Reinsurance Focus

The US District Court for the Eastern District of New York recently adopted the US Magistrate’s Report and Recommendation, granting United Insurance Company’s Motion in Aid of Arbitration for a Preliminary Injunction. The dispute arose out of a Binding Authority Agreement (“BAA”) authorizing World Wide Re (formerly World Wide Management Consultants) to underwrite and bind reinsurance risks on UIC’s behalf subject to the underwriting guidelines. The BAA allows both parties to terminate the agreement immediately upon notice for cause, in the event that either party breaches the agreement. The BAA also provides for mandatory arbitration of all disputes. On February 28, 2001, UIC sent a Notice of Termination to World Wide asserting that it breached the agreement when it disregarded UIC’s specific instructions not to bind the risk related to Arcelor Mittal’s reinsurance. By letter dated March 3, World Wide responded, stating that it would continue to write business until an arbitration decision was rendered granting the relief sought. World Wide has since continued to bind risks on behalf of UIC. UIC subsequently filed the instant motion for a preliminary injunction.

The Magistrate issued a Report and Recommendation (adopted by the District Court) granting the motion. The Magistrate concluded that World Wide’s continued actions to continue binding risk on behalf of UIC constituted irreparable harm, and that UIC had demonstrated a likelihood of success on the merits. Accordingly, World Wide was enjoined from writing reinsurance risks on behalf of UIC or modifying or canceling existing risks. United Insurance Co. Ltd. v. Word Wide Web Re, Case No. 11-01177 (E.D. N.Y. Apr. 27, 2011).

This post written by John Black.

The case involves the interpretation and enforcement of a collateral security provision of an indemnification agreement relating to Safeco’s service as a surety on construction contracts. Following the District Court’s grant of plaintiff Safeco’s motion for summary judgment regarding its right to collateral security and the Second Circuit’s subsequent dismissal of an appeal for lack of jurisdiction, defendant M.E.S. filed a motion for reconsideration on the grant of summary judgment. M.E.S. argued that a recent document production showed that plaintiff’s collateral security demand is not based on estimated loss exposure, but rather on “actual claimed losses,” which are treated differently under the terms of the parties’ indemnity agreements.

The court cited a number of authorities, including reinsurances cases, which dictate that where claims have actually been paid, Safeco has an adequate remedy at law in the enforcement of the indemnification clause and is not entitled to the equitable remedy of specific performance of the collateral security provision. The District Court directed Safeco to provide the Court with its collateral security demand in an amount net of paid claims. Safeco Ins. Co. of Am. v. M.E.S., Inc., Case No. 09-3312 (E.D. N.Y. Oct. 4, 2010).

This post written by John Black.

Petitioner, Founders Insurance Company, sought a preliminary injunction to enjoin the respondents from drawing down on a $32,000,000 trust account created for their benefit under the parties’ reinsurance agreement pending the outcome of the arbitration of a dispute. The preliminary injunction was granted, and Founders posted a bond in the amount of $1.6 million as a condition for the injunction, which was fully secured by cash. Great American Insurance Company was the surety on the bond. The injunction was subsequently reversed on appeal. On remand, the trial court indicated on the record that it “vacated” the bond and, at the same time, also awarded respondents damages in the amount of $389,282.74 for lost income as a result of the improper injunction.

Relying on the trial court’s statement that the undertaking was vacated, Founders contacted Great American and requested the return of the cash collateral, and Great American released the collateral. Subsequently, respondents contacted Great American and demanded disbursement from the bond of the amount of lost income damages fixed by the trial court. Upon learning that the bond had been cancelled, respondents moved for an order resettling and clarifying the court’s earlier order. The court granted the motion to the extent of directing Founders to post another bond in the amount of $500,000. Respondents appealed the decision of the trial court ordering Founders to post the second bond rather than directing Great American to make immediate payment of the lost income, contending that the order “failed to adequately remedy the consequences of its ill considered statement that it was vacating the undertaking [the first bond].” The appellate court found that Great American had fulfilled its obligation as surety, since it had released the collateral relying in good faith upon the trial court’s “vacated” statement. Great American, therefore, could not be held liable on the first bond for respondents’ damages. Founders Insurance Co. Ltd. v. Everest National Insurance Co., Index No. 600523/07 (N.Y. App. Div. May 4, 2010).

