Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DENIES CROSS MOTIONS FOR SUMMARY JUDGMENT IN CASE SEEKING RESCISSION OF TWO REINSURANCE FACILITIES

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This dispute relates to two reinsurance contracts between Axa Versicherung (“Axa”) and three subsidiaries of American International Group (collectively, “AIG”). In 1996, Axa’s predecessor in interest, Albingia Verischerungs AG, agreed to participate in a reinsurance facility for AIG for a fourteen month period. Following that term, Algingia agreed to renew its participation for a thirteen month period commencing on December 1, 1997. Axa sought to rescind those contracts on the basis of fraud, alleging that AIG misrepresented or failed to disclose certain material facts in connection with the negotiation of those contracts. Specifically, Axa alleged that AIG misled Algingia concerning what sort of facility the contracts created, “facultative” or “facultative obligatory.” Both parties moved for summary judgment – Axa on the merits and AIG on a statute of limitations defense.

The Southern District of New York denied both motions in their entirety. With respect to AIG’s statute of limitations argument, the court recognized that Axa initiated this action after the six year statute of limitations expired, however, could not conclude that the case was time-barred because “the determination of when plaintiff reasonably could have discovered the alleged misrepresentations involves genuinely disputed issues of fact not appropriate for summary judgment.” The court concluded that those same disputed issues of fact rendered the case inappropriate for summary judgment on the merits. Axa Versicherung v. New Hampshire Ins. Co., Case No. 05-10180 (S.D.N.Y. July 23, 2007).

DISTRICT COURT AFFIRMS BANKRUPTCY COURT ORDER DENYING IMPOSITION OF CONSTRUCTIVE TRUST

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This matter came before the Northern District of New York on appeal from a Bankruptcy Court Order, awarding Richard Breeden, Chapter 11 trustee (the “Trustee”) of The Bennett Funding Group, judgment on the pleadings and dismissing the Ades and Berg Groups’ (the “Ades Investors”) counterclaims for imposition of a constructive trust upon the proceeds of a reinsurance policy allegedly covering the Ades Investors’ losses. The proceeds of the reinsurance policy were to be paid to the Trustee pursuant to the terms of a settlement agreement with Sphere Drake.

In a de novo review, the Court affirmed the Bankruptcy Court’s Order, concluding that the Ades Investors’ claim failed to satisfy all four elements applicable under New York law for the imposition of a constructive trust. Specifically, the Court concluded that while three of the four elements were satisfied, the fourth element, requiring a showing that the Trustee was unjustly enriched when he retained the settlement proceeds from Sphere Drake, was not met. In re: The Bennett Funding Group, Case No. 97-70049 (N.D.N.Y. July 10, 2007).

COURT OF APPEALS FINDS TERMS OF ALLEGED SETTLEMENT OF CLAIM NOT SUBJECT TO SUMMARY JUDGMENT

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Baylor Health Care System (“Baylor”) was insured by Church University Insurance Company, a captive insurer, which was reinsured by Employers Reinsurance Corporation (“ERC”). Following the mediation of a malpractice claim involving serious brain damage, Baylor and ERC agreed to jointly fund a settlement of the claim. A dispute arose as to whether this agreement was merely an interim funding of the settlement, subject to later apportionment between Baylor and ERC, or a final settlement of insurance obligations. Baylor filed an action for breach of contract, and seeking a declaratory judgment against ERC, and the district court entered summary judgment in favor of ERC, finding that a series of post mediation e-mails between counsel for Baylor and counsel for ERC amounted to a full settlement of all disputes between them. The Fifth Circuit reversed, finding that there were disputed issues of material fact as to whether the argreement was a complete settlement or merely an agreement to fund a settlement with the claimant, envisioning a later allocation of the settlement amount through arbitration or a mock trial. Baylor Health Care System v. Employers Reinsurance Corporation, Case No. 06-10582 (5th Cir. July 5, 2007).

REINSURER’S CLAIMS DISMISSED FOR FAILURE TO COMPLY WITH LIQUIDATION ORDER

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This action was brought by the Statutory Liquidator of two insolvent Pennsylvania insurers (Legion and Villanova) against their reinsurer, Stateco Insurance Company. Plaintiff sought relief for an alleged breach of contract arising out of a Management Agreement between the insurers and Stateco. Stateco asserted several counterclaims.

Plaintiff moved to dismiss Stateco’s counterclaims on the basis that Stateco did not comply with an Order of Liquidation, pursuant to which anyone asserting claims against Legion was required to file a proof of claim on or before June 30, 2005. Defendants argued that their claims could not be barred by the Liquidation Order in light of Ninth Circuit precedent (Hawthorne Savings Bank v. Reliance Insurance Co.), as well as lack of personal jurisdiction, among other reasons.

In July, a California District Court granted plaintiff’s motion to dismiss defendant’s counterclaims. The court distinguished Hawthorne on the basis that the claim in Hawthorne was asserted by a policyholder against its insurer which had no connection to the insolvency proceedings. In contrast, the Court held the instant case was “inextricably intertwined with the liquidation proceedings, and Stateco’s counterclaims seek to interfere with those proceedings.” Additionally, the Court held that it did have personal jurisdiction over the defendant as a result of its long-term agency relationship with a Pennsylvania insurer in addition to the choice of law clause contained in the Management Agreement. The court summarily dismissed Defendant’s remaining arguments relating to mutuality and recoupment. Koken v. Stateco Inc., Case No. 05-03007 (N.D. Cal. July 25, 2007).

STATE SUPREME COURT REJECTS PLEA TO ADD PREJUDGMENT INTEREST TO ARBITRATION AWARD

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The Washington Supreme Court recently held that an arbitration award does not transform an unliquidated claim into a fully liquidated sum entitling the prevailing party to prejudgment interest. The underlying dispute arose out of a building contract between the Department of Corrections and Fluor Daniels (“Fluor”). The parties agreed to resolve the dispute in binding arbitration. The dispute proceeded to arbitration and the arbitrator found in favor of Flour Daniels for $5,997,645. Three weeks later, Fluor reduced the award to judgment and sought prejudgment interest from the date of the arbitration until judgment.

The court held that an arbitration decision generally does not convert unliquidated damages into liquidated damages and does not entitle the winner to prejudgment interest between the date of the arbitration decision and entry of judgment. Rather, unliquidated damages accrue interest from the date of judgment, not the date of an arbitration award. State of Washington Department of Corrections v. Fluor Daniel and Fireman’s Fund Ins. Co., Case No. 78290-3 (Wash. July 6, 2007).