs of reinsurance were charged to the MWUA’s members. The defendants contended that most of the defendant companies bore none of the costs of reinsurance and therefore had no incentive to under-reinsure.

The court concluded that plaintiffs failed to satisfy the requirements of Rule 23. Specifically, the court found that plaintiffs did not meet their burden of showing that the number of putative class members was so numerous as to make their joinder impractical. Additionally, the court found that the plaintiffs failed to show that common issues predominated over individual issues with respect to the self-dealing aspect of the plaintiffs’ claims. Association Casualty Ins. Co., et. al. v. Allstate Ins. Co., et. al, Case No. 3:07cv525 (S.D. Miss. July 29, 2008).

This post written by Lynn Hawkins.

COURT DISMISSES SWISS RE’S COMPLAINT AGAINST REINSURANCE ADMINISTRATORS

by

An Illinois district court judge has granted a group of reinsurance administrators’ motion to dismiss a complaint filed by Swiss Re. The Complaint alleged that the defendants (“Access Entities”), who managed and administered several reinsurance programs, breached the contracts by mishandling the claims they were responsible for administering, and that Swiss Re’s predecessors suffered losses as a result.

While the Court found meritless defendant’s arguments based on statutes of limitations and failure to join an indispensable party, the Court agreed that plaintiffs improperly “lumped together” three separate entities. Plaintiffs recognized that not all of the defendants were parties to each agreement, however, they argued that because the Access Entites were mere ‘alter egos’ of one another, they could appropriately be held liable for the acts of the others. The court disagreed, concluding that the Complaint did not adequately allege facts to support a finding of contract liability based on corporate veil piercing. As such, the Complaint was dismissed with leave to file an Amended Complaint. Swiss Reinsurance America Corp. v. Access General Agency, Inc., Case No. 07 C 3954 (N.D. Ill. Aug. 1, 2008).

This post written by Lynn Hawkins.

SEC FILES AND SETTLES ANOTHER FINITE REINSURANCE ENFORCEMENT ACTION, THIS TIME WITH pRUDENTIAL FINANCIAL

by

The Securities and Exchange Commission has filed a lawsuit against Prudential Financial, Inc., alleging violations of the financial reporting, books-and-records and internal control provisions of the Securities Exchange Act of 1934, based upon its former property and casualty subsidiaries (“Prupac”) entering into so-called finite reinsurance contracts with General Reinsurance Corporation. The SEC contends that the reinsurance agreements “had no economic substance and no purpose other than to build up and then draw down on an off-balance sheet asset, or 'bank,' that Gen Re held for Prupac.” Securities and Exchange Commission v. Prudential Financial, Inc., Case No. 08-3916 (USDC N. N.J. Aug. 6, 2008). The SEC reports that it has reached a settlement with Prudential, which has consented to a permanent injunction against further violations of certain sections of the Exchange Act and associated Rules. This is similar to an enforcement action filed by the SEC against Rennaisance Re (see November 6, 2006 blog post).

This post written by Rollie Goss.

FLORIDA BUYS CAT BOND PUT OPTION FROM BERKSHIRE HATHAWAY

by

The Florida Hurricane Catastrophe Fund has agreed to a creative way to fund potential hurricane losses, and create liquidity, agreeing to pay Berkshire Hathaway $244 million for its agreement to buy $4 billion in 30-year tax-exempt bonds if the Cat Fund suffers insured hurricane losses in excess of $25 billion this year. Press reports state that the Cat Fund is looking to this mechanism to enable it to act quickly to reimburse insurers for incurred losses.

This post written by Rollie Goss.