Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

STATE LAW UPDATE: CAPTIVE REINSURANCE ISSUES DOMINATE

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The end of the state legislative season has been dominated by developments regarding captive insurers, although there have been a few other interesting developments as well.

  • Louisiana has entered the captive insurer arena with a statute, SB 150, providing for the formation and operation of domestic captive insurance companies (effective January 1, 2009).

  • Hawaii has amended its already established captive structure by enacting a bill (S 3023), which we previously reported, to provide for Special Purpose Financial Captive Insurance Companies, effective July 1, 2008.
  • The Utah Insurance Department has proposed an amendment to its captive insurer regulations, proposed regulation R590-238, relating to the financial, reporting, record-keeping and other requirements for captive insurance companies. The comment period for this proposed regulation ends August 14, 2008; no hearing has yet been set.

In the non-captive area, the New York Insurance Department has issued two interesting opinions, one stating that a licensed insurance broker may compensate a non-licensee for referrals made to the broker, and another providing that an insurer may not pay an insurance commission to an entity which is not licensed and appointed as an insurance agent or broker.

The US Congress has entered the reinsurance regulation arena, considering H.R. 6213, which, if enacted, would establish the Reinsurance International Solvency Standards Evaluation Board, which would be charged “to evaluate the reinsurance supervisory systems of the States of the United States and jurisdictions outside the United States to determine, on a uniform basis, whether such systems provide adequate capital and risk management standards and an acceptable level of prudential supervision over their domiciled reinsurers.”

This post written by Rollie Goss.

UK COURT RULES THAT FOREIGN ARBITRATION AWARDS DOMESTICATED IN THE UK BEAR INTEREST FROM THE DATE OF ENTRY

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We have reported several times on a dispute over an award issued by the International Commercial Arbitration Court in Moscow, Russia, of over $88 million relating to a dispute over natural gas, and efforts to enforce the award in the UK and the United States pursuant to the New York Convention (see June 14, 2007, November 27, 2007 and March 26, 2008 posts). The UK Commercial Court has ruled that foreign arbitration awards that are reduced to a judgment in a UK court under the UK Arbitration Act of 1996 bear interest at the rate of 8% from the date of the entry of the UK court judgment. This results in interest of approximately $12.6 million on this particular arbitration award. Gater Assets Limited v. Nak Naftogaz Ukrainiy [2008] EWHC 1108 (Comm.).

This post written by Rollie Goss.

ENGLISH COURT DENIES INSURANCE COMPANIES’ REQUEST TO STAY PENDING A PRIOR-FILED CASE IN US DISTRICT COURT

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Seaton Insurance Company and Stonewell Insurance Company are involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes, and the settlement agreement contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.”

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurers in the US, National Indemnity Company, and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the US, alleging that Cavell fraudulently concealed its intention to delegate claims handling to the reinsurer. Allegations of such wrongdoing had been dismissed from the US arbitration. Cavell filed a motion to dismiss, and contended that any suit should be brought in the UK under the terms of the settlement.

Cavell then separately sued Seaton and Stonewell in the UK, seeking a declaration that all of their disputes had been compromised, and seeking damages resulting from Seaton and Stonewell involving it in the US arbitration and the US lawsuit. Seaton and Stonewell gave notice that they would challenge the jurisdiction of the UK court, and sought a stay of the UK lawsuit pending a decision on the motion to dismiss the US lawsuit they had filed.

The Queen’s Bench Division of the Commercial Court refused the insurance companies’ application for a stay for proceedings, finding that the resolution of the motion to dismiss in the US court would not assist it in resolving the jurisdictional challenge in the UK lawsuit. The court also stated that “it is difficult to see how the defendants can challenge the jurisdiction of this court at that stage.” This case is an interesting example of the interplay between proceedings in different countries. Cavell USA Inc. v. Seaton Ins. Co. [2008] EWHC 876 (April 11, 2008).

This post written by Rollie Goss (with thanks to Jason Morris).

COURT DENIES MORTGAGE COMPANY’S MOTION TO DISMISS CLAIMS RELATING TO ALLEGED KICKBACKS ON MORTAGAGE INSURANCE PLACED WITH CAPTIVE REINSURER

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Mortgage loan borrowers filed a class action complaint alleging that Washington Mutual, Inc. (WaMu) violated the Real Estate Settlement Procedures Act (RESPA) by collecting illegal kickbacks or splitting fees from private mortgage insurance providers who had agreed to reinsure the borrowers’ mortgage insurance with WaMu’s captive reinsurer, WaMu Mortgage Reinsurance. WaMu Mortgage Reinsurance allegedly received nearly $300 million in premiums while never paying a single loss.

Citing the policy reason that statutes “like RESPA are enacted to protect consumers from unfair business practices,” the court held that while the filed rate doctrine may bar direct challenges to insurance rates, it does not prohibit plaintiffs from bringing suit for a violation of fair business practices based upon allegations of illegal kickbacks. The court also rejected the other grounds argued for dismissal. Alexander v. Wash. Mut., Inc., Case No. 07-4426 (USDC E.D. Pa. June 30, 2008).

This post written by Rollie Goss (with thanks to Jason Morris).

COURT CONFIRMS ARBITRATION AWARD OVER OBJECTION THAT ARBITRATION PANEL HAD ACTED IN EXCESS OF ITS AUTHORITY

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In this non-insurance case, the party which lost in arbitration sought to have the award vacated under the Federal Arbitration Act on the basis that the panel had exceeded its authority. This opinion contains a good discussion of this standard for vacating an award on this basis in the Third Circuit. The standard is whether the award is “completely irrational” and “draws its essence” from the underlying agreement. “In considering the arbitrator’s interpretation of the contract, the question becomes whether “the interpretation can in any rational way be derived from the agreement, viewed in the light of its language, its context, and any other indicia of the parties’ intention.” Exxon Shipping Co. v. Exxon Seamen’s Union, 73 F.3d 1287, 1295 (3d Cir. 1996).” Finding that the motion to vacate the award was, in reality, merely a challenge to the arbitrators’ factual and legal determinations, the court denied the motion to vacate and confirmed the award. Southco, Inc. v. Reell Precision Manufacturing Corp., Case No. 08-189 (USDC E.D. Pa. May 27, 2008).

This post written by Rollie Goss.