The IRS has proposed a regulation (full text here) which would postpone the tax deduction for an incurred loss arising from related party business until the loss is paid, instead of permitting an earlier deduction for certain loss reserves. This proposal has surprised the industry, as it was issued without any notice. The proposal would affect a single parent captive filing a consolidated tax return with its parent. There is concern among the US captive regulators that this would eliminate an important tax incentive for US domiciled captives, resulting in captives moving offshore. The Captive Insurance Companies Association has posted a frequently asked question document relating to this proposal. There is a comment period open on this proposal until December 27, 2007.
COURT CONFIRMS ARBITRATION AWARD BASED UPON A FAILURE TO CARRY A BURDEN OF PROOF
An arbitration proceeding ensued as a result of a motor vehicle accident. The arbitrator could not decide which party was at fault, and therefore held in favor of the respondent, finding that the Claimant had failed to carry her burden of proof on her affirmative claims. The losing party sought to vacate the award, contending that the arbitrator had improperly presumed her to have been at fault, in manifest disregard of law. The court disagreed, finding that an award based upon a simple failure to sustain one’s burden of proof was appropriate. Beverly v. Collier, Case No. 06-1414 (USDC E.D. Ark. Oct. 12, 2007).
UK COURT GRANTS AVOIDANCE OF REINSURANCE AGREEMENTS DUE TO MISREPRESENTATIONS IN THE PLACEMENT PROCESS
The UK Commercial Court, Queen’s Bench Division, has granted a request to avoid several reinsurance agreements based upon misrepresentations in the placement of the treaties. The treaties were first loss facultative reinsurance agreements, and the court found that there had been material misrepresentations of the cedent’s underwriting policies. Specifically, the court found that although the placement materials had represented that the cedent insured risks subject to deductibles of from £500,000 to 1 million, the reinsured risks in actuality had deductibles of from £100,000 – 200,000. The court found that the misrepresentations were of a present fact, rather than of future intention, and were highly material to the acceptance of the risk given the conditions of the particular market. The court found that if the actual underwriting practices of the cedent had been disclosed, the reinsurer would not have agreed to the reinsurance agreements. The fact that the reinsurance was a first loss cover made the amount of the deductibles particularly important. Limit No. 2 Limited v. Axa Versicherung AG [2007] EWHC 2321 (Comm. Queen’s Bench October 17, 2007).
COURT HOLDS REQUEST FOR PRODUCTION OF ALL DOCUMENTS FILED WITH ANY REGULATORY AUTHORITIES FOR TEN YEARS OVERBROAD
Excess Insurance Company reinsured H. S. Weavers on more than 500 reinsurance contracts, and entered into a commutation agreement with Weavers. Rochdale Insurance Company partially reinsured one of the reinsurance agreements. Excess sued Rochdale, and sought production of every document filed by Rochdale with regulatory authorities over a ten year period of time. On a motion to compel, the court held that the request was overbroad. Excess did not state a rationale for the breadth of the request. Counsel had failed to meet and confer on the discovery dispute as required by a local rule, prompting a rebuke from the court. Excess Insurance Co. v. Rochdale Insurance Co., Case No. 05-10174 (USDC S.D. N.Y. October 4, 2007). Background on this dispute may be found in a Memorandum of Law filed in opposition to the motion to compel.
NAIC REINSURANCE TASK FORCE ADVANCES COLLATERAL AND REINSURANCE REGULATION PROPOSAL
The NAIC’s Reinsurance Task Force has advanced a proposal “to comprehensively modernize reinsurance regulation in the United States.” The proposal is outlined in a press release issued in conjunction with the recent meeting of the Annual Conference of the International Association of Insurance Supervisors. The proposal is in two parts: (1) NAIC Reinsurance Supervision Review Department; draft proposal to grant recognition of regulatory equivalence to non-U.S. insurance supervisors; and (2) Port of Entry State Criteria for Reinsures [sic] Supervised in Jurisdictions Approved by the NAIC Reinsurance Supervision Review Department and U.S. Licensed Reinsurers. Generally, the proposals provide for the regulation of US domiciled reinsurers through a single state, and the agreement to allow non-US domiciled reinsurers to be regulated in the United States through a single state “port of entry” if the foreign regulatory authorities provide a regulatory regime for the company that is functionally equivalent” to that in the United States The proposals also partially change the collateral requirements to a credit-based system, but do not by any means completely eliminate the collateral requirements. The NAIC has also posted on its website a PowerPoint presentation titled NAIC Reinsurance Collateral Update. The next step in this process is a meeting on November 7-8 in Atlanta in conjunction with the NAIC Financial Summit. Comments on the proposal are posted on the NAIC Reinsurance Task Force’s web site.