Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UK COURT OF APPEALS AFFIRMS RULING THAT LLOYD’S NAMES CAN NOT SUE NATIONAL GOVERNMENT OVER IMPLEMENTATION OF AN EEC INSURANCE DIRECTIVE

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On November 28, 2006, we reported on a ruling by the UK Commercial Court that Lloyd’s Names did not have a cause of action against the government for alleged damages due to the improper implementation of an EEC Insurance Directive. The UK Court of Appeals has affirmed that decision, holding that the assumed failure to transpose the requirements of the Insurance Directive into national law can not be the basis for claims against the national government by the Names. Having disposed of the appeal on this issue, the Court of Appeals did not reach the alternative holding that the claims of the Names were barred by the statute of limitation. Poole v. Her Majesty’s Treasury [2007] EWCA Civ 1021 (Oct. 24, 2007).

This post written by Rollie Goss.

DAMAGES CALCULATION REVERSED – COMMISSION ADJUSTMENTS SHOULD HAVE BEEN BASED ON ‘INCURRED’ RATHER THAN ‘REASONABLE’ LOSSES

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Transatlantic Reinsurance Company (“TRC”), a reinsurer on non-standard automobile insurance policies, and Home State County Mutual Insurance Company (“Home State”) (the ceding and fronting carrier) sued Gamma Group, the agent responsible for binding and adjusting the policies, for breach of contract. The trial court concluded that Gamma breached its contract by failing to factor the run-off into its commission adjustment and instead retaining the premiums from which the adjusted commission payments were to be made.

Gamma appealed the trial court’s judgment arguing: (1) that the trial court erred in awarding damages under the contract because losses and loss adjustment expenses on run-off claims should not have been included in the commission adjustment; and (2) that the court erred in awarding statutory attorney’s fees. In a cross-appeal, TRC and Home State argued that the court erred when it construed the contract to imply that only “reasonable” run-off payments were to be included in the commission adjustment calculation.

The Texas Court of Appeals affirmed the trial court’s judgment on the right to recover damages for breach of contract and attorney’s fees, but reversed the trial court’s judgment with respect to the amount of damages reasoning that the trial court erred by reducing the damage award based on an implied term in the contract. The court stated that “[c]ourts do not rewrite contracts to insert provisions parties could have included or imply restraints for which they did not bargain,” and concluded that “[a]lthough the trial court refer[red] to its determination as a contract construction, it …, in effect, inserted an implied covenant requiring that loss payments be reasonable. Gamma Group, Inc. v. Transatlantic Reinsurance Co. & Home State County Mutual Ins. Co., No. 05-06-00156, (Tex. Ct. App., Dec. 3, 2007).

This post written by Lynn Hawkins.

COURT REFUSES TO VACATE ARBITRATION AWARD, FINDING NO MANIFEST DISREGARD OF LAW OR EVIDENT PARTIALITY

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In an arbitration regarding the purchase of securities, the losing party sought to vacate the award on the basis that it was in manifest disregard of law and that the arbitrator was biased. The court denied the motion, finding that the manifest disregard of law claim was not that the arbitrator disregarded the law, but that he simply erred in the application of applicable law, which even if proven does not constitute manifest disregard of law. The evident partiality contention was based upon alleged conduct of opposing counsel, and its potential affect upon the arbitrator, and the arbitrator’s reviewing of documents which he then declined to admit into evidence. The court easily found that such conduct did not constitute evident partiality, which requires a showing of specific facts that indicate improper motives on the part of an arbitrator. Williams Fund Private Equity Group, Inc., v. Engel, Case No. 06-2266 (USDC D.C. Nov. 7, 2007).

This post written by Rollie Goss.

JURY FINDS AMERICAN RE-INSURANCE ACTED IN BAD FAITH AFTER SUMMARY JUDGMENT IS DENIED

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On June 19, 2007, we reported on a decision of a district court that refused to imply a follow the fortunes provision into a reinsurance agreement. Based on that finding, American Re, the reinsurer, moved for summary judgment, contending that the contracts at issue unambiguously provided that it was only obligated to pay claims that fell within the scope of the facultative certificate and it was entitled to summary judgment because Plaintiff could not make that showing. The Court disagreed, finding that because the reinsurance agreement provided the reinsured the right to settle claims in some instances, a genuine issue of material fact existed as to whether the underlying claim was covered by the facultative certificate.

Two weeks after this decision, the case went to trial, and a jury found that American Re breached its duty of good faith and fair dealing in refusing to reimburse its reinsured for the amount paid to settle the claim at issue. American Motorists Ins. Co. v. American Re-Insurance Co., Case No. C 05-5202 CW (USDC N.D. Cal. Dec. 4, 2007).

This post written by Lynn Hawkins.

ARBITRATION AWARD CAN NOT BE CORRECTED TO REFLECT FACTS NOT PRESENTED TO ARBITRATOR; PRE-JUDGMENT INTEREST GOVERNED BY STATE LAW

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Section 11(a) of the Federal Arbitration Act permits a district court to correct an “evident material mistake in the description of any person, thing, or property referred to in an award.” A district court “corrected” an arbitration award under the authority of that section to reflect that the party which lost the arbitration had paid substantially all of the liability prior to the entry of the award, even though it had been stipulated in the arbitration that the payment had not been made. The court of appeals reversed, finding that an award could be corrected under this section only if the arbitrator had made a mistake by “understanding wrongly” or “recognizing or identifying incorrectly.” The court held that ignorance, or lack of knowledge, because the parties did not convey a fact to the arbitrator, did not qualify as a mistake. The court of appeal also reversed a decision of the district court not to award pre-judgment interest, which was based upon federal law, holding that in a matter in which jurisdiction is based upon diversity of citizenship, questions relating to pre-judgment interest are governed by applicable state law. AIG Baker Sterling Heights, LLP v. American Multi-Cinema, Inc., No. 07-10130 (11th Cir. Nov. 28, 2007).

This post written by Rollie Goss.