Reinsurance Focus

The Seventh Circuit has reversed a federal magistrate’s ruling that defined a stop-loss policy as reinsurance under Wisconsin law.

Edstrom, a manufacturing company, had a stop loss policy in place for its group health plan with Companion Life. Prior to issuing the policy, Companion asked Edstrom to identify any participant who could reasonably be expected to incur more than $32,500 in medical expenses in 2004. Edstrom informed Companion that there was no such participant. In 2004, one of the plan participants had a child that developed a serious medical condition, which was based upon an undisclosed condition that existed prior to the issuance of the policy, and which resulted in claims of at least $890,000. When Companion discovered the child’s condition, it raised the child’s deductible to $450,000, pursuant to a policy provision that allowed the insurer to revise the deductible based on subsequent information that if known before issuing the policy would affect the rates, deductibles, and terms of the policy.

Edstrom initiated arbitration proceedings against Companion. The arbitrator found in favor of Companion finding that the terms of the policy provided the insurer with unfettered rights to raise the deductible. Edstrom unsuccessfully moved to have the award vacated by the District Court claiming that the decision violated Wisconsin Statute Section 631.11(1)(b), which provides that a misrepresentation cannot affect an insurer’s obligations unless the insured “knew or should have known that the representation was false.” Edstrom contended that since it neither knew, nor had reason to know, that the representation regarding potential claims was false, Companion could not raise the deductible. While the arbitrator did not mention this statute, the magistrate judge held that the policy was a contract of reinsurance, and that the statute did not apply to contracts of reinsurance.

The Seventh Circuit held that the federal magistrate’s definition of stop loss policy as reinsurance under Wisconsin law was incorrect. The court stated that “it is a mistake to think that anything someone does to insure someone else against a risk is ‘insurance’ within the meaning of statutes that regulate insurance.” “Stop-loss insurance is an insurance policy for losses that the insured self-insures up to the limit of the deductible,” according to the court.

The contract contained a provision which required that the arbitrator “strictly abide by the terms of this [policy] and shall strictly apply rules of law applicable thereto,” namely the rules of Wisconsin law. The Court of Appeals found this provision to be enforceable. Since there was no evidence in the record that the arbitrator had considered the applicability of the statute to this situation, the appellate court remanded the case to the district court with instructions to vacate the award and to return the case to the arbitrator for consideration of the statute and to determine whether the policyholder knew or should have known that its representation to the insurer was false. Edstrom v. Companion Life Ins. Co., No. 06 C 964 (USCA 7th Cir. Feb. 11, 2008).

This post written by Lynn Hawkins.

In an August 16, 2007 post, we commented on a New York district court’s denial of cross motions for summary judgment in a case seeking rescission of two reinsurance facilities. The court rejected the defendants’ statute of limitations defense on summary judgment, however, following a jury trial, the court agreed that plaintiff’s negligent misrepresentation and breach of the duty of utmost good faith claims were barred by the statute of limitations. The court also merged plaintiff’s claims for material nondisclosure and intentional misrepresentation into a single claim of fraudulent inducement. The bases for the claims are set out in the Second Amended Complaint and in our prior post. Shortly before trial, the court denied a motion by Axa to collaterally estop AIG from “relitigating” certain issues that had been determined in a prior arbitration between AIG and a Lloyd’s syndicate.

At trial, a jury found the defendants liable for fraudulent inducement and concluded that plaintiffs were entitled to rescission of both facilities. The defendants were ordered to remit to plaintiff $20,087,166 plus interest of $8,536,004. The jury also found defendants liable for punitive damages in the amount of $5,750,000. Defendants have posted a supersedeas bond in the amount of $36,000,000 in preparation for an appeal. Axa Versicherung Ag v. New Hampshire Ins. Co., No. 05-cv-10180 (USDC S.D.N.Y. Feb. 6, 2008).

This post written by Lynn Hawkins.