This post written by Brian Perryman.

On April 19, 2010, we reported on a magistrate judge ordering that the defendant, an unauthorized insurer, post pre-pleading security in the amount of $660,389. The defendant subsequently filed an objection to this ruling, arguing that the plaintiff could not recover more than the current amount contained in the segregated accounts at issue. Affirming the ruling of the magistrate judge, the district court observed that the pre-pleading security statute contemplated the posting of an amount sufficient to secure the judgment sought by the plaintiff and concluded that the ruling was not erroneous or contrary to law. Arrowood Surplus Lines Ins. Co. v. Gettysburg Nat’l Indem. Co., Case No. 09-972 (USDC D. Conn. May 7, 2010).

This post written by Dan Crisp.

A court has denied reconsideration of its earlier order holding that an award postponing the determination of a remedy is not final and binding and, thus, is not subject to review. We reported on the earlier order in an August 20, 2009 post. The American Postal Workers’ Union brought a suit alleging that the United States Postal Service breached a collective bargaining agreement by failing to comply with an arbitration award finding liability. On July 14, 2009, the court dismissed the case for lack of jurisdiction. The Union moved for reconsideration, principally arguing that that it should be permitted to move forward to enforce the award because it had been granted final injunctive relief. The court found that the Union was simply regurgitating its earlier, unsuccessful argument. Therefore, the motion for reconsideration was denied. American Postal Workers’ Union v. United States Postal Service, Case No. 08-2200 (USDC D.D.C. Sept. 2, 2009).

This post written by Brian Perryman.

A federal court in Texas denied Aon Re’s motion for preliminary injunction against the defendant TIG Insurance Company. Aon Re moved to enjoin TIG from bringing claims arising out of two reinsurance treaties entered into in the late 1990’s that had been the subject of prior litigation, also in federal court in Texas, and which was resolved on summary judgment in Aon Re’s favor on statute of limitation grounds in 2005. However, TIG subsequently brought claims against Aon Re, based at least in part on issues pertaining to the two treaties, in federal court in Texas, which it withdrew, and then re-filed in state court in California.

Aon Re sought an injunction from the Texas federal court to enjoin TIG from prosecuting any further claims arising from the treaties, as it contended those issues had all been resolved. TIG cited the Anti-Injunction Act, which generally disfavors a federal court’s injunction preventing a state court from exercising its jurisdiction. Aon Re cited the “relitigation” exception to the Anti-Injunction Act, but the Court held that Aon Re failed to demonstrate, under the more strict standards required to obtain injunctive relief, that the prior judgment rendered based on statute of limitations grounds was a judgment “on the merits,” entitling it to the preclusive effect. The court essentially left it to the state court in California to decide for itself whether Aon Re was entitled to preclusion, based on the prior judgment in its favor. Aon RE, Inc. v. TIG Ins. Co., No. 3:09-cv-0300-B (USDC N.D. Tex. Sept. 28, 2009).

This post written by John Pitblado.

Defendant, Centrix Financial, LLC (“Centrix”), sought default protection insurance (“DPI”) covering its “Portfolio Management Program” – a program it created to protect lenders of sub-prime auto loans which Centrix bundled – against the risk of deficiency loan balances and property damage connected with default repossessions. Having been informed by its prior DPI carrier of non-renewal, Centrix approached the plaintiffs, Everest National Insurance Company and Everest Reinsurance Company (“Everest”) to underwrite the risk. When Everest expressed reservation about reinsurance, Centrix’s Chairman and CEO, co-defendant Robert Sutton, offered, as part of a letter of intent memorialized between the parties in an integrated contract, to personally guarantee a reinsurance contract issued by Founders Insurance Company, Ltd. (“Founders”), a Bermuda-based company owned by Sutton.

