Reinsurance Focus

A New Jersey appellate court recently addressed that state’s “direct action statute,” concluding that it did not prevent judgment creditors from pursuing a coverage action arising out of an LMX reinsurance spiral. The plaintiffs in the underlying action were former shareholders of certain insurance companies, and they sued the insurers’ managing general agent for professional negligence. The MGA, now defunct, failed to answer. On the eve of the damages hearing, the MGA’s professional liability and excess carriers (Travelers and ERSIC) asserted a variety of coverage defenses, and denied the claim. The plaintiffs obtained a $92 million judgment against the MGA.

After obtaining their judgment, the plaintiffs filed suit in New Jersey against Travelers and ERSIC seeking coverage under the two policies. The trial court dismissed the coverage case due to lack of standing. The trial court based its decision, in part, on New Jersey’s so-called “direct action statute,” N.J.S.A 17:28-2. That statute requires that certain types of policies (those addressing injury to a person and certain loss or damage to property) contain a provision “that the insolvency or bankruptcy of the person insured shall not release the insurance carrier from the payment of damages for injury sustained or loss occasioned during the life of the policy, and stating that in case execution against the insured is returned unsatisfied in an action brought by the insured person because of the insolvency or bankruptcy, then an action may be maintained by the injured person against the [insurer] under the terms of the policy.” The trial court accepted the defendants’ argument that the statute authorizes a direct action against an insurer only for the particular personal injury and property damage risk specified in the statute.

The appellate court disagreed, first noting the general principle that after an injured plaintiff obtains a judgment against an insured tortfeasor that remains unsatisfied due to insolvency, the plaintiff “stands in the shoes” of the insured with respect to the insurance policy and thus acquires standing to pursue an action against the insurer. The court rejected the “direct action statute” argument, holding that just because the statute mandates that certain specifically identified types of policies must contractually provide for the right to a post-judgment action, it does not follow that no such right exists in connection with other types of policies. The appellate court noted that “direct action statute” is a misnomer because the statute does not actually authorize direct actions. Rather, it prohibits insurers from contractually disclaiming, in the specifically enumerated policy types, an injured party’s right to sue the insurer for an unsatisfied judgment. The statute does not provide that derivative or post-judgment actions are available only in regard to those certain types of policies. Accordingly, the plaintiffs had standing to pursue their coverage action. Ferguson v. Travelers Indem. Co., Case No. A-3530-12T3 (N.J. Super. Ct. App. Div. August 4, 2014).

This post written by Catherine Acree.

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A judgment found that certain Lloyd’s reinsurers were not liable to cover the destruction of cargo on board a vessel that capsized in the Philippines during a Typhoon. The trial court relied on a typhoon warranty clause contained in both the reinsurance policy and the underlying insurance policy, which deemed the policy void if a vessel sailed out of port (1) “when there is a typhoon or storm warning at that port”; or (2) when the destination or intended route “may be within the possible path of the typhoon or storm announced at the port of sailing, port of destination or any intervening point.” The trial court had found that there was a typhoon or storm warning at the port of sailing, and that the vessel’s route was within the possible path of the typhoon or storm announced at the port.

On appeal, the cedent argued that the first condition of the typhoon warranty clause was not breached under a four-step analysis: (1) the reinsurance policy contained a follow the settlements clause, (2) which required the reinsurance coverage to be interpreted like the underlying insurance policy, (3) the insurance policy should be construed in accordance with what an experienced insured would have understood the storm notice to mean, and (4) in this case, the storm notice would not be understood by an experienced insured as a sufficient warning against embarking. The court rejected this argument, holding that the clause must be understood according to only its plain meaning, both with respect to the clause in the insurance policy and the parallel clause in the reinsurance policy, and here it was undisputed that a storm warning had been issued. The court also rejected the cedent’s contention that the intended path of the vessel would not have crossed the possible path of the typhoon, finding that it was proper for the trial court to determine that the intended route was within the typhoon’s path. Amlin Corporate Member Ltd. v. Oriental Assurance Corp., [2014] EWCA Civ 1135 (Royal Courts of Justice, July 8, 2014).

This post written by Michael Wolgin.

