Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Appellate opinions confirm arbitration awards

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Three recent appellate opinions confirmed arbitration awards:

  • The Eighth Circuit reversed a District Court Order, remanding for confirmation of an arbitration award.  The District Court had vacated the award on the basis that the Panel's finding that California law applied, and its dismissal of a claim under the Minnesota Franchise Act, violated a fundamental public policy of Minnesota.  The Court of Appeals reversed, finding that the applicable standards under the California and Minnesota franchise statutes were virtually identical.  Twin Cities Galleries, LLC v. Media Arts Group, Inc., Case No. 06-1777 (8th Cir. Feb. 9, 2007).

  • On January 27, 2006, the Sixth Circuit entered an opinion affirming the decision of a District Court vacating an arbitration award on the basis that the award did not draw its essence from an applicable collective bargaining agreement.  However, in an en banc opinion, the Court has overruled the appellate panel, reversing and remanding for the entry of an Order confirming the arbitration award.  The basis for the reversal rested upon findings that: (1) the arbitrator was not charged with fraud or dishonesty in making the award; (2) the arbitrator was arguably construing the contract in the award; and (3) the party challenging the award showed nothing more than an error or a “serious error” in the arbitrator's interpretation of the contract.  Michigan Family Resources, Inc. v. Service Employees International Union, Case No. 04-2564 (6th Cir. Jan. 26, 2007).

  • The Appellate Division of the New Jersey Superior Court has affirmed summary judgment against an arbitration claimant in a case arising out of an automobile accident.  An arbitrator dismissed the claim based upon a failure of proof and failure to prove causation.  An appeal was denied under the applicable appeal rules of the American Arbitration Association.  The claimant then filed a Complaint in Court, contending that the respondent in the arbitration had committed fraud.  The court granted summary judgment, finding that to be potentially viable, a fraud claim must allege fraud on the part of the arbitrator rather than a party, and that the Complaint was not timely filed.  The appellate panel affirmed. Brown v. CSC Insurance Services, Docket No. A-2283-05T5 (Jan. 22, 2007).

UK Court denies challenge to judgments against reinsurance intermediaries

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The UK Queen's Bench Division of the Commercial Court has denied applications to vacate prior judgments in an action brought by a reinsured against several defendants which served as reinsurance intermediaries under two binders involving short tail property and contingency risks and personal accident risks. Prior liability judgments had found that the intermediary group had fraudulently abused the binders by placing risks through the binders which were not authorized, and by signing an addenda to the binders, without authority, that provided the intermediaries an extra 40% commission on the first 12 months gross premium. Prior judgments had rescinded the binders and awarded damages for fraud and conspiracy totaling approximately £17,000,000. The opinion holds that liability judgments against several of the defendants were proper. R & V Versicherung AG v. Risk Insurance and Reinsurance Solutions SA, [2007] EWHC 79 (Comm. Jan. 29, 2007).

Broker Not Liable for Contingent Expenses Resulting from Insurer’s Downgraded Financial Rating

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Aon Risk is a commercial insurance broker that served as the broker of record for Synagro, a Texas-based waste management company. Aon Risk obtained insurance from Reliance National Indemnity Company for Synagro in 1998 and 1999. Synagro filed suit against Aon Risk in 2001, asserting that Aon was responsible for contingent expenses that Synagro might incur as a result of Reliance’s downgraded financial rating and its liquidation. A jury found that Aon Risk was not responsible for Synagro’s alleged damages, and a judgment was entered in favor of Aon.

Aon Risk filed a counterclaim against Synagro seeking payment for the cost of the insurance plus its commission. A Texas Court of Appeals recently affirmed an award of $316,000 to Aon Risk, finding that there was sufficient evidence for a jury to conclude that Synagro breached its contract with Aon Risk. Synagro of Texas-CDR v. Aon Risk Services, Case No. 13-04-663 (Tex. Ct. App. Jan. 4, 2007).

Mercantile exchanges to commence trading of catastrophe futures

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In an interesting form of alternative risk transfer, the Chicago Mercantile Exchange announced that it will commence trading Hurricane index futures and options contracts to hedge hurricane risks. A press release describes the financial instruments generally, while a separate page on the CME’s web site provides more detailed information. At about the same time, the New York Mercantile Exchange announced plans to trade futures contracts based upon the risk of catastrophic property damage from natural disasters. Weather futures are now traded on the Chicago Board of Trade, a NYMEX company. The two exchanges will trade somewhat different types of contracts, based upon different risks. It will be interesting to see what effect, if any, these offerings have on the reinsurance market.

SEC settles sham reinsurance allegations with Renaissance Re

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The SEC has settled allegations that Renaissance Re entered into a sham reinsurance transaction that had no economic substance and no purpose other than to smooth and defer $26.2 million of Renaissance Re's earnings from 2001 to 2002 and 2003. To effectuate the settlement, the SEC filed a Complaint against Renaissance Re in US District Court and simultaneously announced a settlement of the allegations. The settlement required Rennaisance Re to pay a $15 million civil penalty, which Renaissance Re had offered to pay last summer, as reported in an August 25, 2006 posting in this blog.