Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

REINSURERS GRANTED TRANSFER OF VENUE IN CASUALTY COVERAGE DISPUTE

by

The plaintiff, Huntsman, took out a casualty insurance policy with the defendant, International Risk Insurance Company (“IRIC”), a captive insurer that had been formed for the sole purpose of insuring Huntsman’s companies through the reinsurance market. IRIC then entered into separate reinsurance agreements with a group of reinsurers. After a fire at its ethylene plant, Huntsman submitted claims to the reinsurers and received payments totaling $305 million. However, a dispute arose concerning Huntsman’s right to receive additional payments under the casualty policy and the reinsurance certificates, and the reinsurers filed a lawsuit in the United States District Court for the Southern District of Texas seeking an order compelling arbitration or, in the alternative, declaring that Huntsman was not entitled to coverage for certain claimed items. After the reinsurer’s lawsuit was filed, Huntsman filed its own lawsuit in the state district court for Jefferson County, Texas, seeking a judicial declaration that IRIC was obligated to pay the amounts demanded by Huntsman. In turn, IRIC tendered the defense of Huntsman’s state court lawsuit to the reinsurers. When this tender was rejected, IRIC filed a third-party petition against the reinsurers in the state suit. The reinsurers then removed the state suit to the United States District Court for the Eastern District of Texas, and moved to transfer the removed suit for consolidation with its own ongoing suit in the Southern District of Texas.

The motion to transfer venue was granted. The court cited the “first-to-file” rule, which states that when related cases are pending before two federal courts, the court in which the case was last filed may refuse to hear it if the issues raised by the cases substantially overlap. The court found that both lawsuits involved the same parties, same loss and same underlying insurance policy. The central dispute in both cases was whether Huntsman was due additional sums under the policy and reinsurance certificates. Each case also involved an interpretation of the dispute resolution provision contained in the certificates. The court rejected Huntsman’s argument that the first-to-file rule should not apply because the reinsurer’s suit was filed in anticipation of Huntsman’s suit. The court observed that the first-to-file rule not only determines which forum may decide the merits of the case, but also which forum should decide whether a later suit should be dismissed, stayed or transferred and consolidated. Huntsman Corp. v. International Risk Insurance Co., Case No. 08-CV-029 (USDC E.D. Tex. Apr. 22, 2008).

This post written by Brian Perryman.

ARBITRATION MATTER REMANDED TO ARBITRATIOR FOR CLARIFICATION OF AWARD

by

A district court has granted a motion to dismiss an action filed by a postal workers union against the United States Postal Service that sought to enforce an arbitration award. The arbitrator ruled in favor of the union on the merits of the dispute, included remedial provisions in his award, but expressly retained jurisdiction for the implementation and interpretation of the award. The court found that the complete arbitration rule did not apply because although the award was a final determination on the merits of the dispute, it did not fully complete the adjudication of the remedial aspects of the dispute. The award hence was not final as to its remedy. Finding that there was additional discretion to remand an arbitration award concerning an employment agreement compared to other arbitration awards, the court found that it had authority to remand to the arbitrator for clarification if it determined that the award was ambiguous, which it held meant that the award was subject to at least two differing interpretations. The court found two ambiguities in the award, and remanded for clarification of the remedies to be implemented. The court cautioned that the arbitrator did not have authority to revisit the merits of the dispute, which he had conclusively determined. Pittsburgh Metro Area Postal Workers’ Union v. United States Postal Service, Case No. 07-781 (USDC W.D. Pa. Apr. 16, 2008).

This post written by Rollie Goss.

COURT RULES THAT REINSUREDS MAY NOT RECOVER TORT DAMAGES FOR BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

by

The plaintiff, a joint powers self-insured retention pool consisting of numerous California public agencies, sued the defendant, a reinsurer that reinsured plaintiff pursuant to two agreements, after the defendant declined to provide reinsurance coverage. The lawsuit alleged breach of contract and tortious breach of the implied covenant of good faith and fair dealing, and sought declaratory relief. The defendant moved to dismiss the implied covenant claim, arguing that, under California law, reinsureds may not recover tort damages for a breach of the implied covenant of good faith and fair dealing. That motion was granted. The court held that the availability of tort remedies in the context of a contractual dispute depends on whether social policy supports their imposition. While tort remedies for breach of the implied covenant of good faith and fair dealing in insurance policies had previously been recognized by California courts, they were only considered appropriate because the policies were characterized by elements of adhesion and unequal bargaining power, public interest and fiduciary responsibility. The relationship between reinsurer and reinsured does not implicate the same concerns since reinsureds are sophisticated business entities and, in obtaining reinsurance coverage, are merely seeking the commercial advantage of writing more policies than their reserves would otherwise sustain. The court ruled that more was needed before it could justify the imposition of tort damages in a straightforward contractual dispute. California Joint Powers Insurance Authority v. Munich Reinsurance America, Inc., Case No. CV 08-956 (USDC C.D. Cal. Apr. 21, 2008).

