Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT REVIVES RICO SUIT AGAINST INSURER

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The Third Circuit has revived a RICO suit against First Unum Life Insurance Co., finding that a lower court erred when it held that such a claim would interfere with state regulation of insurers. The plaintiff, Richard Weiss, brought suit under RICO against his insurer, First Unum, alleging that First Unum discontinued payment of his disability benefits as part of First Unum’s racketeering scheme involving an intentional and illegal policy of rejecting expensive payouts to disabled insured. The District Court dismissed his claim, believing that the allowance of such a RICO claim would interfere with New Jersey’s statutory regulation of insurers, and thus run afoul of the McCarran-Ferguson Act.

The Third Circuit reversed finding that the District Court’s reading of McCarren Ferguson was too narrow. The McCarran-Ferguson precludes applying a federal law only when doing so would “invalidate, impair, or supersede” state insurance law. After reviewing the totality of New Jersey's insurance regulatory scheme, including New Jersey’s Insurance Trade Practices Act and Consumer Fraud Act, the Third Circuit concluded that the District Court had erred in holding that RICO would impair it. Specifically, the Court stated “[t]here is nothing in the regulatory scheme that indicates that allowing other remedies as part of its regulation of insurance would frustrate or interfere with New Jersey's insurance regime…To the contrary, the legislation permits additional remedies … and the New Jersey courts have felt free to fashion them.” This case is one of a series which considers the issue of whether a federal statute that adds remedies not available under state law, which are not necessarily inconsistent with state law, violate McCarran-Ferguson. The counter-argument is that by affording a remedy that the state deliberately withheld, the federal statute is indeed inconsistent with state law. Weiss v. First Unum Life Ins. Co., Case No. 05-5428 (3d Cir. April 3, 2007).

RHODE ISLAND JOINS MAJORITY OF JURISDICTIONS REFUSING TO RECOGNIZE GENERAL DUTY OF DUE CARE FROM INDEPENDENT INSURANCE ADJUSTER TO INSURED

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This case arose from an insured’s allegation that its insurer both failed to defend it from claims of breach and to indemnify it for a settlement within the policy’s aggregate limit. The insured also sued the insurer’s claims administrator, presenting the novel issue of whether an independent claims administrator can be liable to an insured for bad faith claims handling, tortious interference with contractual relations, or negligence.

Applying Rhode Island law, the District Court of Rhode Island concluded that the insured could maintain a common law claim for bad faith, but could not maintain a statutory cause of action for bad faith because the statutory language limited claims to “the insurer issuing the policy.” (Emphasis added). The court also permitted the insured to proceed with a claim for tortious interference with contractual relations. The court, however, concluded that the insured could not maintain a negligence claim because “…binding [the administrator] to a duty of reasonable care viz-a-viz the insured would be illogical…without, at a bare minimum, holding…the actual insurer to the same.” In so holding, Rhode Island joined the majority of jurisdictions that have refused to recognize a general duty of due care from an independent insurance adjuster or insurance adjusting company to the insured. Robertson Stephens, Inc. and Bank of America Corp. v. Chubb Corp., Case No. 05-00360 (D.R.I. Feb. 14, 2007) .

FSA adopts regulations to facilitate special-purpose vehicles

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The UK's Financial Services Authority (“FSA”) has adopted regulations to implement portions of the European Union's Reinsurance Directive that are designed in part to facilitate the expedited formation and management of special-purpose vehicles, which may be used for securitizations or other forms of alternative risk transfer arrangements. The proposals were described in a Consultation Paper, CP06/12, Implementing the Reinsurance Directive, which was published in June 2006 with a summary and a description of the Consultation Paper in a newsletter publication. A comment period followed. Rules were adopted by the FSA effective December 31, 2006. Special-purpose vehicle Rules and Guidelines may be found in the FSA's Handbook.

Allianz issues cat bond covering flood risks

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Allianz Global Corporate & Specialty has issued a $150 million cat bond to transfer the risks of severe river floods in Great Britain and earthquakes in Canada and the United States (excluding California). See various descriptions of this bond. This is believed to be the first cat bond covering flood risks, and was written on a parametric basis, using a model prepared by Risk Management Solutions. This is the first bond issued using Blue Wings Ltd., a Cayman Islands-based special purpose vehicle, and is intended to be the first part of a $1 billion program.

Courts rule on arbitration awards

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Three recent decisions addressed whether arbitration awards should be confirmed or vacated:

  • In Hudson v. ConAgra Poultry Co., No. 06-2596 (USCA 8th Cir. Apr. 4, 2007), the Court affirmed a District Court judgment, which compelled arbitration of tort claims and denied a motion to vacate an arbitration award, finding that the claims of the party were barred by res judicata. The arbitrability of the tort claim was based upon the language of the agreement containing the arbitration clause, and both state and federal law, while the Court rejected the contention that the arbitration award amounted to manifest disregard of law.

  • In Riddle v. Wachovia Securities, No. 06-1177 (USCA 8th Cir. Mar. 30, 2007), a very short opinion, the Court affirmed a District Court decision holding that a party had failed to carry its burden to support vacature of an arbitration award on the ground that the arbitration panel was guilty of misconduct in failing to postpone the final hearing. While the opinion does not disclose the reason for the Panel's action, it appears from the District Court filings that the request was based upon the last minute attempted withdrawal of counsel for Riddle, which Wachovia contended had occurred in two prior arbitrations as a delaying tactic. While denying Riddle's motion to vacate the award, the District Court dismissed the action, denying Wachovia's motion to modify the Order to confirm the award, because Wachovia had not moved for confirmation of the award within the time provided in the Federal Arbitration Act.

  • In State Farm Ins. Co. v. Penn. Mfgr's Assn. Inc. Co., Index 8923/05 (NY Supreme Court, App. Div. Mar. 27, 2007), the Court vacated an arbitration award as being against public policy, because the claim for contribution was barred by a prior settlement and releases, and General Obligations Law section 15-108.