Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FOLLOW THE SETTLEMENT DOCTRINE DOES NOT APPLY TO CLAIM BY PRIMARY INSURER TO EXCESS INSURER’S REINSURER

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This lawsuit addresses the responsibility of several insurers to cover the settlement of a medical malpractice claim. Texas Farmers Insurance provided primary coverage, Ordway Indemnity provided excess coverage and Lexington Insurance provided reinsurance to Ordway. Texas Farmers contended that it had paid amounts in excess of its coverage, and sought reimbursement from Lexington, as Ordway's reinsurer. Texas Farmers contended that the follow the settlements doctrine applied, and required reimbursement by Lexington. The court disagreed, finding that the doctrine did not apply since Lexington was not Texas Farmer's reinsurer, and found in any event that the entire settlement amount fell within the limits of Texas Farmer's coverage. Since the primary coverage was not exhausted, the excess cover was not triggered, and Lexington had no payment obligation. Texas Farmers Insur. Co. v. Lexington Insur. Co., Case No. 06-8220 (USDC C.D. Cal. Apr. 21, 2008).

This post written by Rollie Goss.

COURT DISMISSES PETITION FOR NAMING OF ARBITRATOR FOR LACK OF JURISDICTION

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A US District Court has dismissed a Petition seeking the appointment of a neutral arbitrator, finding that it did not have jurisdiction over the dispute. The only source of jurisdiction cited by the parties was the arbitration agreement. This ruling is in accord with rulings of other courts, which have held that the Federal Arbitration Act is not itself a source of federal court jurisdiction. Typically, parties rest jurisdiction for arbitration disputes in federal courts upon diversity jurisdiction. Northern California Relief. v. Insurance Company of the West, Case No. 08-942 (USDC N.D. Cal. Mar. 10, 2008).

This post written by Rollie Goss.

REINSURER’S COUNTERCLAIMS (MOSTLY) SURVIVE MOTION TO DISMISS

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A reinsurer may proceed with its counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent misrepresentation and violation of the Connecticut Unfair Trade Practices Act, a federal district court held. The reinsurer, Universal, was a “rent-a-captive” under an alternative risk insurance program establishing a loss fund composed of the net premium under the insurance program. The loss fund was to be used to pay claims under the program. After a lawsuit was filed, Universal countersued for breach of contract, alleging that it suffered damages because it was denied access to certain funds for a year, and by virtue of its contingent liability. The plaintiff contended that this alleged breach caused only incidental expenses and unrecoverable attorneys’ fees. Construing the allegations in Universal’s favor on the motion, the court found that damages had been sufficiently alleged, but that attorneys’ fees were unrecoverable. The court next found that the elements of the breach of good faith had been pled, and that the circumstances of the alleged fraudulent misrepresentation had been stated with particularity. Finally, the court ruled that the unfair trade practices claim would survive since Connecticut courts had recognized such claims where a party consciously refuses to honor an agreement by which it is bound. Arrowood Indemnity Co. v. Universal Reinsurance Co., Case No. 06 CV 158 (USDC D. Conn. May 6, 2008).

This post written by Brian Perryman.

COLLATERAL SOURCE RULE BARS EVIDENCE OF REINSURANCE AT TRIAL

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In a recent decision, the Fifth Circuit touched on the collateral source rule, which generally prohibits parties from introducing evidence of reinsurance. The plaintiff medical center and its insurer (Western Professional Insurance) alleged that the defendant medical center and other defendants supplied misleading letters recommending a physician the defendants had fired just two months earlier for on-duty use of narcotics. While in the plaintiff medical center’s employ and under the influence of narcotics, the physician sent a patient into a permanent vegetative state. A judgment was rendered against the medical center and in favor of the patient. The plaintiffs sued for misrepresentation and negligence and, in turn, a judgment was rendered against the defendants.

On appeal, the court reversed the judgment against the defendant medical center for insufficiency of evidence, but remanded the case for further proceedings. The court rejected the defendants’ argument that the district court erred in excluding evidence of Western’s reinsurance. The Fifth Circuit noted that, under governing Louisiana law, the collateral source rule provides that payments made to, or benefits conferred on, an injured party from sources other than the tortfeasor, notwithstanding that such payments or benefits cover all or part of the harm for which the tortfeasor is liable, are not credited against the tortfeasor’s liability. The defendants’ attempt to introduce evidence of reinsurance at trial was “nothing more than a classic argument against the collateral source rule.” Kadlec Medical Center v. Lakeview Anesthesia Associates, No. 06-30745 (5th Cir. May 8, 2008).

This post written by Brian Perryman.

TEXAS SUPREME COURT FINDS WAIVER OF RIGHT TO ARBITRATE BY TAKING CASE TO EVE OF TRIAL

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The Texas Supreme Court has held that a party waived its right to arbitrate by vigorously, and successfully, opposing a demand for arbitration, taking substantial discovery on virtually every issue in the case and taking a dispute to the eve of trial before reversing course and demanding arbitration. The court's opinion reverses the decision of the lower courts, which had allowed the change in tactics. The court found that a showing of prejudice was required to support a finding that the right to arbitration had been waived, and found that prejudice was present due to the unfairness of the change of position, and the delay, expense and damage to the opponent's legal position. The court was bothered by the fact that the process had been manipulated to gain an unfair tactical advantage. The facts were so extreme here, that the court found that to deny the proposition that the right to arbitrate had been waived would amount to a holding that a party could never waive its right to arbitrate through participating in a lawsuit in lieu of arbitration. Homes v. Cull, No. 05-882 (Tex. May 2, 2008).

This post written by Rollie Goss.