Reinsurance Focus

The court in the MDL action involving allegations of improper “contingent commissions” has approved a settlement with the Marsh companies, the preliminary approval of which was reported in a September 4, 2008 post. Marsh is at least the third broker to settle such allegations. The settlement provides for a $69 million fund to be distributed to class members. Marsh may use up to $5 million of the fund to resolve and settle claims of state officials representing policyholders who are potential members of the settlement class. In addition, Marsh may use up to $7 million of the fund to resolve and settle claims of individual plaintiffs in pending actions relating to the same matters that are at issue in the class action. The approved settlement is described in the court’s Memorandum Opinion. At the same time, the court issued a separate Memorandum Opinion granting class counsels’ application for an award of attorneys’ fees, reimbursement of expenses and incentive award payments. Class counsel in the federal proceedings were awarded $14.5 million; class counsel in a concurrent state court class action were awarded $4.5 million. The court entered a Final Judgment on February 17, 2009. An objector has filed a Notice of Appeal to the Third Circuit, appealing the settlement approval.

Shortly thereafter, Marsh filed a motion to enforce the final judgment and order, and to specifically enjoin the pursuit of two state court litigations by settlement class members pursuant to the Anti-Injunction Act and All Writs Act. The grounds for the motion are detailed in Marsh’s Memorandum of Law. In re Insurance Brokerage Antitrust Litigation, Case No. MDL 1663 (USDC D.N.J. Feb. 17, 2009).

This post written by Brian Perryman.

Guarantee Trust Life Insurance Company (“GTL”) sells health insurance to college students, and obtained reinsurance from First Student Programs, LLC (“FSP”). The reinsurance agreement required that FSP obtain reinsurance, and it purportedly reached an agreement to reinsure its risks with American United Life Insurance Company (AUL), which also provided excess reinsurance directly to GTL. When AUL failed to pay claims, GLT sued FSP for breach of the reinsurance requirement of their agreement, and FSP filed a third-party complaint against AUL. AUL moved to dismiss. In an earlier dispute between GTL and AUL, which was arbitrated, an arbitrator found that AUL was not contractually bound to provide excess reinsurance to GTL. AUL contended that this prior adjudication precluded FSP’s claim against it based upon the doctrine of res judicata.

Applying Pennsylvania law, the US District Court for the Northern District of Illinois granted AUL's motion to dismiss in part, and denied it without prejudice in part. The court determined that FSP's breach of contract action should not be dismissed because it was not clear, as a matter of law, that FSP was acting merely as an agent for GTL when it allegedly contracted with AUL so the rule that agents may not sue for contracts entered into on behalf of a principal should not be applied here. The court further held that FSP sufficiently pleaded a claim for promissory estoppel but applied Pennsylvania's “gist of the action” doctrine to dismiss the fraud claim. The court surmised that the fraud claim was inextricably tied to the breach of contract claim so it was barred as a matter of law under the doctrine. The court also dismissed the indemnification and contribution claims as they were expressly conditioned upon a finding that FSP is liable to GTL, and those parties had settled the matter as between them.

Finding that the third party excess reinsurance agreement was not actually intended to benefit FSP, the court dismissed FSP's Third-Party Beneficiary claim. AUL’s res judicata defense remains pending. Guarantee Trust Life Ins. Co. v. First Student Programs, LLC, Case No. 05-1261 (USDC N.D.Ill. Jan. 28, 2009).

This post written by John Black.

The UK’s Financial Services Authority has imposed a fine on Aon Limited of £5.25 million. FSA contended that Aon failed to take reasonable care to establish and maintain effective systems to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals. As a result, between January 2005 and September 2007, Aon failed to properly assess the risks involved in its dealings with firms and individuals in Bahrain, Bangladesh, Bulgaria, Burma, Indonesia and Vietnam who helped it win business. In total, the firm made suspicious payments amounting to approximately $7 million. This is the largest financial crime related fine imposed by the FSA to date. The FSA published a press release and a Final Notice relating to this fine.

This post written by Brian Perryman.

A British commercial court tried claims on December 8 and 9, 2008 made by Markel International Insurance Company (“Markel”) and QBE Insurance (Europe) Limited and Amalfi Underwriting Limited as against certain allegedly rogue agents who devised a scheme to defraud the plaintiffs of premium. The agents signed a number of unauthorized bonds on behalf of the principals, and shielded the receipt of premium through a complex accounting scheme.

