Reinsurance Focus

A reinsured lost its case for reinsurance benefits because the reinsured’s settlement of an underlying claim fell outside the time limits imposed on the reinsurer’s potential liability. Arrowood Surplus Lines Insurance Company filed suit against Westport Insurance Company for amounts purportedly owed under a liability reinsurance agreement and arising from Arrowood’s settlement of a claim under an insurance policy it issued to Equity Residential. The trial court dismissed the complaint for failure to state a claim. Arrowood appealed to the Second Circuit. The appellate court held that, by its terms, the reinsurance agreement provided reinsurance coverage for policies that become effective after the agreement’s inception date of February 1, 1999 with respect to occurrences taking place before the agreement’s termination date of August 18, 2000. Insurance policies issued for multiple years “become effective” on the anniversary of their inception. An optional run-off provision provided further coverage for policies that became effective before the termination date through the anniversary of their inception. The Equity policy was issued on December 15, 1999, and Arrowood elected to maintain run-off coverage thereon through December 15, 2000. The Equity policy dispute involved coverage periods beyond December 15, 2000, so those periods were not covered by the agreement because they fell outside its time limitations. The Second Circuit declined to accept Arrowood’s argument that the agreement’s “follow the fortunes” provision expanded coverage beyond the agreement’s express time limitations. Arrowood Surplus Lines Insurance Co. v. Westport Insurance Co., No. 10-0397-CV (2d Cir. Oct. 8, 2010).

This post written by Brian Perryman.

Guarantee Life filed an Illinois state action seeking a declaration that an unexecuted 2006 reinsurance agreement with American Medical and Life was null and void. Despite numerous problems in its dealings with American (such as the state action), Guarantee Life entered another reinsurance agreement with American in 2008. No surprisingly, the 2008 agreement led to litigation. Guarantee Life filed a federal suit against American alleging breach of the 2008 agreement and violations of the Illinois Insurance Code. Because of the pendency of the Illinois state action, American moved to dismiss the federal complaint asking the court to abstain from hearing the case.

The United States District Court for the Northern District of Illinois denied American’s motion to dismiss finding that although the state and federal cases were parallel, abstention was not appropriate. The Court held that American failed to demonstrate the “clearest of justifications” or anything “extraordinary” that would overcome its “virtually unflagging” obligation to exercise its jurisdiction. Guarantee Trust Life Ins. Co. v. American Medical & Life Ins. Co., Case No. 01-02125 (USDC N.D. Ill. Sept. 15, 2010).

This post written by John Black.

We previously reported in a June 25, 2010 post on a lawsuit brought by plaintiff American Insurance Group, Inc., and its affiliates and subsidiaries, alleging underreporting of worker compensation premiums to the the National Worker’s Compensation Reinsurance Pool. That post discussed the court’s order on motions to dismiss brought by the defendants. The court has now ruled on a motion to reconsider the earlier order, granting the motion in part and denying it in part. Specifically, the court agreed with the Pool that the court was mistaken when it concluded that the Pool became the National Workers Compensation Reinsurance Association. The court affirmed, however, that the Pool has the capacity to be sued, since the Pool qualified as a voluntary unincorporated association that may sue or be sued in its own name. American International Group, Inc. v. Ace INA Holdings, Inc., Case No. 07 CV 2898 (USDC N.D. Ill. Sept. 16, 2010).

This post written by Brian Perryman.

The Eighth Circuit has reversed the district court’s entry of summary judgment that had disposed of the U.S. Government’s suit on behalf of the crop insurance reinsurer, Federal Crop Insurance Corporation (FCIC), against a crop insurance agent. The Government alleged various violations of provisions of the Federal Claims Act, including Section 3729(a)(1), which renders liable any person who knowingly “causes to be presented” to the United States Government a fraudulent claim for payment. The district court held that because the Government alleged that the agent “caused to be presented” fraudulent claims to the crop insurer and not the FCIC, the agent could not have caused fraudulent claims to be presented to the Government. Among other holdings, the Eighth Circuit held that a genuine issue of material fact existed as to whether the insurance agent “caused to be presented” fraudulent claims to the Government when the agent facilitated the submission of fraudulent claims to the insurer, which, in turn, transmitted the fraudulent claim data electronically to the FCIC. United States v. Hawley, No. 08-2992 (8th Cir. Aug. 23, 2010).

This post written by Michael Wolgin.

USF&G won a significant judgment against its reinsurers under certain reinsurance agreements covering liabilities in the 1950’s and early 1960’s (particularly 1959) in New York state court. USF&G, after protracted and largely unsuccessful coverage litigation with its insured, Western Asbestos Company, settled consolidated underlying asbestos claims for approximately $987 million (the settlement generally placed the liabilities in calendar year 1959). USF&G thereafter looked to its reinsurers under certain reinsurance agreements that covered that time period. The defendant reinsurers resisted, including American Re, under a certain reinsurance agreement for which USF&G sought $202 million, and another pool of reinsurers, under a reinsurance treaty for which USF&G sought an additional $59 million. The defendants asserted numerous theories limiting or eliminating their liabilities altogether, and the parties all cross-moved for summary judgment. The court rejected each of the defendants’ arguments, focusing principally on the follow-the-fortunes doctrine, and awarded USF&G the approximately $260 million in judgments it sought, along with interest and costs. United States Fidelity & Guaranty Co. v. American Re-Insurance Co., No. 604571/02 (N.Y. Sup. Ct. Aug. 20, 2010)

This post written by John Pitblado.