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We have previously reported on a case styled Munoz v. PHH Corp., one of similar suits alleging putative class actions under the Real Estate Settlement Procedures Act arising from purported “sham” reinsurance transfers covering private mortgage insurance. Defendants in that case filed a motion for partial judgment on the pleadings asserting that plaintiff-intervenor, and all others similarly situated, failed to plead sufficient facts to state a claim for application of equitable tolling and/or equitable estoppel to the one-year statute of limitations for alleged violations of the Act. The court granted defendants’ motion for equitable tolling and equitable estoppel/fraudulent concealment pleadings. The loan document disclosures adequately placed plaintiff on notice of her claim and that she failed to allege extraordinary circumstances that prevented her from timely filing. In particular, the disclosures explained the requirement of mortgage insurance, the purpose of the mortgage insurance, the borrower’s rights and responsibilities under mortgage insurance, and the potential occurrence of captive insurance. The court also found that plaintiff failed to plead an act of concealment separate and apart from an underlying RESPA claim. The court, however, is allowing plaintiff one opportunity to file and serve an amended complaint to cure deficiencies within 20 days from date of the court’s order. Munoz v. PHH Corp., No. 1:08-CV-0759 (USDC E.D. Cal. Aug. 11, 2014).

This post written by Kelly A. Cruz-Brown.

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A New York federal court recently was presented with a reinsurance dispute about the amount a reinsurer was required to pay under certain reinsurance Certificates. The issue was whether the reinsurer’s obligation was capped at the stated limit, or whether the reinsurer was also liable for defense costs in excess of the limit that the direct insurer had reimbursed. The court ruled that the “Certificate Limits” stated in the “Reinsurance Accepted” section of the Certificates capped the maximum amount that the reinsurer could be obligated to pay for combined loss and expenses.

The court rejected the direct insurer’s argument that the reinsurer should have to pay additional sums for defense costs above the amount of the “Certificate Limits,” ruling that “the unambiguous language in the ‘Reinsurance Accepted’ sections of the Certificates does not differentiate between reinsurance accepted for loss versus reinsurance accepted for expenses, but simply provides a total cap on liability. If the parties intended to exclude expenses from the total liability cap, they could have made that clear in the language of the Certificates.” Under New York law, for costs to be excluded from the liability cap in a reinsurance certificate, language in the certificate must expressly state that such costs were excluded from the indemnification limit. Because nothing in the Certificates that expenses were to be excluded from the Certificate Limits, the court entered summary judgment in favor of the reinsurer. Global Reinsurance Corp. of America v. Century Indemnity Co., Case No. 1:13-CV-6577 (USDC S.D. N.Y. Aug. 15, 2014).

This post written by Catherine Acree.

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Public Risk Management of Florida, an intergovernmental risk management association that functions as a primary insurer for certain government entities in Florida, ceded some of its risk to One Beacon under a reinsurance policy. Public Risk’s insured, the City of Wintergarden, made a claim for defense and indemnity for an underlying lawsuit against it by a contractor who performed public works, but was claimed it was underpaid as a result of delays arising from the City’s failure to provide accurate plans and maps. Public Risk defended under a reservation of rights. It also tendered the claim to One Beacon, which disagreed there was a duty to defend. Ultimately, Public Risk was not required to indemnify its insured, but sustained over $286,941.07 in loss for legal fees above the $200,000 retention, which it believed were owed by One Beacon pursuant to the reinsurance agreement. Public Risk sued One Beacon, but the district court found no duty to defend and dismissed the claim. Public Risk appealed, and the Eleventh Circuit reversed the coverage ruling, finding that the underlying claims did not sound entirely in intentional tort, and therefore there was a duty to defend. Public Risk Management of Florida v. One Beacon Insurance Co., No. 13-15254 (11th Cir. June 24, 2014).

This post written by John Pitblado.

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The Court for the Middle District of Louisiana upheld a magistrate’s ruling denying a motion to remand filed by the Louisiana Commerce and Trade Association of Self Insurer’s Fund (“LCTA”), holding that the defendant foreign reinsurers (“Reinsurers”) properly removed the state court action under the Convention of the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) which Congress implemented under the Convention Act, 9 U.S.C. §§201-208. In so holding, the Court first found it had subject matter jurisdiction under the Convention Act and rejected LTCA’s argument that, because the issue of arbitrability was not raised below, the state court action did not “relate to” an arbitration as required by the New York Convention. Noting the extraordinary breadth of the New York Convention, the Court found that because LTCA’s claim against the Reinsurers arose under the Reinsurance Contract which included an arbitration clause, the state court action thus related to the arbitration clause. The Court also noted that a party is not required to first move to compel arbitration before it is permitted to remove the action and, in any case, the Reinsurers in this case had advised the state court that they intended to remove the action.

The Court then turned to LTCA’s contractual argument that the Reinsurers waived their right to remove under the Service-of-Suit Clause in the Reinsurance Contract. In this case, the Service-of-Suit clause provided that the Reinsurers agreed to submit to the jurisdiction of a court of competent jurisdiction within the United States in the event they failed to pay any amount claimed under the Reinsurance Contract. The Service-of-Suit Clause, however, further provided that nothing contained in that provision constituted a waiver of the Reinsurer’s right to remove the action to a United States District Court. The Court found that this provision was not an explicit, clear, and unequivocal waiver of the right to remove, as required under applicable law, and further found it expressly and sufficiently reserved the Reinsurer’s right to removal. Louisiana Commerce and Trade Association Self-Insurers Fund v. Certain Underwriters at Lloyd’s London Subscribing to Contract Number A1430B600/A2430B600, No 13-700-JJB-RLB (M.D. La. July 15, 2014), affirming and adopting Magistrate Judge’s Report and Recommendations dated May 6, 2014.

