Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Captive Insurer’s Claims Against Reinsured Survive Motion To Dismiss

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Mount Mansfield, a captive insurance company for workers’ compensation claims, filed a Complaint against its reinsured, American International Group (AIG) and several of its affiliates alleging that AIG and its affiliates improperly handled workers’ compensation claims, inflated the value assigned to Mount Mansfield’s reserve requirements, and unnecessarily forced Mount Mansfield into rehabilitation, resulting in damage to the corporation.

The circuit court dismissed the Complaint, finding that the claims were barred by the doctrine of res judicata based upon a prior lawsuit. The prior proceeding involved a dispute between Mount Mansfield’s sole shareholder, MMIG, and AIG. The Illinois Court of Appeals reversed the circuit court’s ruling, concluding that Mount Mansfield was not a party to the prior action nor in privity with the parties that brought that action. Under Illinois law, privity is said to exist between parties who adequately represent the same legal interests.

In reaching its decision, the court explained that “a shareholder of a corporation has no personal or individual right to pursue an action against third parties for damages resulting indirectly to the shareholder because of an injury to the corporation.” Because MMIG was unable to establish its right to bring an action on Mount Mansfield’s behalf, MMIG could not adequately represent the legal interest of Mount Mansfield in those proceedings. Mount Mansfield Ins. Group v. American International Group, Inc., No. 05-L-6662 (Ill. Ct. App., Third Division, March 30, 2007).

Third Circuit Holds Arbitrator, Not Court, Decides Whether To Consolidate Arbitration Proceedings

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In an appeal of a District Court decision discussed in an August 30, 2006 posting in this blog, the Third Circuit recently affirmed a district court’s ruling that an arbitrator, not a court, should decide whether coverage disputes under essentially identical insurance contracts should be arbitrated separately on a contract-by-contract basis or collectively in a consolidated arbitration.

The underlying dispute related to the payment of asbestos claims under reinsurance coverage that Westchester Fire Insurance Company purchased from certain Lloyd’s of London reinsurers. The parties disagreed as to how to characterize the coverage at issue.

The Third Circuit’s decision relied heavily on two recent Supreme Court decisions, namely, Howsam v. Dean Witter Reynolds, Inc. and Green Tree Financial Corp. v. Bazzle. In light of this authority, the parties’ agreement to arbitrate their disputes, contractual silence as to the consolidation issue, and the longstanding federal policy favoring arbitration, the Court could see no reason why this procedural issue should not be resolved in arbitration. Certain Underwriters at Lloyd’s v. Westchester Fire Insurance Company, No. 06-1457 (3d. Cir., June 12, 2007).

Court Rejects Implication of Follow the Settlements Provision into Facultative Reinsurance Certificate

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American Re-Insurance provided a facultative reinsurance certificate to Specialty National Insurance (now known as American Motorists Insurance Co.), which had reinsured the Montana Municipal Insurance Authority, a municipal insurance pool that provides insurance to its member entities, including the city of Great Falls, Montana. A dispute arose under the facultative reinsurance when a claim was paid and American Re disagreed as to the interpretation of some of the coverage underlying its reinsurance. Although the facultative certificate did not contain a typical “follow the settlements” provision, American Motorists contended that language in the certificate had the same effect. Interpreting the facultative certificate, the district court disagreed, finding that there was no follow the settlements provision in the certificate. The court therefore granted summary judgment to American Re with respect to a declaratory judgment claim that sought a declaration that American Re was obligated to indemnify American Motorists under the certificate pursuant to the follow the settlements doctrine. American Motorists ins. Co. v. American Re-Insurance Co., Case No. 05-5202 (USDC N.D. Cal. May 29, 2007).

WTC Insurance Settlement Already Results in Reinsurance Arbitration

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On June 6, we reported on a settlement reached with a number of insurers with respect to the destruction of New York’s World Trade Center towers. SCOR, which provided reinsurance to one of the settling insurers, Allianz Global Risks, has issued a press release stating that the settlement agreement “does not respect the terms and conditions of the Certificate of Reinsurance between SCOR and Allianz,” and stating that SCOR has requested that the issue of whether the settlement is within the coverage of its reinsurance be referred to arbitration.

District Court Compels Discovery of Reinsurance Agreement In Declaratory Judgment Action Between Insurers and Insured

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In an insurance coverage case involving fifteen insurance companies and one insured, the insured, Bunge North America, filed a motion to compel discovery relating to reinsurance, loss reserves, claims handling manuals, and document retention policies. The insurers filed a declaratory judgment action against Bune seeking a declaration that under the terms of the policy, they did not have an obligation to defend, indemnify, or reimburse Bunge for damages caused by pollution at one of Bunge’s sites. In various counterclaims and cross claims, Bunge alleged that the insurers acted in bad faith in failing to fairly investigate Bunge’s coverage claims in a timely manner.

The Kansas District Court ruled that the reinsurance agreement, normally beyond the scope of discovery in a declaratory judgment action, was discoverable because Bunge had brought several counterclaims in which it sought a monetary award. Specifically, the court found that reinsurance was relevant “for purposes of rebutting the Insurers’ defense of late notice, for purposes of establishing Bunge’s claims of bad faith and improper handling, and for purposes of reconstructing the terms of any lost policies.” United States Fire Ins. v. Bunge North America, Case No. 05-2192-JWL-DJW (USDC D. Kan. May 25, 2007).