Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

Court defers to AAA's decision as to finality of arbitration award

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In a non-reinsurance arbitration under the auspices of the American Arbitration Association, a three member panel signed an award, which the AAA found was not final due to continuing discussions among the members of the panel. Three days later, the panel issued a final award, which the AAA sent to the parties. A dispute arose as to which award should be confirmed. The District Court respected the authority of the AAA to determine the finality of awards, and confirmed the latter award. The US Court of Appeals for the Second Circuit affirmed. The Courts also rejected a contention that the latter award was in manifest disregard of law. Appel Corp. v. Katz, Case No. 02-8879 (2nd Cir. Feb. 2, 2007).

Court defers to AAA’s decision as to finality of arbitration award

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In a non-reinsurance arbitration under the auspices of the American Arbitration Association, a three member panel signed an award, which the AAA found was not final due to continuing discussions among the members of the panel. Three days later, the panel issued a final award, which the AAA sent to the parties. A dispute arose as to which award should be confirmed. The District Court respected the authority of the AAA to determine the finality of awards, and confirmed the latter award. The US Court of Appeals for the Second Circuit affirmed. The Courts also rejected a contention that the latter award was in manifest disregard of law. Appel Corp. v. Katz, Case No. 02-8879 (2nd Cir. Feb. 2, 2007).