The court found certain of the agents more or less culpable depending on their level of involvement in the conspiracy. The court also analyzed the appropriate quantum of damages in reference to the amount of premium concealed, and declined to entertain a number of failure-to-mitigate arguments raised by the defendants as untimely, having first been raised after trial. Markel International Insurance Company Limited v. Surety Guarantee Consultants Limited, [2008] EWHC 3087 (Comm. Ct. Queens Bench Div. Dec. 17, 2008)

This post written by John Pitblado.

A court entered an Order on a jury verdict of $23.87 million in favor of several of the United National group of insurance companies and against Aon Limited and certain of its predecessors. The verdict was composed of $16.87 million in damages and $7 million in attorneys’ fees.

United National brought the action seeking indemnification from Aon for damages it sustained as a result of an arbitration award that partially rescinded the reinsurance obligations of an Italian reinsurer, Riunione Adriatica di Sicurta, to United National. The partial rescission was made in connection with a program providing insurance coverage to United States contractors and allied trades for risks arising out of residential and commercial construction projects. The arbitration award stemmed out of Aon’s improper conduct in soliciting RAS’s participation in this program without disclosing to RAS material information relating to, among other things, the program’s loss reserve methodology, premium discounts, and the frequency of claims. In the arbitration, RAS alleged that the program – which was placed and managed by Aon as the agent for United National – had been misrepresented by Aon to RAS as a successful program with low loss ratios. RAS also alleged that Aon failed to disclose until after the negotiations over RAS’s participation in the program were complete that RAS’s underwriter had solicited a $250,000 kickback from Aon. Due to the partial rescission, United National was obligated to pay RAS’s damages. United National then brought the indemnity suit against Aon to recover not only those damages United National paid to RAS, but also its attorneys’ fees and costs paid in defending the arbitration initiated by RAS. United National Insurance Co. v. Aon Limited, Case No. 04-CV-539 (USDC E.D. Pa. Dec. 4, 2008).

This post written by Brian Perryman.

We previously reported on problems in the London Personal Accident Reinsurance market in the 1990s, including an extensive Commercial Court opinion involving Sphere Drake Insurance Limited and its broker, Stirling Cooke Brown. In the present action, American Reliable Insurance Company, one of the participants in that market, sued its reinsurance broker in the UK Commercial Court, seeking to recover damages. Prior to the case management conference, after admitting certain factual findings made by the court in the prior Sphere Drake case, the defendant broker, Willis Limited (“Willis”), sought to withdraw some of those admissions, including admissions regarding the nature of the Personal Accident Reinsurance market. Willis had also been sued by another one of its former clients, CNA Insurance Company Limited, and had made admissions in that case which were inconsistent with those it had made in the American Reliable case.

The Court denied Willis’ application to withdraw its admissions. In support of the denial, the Court explained that Willis neither presented new evidence nor made any positive challenges to the prior admissions. This opinion demonstrates some of the substantial differences between civil case management in US and UK courts. American Reliable Insurance Company v. Willis Limited [2008] EWHC 2677 (Comm. Oct. 24, 2008) (Note: Jorden Burt has represented American Reliable Insurance Company in disputes in the Personal Accident Reinsurance market).

This post written by Dan Crisp.

On October 14, 2004, the Office of the New York State Attorney General filed a lawsuit against Marsh, Inc. for the practice of accepting contingent commissions and cited a number of insurers, including The Hartford, in the complaint. The following day, Appellant Staehr filed his complaint against The Hartford on behalf of a putative class of shareholders. Staehr’s complaint alleged that shareholders were misled into investing in The Hartford based on the strength of its business, which was in part due to paying contingent commissions to brokers, which The Hartford failed to disclose. The district court found that the Plaintiffs’ claims were time-barred by the Sarbanes-Oxley two-year statute of limitations based on publicly available information that placed the Plaintiffs on inquiry notice in July of 2001.

On appeal, the main issue to be decided was whether the publicly available facts amounted to a “storm warning,” which triggered a duty to inquire and started the running of the limitation period. For a duty of inquiry to exist, the facts must “relate directly to the misrepresentations and omissions the Plaintiffs later allege in their action against the defendants,” analyzed under an objective standard. The Hartford contended that a duty to inquire arose based upon media reports, regulatory filings, and state court complaints. The circuit court determined that the media reports would not put an ordinary investor on notice because the reports primarily contained industry information, not information specific to The Hartford, the regulatory filings were not specific enough with respect to contingent commissions, and an unpublicized lawsuit containing similar allegations that was filed against subsidiaries of The Hartford in a California state court would not put an ordinary investor on notice. The Second Circuit vacated the decision granting the motion of dismiss as time-barred and remanded the case to the district court. Staehr v. The Hartford Financial Services Group, Inc., No. 06-3877-cv (2d Cir. Aug. 18, 2007).

This post written by Dan Crisp.

