Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

REINSURER FAILS IN ATTEMPT TO OBTAIN DOCUMENTS DUE TO FOLLOW THE FORTUNES PROVISION IN FACULTATIVE CERTIFICATE

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Argonaut Insurance Company reinsured Hartford Accident and Indemnity Company under a facultative certificate which covered a $1 million general liability policy, which was subject to the terms, conditions, and limits of liability set forth in the facultative certificate. Hartford retained $250,000 under the facultative certificate, and Argonaut reinsured 50%, or $375,000, of the $750,000 above Hartford’s retention. Hartford issued three primary policies over a number of years and paid $5 million to settle products liability claims, allocating the amount equally to the three primary policies. Hartford later agreed to pay $54 million to buy back its primary policies and some excess policies it had issued. The issue with respect to the reinsurance became how the losses were allocated by year.

Argonaut sought documents to explore potential inconsistencies in allocations over the years, but Hartford contended, and the district court agreed, that a follow the fortunes clause made such an argument irrelevant, since the allocation had been made in good faith, was reasonable and was within the terms of the applicable policies. Hartford represented that it had issued over 175 policies to this insured over 30 years time, that many were totally unrelated to the single policy that Argonaut reinsured, and that it would take more than 12,000 hours to collect and conduct a preliminary review of the documents sought by Argonaut. At the same time, the court granted a motion to compel by Hartford seeking documents relating to Argonaut’s reinsurance and knowledge of the underlying claims, finding that Argonaut had put such documents at issue in one of its defenses to Hartford’s Complaint. Hartford Accident and Indemnity Co. v. Argonaut Insurance Co., Case No. 06-1813 (USDC D. Conn. Apr. 25, 2008). The court denied a motion for reconsideration, finding that requiring that Hartford provide all of the underlying insurance policies to its reinsurer would undermine the follow the fortunes doctrine.

This post written by Rollie Goss.

JUDICIAL PANEL ON MULTIDISTRICT LITIGATION TRANSFERS CASE FILED BY TENNESSEE INSURANCE COMMISSIONER INVOLVING RECIPROCAL OF AMERICA TO PENDING MDL ACTION

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The Tennessee Insurance Commissioner, as liquidator for three risk retention groups, sued General Reinsurance Corp, Milliman, Price Waterhouse Coopers, Wachovia Bank and others in Tennessee state court, alleging a broad based conspiracy and fraud in a reinsurance program involving Reciprocal of America. After the case was removed to federal district court, the Judicial Panel on Multidistrict Litigation granted a motion to transfer the case to the Reciprocal of America Sales Practices Litigation MDL proceeding pending in the Western District of Tennessee. The Panel found that the actions involve questions of fact arising out of relationships and transactions substantially similar to those involved in the MDL action, and that transfer and consolidation therefore was appropriate under 28 U.S.C. section 1407. In re: Reciprocal of America Sales Practices Litigation, MDL No. 1551 (JPML June 5, 2008).

This post written by Rollie Goss.

COURT FINDS CLAIMS RELATING TO REINSURANCE PLACEMENT BARRED BY STATUTE OF LIMITATION

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Gerling Global Reinsurance alleged that it was “lured” to provide reinsurance through material misrepresentations and omissions and instituted arbitration against Fremont Indemnity Company. After reaching a settlement with Fremont Indemnity, Gerling sued Fremont General Corporation, Fremont Compensation Insurance Group and Louis Rampino, alleging that they had participated in a scheme to increase the premium revenue of Fremont Indemnity, seeking to recover the balance of its losses not recovered in the settlement with Fremont Indemnity. Gerling contended that the running of the statute of limitations was tolled because the defendants were alter egos of Fremont Indemnity. Both the district court and the Ninth Circuit Court of Appeals disagreed, finding that the causes of action against all of the parties accrued at the same time, and that there was no tolling of the running of the statutes of limitation on the claims against Fremont General Corporation, Fremont Compensation Insurance Group and Louis Rampino during the arbitration with Fremont Indemnity. Gerling Global Reinsurance Corporation of America v. Fremont General Corp., No. 07-55198 (USCA 9th Cir. June 24, 2008).

This post written by Rollie Goss.