The Ninth Circuit affirmed a magistrate’s ruling that Coregis Insurance Company complied with the plain language of an insurance policy issued to Independent School District of Boise City when Coregis cancelled coverage. The policy permitted Coregis to cancel the policy after it had been in effect for more than 60 days if it was unable to secure adequate reinsurance. The policy also contained a rate guarantee endorsement in which Coregis agreed “to keep this policy in effect and that rates will not increase more than 3% per year for the 2002-2003 and 2003-2004 policy years.” After one of the school shootings, reinsurance for terrorism risks was not available. The court determined that the two policy provisions could be read in harmony. Independent School District of Boise City v. Coregis Ins. Co., No. 06-35627 (9th Cir. Jan. 23, 2008).

This post written by Lynn Hawkins.

A New York state court, in an action involving claims under a quota share reinsurance of insurance issued to automobile financing institutions covering the residual value of motor vehicle leases, has resolved some issues as to the interpretation of the reinsurance as a matter of law, finding no ambiguity in the quota share agreements. At the same time, the court denied summary judgment on a claim to rescind the reinsurance on the basis that the cedent had not disclosed to the reinsurer, at the time the reinsurance was placed, that its own actuary had projected a loss ratio of over 100% on the underlying risks. The court found that there was a disputed issue of fact as to when the cedent had knowledge of high losses, but that if it was established that the cedent had such knowledge at the time of placement, rescission would be appropriate. The interpretation issues included such important issues as determining that an entire block of risks could not be ceded to the quota share agreement and the percentage of the pool reinsured by a particular quota share reinsurer. Gulf Insurance Co. v. Transatlantic Reinsurance Co.,. No. 601602/03 (N.Y. Sup. Ct. Nov. 21, 2007).

This post written by Rollie Goss.

The UK Commercial Court, Queen’s Bench Division, has granted a request to avoid several reinsurance agreements based upon misrepresentations in the placement of the treaties. The treaties were first loss facultative reinsurance agreements, and the court found that there had been material misrepresentations of the cedent’s underwriting policies. Specifically, the court found that although the placement materials had represented that the cedent insured risks subject to deductibles of from £500,000 to 1 million, the reinsured risks in actuality had deductibles of from £100,000 – 200,000. The court found that the misrepresentations were of a present fact, rather than of future intention, and were highly material to the acceptance of the risk given the conditions of the particular market. The court found that if the actual underwriting practices of the cedent had been disclosed, the reinsurer would not have agreed to the reinsurance agreements. The fact that the reinsurance was a first loss cover made the amount of the deductibles particularly important. Limit No. 2 Limited v. Axa Versicherung AG [2007] EWHC 2321 (Comm. Queen’s Bench October 17, 2007).

We have reported previously on developments in Legion Insurance’s liquidation proceeding (see January 16, 2007 and April 26, 2007 posts), including an attempt to recover premiums allegedly owed by American Patriot Insurance Agency, Inc. (“American Patriot”) relating to a workers’ compensation program under a limited agency agreement.

On September 7, an Illinois federal court granted the Commissioner’s motion for summary judgment on American Patriot’s affirmative defenses for setoff and rescission. The court concluded that American Patriot had waived their right to rescind the limited agency agreement where they failed to take any steps towards rescinding the agreement until three years after they acquired knowledge of the fraud, coupled with Defendants’ continued retention of the benefits of the contract. With respect to American Patriot’s setoff defense, the liquidator contended that the alleged debts could not be mutual because they were not due and owing between the same parties or based upon the same contracts, and that mutuality of capacity was lacking because the premium owed by American Patriot were held in a fiduciary capacity. The judge agreed, stating that “the debts asserted by Defendants lack a mutuality of time with the debts asserted against them by the Liquidator, and Defendants’ claim for setoff must be dismissed on these grounds.”

The court denied summary judgment to the liquidator on American Patriot’s remaining affirmative defenses of unclean hands, fraud, negligent misrepresentation, estoppel of a 2000 program year and breach of contract. Ario v. American Patriot Ins. Agency, Case No. 05 C 1049 (N.D.Ill. September 7, 2007).