This post written by Brian Perryman.

COURT ADDRESSES PROCESS FOR REPLACING PARTY-APPOINTED ARBITRATOR WHO HAS WITHDRAWN

by

WellPoint Health Networks and John Hancock Life Insurance Company became involved in a dispute over the interpretation of three documents relating to WellPoint’s purchase from John Hancock of what were termed Hancock’s Group Business Operations. The Purchase and Sale Agreement, Coinsurance Agreement and Administration Agreement all contained arbitration provisions. The issue was whether three loss-producing books of insurance business, the most important of which were heavily loss producing personal accident risks originated by JEH Re Underwriting Management in Bermuda, were included in the transaction. WellPoint demanded arbitration, seeking additional information about these businesses and a declaration of its responsibilities. Hancock counter-demanded for arbitration seeking $42.4 million from WellPoint, which it later “revised” to $464.4 million. Both parties appointed an arbitrator, and when the party-appointed arbitrators could not agree on an umpire, under the terms of the contract the Denver office of the American Arbitration Association appointed the umpire. Shortly after Hancock increased its claim by ten-fold, Hancock replaced its counsel and sought to replace its party-appointed arbitrator. Conceding that it could not “fire” its appointed arbitrator, WellPoint apparently convinced the arbitrator to withdraw, and a dispute arose as to how to appoint a replacement.

Neither the agreements nor applicable law expressly covered the issue. WellPoint contended that it could appoint a replacement, while Hancock contended that it could appoint the replacement under a provision allowing it to do so if WellPoint defaulted in timely appointing an arbitrator. The remaining arbitrator and umpire allowed WellPoint to appoint a successor, who Hancock conceded was qualified under the arbitrator qualification provisions of the agreements. The arbitration proceeded in two phases, with an interim award entered after the initial phase, and a final award entered after the second phase. The panel's conclusion was that the JEH Re business was not included in the purchase transaction, and that WellPoint owed Hancock $26.4 million instead of the $464 million it had requested.

Hancock moved to vacate the awards, while WellPoint moved to confirm. The first issue was whether the award after the initial phase was subject to immediate confirmation. If it were, Hancock’s motion to vacate was untimely. The court determined that the “initial award” was not a final award, and that Hancock had acted timely in seeking to vacate the final award.

With respect to the replacement of the arbitrator, the court held that Hancock had not waived its right to challenge the appointment by failing to seek relief immediately under section 5 of the FAA. The court upheld the appointment of the replacement arbitrator by WellPoint based upon its interpretation of the agreements and the evident intention of the parties that each would appoint one of the arbitrators. The fact that neither the agreements nor the FAA clearly addressed the situation provided the court with discretion, which it interpreted to require it to attempt to implement the intention of the parties.

This is a very interesting, 33 page opinion, which addresses a number of issues of great importance in many reinsurance arbitrations. The Seventh Circuit has addressed some interesting arbitration process issues, and we will watch to see if this decision is appealed. WellPoint Health Networks, Inc. v. John Hancock Life Ins. Co., Case No. 07-943 (USDC N.D. Ill. Apr. 24, 2008).

This post written by Rollie Goss.

AIG POST-TRIAL MOTIONS DENIED

by

In a March 5, 2008 post, we reported on a jury verdict against AIG subsidiaries for $28 million plus punitive damages in a case seeking the rescission of two reinsurance facilities. AIG filed a motion for judgment as a matter of law, or in the alternative for a new trial, and to amend the judgment. Finding no legal error and sufficient facts to support the jury's verdict, the court has denied AIG's motion. AXA Versicherung AG v. New Hampshire Insur. Co., Case No. 05-10180 (USDC S.D.N.Y. Apr. 22, 2008).

This post written by Rollie Goss.