Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

INSURANCE COMPANY SANCTIONED FOR FAILURE TO COMMUNICATE

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A New York district court sanctioned Excess Insurance Company in the amount of $4,500 for its failure to communicate with the defendants and with the court. The plaintiff initially filed this action in December 2005, seeking reimbursement under reinsurance agreements executed in 1979 and 1980 with Metropolitan Reinsurance Company. At the initial pre-trial conference, Defendant Odyssey America maintained that it was not the proper party because it was not the successor-in-interest to Met Re. Shortly thereafter, plaintiffs commenced arbitration proceedings against the proper party. For the following six months, the defendant and the court were unable to contact the plaintiff regarding voluntary dismissal of the action. The court, recognizing plaintiff’s “grossly negligent” conduct, sanctioned plaintiff’s in the amount of $4,500 and dismissed the case with prejudice. Excess Ins. Co. v. Odyssey Am. Reinsurance Co., No. 05 Civ. 10884 (NRB), (USDC S.D.N.Y. Nov. 28, 2007).

This post written by Lynn Hawkins.

NEW JERSEY SUPREME COURT HOLDS THAT IBNR CLAIMS CANNOT PARTICIPATE IN FINAL DIVIDEND PLAN FOR INSOLVENT INSURER

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Integrity Insurance Company, which among other risks insured environmental and products liability risks with long claim tails that were subject to reinsurance, was declared insolvent. The issue arose as to whether the IBNR claims for such risks could participate in the liquidation plan, which would mean that the liquidator could collect on such claims from Integrity’s reinsurers immediately. The applicable New Jersey statute provides that only “absolute” claims may participate in a liquidation plan. The liquidation court held that IBNR claims could participate in the liquidation plan, but the Court of Appeals reversed (reported on in an October 11, 2006 post to this blog). The New Jersey Supreme Court held that since IBNR claims are actuarial estimates, they are not “absolute” as of the claim bar date, and therefore cannot participate in the liquidation plan. The holding turned on the interpretation of “absolute,” which the Court held required that the claims be capable of being determined on their own merit, standing on their own, independent of any other claim. Since IBNR claims are estimated in part based upon the insurer’s historical experience, they did not qualify as being “absolute.” It had been estimated that allowing IBNR claims, instead of requiring that they be considered in a run-off mode, would have saved $45 million in administrative expense. This principle could have a significant effect upon the duration of liquidation proceedings, their expense and the amount and timing of funds available from reinsurance to fund liquidation plans. In re Liquidation of Integrity Insurance Company, A-29 (December 13, 2007).

This post written by Rollie Goss.

OREGON SUPREME COURT PIERCES SUPERIOR NATIONAL CORPORATE VEIL IN INSOLVENCY CONTEXT

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The case involved a dispute over a $10.6 million deposit that Superior National Insurance Company (“SNIC”) made with the Oregon Department of Consumer and Business Services (“DCBS”). The Court was asked to decide whether DCBS could use SNIC’s deposit to satisfy the statutory liabilities of an insolvent insurer, Commercial Compensation Casualty Company (“CCCC”). SNIC was a retrocessionaire of CCCC, and both SNIC and CCCC were under the common control of a parent holding company, Superior National Insurance Group (“Superior National”).

The court first concluded that a retrocessionaire was a “reinsurer” for purposes of the insurance code, making its statutory deposits subject to control by DCBS. Despite this, the court held that SNIC was not liable for all of CCCC’s losses since, under the pooling agreement, SNIC only agreed to pay for 22% of the losses and expenses of the pooled business.

The court next concluded that SNIC and CCCC were “operationally a single company for all practical purposes,” and held that Superior National caused CCCC to violate the Insurance Code by failing to make the required deposit. Because SNIC and CCCC were under the common control of Superior National and because Superior National took actions to evade government regulation, the Oregon Supreme Court held that the requirements for corporate veil piercing were met. As such, the Court ordered Superior National to reimburse the Oregon Insurance Guaranty Association for payments made on behalf of CCCC. Oregon Insurance Guaranty Association v. Superior National Insurance Company, No. 00C-18554, (Or. Nov. 29, 2007).