This dispute relates to two reinsurance contracts between Axa Versicherung (“Axa”) and three subsidiaries of American International Group (collectively, “AIG”). In 1996, Axa’s predecessor in interest, Albingia Verischerungs AG, agreed to participate in a reinsurance facility for AIG for a fourteen month period. Following that term, Algingia agreed to renew its participation for a thirteen month period commencing on December 1, 1997. Axa sought to rescind those contracts on the basis of fraud, alleging that AIG misrepresented or failed to disclose certain material facts in connection with the negotiation of those contracts. Specifically, Axa alleged that AIG misled Algingia concerning what sort of facility the contracts created, “facultative” or “facultative obligatory.” Both parties moved for summary judgment – Axa on the merits and AIG on a statute of limitations defense.

The Southern District of New York denied both motions in their entirety. With respect to AIG’s statute of limitations argument, the court recognized that Axa initiated this action after the six year statute of limitations expired, however, could not conclude that the case was time-barred because “the determination of when plaintiff reasonably could have discovered the alleged misrepresentations involves genuinely disputed issues of fact not appropriate for summary judgment.” The court concluded that those same disputed issues of fact rendered the case inappropriate for summary judgment on the merits. Axa Versicherung v. New Hampshire Ins. Co., Case No. 05-10180 (S.D.N.Y. July 23, 2007).

BJC, a network of hospitals is the sole shareholder of ATG, a captive insurance company that provides insurance for BJC. A dispute arose between ATG and its reinsurer, Columbia Casualty pertaining to the “incurred loss condition” clause in their reinsurance agreement. The incurred loss condition provided that continued coverage would be conditioned upon an incurred loss ratio of less than 75%. A few days before the end of the second policy year, Columbia terminated the agreement, claiming that BJC had exceeded the incurred loss ratio on an aggregate basis and on an individual claim.

Much of the case revolved around the actuarial work Columbia presented to BJC to justify Columbia’s determination that the incurred loss ratio had exceeded 75%. While the Eighth Circuit agreed that Columbia had broad discretion to determine the incurred loss, it held BJC presented sufficient evidence from which a reasonable jury could conclude that Columbia acted in bad faith.

The Court also agreed with the district court’s decision to strike the prayer for punitive damages because ATG’s complaint failed to allege fraud with the particularity required by Federal Rule of Civil Procedure 9(b).

Finally, the Court affirmed the district court’s finding that BCA was precluded from recovering compensatory damages resulting from Columbia’s decision to terminate the Contract because BJC failed to properly quantify its costs.

BJC v. Columbia Casualty, Case No. 06-1326 (8th Cir., February 23, 2007).

The UK Queen's Bench Division of the Commercial Court has denied applications to vacate prior judgments in an action brought by a reinsured against several defendants which served as reinsurance intermediaries under two binders involving short tail property and contingency risks and personal accident risks. Prior liability judgments had found that the intermediary group had fraudulently abused the binders by placing risks through the binders which were not authorized, and by signing an addenda to the binders, without authority, that provided the intermediaries an extra 40% commission on the first 12 months gross premium. Prior judgments had rescinded the binders and awarded damages for fraud and conspiracy totaling approximately £17,000,000. The opinion holds that liability judgments against several of the defendants were proper. R & V Versicherung AG v. Risk Insurance and Reinsurance Solutions SA, [2007] EWHC 79 (Comm. Jan. 29, 2007).

The financial collapse of Reciprocal of America, an insurer and reinsurer, resulted in a number of lawsuits, including a series of lawsuits by policyholders and state Insurance Commissioners in Alabama and in other states against the company's officers and directors. When two officers pleaded guilty to criminal charges relating to the operation of the company, the company's D&O insurer filed a declaratory judgment action, seeking rescission of the policies it had issued. While the actions filed by the policyholders and Insurance Commissioners were granted MDL status, the MDL Panel declined to add the D&O insurer's action to that proceeding. The District Court dismissed the D&O insurer's action, on the basis that it would abstain from hearing the claims in deference to the parallel state court actions. The Fourth Circuit reversed, vacating the decision, finding that the requirements for abstention were not present, and that the rescission action should go forward. Great American Ins. Co. v. Gross, Case No. 05-2069 (4th Cir. Oct. 30, 2006).