Reinsurance Focus

A court has found that a reinsurer’s (Global Reinsurance Corporation of America) maximum exposure under a facultative certificate is $1 million dollars, inclusive of expenses. The issue raised in the case by the parties’ cross-motions for judgment on the pleadings was whether expenses are subject to the $1 million limit stated in the certificate’s “Reinsurance Accepted” section. The reinsured (Pacific Employers Insurance Company) alleged the $1 million cap did not apply to the expenses, and requested that the court find that as a matter of law that Global was obligated for up to $1 million of loss and, in addition thereto, a pro rata share of expenses. In turn, Global sought a declaration that the cap is the maximum Pacific Employers could potentially recover. The “Reinsurance Accepted” section stated: “$1,000,000 ANY ONE OCCURRENCE AND IN THE AGGREGATE[.]” Examining the certificate’s plain language, the court found that this section’s “broad and unambiguous language” encompassed expenses because it defined Global’s maximum exposure. The section did not differentiate between reinsurance accepted for “losses” versus reinsurance accepted for “expenses,” but simply provided a total cap on liability for loss payments, expense payments, or any combination thereof. Pacific Employers Insurance Co. v. Global Reinsurance Corp. of America, Case No. 09-6055 (USDC E.D. Pa. Apr. 23, 2010).

This post written by Brian Perryman.

New York’s Appellate Court affirmed a ruling denying the defendant reinsurance brokers’ motion to dismiss claims alleged by the plaintiff, the putative cedent. American Home procured, through the defendants, certain reinsurance contracts. After dispute arose between American Home and its reinsurers in connection with approximately $23 million in claims, the insurer and reinsurers arbitrated, and the reinsurers successfully rescinded the contracts, based on misrepresentations by the brokers in the procurement thereof (the arbitrators held that the insurer and its agents were held to the uberrima fides, or utmost good faith standard, so it did not matter if the misrepresentations were negligent or intentional). American Home then filed suit against the brokers alleging breach of fiduciary duty, negligence, common law indemnification, contribution and unjust enrichment. The brokers moved to dismiss claims based in part on the plaintiff’s involvement in the misrepresentations, but the court denied the motion, and the appellate court affirmed. American Home Assurance Co. v. Naush, Hogan & Murray, Inc., No. 602858/08 (N.Y. Sup. Ct. App. Div. March 23, 2010).

This post written by John Pitblado.

Gulf Insurance Company sued Gerling Global Reinsurance Corporation of America (“Gerling”) and others who participated in reinsurance treaties covering a portfolio of Gulf’s automobile residual value insurance. Gerling denied Gulf’s claims for its portion of payments Gulf made in connection with underlying coverage litigation which settled for $266 million. Gulf sued Gerling, and Gerling countersued, seeking rescission of the treaties on the basis of nondisclosures and misrepresentations made by or on behalf of Gulf. The issues turned in part on the interpretation under the treaties of the percentage of the reinsurers’ participation. That interpretation was impacted by a further determination as to the amount of premium paid, but Gerling argued, and the trial court agreed, that the amount of premium was miscalculated by its bookkeeping department, and that Gulf improperly based its premium payment on those miscalculations. The premium payments were also not made until after formation of the treaties, and thus, the trial court found, did not affect interpretation of the treaties. After addressing a number of other contract interpretation issues, the Appellate Court essentially affirmed, with partial modification, the trial court’s decisions granting partial summary judgment to Gerling, and denying partial summary judgment to Gulf. Gulf Insurance Company v. Transatlantic Reinsurance Company, Nos. 6016023/03 and 601077/04 (N.Y. App. Div., Oct. 1, 2009)

This post written by John Pitblado.

In an action arising out of an alleged failure to honor a reinsurance agreement, defendant reinsurer Carnforth Limited filed a third-party complaint against Mosaic Global Holdings asserting two breach of contract claims and a declaratory judgment claim. According to the third party complaint, Mosaic breached an Intercorporate Agreement and a 2007 Settlement Agreement by “refusing to honor its defense and indemnity obligations to Carnforth for the TIG Reinsurance Claims.” Mosaic subsequently moved to dismiss the third party complaint and to strike Carnforth’s claims for attorneys’ fees. The district court denied the motion to dismiss, citing that under the facts pled by Carnforth, Mosaic may be obligated to indemnify Carnforth for the costs it incurs in the defense of plaintiff TIG’s complaint. Thus, even if Mosaic was not found liable with respect to TIG’s complaint, Carnforth’s third-party complaint still provides an avenue of recovery against Mosaic. Finally, the court denied Mosaic’s motion to strike attorneys’ fees noting that the language of the parties’ Intercorporate Agreement requires Mosaic to indemnify Carnforth “for all sums expended in the defense, settlement and satisfaction of the TIG reinsurance.” Carnforth Ltd. v. Mosaic Global Holdings, Inc., Case No. 08-3618 (USDC N.D. Ill. April 22, 2009).

