Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

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.