This post written by Lynn Hawkins.

COURT DENIES MOTION TO VACATE ARBITRATION AWARD

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Commercial Risk Reinsurance Company Limited (“Commercial Risk”) brought this action to vacate an arbitration award against it and in favor of Security Insurance Company of Hartford (“Security”). In the underlying arbitration, Security sought to recover losses arising from workers compensation programs covered by two reinsurance agreements entered into by the parties in 1999 and 2000. In those contracts, Commercial Risk agreed to accept a certain share of Security’s interests and liabilities associated with the covered workers compensation programs insured by Security. Commercial Risk denied payments of amounts billed by Security under the treaties contending that a portion of the losses were not covered. The arbitration panel found in favor of Security.

Commercial Risk argued that the award should be overturned because: (1) the panel issued the Award jointly rather than severally against the two separate Commercial Risk entities; (2) the arbitration proceeding was fundamentally unfair because the panel excluded testimony of Commercial Risk’s witnesses and exhibits pertaining to damages; and (3) the panel exceeded its authority in a variety of ways. The Court rejected all of Commercial Risk’s arguments finding “no evidence that the arbitrators engaged in misconduct, or exceeded their authority, or that Security committed any fraud sufficient to vacate the Award.” Commercial Risk Reinsurance Co. Ltd. v. Security Insurance Co. of Hartford, Case No. 07 Civ 2772 (S.D.N.Y., Nov. 30, 2007). Commercial Risk’s motion for reconsideration also was denied. Commercial Risk Reinsurance Co. Ltd. v. Security Insurance Co. of Hartford, Case No. 07 Civ 2772 (S.D.N.Y., Dec. 12, 2007).

This post written by Lynn Hawkins.

ENGLISH REINSURANCE ASSETS TO BE REMITTED TO AUSTRALIAN LIQUIDATORS, BUT FOR WHAT REASON?

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In a July 12, 2007 post, we reported on issues relating to HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. The House of Lords disagreed, allowing an appeal and ruling that the English assets of the insolvent insurer should be remitted to the Australian liquidator. There were sharp differences of opinion as to why exactly that should be the case.

The HIH group presented winding up petitions to the Supreme Court of New South Wales in 2001. Some of the assets, which consisted mostly of reinsurance claims on London policies, were situated in England, so English provisional liquidators were appointed. The Australian judge subsequently issued winding up orders and sent a letter to the High Court in London asking that the provisional liquidators remit the assets to the Australian liquidators for distribution in accordance with Australian law. The question on appeal was whether the English court could and should accede to the request. The alternative was a separate liquidation and distribution of the English assets under the English Insolvency Act of 1986. The manner of distribution mattered because Australian law generally gave priority to insurance creditors at the expense of other creditors, while the same result would not obtain under English law.

The decision was resolved primarily by analyzing the tension between section 426(4) of the Insolvency Act, which allows an English court with insolvency jurisdiction to assist designated foreign courts (including Australian courts), and section 426(5) of the same Act, which allows a court discretion to provide assistance in accordance with the rules of private international law, including the common law principle of “modified universalism.” That principle requires United Kingdom courts to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution. While the court stated that a refusal to remit the assets might be appropriate if it causes a manifest injustice to a creditor, it ultimately found that the Australian distribution was not unacceptably discriminatory or contrary to public policy.

The dispute was focused on whether the basis of jurisdiction ought to be grounded in the common law considerations allowed by section 426(5) or the discrete statutory authority of section 426(4). Lord Hoffmann would have allowed the remission solely through the exercise of common law principles. He argued that under the common law doctrine of ancillary winding up, English courts may “disapply” parts of the statutory scheme by authorizing the English liquidator to allow actions he is obliged by statute to perform in accordance with English law to be performed by the foreign liquidator in accordance with foreign law. Others, including Lord Phillips, rejected this view: “I do not propose to stray from the firm area of common ground [of allowing the appeal under section 426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.” Lord Neuberger, too, opposed Lord Hoffman’s view, stating that he took “the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act.” McGrath v. Riddell [2008] UKHL 21 (Apr. 9, 2008).

This post written by Brian Perryman.