Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

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.