Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT APPROVES INSURANCE COMPANY REORGANIZATION PLAN BASED UPON ASSUMPTION REINSURANCE AGREEMENT

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A Pennsylvania judge has approved the fourth amended plan for the rehabilitation of Fidelity Mutual Life Insurance Company, which is based upon Fidelity transferring its outstanding insurance and annuity contracts to Commonwealth Annuity and Life Insurance Company under an assumption reinsurance agreement. Assets of value equal to the assumed liabilities are also being transferred to Commonwealth, which is paying a ceding commission of $3.9 million and a contingent payment of up to $5.9 million. The proposed reinsurance transaction drew a single objection, which contended that Commonwealth was potentially financially unstable. The court rejected the objection, based in part upon Commonwealth’s A. M. Best rating of “A-“ and its estimated risk-based capital ratio of 8 to 1. The court found that the proposed plan complied with applicable regulations and was fair, equitable and financially sound. Ario v. Fidelity Mutual Life Ins. Co., No. 389 M.D. 1992 (Pa. Commonwealth Ct. Oct. 25, 2007).

This post written by Rollie Goss.

COURT CERTIFIES CLASS OF HOME BORROWERS WHO HAD PRIVATE MORTGAGE INSURANCE REINSURED WITH LENDER’S CAPTIVE REINSURER

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The US District Court for the Northern District of California has certified a nationwide class of persons who secured residential mortgage loans from Wells Fargo Bank, where the down payments were funded with borrowed funds subject to private mortgage insurance (“PMI”) with Wells Fargo as the beneficiary of the PMI, and the PMI was reinsured by Wells Fargo’s captive reinsurance company. The Complaint alleged violation of the federal Real Estate Settlement Procedures Act (“RESPA”) in that payments relating to the reinsurance amounted to illegal kickbacks. The court found that while the plaintiffs might not be able to maintain a claim that the amount paid for the insurance (and reinsurance) was excessive, claims that the payments amounted to illegal kickbacks under RESPA could be subject to class-wide treatment. Kay v. Wells Fargo & Co., Case No. C 07-01351 (USDC N.D. Cal. Nov. 30, 2007).

This post written by Rollie Goss.

NEW YORK COURTS ADDRESS DISCOVERY AND VENUE DISPUTES IN CONTRACT RESCISSION CASE INVOLVING ALLEGED FINITE REINSURANCE TRANSACTION

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In a recent discovery dispute between Udayan Ghose (the former Chairman of the Board of Directors of New Cap Reinsurance Corporation ) and CNA Reinsurance, a New York trial court compelled CNA to produce underwriting manuals and guidelines, claims handling manuals, and documents concerning whether it sold finite reinsurance. Plaintiffs argued that the underwriting manuals and other such documents were necessary to disprove defendants’ defense of rescission of the D&O liability policy at issue in the litigation. CNA argued that its underwriting materials were irrelevant since a third party (Encon Underwriting) was responsible for underwriting the policy. Because the defendants were arguing that they would not have issued the policy if they had known of certain misrepresentations made by New Cap, the court concluded that the requested documents were discoverable as being relevant to the issue of materiality. Ghose v. CNA Reinsurance Co. Ltd, No. 108121/04 (N.Y. Sup. Ct., Aug. 20, 2007).

Just a few weeks later, the New York Supreme Court Appellate Division issued an opinion on defendants’ appeal of an order denying a motion to dismiss on forum non conveniens grounds. In a unanimous decision, the Appellate court reversed and granted the motion to dismiss on the condition that the defendants consent to jurisdiction in either Australia, England, or Bermuda, and to waive any statute of limitations defense. The court noted in dicta that if the case had remained in New York state court, it would have sustained an interim award of defense costs, pending resolution of the insurers’ attempt unilaterally to rescind the underlying policy. Ghose v. CNA Reinsurance Co. Ltd, 2007 NY Slip Op 06572 (NY App. Div. Sept. 6, 2007).

This post written by Lynn Hawkins.

COURT RULES ON QUESTIONS OF DIRECT ACCESS TO REINSURANCE PROCEEDS BY INSURED UPON INSOLVENCY OF INSURER/REINSURED

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Joel Ario, Commissioner of the Pennsylvania Department of Insurance, acting in his capacity as Liquidator of Reliance Insurance Company, initiated this action against Swiss Re and Tribune Company seeking a declaration that Tribune was not entitled to direct access to a series of reinsurance proceeds payable under various agreements between Swiss Re and Reliance. Tribune insured its workers’ compensation risks with Reliance, which was a fronting insurer that reinsured the risks with Swiss Re. When Reliance was declared insolvent, the issue arose as to whether Reliance’s reinsurance with Swiss Re was an asset of Reliance’s estate, or whether Tribune could gain direct access to the reinsurance proceeds. Generally, reinsurance is an important asset of the estate of the insolvent reinsured. However, if the reinsured does not take significant risks as an insurer, instead merely passing through the risks to the reinsurer, the ultimate insured may obtain direct access to the reinsurance proceeds.

The relationships were structured through two written agreements, which received different treatment by the court. The referee appointed to resolve the dispute concluded that Tribune was not entitled to direct access to the reinsurance proceeds under a Gross Compensation Program (GCP) agreement, but was entitled to direct access to proceeds under a Loss Portfolio Transfer (LPT) agreement. Both the Liquidator and Tribune filed objections. The Commonwealth Court of Pennsylvania sustained the findings of the Referee, concluding that: (1) Tribune was not entitled to direct access to the proceeds payable by Swiss Re to Reliance under the GCP because the Gross Compensation Program was not a true reinsurance arrangement, but rather, was more akin to traditional insurance; and (2) Tribune was, however, entitled to direct access to payments under the LPT because the evidence established that Reliance was a fronting company, and therefore the LPT was not an asset of the Reliance Estate. Ario v. Swiss Reinsurance America Corp. and Tribune Co., NO. 860 M.D. 2003 (Pa. Commw. Ct., Dec. 21, 2007).

This post written by Lynn Hawkins.

NURSING HOME ARBITRATION AGREEMENT UPHELD

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A former Air Force intelligence officer with a bachelor’s degree in English and 27 years of experience as a claims examiner and manager for an insurance company, pursuant to a power of attorney and health care directive, signed papers admitting his 91-year old father to a nursing home. The arbitration provision was presented as a separate document, was not a requirement for admission and was discussed prior to its execution. After the father passed away and negligence claims were filed, a motion to compel arbitration was filed, and the validity of the arbitration provision was contested. The Massachusetts Supreme Court, applying both Massachusetts law and the Federal Arbitration Act, found that the arbitration agreement was enforceable, and not unconscionable. Some of the defendants were parties to the arbitration agreement, while others were not. The lower courts had held that it was inequitable and inefficient to force the plaintiff to litigate against some defendants in court and others in arbitration, but the Supreme Court disagreed, holding that this was “the necessary result of the choice that Miller made when he signed the arbitration agreement.” Miller v. Cotter, 448 Mass. 671 (Mass. 2007).

This post written by Rollie Goss.