Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NON-SIGNATORY BOUND TO REINSURANCE CONTRACT’S ARBITRATION PROVISION

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A Pennsylvania district court has held that a non-signatory insured is obligated to arbitrate claims against a reinsurer pursuant to the reinsurance contract’s arbitration provision. The plaintiff, a psychiatrist, purchased malpractice insurance from Transatlantic Reinsurance Company (“TRC”) using Legion Insurance as a fronting company. The insured later was sued for malpractice. Legion initially defended the action, but subsequently withdrew and a judgment was issued against the plaintiff.

Thereafter, Legion was declared insolvent and ordered into liquidation. Following a court ruling that Legion’s insureds could assert direct actions against TRC, the plaintiff filed an action against TRC for Legion’s breach of contract and breach of the duty of good faith and fair dealing and bad faith. The plaintiff also alleged bad faith against TRC for its own conduct.

TRC moved to compel arbitration arguing that as a third party beneficiary of the reinsurance contract, the plaintiff was bound to arbitrate the dispute. TRC also argued that the plaintiff was equitably estopped from disavowing the arbitration provision while simultaneously seeking to invoke the benefits of the agreement. The court granted TRC’s motion to compel arbitration finding in favor of TRC on both arguments. Doeff v. Transatlantic Reinsurance Company, Case No. 07-2110 (USDC E.D. Pa. Dec. 14, 2007).

This post written by Lynn Hawkins.

STATE LEGISLATIVE UPDATE

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It's state legislative session time of the year again – time to review what is going on in the state legislatures and insurance departments relating to reinsurance. This year there is considerable activity in three areas: (1) captive insurance companies; (2) catastrophe funds; and (3) reinsurance credit issues.

  • Captive insurers: Connecticut General Assembly Bill No. 281 would allow captive insurance companies to be licensed and domiciled in Connecticut. HB 2151, pending in the Hawaii House, would authorize medical malpractice captive insurance companies. Hawaii Senate Bill No. 3023 would authorize the creation and regulation of special purpose financial captive insurance companies. Hawaii HB No. 3101 is a House version of SB 3023. Michigan SB No. 1061, which has been passed and sent to the governor (bill text; bill analysis), would authorize the formation of captive insurance companies in Michigan, including special purpose financial captives for purposes of securitizations. The Missouri Insurance Department has proposed regulations containing requirements for the financial management and control of captives. New Jersey Assembly Bill No. 1580 would authorize and regulate captives. Utah HB 55 would modify Utah's Captive Insurance Companies Act and enact the Special Purpose Financial Captive Insurance Company Act.

  • Catastrophe funds: Five states have actions pending in this area. There is a bill pending in the Alabama Senate (SB 5) which would establish a coastal insurance authority and cat fund for wind and flood insurance for both residential and commercial property along the Gulf and authorize certain coverages by captive insurers. A bill is pending in the Connecticut General Assembly (No. 167) which would direct the Insurance Commissioner to study the feasibility of establishing a cat fund to offer reinsurance to the private insurance market. HB 1918 (bill text; bill summary), pending in the Missouri House, would create a cat fund for residential property earthquake risks. The fund would reimburse member insurers for a portion of losses paid by the insurers. The Insurance Department would be authorized to issue bonds to support the fund. Senate Bill No. 249, pending in the New Jersey Senate, would create a catastrophic health care claim reinsurance program. New Jersey Assembly Bill No. 2198 would create a state cat fund and fund it at an initial $10 million level. Virginia Senate Bill No. 318 would create a wind joint underwriting association to cover coastal areas.

  • Reinsurance credit: The Utah legislature has adopted a bill (SB 143) (which is awaiting action by the governor) which modifies a number of financial requirements relating to insurers and insurance products, including when domestic and foreign ceding insurers are allowed credit for reinsurance. It also addresses requirements for assumption agreements and reinsurance contracts and grants rulemaking authority on reinsurance credit issues.

This post written by Rollie Goss.

SEVENTH CIRCUIT HOLDS STOP-LOSS POLICY NOT REINSURANCE UNDER WISCONSIN LAW

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The Seventh Circuit has reversed a federal magistrate’s ruling that defined a stop-loss policy as reinsurance under Wisconsin law.

Edstrom, a manufacturing company, had a stop loss policy in place for its group health plan with Companion Life. Prior to issuing the policy, Companion asked Edstrom to identify any participant who could reasonably be expected to incur more than $32,500 in medical expenses in 2004. Edstrom informed Companion that there was no such participant. In 2004, one of the plan participants had a child that developed a serious medical condition, which was based upon an undisclosed condition that existed prior to the issuance of the policy, and which resulted in claims of at least $890,000. When Companion discovered the child’s condition, it raised the child’s deductible to $450,000, pursuant to a policy provision that allowed the insurer to revise the deductible based on subsequent information that if known before issuing the policy would affect the rates, deductibles, and terms of the policy.

