Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CALIFORNIA COURT FINDS NO ATTORNEY-CLIENT RELATIONSHIP EXISTS BETWEEN REINSURER AND COUNSEL FOR REINSURED

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The issue presented in this case relates to the nature and extent of the duty, if any, owed to the reinsurer by counsel retained by the ceding insurer to protect the interests of the insured under the underlying policy.

In this action for professional negligence, Zenith Insurance Company (“Zenith”) entered into a contract of reinsurance with Royal Insurance Company (“Royal”). Under the contract, Zenith agreed to reinsure 100% of Royal’s exposure under certain liability policies. After claims were asserted against Royal’s insured, Royal retained the law firm of Cozen O’Connor to provide legal services with respect to the defense of such claims. Ultimately, Zenith filed this action for professional negligence against Cozen alleging that an attorney-client relationship existed based on either: (1) an implied in fact contract; or (2) the theory that Zenith was an intended beneficiary of Cozen’s legal services.

The California Court of Appeals disagreed with Zenith for two reasons. First, under the “intended beneficiary” theory, both Cozen and Royal must have intended Zenith to be the beneficiary of legal services Cozen was to render. The Court held that the fact that Cozen’s representation could incidentally benefit Zenith did “not sufficiently satisfy this predicate.” Moreover, the fact that Zenith agreed to reimburse Royal for all legal fees did not change the conclusions. Second, there was no express agreement between Zenith and Cozen, and Zenith did not allege the predicate facts necessary to establish an implied contract between it and Cozen. Zenith Ins. Co. v. Cozen O’Connor, Case No. B184684 (Cal. Ct. App., March 21, 2007).

Delaware Commissioner approves acquisition of Royal Indemnity

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The Delaware Insurance Commissioner has approved an application by Royal and Sun Alliance Insurance Group plc, a British insurance holding company, to sever its relationship with its US subsidiaries. The approval is subject to a number of conditions. The companies involved are Royal Indemnity Company, Security Insurance Company, Guaranty National Insurance Company, and Royal Surplus Lines Insurance Company. In the Matter of: The Proposed Acquisition of Royal Indemnity Company, Docket No. 313 (Del. Insur. Dept. Feb. 20, 2007).

REHABILITATED INSURERS PERMITTED TO DEFER PAYMENTS TO FAIR PLANS

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The Rhode Island Supreme Court, in a de novo review, denied an appeal by the Rhode Island and Massachusetts Fair Access to Insurance Requirements (FAIR) Plans relating to a judgment authorizing the deferral of certain payments owed to them under State and Federal law. The Rhode Island and Massachusetts FAIR Plans are funds statutorily established for the purpose of providing basic property insurance to persons who would otherwise be unable to obtain it.

In 2003, the Rhode Island Superior Court placed Pawtucket Mutual Insurance Company (PMIC) and its subsidiary, Narragansett Bay Insurance Company (NBIC) into rehabilitation after finding that their financial condition was hazardous to their policyholders, creditors and/or the public. As a way to revitalize PMIC and NBIC, the Rehabilitator converted PMIC from a mutual company to a stock company. In order to facilitate the sale of the newly formed stock company, the Rehabilitator filed a petition to defer PMIC and NBIC payments of FAIR Plan assessments. The FAIR plans filed objections.

Relying on the broad statutory authority granted to the Rehabilitator to take steps necessary to revitalize an insurer, the court affirmed the decision to allow deferral of payments to the FAIR Plans. Marques v. Pawtucket Mutual Insurance Company, Case No. 2006-52-Appeal (R.I. Feb. 19, 2007).

UK Court enjoins depositions in US lawsuit

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In the autumn of 2006, facultative reinsurance specialists left Benfield to join Aon. Although the principal individuals involved worked in the UK, there were allegations of conspiracy and other misconduct in both the UK and the US. Benfield filed suit in US District Court in New York in October 2006, and in the UK the following month. The UK proceeding proceeded towards a trial in March 2007, while the US proceeding proceeded into discovery without a trial date being set. When it became apparent that Benfield would seek to depose critical witnesses in the US suit prior to the UK trial, while trial preparations were underway, the UK Court enjoined Benfield from taking the depositions until after the UK trial. Although reluctant to take action that would interfere with the US suit, the UK Court noted the slow pace of progress of the US suit, and articulated nine factors that it took into account in reaching its decision. This is a very interesting opinion dealing with the “coordination” and relationships between a UK and a US proceeding. Benfield Holdings Limited v. Aon Limited, [2007] EWHC 171 (Queen's Bench Feb. 21, 2007).

In mid-March, 2007, Aon announced it reached “a global and comprehensive settlement with Benfield… relating to former Benfield facultative reinsurance employees…who will be joining Aon on April 1.” Under the terms of the settlement, Benfield will receive payments over time totaling more than $18 million dollars.

INVESTOR LOSES APPEAL TO VACATE ARBITRATION AWARD

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After losing several million dollars in high-risk investments, Michael Lessin filed a statement of claim alleging misrepresentation and negligent supervision against his broker, Brett Bernstein and investment firm, Merrill Lynch. A panel of three NASD arbitrators heard evidence over a six-day period and found Merrill Lynch, but not Bernstein, liable to Lessin for compensatory damages of $32,975. Lessin sought to vacate the arbitration award on the basis that the arbitration panel refused to hear one of his expert witnesses and demonstrated a manifest disregard of the law in awarding compensatory damages.

The D.C. District Court affirmed the arbitration award and Lessin appealed to the D.C. Circuit Court of Appeals. Lessin argued that the arbitration panel engaged in misconduct by refusing to hear pertinent evidence from one of his two designated expert witnesses. Lessin proffered two expert witnesses to show that certain notes regarding his investments stored in a Merrill Lynch computer system were fabricated after the fact. While the Court of Appeals recognized that the experts were testifying to different aspects of the computer system (one on personal observation/testing and the other on methodology), the court concluded that “[e]very failure of an arbitrator to receive relevant evidence does not constitute misconduct requiring vacatur of an arbitrator’s award.” The Court of Appeals also rejected Lessin’s claim that the panel manifestly disregarded the law because Lessin was unable to demonstrate that the panel acted beyond its authority or that the award violated an explicit public policy.

This is yet another, in a long line of cases, demonstrating the limited judicial review of arbitration awards, and the limited success that parties have in overturning arbitration awards. Lessin v. Merrill Lynch, Case No. 06-7067 (D.C. Cir. Mar. 16, 2007).