Reinsurance Focus

A breach of contract claim survived dismissal in a potential class action lawsuit by homeowners against a mortgage lender for alleged kickbacks obtained when the lender required the homeowners to pay for force-placed insurance (FPI) on mortgaged properties. The homeowners contended that the lender breached its contractual duty of good faith and fair dealing by funneling back to itself a portion of the premiums paid by the homeowners for the FPI by, among other things, providing reinsurance through its own captive insurance company. While the court held that the contract claim could proceed against the lender, the court dismissed other claims for unfair and deceptive trade practices, and for unjust enrichment. Montanez v. HSBC Mortgage Corp. (USA), Case No. 11-4074 (USDC E.D. Pa. July 18, 2012).

This post written by Michael Wolgin.

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The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”

The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.

With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”

This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).

This post written by Rollie Goss.

On July 21, 2008 and August 20, 2008 we reported on the early stages of a class action lawsuit filed by mortgage loan borrowers against now-defunct Washington Mutual, Inc. (“WaMu”), for alleged violations of the Real Estate Settlement Procedures Act. The borrowers contended that WaMu collected illegal kickbacks from private mortgage insurance providers who had agreed to reinsure the borrowers’ mortgage insurance with WaMu’s captive reinsurer. After WaMu failed the court substituted as a party the FDIC in its capacity as receiver for WaMu. The court has now granted FDIC’s motion to dismiss the action. The court held that the relief sought by the borrowers, treble damages under RESPA, constitutes a penalty, which, under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, may not be awarded against the FDIC in its capacity as receiver. Alexander v. Washington Mutual, Inc., Case No. 07-4426 (USDC E.D. Pa. June 28, 2011).

This post written by Michael Wolgin.

In a suit between AXA and AIG in which AIG prevailed over AXA’s claim that AIG fraudulently induced it to enter into two reinsurance facilities, a court has set aside AIG’s award of over $200,000 in litigation costs. AIG had prevailed in the case after the Second Circuit Court of Appeals reversed a $35 million jury verdict in favor of AXA, which awarded compensatory and punitive damages, on the grounds that the case was barred by the statute of limitations. The court reasoned that it would be “inequitable to award costs to AIG,” especially in light of the fact that “after a two-week trial, a jury of twelve citizens unanimously found that AIG had defrauded AXA to such a deplorable extent that the conduct merited an award of punitive damages.” AXA Versicherung AG v. New Hampshire Insurance Co., Case No. 05-10180 (USDC S.D.N.Y. March 9, 2011).

This post written by Michael Wolgin.

Changing an underlying insurance policy can create a reinsurance coverage gap; a “follow the fortunes” provision in the reinsurance agreement will not always close the gap. In a Treaty Tip, Tony Cicchetti describes a recent example of this.

This post written by Tony Cicchetti.

Granite Reinsurance Company won an award for unpaid premiums from Acceptance Insurance Company (in rehabilitation) in a bankruptcy adversary proceeding. The unpaid premiums amounted to $9 million on a $15 million dollar policy that was purchased to cover Acceptance for five years. The parties had agreed to a $3 million per year premium payment schedule, due at the beginning of each of the five years covered under the reinsurance agreement. However, a dispute arose as to the calculation of pre-judgment interest on the award. The bankruptcy court awarded Granite Re pre-judgment interest calculated from the date each $3 million dollar premium payment became due (a different date for each of the three unpaid premium payments), and also awarded post-judgment interest from the date of judgment. In Re Acceptance Ins. Cos., Inc. No. BK-of-80059 (USDC Bankr. D. Neb. Jan. 19, 2011).

This post written by John Pitblado.

The doctrine of uberrimae fidei, or utmost good faith, has been invoked in reinsurance disputes for many years. In a Special Focus feature, John Pitblado explores the origins of this doctrine and its current status in the reinsurance field.

This post written by John Pitblado.

How important is it to specify the rate at which unpaid amounts will accrue interest under a reinsurance agreement? In a Treaty Tip, Tony Cicchetti provides two examples from recent court opinions that illustrate the importance of covering this topic in a reinsurance contract.

This post written by Tony Cicchetti.

In an unpublished disposition, a California appellate court reversed a summary judgment order as to a reinsured’s claims for breach of contract and insurance bad faith where the policy period was extended by statute (California Insurance Code section 678.1) because the underlying insured was not provided with the requisite notice of nonrenewal, but affirmed the summary judgment order as to the reinsured’s negligence claim. The defendants reinsured plaintiff Norcal Mutual Insurance Company for any liability Norcal might incur under a managed health care professional liability policy for the initial policy period of August 1999 through August 2000. Although the claim by Norcal’s insured that created Norcal’s liability fell outside the period of the 1999/2000 policy, Norcal contended the policy period was extended until June 2001 because its insured was not provided with notice of nonrenewal of the 1999/2000 policy, as required by section 678.1.

On appeal, the court held that notice of nonrenewal was not excused by a statutory provision that notice is not required where the insured “has obtained replacement coverage or has agreed, in writing, within 60 days of the termination of the policy, to obtain that coverage.” Norcal’s insured agreed in writing to obtain replacement coverage, but section 678.1 “taken as a whole” compelled the conclusion that a “replacement” policy “is not synonymous with renewal of existing coverage.” The court found that “replacement” coverage referred to in one subsection of the statute means insurance obtained from a different insurer, while renewal of coverage referred to elsewhere in the same statute means coverage obtained from the same insurer for a subsequent policy period. The court, however, rejected Norcal’s negligence claim because section 678.1 “clearly” places the duty to provide notice of nonrenewal on the insurer, not a reinsurer. Norcal Mutual Insurance Co. v. Certain Underwriters at Lloyd’s of London, No. B213122 (Cal. Ct. App. Feb. 22, 2010).

This post written by Brian Perryman.

The Rehabilitator of Frontier Insurance Company challenged a New York federal court to reconsider summary judgment rulings that dismissed claims against Everest Reinsurance Company. The Rehabilitator’s claims against Everest sounded in fraudulent conveyance on the theory that payments made to Everest under a reinsurance contract it issued to Frontier were not based on fair consideration because no risk was transferred under the contract. The Court had previously ruled that there was fair consideration due to an antecedent debt at the time the parties entered into the reinsurance contract. The Court allowed reconsideration, but upon review maintained its prior ruling. Mills v. Everest, Case No. 05-8928 (USDC S.D.N.Y. June 8, 2009). Further background to supplement the brief opinion is found in a related Memorandum of Law.

This post written by John Pitblado.