Everest and Founders ultimately proceeded to arbitration as a result of losses, and the arbitration panel ordered Founders to post security in the amount of $70,000,000. Founders failed to comply with the order, and Everest thereafter looked to Sutton to satisfy his obligation to post the security. Sutton resisted, claiming the guarantee obligation was unenforceable as it was fraudulently induced and made under economic duress. Everest sued in federal court and moved for summary judgment. The court rejected Sutton’s defenses, finding that the economic duress he faced in the course of negotiating the various agreements with Everest was not of Everest’s making, and that Sutton’s fraudulent inducement claims, even if true, were barred under the parol evidence rule as the claims were contradicted by the terms of the integrated contract entered into by the parties. The court granted summary judgment in favor of Everest. Everest National Ins. Co. v. Sutton, Case No. 07-722 (USDC D.N.J., Aug. 13, 2008).

This post written by John Pitblado.

The UK Court of Appeals has allowed an appeal and reversed an Order for security for costs in favor of a party seeking to set aside the enforcement of an arbitration award rendered at the International Commercial Arbitration Court in Moscow, Russia. The analysis may be of interest to those involved in international arbitrations involving the New York Convention. The lower court’s decision was reported on in this blog on June 14, 2007. Gater Assets Ltd. v. Nak Naftogaz Ukrainiy [2007] EWHC 725 (CA Oct. 17, 2007).

This post written by Rollie Goss.

In a prior posting (dated 7/24/2006) this blog reported on a Connecticut Supreme Court decision reversing the dismissal of an appeal by the Court of Appeals, holding that the denial of pre-pleading security was an appealable final judgment, and remanding the case to the Court of Appeals for consideration of the merits of the appeal. The trial court had determined that the relevant statutory text required service to be made on the insurance commissioner or the secretary of the state and precluded service made on the unauthorized insurers’ contractually designated agents for service of process. On remand, the court of appeals disagreed with the trial court’s judgment in favor of the defendant insurers. However, the court was persuaded that on remand, for constitutional reasons, the defendant insurers are entitled to a hearing regarding the amount of pre-pleading security that they must provide. Hartford Accident and Indemnity Co. v. Ace American Reinsurance Co., AC 25661 (Ct. Ct. App. Aug. 14, 2007).

This case arose out of a reinsurance contract between Scottish Re Life Corporation (“Scottish Re”) and Annuity and Life Reassurance Ltd. (ALR). The contract required ALR to maintain significant assets in a trust for Scottish Re’s benefit. In 2005, Transamerica Occidental Life Insurance Company (“Transamerica”) assumed all of ALR’s obligations to Scottish Re by executing a novation agreement. Scottish Re agreed to release its interest in the trust to Transamerica as part of the novation agreement, not realizing at that time that Transamerica was not licensed or accredited by the State of New York. That fact affected Scottish Re’s financial status and ability to do business in New York. Scottish Re filed a motion to compel arbitration and for provisional and/or injunctive relief. The trial court issued an order directing arbitration and for provisional remedies, requiring Transamerica to either repudiate its claim of rescission or return the assets it had received as part of the novation agreement to a qualifying trust for Scottish Re’s benefit.

Earlier this month, the North Carolina Court of Appeals allowed an appeal from the trial court’s interlocutory order. While interlocutory orders are not generally immediately appealable in state court, the Court of Appeals stated that “[g]iven the large amount of money at issue in this case, the fact that the trial court impinged appellant’s right to the use and control of those assets, and the unavoidable and lengthy delays, acknowledged by both parties, preceding actual arbitration of the matter, we hold that appellee must be granted its appeal to preserve a substantial right.” The Court of Appeals affirmed the granting of provisional remedies. Scottish Re Life Corp. v. Transamerica Occidental Life Ins. Co., No. 06 CVS 2724 (N.C. Ct. App. July 3, 3007).