This post written by John Black.

The UK Court of Appeals has entered a decision dealing with reinsurance avoidance issues which may be of interest to US practitioners due to the similarity of avoidance standards in the UK and the US. On October 31, 2007 we reported on a decision of the UK Commercial Court, Queen’s Bench Division, avoiding two facultative reinsurance agreements due to misrepresentations by the placing broker as to the amount of deductibles required for ceded risks. The UK Court of Appeals has agreed that the initial reinsurance agreement (covering risks from July 1, 1996 through June 30, 1997, extended by endorsement through January 31, 1998) should be avoided, but has decided that the second reinsurance agreement (covering risks from February 1, 1998 through January 31, 1999) should not be avoided. The representation at issue was made prior to the placement of the first reinsurance agreement, and stated that “[a]s a matter of principle they [the cedents] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.”

The Commercial Court characterized this statement as a statement of “current policy,” which continued to be effective through the placement of the second reinsurance agreement. There was testimony that this was the policy and practice of the cedents up to the placement of the first reinsurance agreement, but that due to market conditions it was not possible to continue this practice after July 1996. The Court of Appeals stated that the claim of avoidance was based upon an alleged misrepresentation, not upon an asserted failure to disclose, and that to be actionable: (1) a statement must be a representation of existing fact, not of future fact or opinion; and (2) that a representation as to expectation or belief is not actionable if it is made in good faith. The first point is similar to the elements of fraud claims in many US jurisdictions.

The Court of Appeal held that the alleged representation was a statement of intention that was a representation of existing fact prior to July 1996, and that it was a material misrepresentation. The Court found that since the extension of the first reinsurance agreement for an additional seven months was an amendment to an existing contract, rather than a new contract, the reinsurance was avoided through January 31, 1998. The Court stated that the representation was not continuing in nature 19 months after it had been made, rather that it “relates to the time when it is made ….” The Court therefore held that the alleged misrepresentation was not a basis to avoid the second reinsurance agreement. Although not stated, the fact that there was testimony that the market conditions made it impossible for the cedents to maintain a policy or practice of maintaining deductibles at the levels represented after July 1996 supports this conclusion. The Court of Appeals was careful to state that it had not been contended that the cedents were under an obligation to disclose the level of deductibles intended to be written with respect to the second reinsurance agreement, leaving open the question of whether avoidance could be based upon a failure to disclose as opposed to an affirmative misrepresentation. Limit No. 2 Limited v. Axa Versicherung AG [2008] EWCA 1231 (Ct.App. Nov. 12, 2008).

This post written by Rollie Goss.

Legion Insurance Company provided casualty insurance to businesses in the United States, including a Workers Compensation Act cover. This cover comprised two sections: Section A gave cover for statutory benefits in respect of death or bodily injury arising from an accident at work, and Section B gave cover for payments in respect of an employer’s fault based liability for an accident, killing or injuring an employee. This business was part of what was known as the “Mainframe Account.” In 1998, Hannover Re underwrote some excess of loss reinsurance policies giving cover to Legion for its liabilities in respect of business allocated to the Mainframe Account. By four excess of loss retrocession contracts, Syndicate 53 at Lloyd’s was a retrocessionaire of some of the Mainframe Accounts. One Ian Crane was the Syndicate’s active underwriter. Three of the four retrocessions included Hannover as reinsured. The retrocessions were limited to Section A of the cover.

The Syndicate avoided as against Hannover. During the ensuing trial, the Syndicate’s claims focused on nondisclosure by Hannover of underwriting and claims audits which it had conducted of Legion; misrepresentation and nondisclosure concerning the “comparative strictness of the underwriting requirements for the Mainframe Account”; and misrepresentation and nondisclosure concerning Legion’s underwriting practices (specifically, it was alleged that Legion had underwritten by reference to an “underwriting box” and had not used actual loss histories to calculate expected losses). In response, Hannover principally argued that the underwriting audits were not relevant and that the Syndicate’s criticism of Legion’s loss rating approach was not material since Crane had ample information with which to form his own judgment. Further, the claims audits did not reveal any serious problems relating to a Mainframe carve-out renewal proposal.

