Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Cat risk legislative update

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There are three recent items of interest in pending legislation regarding cat risks:

  • a Bill has been introducted in the United States Senate (S. 292) to establish a bi-partisan Commission on Catastrophic Disaster Risk and Insurance, to assess the condition of the property and casualty insurance and reinsurance markets in the aftermath of the recent hurricanes, and the ongoing exposure of the United States to various cat risks, and recommend any necessary legislative and regulatory changes to improve the financial health and competitiveness of such markets and assure consumers of the availability of adequate insurance coverage at competitive prices;

  • a Bill has been introduced in the Missouri Senate (SB 518 – bill text and bill summary) to establish the Missouri Catastrophe Fund to help protect property and casualty insurers against insolvencies caused by certain natural disasters.

  • two Bills have been introduced in the New York Senate to establish a state cat fund (S. 1883 and S. 2520).

Hannover Re issues $106 million cat securitization

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Hannover Re has issued a $160 million securitization of catastrophe risks. Hannover described the issue as the completion of its “K3” transaction, being composed of a variety of non-proportional reinsurance of natural perils (hurricanes and earthquakes in the United States, windstorms in Europe and earthquakes in Japan) and worldwide aviation business.

Silence Deemed Insufficient to Preclude Aggregate Liability

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In a matter that is difficult to describe briefly, an arbitrator has entered an award in an interesting reinsurance claims issue, and the award has been confirmed. Gerling Global Reinsurance Corporation (“Gerling”) issued a certificate of facultative reinsurance to Employers’ Surplus Lines Insurance (“Employers”) reinsuring an Excess Umbrella policy providing for $5,000,000 per occurrence and aggregate losses. When Gerling refused to pay its pro rata share of certain indemnity and defense costs, Employers demanded arbitration to enforce the certificate. Gerling argued that a non-concurrency existed between the facultative certificate and the umbrella policy with regard to the aggregate liability and liability for defense costs. Gerling argued that the absence of the word “aggregate” in various sections of the certificate precluded consideration of aggregate limits of liability and that its reinsurance limits applied strictly on a per-occurrence basis. Gerling also argued that it was not required to reimburse Employers for the defense costs associated with the settlement because the “follow the settlements” clause in the certificate was subject to the condition that an indemnity payment must be made on a specific claim before any defense costs attached. Gerling argued that this language was non-concurrent with Employers’ ultimate net loss liability theory. While the arbitrator acknowledged that the presumption of concurrency is “not absolute and can be overridden by clear language of limitation in the certificate,” this was not such a case. The arbitrator concluded that the absence of the word “aggregate” was insufficient to preclude liability, stating that “silence, as an expression of limitation, strains credulity and is insufficient to preclude aggregate liability.” The arbitrator also noted Gerling’s failure to use any of the methods available to it to limit aggregate liability, such as including the phrase “Nil Aggregate” in the certificate or by adding an endorsement. With respect to liability for defense costs, the arbitrator concluded that Gerling misinterpreted the “follow the settlements” clause and that the concept of “ultimate net loss” contained in the Employers’ policy was entitled to the presumption of concurrence. As such, Gerling was responsible for its share of the defense costs. Employers’ Surplus Lines Insurance Co. v. Global Reinsurance Corp., Case No. 07-30 (USDC S.D.N.Y. Jan. 11, 2007).

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).