TIG Insurance entered into an agreement with Titan Underwriting for Titan to act as managing general underwriter, soliciting and procuring stop-loss health and life insurance insureds for policies to be issued by TIG. Titan was also obligated to obtain reinsurance to cover the stop-loss policies issued by TIG. Chubb Re reinsured TIG, and TIG received a percentage of the ceding commission of the gross premiums ceded to the reinsurer, a portion of which Titan received as compensation. Subsequently, TIG terminated the stop-loss program and sued Titan for, among other things, breach of contract and fraud. TIG also sent a letter to state insurance commissioners requesting information that Titan refused to produce to TIG. In response, Titan counterclaimed for breach of the Chubb reinsurance agreement, tortious interference with a contract, tortious interference with its business relationships with policyholders, defamation and negligence. The trial court dismissed each of the counterclaims and the court of appeals affirmed the dismissal.

The appellate court found that Titan, which was not a party to the reinsurance agreement, could not sue in the capacity of a third-party beneficiary. Although Titan was entitled to receive a percentage of the ceding commission, the contract contained a provision disclaiming any intent to create a third-party beneficiary. The tortious interference with a contract claim failed because it was legally impossible for TIG to interfere with its own contract (the reinsurance agreement). The tortious interference with business relationships claim failed because Titan failed to establish that it had existing relationships with the policyholders, whose relationships were insurance policies with TIG. The defamation claim, which was based on TIG’s letter to the insurance commissioners, also failed since the letter was not alleged to contain statements that could be “reasonably construed to disgrace or injure Titan’s reputation in the community or subject Titan to public ridicule and contempt.” Finally, the negligence claim failed since Titan failed to establish, as it was required to do, that TIG owed Titan a duty of care. TIG Insurance Co. v. Titan Underwriting Managers, LLC, No. M2007-01977-COA-R3-CV (Tenn. Ct. App. Nov. 7, 2008).

This post written by Brian Perryman.

After a failed bid to take an interlocutory appeal from a federal district court’s denial of its motion for summary judgment in a case alleging that the broker negligently presented incomplete and misleading information to the plaintiff reinsurer, the court considered a number of evidentiary motions in limine. On October 9, 2008 we reported the US District Court for the Eastern District of Pennsylvania’s ruling on those motions. Some of the proffered testimony and exhibits were excluded with the caveat that the proponent could undertake to cure the defect and seek admission a second time. Plaintiffs sought reexamination of five pieces of excluded evidence. The court generally found the proffered evidence admissible. The most notable exhibits in this category were two extensive financial tables purportedly generated from the reinsurer’s financial system, and a summary of various “bordereaux” and other information included in the financial tables. The court originally excluded these for lack of foundation, but Plaintiff proffered a detailed affidavit describing the computer system, the witnesses' knowledge and oversight of its operation, and his attestation of authenticity. The court determined that the witness was qualified to authenticate the documents and that his sworn affidavit was sufficient. Accordingly, the exhibits were found to be admissible at trial. United National Insurance Co. v. Aon Ltd, Case No. 04-539 (E.D. Pa. Aug. 7, 2008).

This post written by John Black.

On April 24, 2008, we reported on a reinsurance broker’s failed bid to take an interlocutory appeal from a federal district court’s denial of its motion for summary judgment in a case alleging that the broker negligently presented misinformation to the plaintiff reinsurer. Since that time, the parties filed, and the court ruled on, a number of motions in limine to exclude certain evidence at trial:

(1) The broker’s motion to preclude evidence of “pure omissions” and evidence of alleged misrepresentations not presented at a prior arbitration was denied. Among other things, the court rejected the argument that the information supplied by the broker was necessarily complete in itself. It was for the jury to decide whether the information was misleadingly incomplete.

(2) The broker’s motion to preclude the use of an expert’s supplemental report as untimely disclosing all the expert’s underlying data was also denied. The court, however, did allow the broker the opportunity to allow a supplemental deposition on the new data.

(3) The record of a prior arbitration between the plaintiff and a non-party, including the reports of two experts submitted in the arbitration, was precluded in part because it appeared to be hearsay not covered by an exception.

(4) The plaintiff’s motion to preclude the testimony of an expert who intended to ruminate on what the arbitral panel might have been thinking was excluded as purely speculative.

(5) A motion to exclude two English legal decisions as inadmissible hearsay was denied. The broker successfully argued that its expert properly referenced the foreign decisions as establishing the basis of industry practices and was therefore admissible under Federal Rule of Evidence 703.

United National Insurance Co. v. Aon Ltd., Case No. 04-539 (USDC E.D. Pa. Aug. 7, 2008).

This post written by Brian Perryman.