This post written by Leonor Lagomasino.

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A putative class of mortgage consumers sued Flagstar Bank and its captive reinsurer alleging that they engaged in an illegal “kickback” scheme with private mortgage insurers, which scheme artificially inflated the price of such insurance for the plaintiffs, in violation of the Real Estate Settlement Procedures Act (“RESPA”). The defendants claimed plaintiffs failed to file suit within RESPA’s one year statute of limitations. Plaintiffs claimed the statute was equitably tolled because defendants actively concealed the “scheme.”

After declining to grant a motion to dismiss on the pleadings, and allowing the parties to make an adequate factual record on the statute of limitation issue for summary judgment, the court granted the defendants’ summary judgment motion. The statute ran “from the date of the occurrence of the violation,” which commences upon the closing of the loan, and that each of the plaintiffs’ claims were filed in excess of a year from closing. The court rejected the plaintiffs’ equitable tolling argument, noting that in RESPA cases, “silence is insufficient to toll the statute of limitations; the defendant must have performed an independent act of concealment upon which the plaintiff justifiably relied.” The record included no evidence of active concealment on the defendants’ part. Hill v. Flagstar Bank, Case No. 12-2770 (USDC E.D. Pa. June 26, 2014).

This post written by John Pitblado.

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In this case, plaintiffs sought leave to renew their motion to dismiss certain retention-related and assignment affirmative defenses based on provisions of certain Loss Portfolio Transfer (LPT) agreements, and to re-argue the motion to dismiss based on their contention that the court: (1) overlooked arguments raised by the parties; (2) determined issues sua sponte without factual and legal support; and (3) misapplied precedent to the undisputed facts at issue.  The court denied plaintiffs’ motions.  The court determined that plaintiffs had failed to refute defendant’s assertion that the LPT may have transferred all of the plaintiffs’ relevant interests and constituted an impermissible assignment because plaintiffs failed to provide documentation showing that the cap in the LPT agreements could be exceeded.  The court also decided that plaintiffs failed to meet their burden of showing that the defendant’s retention defenses were without merit as a matter of law.  The court determined that the LPT did not satisfy the definition of treaty insurance because it was not obtained in advance of coverage. Furthermore, the court determined that the parties’ statements concerning the extent of plaintiffs’ assignment of their interests in the insurance certificates in question were not fatal to defendant’s assignment defenses as a whole.  Granite State Ins. Co. v. Transatlantic Reinsurance Co., Index No. 652506/2012 (Sup. Ct of N.Y., County of N.Y. June 18, 2014).

This post written by Kelly A. Cruz-Brown.

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Service of Suit provisions are standard in reinsurance agreements, but broad provisions viewed by many as “standard” may create unintended consequences.  This issue is discussed by Rollie Goss in a Treaty Tip titled The Service of Suit Provision.

This post written by Rollie Goss.

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The case involved two facultative reinsurance contracts, each of which covered excess liability for similar umbrella liability insurance policies, and each of which contained a “follow the settlements” provision. After the insurer agreed to pay a percentage of the insured’s asbestos injury claims and defense expenses, the insurer began billing the reinsurer, but the reinsurer disputed liability. The reinsurer contended that it was not required to pay defense expenses in the same fashion as indemnity for one of the reinsurance certificates, arguing that the underlying insurance policy covered by that certificate lacked a reference to “defense expense” in the policy limit provision.

The court, however, rejected the reinsurer’s argument and entered summary judgment in favor of the insurer, finding that the reinsurer failed to demonstrate that the cedent was seeking coverage beyond the scope of the agreements. “It may be,” the court explained, “that defendant believes that defense expenses should not be included in the settlement because [the policy] does not use the phrase ‘defense expenses’ when defining the total limits of liability. However, … the provision does not affect the type of expenses that are covered, only the amount.” The court also considered two issues raised in later briefing: (1) whether the cedent proved the extent to which it exceeded the retention amounts; and (2) whether the cedent calculated prejudgment interest correctly, but reserved ruling on those issues, pending supplemental briefing. Employers Insurance Co. of Wausau v. R & Q Reinsurance Co., No. 13-cv-709 (USDC W.D. Wisc. May 16, 2014).

This post written by Michael Wolgin.

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