Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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

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COURT ADDRESSES PROCESS FOR REPLACING PARTY-APPOINTED ARBITRATOR WHO HAS WITHDRAWN

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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

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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.

FAA SUPPLIES ABSENT TERMS IN ARBITRATION CLAUSE

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A Virginia district court dismissed a Complaint alleging breach of contract after the defendant sought to enforce the arbitration clause in the contract governing the parties’ relationship. The plaintiff argued that the arbitration clause was too vague and indefinite to be enforced, in that it failed to prescribe a location, a number of arbitrators, procedural rules, or any enforcement mechanism for an arbitration award. However, because the parties agreed that the FAA was the appropriate federal law regarding arbitration, the court concluded that the absent terms were supplied by the FAA. Wolverine Fire Protection v. Atlantic Marine Construction Co., Case No. 2:08cv75 (USDC E.D. Va. April 24, 2008).

This post written by Lynn Hawkins.

REINSURANCE CLAIMS REJECTED; COURT REFUSES TO SEAL CONFIRMATION

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Argonaut Insurance reinsured Global Reinsurance under excess of loss, quota share and facultative reinsurance agreements. A dispute arose as to whether certain commutation payments made by Global and ceded to the reinsurance agreements came within the scope of the reinsurance agreements, and arbitration was demanded. Background is found in the Petition to Confirm the arbitration award (which is redacted). An arbitration panel decided in favor of Argonaut, finding that the commutation payments were not “claims, losses or settlements within the terms, limits and conditions of the Retrocessional Contracts at issue ….” Copies of the reinsurance contracts and the arbitration award are found in a declaration filed in support of confirmation of the award. The award was confirmed with the agreement of all parties. The court denied a request to keep filings in the confirmation proceeding under seal, finding that there had not been a sufficient showing to overcome the presumption that filings in US District Courts are public. Global Reinsur. Corp. v. Argonaut Insur. Co., Case No. 07-8350 (USDC S.D.N.Y. 2008).

This post written by Rollie Goss.