Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

AIG SETTLES FINITE REINSURANCE DISPUTE WITH PENNSYLVANIA DEPARTMENT OF INSURANCE

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AIG has settled issues with the Pennsylvania Department of Insurance arising out of finite reinsurance and bid-rigging allegations, agreeing to pay over $9 million in penalties and costs. This is the largest penalty ever levied upon an insurer by the department. The finite reinsurance issues arose out of one of the transactions included in the recent criminal conviction in Connecticut. New compliance measures are included to ensure accurate financial reporting and increased transparency of commission payments to agents and brokers. Details of the settlement are generally set out in a press release issued by the Department, and in a detailed settlement agreement.

This post written by Rollie Goss.

REINSURER’S AGENT IMPROPERLY JOINED IN INSURED’S ACTION AGAINST REINSURER

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Plaintiff, First Automotive Service Corporation (“FASC”), insures extended vehicle service contracts sold to automobile dealers and vehicle owners. Defendant, Northbrook Indemnity Company, is the reinsurer for a portion of that risk, and defendant, First Colonial Insurance Company (“First Colonial”), acts as “agent” and “manager” for Northbrook. FASC filed this lawsuit in state court in mid-2007 alleging that Northbrook owed FASC in excess of $10 million for claims arising under the four placement slips. Northbrook removed the case to federal court based upon diversity jurisdiction, contending that First Colonial corporation (a Florida corporation), had been fraudulently joined to defeat diversity. In their motion to remand, plaintiffs asserted that the parties were properly named.

The Court denied plaintiffs’ motion to remand, finding that “plaintiffs provide no basis for the Court to find that First Colonial acted as other than agent for Northbrook as it pertains to the placement slips,” and that “[t]here was no express agreement alleged or established by evidence that First Colonial would be personally liable to . . . FASC as reinsurer.” As such, the court concluded that “First Colonial, as agent to insurer Northbrook, is not a proper party in plaintiffs’ declaratory judgment action because as agent it is not a party to the contract between the insured and the insurer.” First Automotive Services Corp. v. First Colonial Ins. Co., Case No. 07-682 (USDC M.D. Fla. March 25, 2008).

This post written by Lynn Hawkins.

NEW YORK DISTRICT COURT CERTIFIES CLASS AGAINST SCOR

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A New York district court judge partially granted and partially denied a motion to certify the class in the SCOR Holding AG litigation. The judge certified a class that included: (1) US residents who purchased Converium shares on the Swiss Exchange; and (2) any person who purchased Converium American Depository Shares on the NYSE. The court specifically denied certification as to non-US investors that purchased shares of Converium on a non-US exchange.

Converium Holding AG (“Converium”), now known as SCOR Holding (Switzerland) AG, was a multinational reinsurer with offices in Switzerland, Germany and New York. This securities litigation was filed in September 2004 following the collapse of Converium North America. Plaintiffs alleged that, between Converium’s initial public offering in December 2001 and September 2004, the defendants misrepresented the sufficiency of Converium North America’s loss reserves, resulting in a representation to the public that Converium’s financial position was far stronger than it actually was during the relevant period. In re Scor Holding (Switzerland) AG Litigation, Case No. 04 Civ. 7897 (S.D.N.Y. March 6, 2008).

This post written by Lynn Hawkins.

SECOND LEGISLATIVE UPDATE

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Following is our second update for this year on reinsurance-related activity in the state legislatures. All three of the bills described in this post were previously described in our March 10, 2008 post.

  • Captive insurers: Michigan SB 1016 was signed by the governor March 13, 2008, and became effective March 18, 2008. Meanwhile, the final version of HB 55, the Utah amendments to its Captive Insurance Companies Act, which include the enactment of a new Chapter, Chapter 37a, titled Special Purpose Financial Captive Insurance Company Act, was signed by the governor March 18, and will become effective May 5, 2008.
  • Financial requirements: Utah SB 143 was signed by the governor March 17, and will become effective July 1, 2008. The final version of this bill modifies the requirements for when a domestic or a foreign ceding insurer is allowed credit for reinsurance and modifies the restrictions on investments by insurers.

This post written by Rollie Goss.

CASE UPDATE: ENGLISH COURT OF APPEAL REVERSES DECISION DENYING REINSURANCE COVERAGE, MARKING DEPARTURE FROM TRADITIONAL FOLLOW THE SETTLEMENTS RULINGS

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In a May 23, 2007 post, we reported on a UK decision denying reinsurance coverage despite a follow the fortunes provision based on a finding that the damages occurred outside the coverage period of the reinsurance, despite the conclusion of a US court on the underlying claim finding liability for damage occurring outside the coverage period of the underlying policy. The UK Court of Appeals has allowed an appeal, finding that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance.

The English appellate court agreed that the insurance and reinsurance contracts were not entirely “back to back” in terms of the coverage periods, but concluded that although there were some differences in the contracts, the parties intended that they should have the same effect and therefore, the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract. Despite the fact that the reinsurance appeared only to cover damage that occurred during the period of the reinsurance, and the trigger of coverage used by the US court permitted a broader recovery from the insurer, the Court of Appeals accepted the proposition that “the same or equivalent [coverage] wordings should be given the same meaning in the reinsurance contract as in the insurance contract.”

Explaining that the UK reinsurer had taken certain known risks in reinsuring a US insurer, the Court concluded that although the judgment against the insured was not one which the reinsurers expected, nevertheless it was one which was a possibility that they agreed to cover. This decision marks a departure from previous ‘follow the settlement’ cases involving differences in the insurance and reinsurance contracts, which have typically been resolved in favor of the reinsurers. Wasa International Ins. Co. v. Lexington Ins. Co., [2008] EWCA Civ 150 (Feb. 29, 2008).

This post written by Lynn Hawkins.