Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT RULES ON VALIDITY OF AMENDMENTS TO FEDERAL CROP REINSURANCE PROGRAM

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The D.C. district court recently addressed whether the Federal Crop Insurance Corporation (“FCIC”) had authority to promulgate two federal regulations relating to the administration of its reinsurance agreements, and if so, whether they also had authority to promulgate an amendment to those regulations. Plaintiffs, agricultural insurance providers, alleged the FCIC’s unilateral amendments to their reinsurance agreements constituted a breach of contract.

Following a lengthy procedural path, the plaintiffs filed their claim with the Department of Agriculture Board of Contract Appeals. The Board concluded that plaintiffs’ claims were time barred pursuant to a federal regulation that mandated a 45-day period for bringing administrative claims. Plaintiffs subsequently filed a complaint in the D.C. district court requesting the court conclude that the agency lacked jurisdiction to hear the plaintiffs’ claims and to overturn the agency’s interpretations of the contract and relevant statutes and regulations. Plaintiffs also sought a determination that the agency’s procedures and final decision violated the Constitution. Both parties filed motions for summary judgment.

Applying the “Chevron deference” analysis, the court concluded that the FCIC had authority to promulgate both regulations. With respect to the amendment, the court concluded that it qualified as an “interpretive rule,” and therefore was not required to comply with the notice and comment requirements under the APA. As such, the rule was valid, and the court granted the defendant’s motion for summary judgment as to several of plaintiff’s claims. The court remanded some of plaintiffs’ claims to the Board to address what action triggered the limitations period and whether the 45-day limitations period was controlling in light of a conflicting 6-year statutory limitation period.

Finally, the court dismissed plaintiffs’ constitutional claims stating that they were “without merit” and dismissed plaintiffs’ contract and unjust enrichment claims for failure to exhaust administrative remedies. Ace Property and Casualty Ins. Co. v. Federal Crop Ins. Corp., Case No. 06-1430 (RMU) (D.D.C., Sept. 28, 2007).

IRS PROPOSES ELIMINATION OF LONG-STANDING TAX BENEFIT FOR CAPTIVES

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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

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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

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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

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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.