Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Reverses Dismissal of Insurer’s Complaint Against Parent Corporation For Misappropriation of Net Operating Loss

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The California Court of Appeal reversed a trial court’s judgment dismissing a subsidiary insurer’s complaint against its parent company. The subsidiary insurer, Fremont Indemnity, (by and through the Insurance Commissioner as its liquidator) sued Fremont General, the parent company, alleging the defendants misappropriated net operating losses of its predecessor in interest and misappropriated other assets of its former subsidiary. Fremont Indemnity also asserted a claim for conversion of the net operating losses, in addition to alleging improper distributions in violation of the California Insurance Code.

The defendants demurred to the complaint. In support of the demurrer, the defendants sought judicial notice of a letter that provided for the Insurance Commissioner to supervise and provide regulatory oversight of Fremont Indemnity. Defendants alleged that the letter allowed Fremont General to use the net operating losses in the manner alleged. They also argued the conversion claim failed because the unauthorized taking of an intangible property interest in not an actionable conversion.

The appellate court held that it was improper for the trial court to take judicial notice of the letter. Specifically, the court stated “[a]lthough the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable.” Additionally, the court concluded conversion is not restricted to tangible property and held a net operating loss and the owner’s alleged right of ownership and exclusive possession to this loss are sufficiently definite to support a conversion claim. Poizner v. Fremont General Corporation, No. BC320766 (Ct. App. Cal., Feb. 28, 2007).

State legislative update

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Bills have been introduced in state legislatures with a wide variety of reinsurance-related topics:

  • cat reinsurance: Connecticut Bill No. 65 would establish a state catastrophe fund to offer reinsurance to the private market; Florida SB 2806 would provide additional reform in allowing the state to sell reinsurance in the state hurricane catastrophe fund;

  • cat funds: New York A 4011 would establish a state catastrophe fund;

  • captives: District of Columbia B16-0897 would authorize the use of special purpose financial captive insurance companies to facilitate risk securitization; Missouri HB 238 would add 50 sections to the state's captive insurance company act, including allowing the creation of special purpose life reinsurance companies (bill text; bill summary);

  • credit for reinsurance: New Hampshire new regulation Part Ins 601 would provide rules for allowing credit for reinsurance; and

  • health care reinsurance: Arkansas SB 769 would enact the Small Employer Health Reinsurance Program Act of 2007; South Dakota SB 129 would establish a state health reinsurance pool to spread the expenses of high-cost individuals.

SECOND CIRCUIT FINDS JURISDICTION UNDER FAA TO HEAR INTERLOCUTORY APPEAL

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This ruling addresses the narrow issue of whether or not an appellate court has jurisdiction under the FAA to hear an interlocutory appeal of a decision denying a motion to compel arbitration. In 2004 appellees filed a class action against several American Express companies (collectively, “Amex”) alleging conspiracy to fix fees for transactions in foreign currencies and conspiracy to impose compulsory arbitration clauses on their cardholders in order to suppress competition and deprive their cardholders of a meaningful choice concerning the arbitration of disputes.

Amex moved to compel arbitration pursuant to the arbitration clauses contained in the cardholder agreements. The District Court denied the motion, reasoning that, because the plaintiffs/appellees had raised an antitrust claim concerning the validity of the arbitration clauses, a jury trial was necessary to determine the validity of the arbitration clauses prior to enforcement.

Amex appealed, invoking Section 16 of the FAA, which grants jurisdiction to courts of appeals over interlocutory appeals from refusals to stay an action under 9 U.S.C. § 3 and from denials of petitions to compel arbitration under 9 U.S.C. § 4. Appellees filed a motion to dismiss on the ground that Section 16 of the FAA does not apply in cases where arbitration is required by principles of equitable estoppel.

The Second Circuit denied appellee’s motion to dismiss the appeal, holding that “when a District Court finds that a signatory to a written arbitration agreement is equitably estopped from avoiding arbitration with a non-signatory, the writing requirement of Section 16 of the FAA is met.” Ross v. American Express Company, Case No. 06-4598 (2d Cir. February 13, 2007).

Non-legislative reinsurance market developments

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Apart from legislative activity in the area of cat funds and cat risk reinsurance, there have been three recent items of interest with respect to alternative reinsurance arrangements:

  • Hanover Re, which has been very active in securitizing reinsurance risks, has securitized reinsurance recoverables valued at approximately $1 billion, to accelerate the cash flow in that area;
  • The World Bank has created a regional catastrophe risk insurance pool that is currently covering 18 Caribbean countries. Two press releases describe the pool and the initial funding for the pool, which will purchase reinsurance in the private market. A detailed report available at the World Bank's Internet site provides additional detail;
  • Guy Carpenter & Company and MMC Securities Corp. has issued a detailed report titled The Catastrophe Bond Market at Year-End 2006, providing an annual review of the catastrophe bond market and an update on bond transaction activity and market dynamics. It provides interesting descriptions of different kinds of alternative risk transfer mechanisms, such as catastrohe bonds, side cars, and extreme mortality transactions, with listings of transactions in each category.

NON-SIGNATORY LACKED STANDING TO COMPEL ARBITRATION

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This case addressed whether a court was required to recognize the right of a non-signatory to compel arbitration. The Defendant, Boris Bannai, executed an agreement for the sale of ore on behalf of Northgate. The agreement included an arbitration clause, requiring the arbitration of all claims relating to the agreement in London. When the plaintiff sued Bannai for fraud and unjust enrichment based on the agreement, Bannai moved to compel arbitration. Applying English law as required by the choice of law provision in the arbitration agreement, the court denied the motion, concluding that as a nonsignatory, Bannai lacked standing to compel arbitration. There are three expecptions to the general principle of English law that a non-party to an agreement may not compel arbitration, but none of the exceptions were asserted. Felman Productions Inc. v. Boris Bannai, Case No. 3:06-0644 (USDC S.D. W.Va. March 5, 2007)