Edstrom initiated arbitration proceedings against Companion. The arbitrator found in favor of Companion finding that the terms of the policy provided the insurer with unfettered rights to raise the deductible. Edstrom unsuccessfully moved to have the award vacated by the District Court claiming that the decision violated Wisconsin Statute Section 631.11(1)(b), which provides that a misrepresentation cannot affect an insurer’s obligations unless the insured “knew or should have known that the representation was false.” Edstrom contended that since it neither knew, nor had reason to know, that the representation regarding potential claims was false, Companion could not raise the deductible. While the arbitrator did not mention this statute, the magistrate judge held that the policy was a contract of reinsurance, and that the statute did not apply to contracts of reinsurance.

The Seventh Circuit held that the federal magistrate’s definition of stop loss policy as reinsurance under Wisconsin law was incorrect. The court stated that “it is a mistake to think that anything someone does to insure someone else against a risk is ‘insurance’ within the meaning of statutes that regulate insurance.” “Stop-loss insurance is an insurance policy for losses that the insured self-insures up to the limit of the deductible,” according to the court.

The contract contained a provision which required that the arbitrator “strictly abide by the terms of this [policy] and shall strictly apply rules of law applicable thereto,” namely the rules of Wisconsin law. The Court of Appeals found this provision to be enforceable. Since there was no evidence in the record that the arbitrator had considered the applicability of the statute to this situation, the appellate court remanded the case to the district court with instructions to vacate the award and to return the case to the arbitrator for consideration of the statute and to determine whether the policyholder knew or should have known that its representation to the insurer was false. Edstrom v. Companion Life Ins. Co., No. 06 C 964 (USCA 7th Cir. Feb. 11, 2008).

This post written by Lynn Hawkins.

JURY FINDS AIG SUBSIDIARIES LIABLE FOR $28 MILLION PLUS PUNITIVE DAMAGES FOR FRAUDULENT INDUCEMENT

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In an August 16, 2007 post, we commented on a New York district court’s denial of cross motions for summary judgment in a case seeking rescission of two reinsurance facilities. The court rejected the defendants’ statute of limitations defense on summary judgment, however, following a jury trial, the court agreed that plaintiff’s negligent misrepresentation and breach of the duty of utmost good faith claims were barred by the statute of limitations. The court also merged plaintiff’s claims for material nondisclosure and intentional misrepresentation into a single claim of fraudulent inducement. The bases for the claims are set out in the Second Amended Complaint and in our prior post. Shortly before trial, the court denied a motion by Axa to collaterally estop AIG from “relitigating” certain issues that had been determined in a prior arbitration between AIG and a Lloyd’s syndicate.

At trial, a jury found the defendants liable for fraudulent inducement and concluded that plaintiffs were entitled to rescission of both facilities. The defendants were ordered to remit to plaintiff $20,087,166 plus interest of $8,536,004. The jury also found defendants liable for punitive damages in the amount of $5,750,000. Defendants have posted a supersedeas bond in the amount of $36,000,000 in preparation for an appeal. Axa Versicherung Ag v. New Hampshire Ins. Co., No. 05-cv-10180 (USDC S.D.N.Y. Feb. 6, 2008).

This post written by Lynn Hawkins.

CONTROVERSY OVER ARBITRATION AWARD CENTERS OVER WHETHER PARTIAL AWARD WAS FINAL

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A single arbitrator heard evidence on claims for monies allegedly due under a facultative reinsurance contract. The arbitrator entered a partial final award, finding liability for indemnity payments, no liability for certain defense costs and requiring supplemental submissions on the amount of the indemnity and cost obligations. The parties moved for confirmation or vacation of this award, and the court declined to act, stating that the award was not yet final. The court remanded the matter to the arbitrator for further proceedings. On remand, the arbitrator held to his indemnity determination but decided that further submissions justified an award of defense costs. A final award was entered for $3 million, plus interest. The prevailing party sought to confirm the award, and the losing party contended that the partial award was final as to the defense cost issue, and the arbitrator did not have authority to change that ruling under the doctrine of functus officio. The court held that the partial award was not final, and hence the doctrine did not apply, and confirmed the final award, entering final judgment on the award. Employers' Surplus Lines Ins. Co. v. Global Reinsur. Corp., Case No. 07-2521 (USDFC S.D.N.Y. Feb. 2008).

This post written by Rollie Goss.