The court found that the underwriting and claims audits contained serious issues that were known to Hannover, and that Crane had not been able to consider these audits. Nonetheless, the 1998 carve-out renewal proposals described Legion’s loss rating approach, so Crane was in an equally good position as Hannover to form his own judgment about Legion’s loss rating practice. Regarding the nondisclosed claims audits, it was found that they described Legion’s practices as average, so this would not affect the judgment of a prudent underwriter. Regarding the allegation of the “comparative strictness of the underwriting requirements for the Mainframe Account,” the court found that these requirements had been explained to Crane. Finally, regarding the allegation on the use by Legion of an underwriting box was rejected as failing to understand how the box actually worked: Legion’s underwriters would individually underwrite each new piece of business going into the program and that business had to have enough experience to qualify it for the Mainframe Account, so Legion was providing cover to individual insureds by reference to their actual loss histories. The requirements for use of the underwriting box were consistent with the actual loss histories. Moreover, Crane was informed of the underwriting box in a November 1998 discussion. Thus, the Syndicate was not entitled, as against Hannover, to avoid the 1998 Mainframe carve-outs. Crane v. Hannover Ruckversicherungs-Aktiengesellschaft [2008] EWHC 3165 (Q.B. Comm. Div. Dec. 19, 2008).

This post written by Brian Perryman.

The parties in this case moved for summary judgment as to whether the theft of Defendants' boat was covered under a maritime insurance policy. Plaintiff Great Lakes Reinsurance PLC asserted that because the defendant failed to disclose a prior theft of a boat on the insurance application, the insurance should be void ab initio under the doctrine of ubberimae fidei, which frequently has application in reinsurance matters. The insurance application specifically asked whether the prospective insured had suffered a “marine loss” in the prior ten years. This question was answered in the negative, despite the fact that the responding party had a boat stolen the prior year. The court found that there was no disputed issue of fact that this response was a misrepresentation, but that there was insufficient evidence to support summary judgment as to whether the question was material, which was required for avoidance. The court declined to follow Ninth Circuit precedent that every specific question on an application is material, holding that controlling Eleventh Circuit precedent required a factual demonstration of materiality. The detailed opinion is in a Magistrate Judge's Report and Recommendation, which were adopted by the district court judge. Great Lakes Reinsurance PLC v. Roca, Case No. 07-23322 (USDC S.D.Fl. Jan. 6, 2009).

This post written by John Black.

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.

In a March 5, 2008 post, we reported on a jury verdict against AIG subsidiaries for $28 million plus punitive damages in a case seeking the rescission of two reinsurance facilities. AIG filed a motion for judgment as a matter of law, or in the alternative for a new trial, and to amend the judgment. Finding no legal error and sufficient facts to support the jury's verdict, the court has denied AIG's motion. AXA Versicherung AG v. New Hampshire Insur. Co., Case No. 05-10180 (USDC S.D.N.Y. Apr. 22, 2008).

This post written by Rollie Goss.

The US Court of Appeals for the Fifth Circuit has affirmed a summary judgment in favor of Aon, ruling that claims asserted against it by TIG arising out of the placement of reinsurance were barred by the statute of limitation. Aon acted as reinsurance intermediary and broker for TIG with respect to workers’ compensation risks that TIG ceded to U.S. Life. Aon failed to pass to U.S. Life historical loss information regarding the ceded risks that TIG had provided to Aon, and U.S. Life succeeded in rescinding that portion of the reinsurance in an arbitration due to the failure to provide known historical loss information. TIG then sued Aon for damages for breach of fiduciary duty. The district court held, and the Fifth Circuit affirmed, that the cause of action arose under Texas law when TIG and U.S. Life entered into an “impaired reinsurance agreement,” rather than when U.S. Life succeeded in rescinding the reinsurance (or even when U.S. Life first contended that it had the right to rescind). The courts refused to apply the discovery rule to delay the accrual of the cause of action because: (1) TIG only used Aon to solicit bids, dealing directly with bidders to negotiate reinsurance agreements and confirm the information that had been provided to the bidders; and (2) at the time that it received U.S. Life’s reinsurance proposal, TIG suspected that the loss information had not been passed to U.S. Life due to the fact that the proposal was much lower than other proposals it had received. The courts essentially imposed a duty to inquire upon TIG at that time, a duty which it had not satisfied. The Fifth Circuit concluded that “[i]nquiry could have been made to determine or confirm the facts and assumptions on which the bargain was to be based,” and that the “injury was not inherently undiscoverable” when the reinsurance agreement was executed. This seems like a harsh result, since neither party to the reinsurance agreement knew it was potentially voidable until the arbitration. There may have been a number of reasons why US Life's proposal was so low, some of which might not make the reinsurance agreement “impaired” from its inception. The effect of this decision, however, at least in the Fifth Circuit, is that cedents cannot rely upon brokers to do their jobs and pass on historical loss information that the cedent has provided to the broker if there is a reasonable doubt that the loss information may have been passed on to a prospective reinsurer. TIG Ins. Co. v. Aon Re Inc., No. 05-11450 (USCA 5th Cir. Mar. 13, 2008).

This post written by Rollie Goss.