A federal district judge has agreed with a magistrate judge’s recommendation to deny a motion to abstain where an earlier-filed reinsurance coverage lawsuit was pending in Connecticut state court. In May 2009, the defendant filed suit in state court, contending there was no coverage under two reinsurance agreements for losses the plaintiffs incurred regarding asbestos-related claims. Five months later, the plaintiffs filed suit in federal court, seeking monetary relief for the defendant’s alleged breaches of contract, and for a declaration of the parties’ rights and obligations. The federal suit concerned the same two reinsurance contracts at issue in the state suit, but also involved claims under eleven additional contracts between the parties.

The defendant asked the federal court to defer to the first-filed state suit, which itself had been stayed on the state court’s finding that the federal suit would be the better vehicle to resolve the disputes. The magistrate judge recommended against abstention. The parties submitted briefing on the defendant’s objections to the recommendation, including objections, opposition to the objections and a reply in support of the objections. In adopting the magistrate judge’s recommendations, the district judge noted that, while the same parties and two of the same contracts were involved in the state suit, the claims were more comprehensive in the federal court because of the additional contracts at issue, and because the damages claims were absent from the state suit. Seaton Insurance Co. v. Clearwater Insurance Co., No. 09-516 S (USDC D. Conn. Sept. 2, 2010).

This post written by Brian Perryman.

Massachusetts Mutual Life Insurance Company was awarded in excess of $1.4 million in pre-judgment interest, on a $32 million breach of contract award against its reinsurer, Employers Reinsurance Corporation. A Missouri federal court applying Connecticut law analyzed the issue under equitable principles, and found that the Connecticut statute authorizing pre-judgment interest sets a maximum of ten percent interest, but that the Court may, in its discretion, award a lesser amount. The Court found that the appropriate interest rate to be applied in the case was the one-year constant maturity Treasury rate adopted into the federal statute governing pre-judgment interest (and attested to in an affidavit indicating the current Treasury rate). The Court dated the accrual of interest back to April, 2006, when Employers Re stopped making reimbursement payments to Mass Mutual, which payments the Court previously held were required under the parties’ reinsurance treaty. Employers Reinsurance Corp. v. Massachusetts Mutual Life Ins. Co., No. 06-0188 (USDC W.D. Mo. August 19, 2010)

This post written by John Pitblado.

A third-party complaint disputing the nature and extent of an obligation to reinsure an insurance company with respect to losses arising from assumed reinsurance risks has been dismissed without prejudice, to allow an arbitrator to decide the scope of a settlement agreement. Through a settlement agreement, the insurance company resolved its dispute with the defendant named in the original complaint. The original complaint was dismissed with prejudice. Thereafter, the insurance company contended that its claims against the third-party defendant reinsurer should be voluntarily dismissed without prejudice to allow arbitration of those parties’ claims. The reinsurer argued the voluntary dismissal should be with prejudice, as the insurance company’s claims in the third-party complaint were derivative of the claims in the original complaint. The court declined to dismiss with prejudice, finding that the question of whether the claims were, in fact, derivative was a question better left for the arbitrator. Eagle Star Insurance Co. v. Highland Insurance Co., Case No. 02-2165 (USDC S.D. Cal. July 22, 2010).

This post written by Brian Perryman.

The US District Court for the Southern District of Florida recently issued an opinion on defendant Constructora del Litoral’s Motion to Dismiss for Insufficiency of Service of Process by plaintiff Folksamerica Reinsurance. The action arises out of defendants’ alleged failure to indemnify Folksamerica for sums paid in connection with reinsuring surety bonds issued for a construction project in Ecuador. Plaintiff served process pursuant to the Inter-American Convention on Letters Rogatory and Additional Protocol. Constructora alleged in its Motion to Dismiss that service was improper under both Ecuadorian law and under the Convention. The Court concluded that, although defendants had met the burden in establishing that service of process was insufficient, Folksamerica should be given 60 days to perfect service and file proof with the Court. Further background is available in the motion to dismiss, and the opposition to the motion to dismiss. Folksamerica Reinsurance Co. v. Constructora del Litoral, S.A., Case No. 10-20560 (S.D. Fla. June 18, 2010).

This post written by John Black.

Motions to dismiss a lawsuit brought by plaintiff American Insurance Group, Inc., and its affiliates and subsidiaries, has been dismissed in part, and granted in part. Some of what the court has described as a “long and tortured procedural history” of the case is reported in our posts of March 27, 2008 and April 6, 2009. Plaintiffs’ claims against defendants stemmed from five underlying allegations. First, plaintiffs alleged that the defendant insurance companies improperly underreported to the National Council on Compensation Insurance, administrator for the National Worker’s Compensation Reinsurance Pool, the amount of their voluntary market workers compensation premiums, which resulted in a decrease in their residual market obligations. Second, plaintiffs alleged that the Pool board members blocked participation in an AIG settlement fund established to compensate third parties allegedly injured by AIG. Third, plaintiffs contended that Pool board members suppressed investigations into premium underreporting. Fourth, plaintiffs alleged that certain of the defendants conspired to direct NCCI to issue false quarterly Pool statements. Finally, plaintiffs allege that the Pool board directed NCCI to ignore amended premium filings with the intent of further disabling the effectiveness of the AIG settlement fund. Several of the defendants also filed counterclaims, which AIG unsuccessfully moved to dismiss. American International Group, Inc. v. Ace INA Holdings, Inc., Case No. 07 CV 2898 (USDC N.D. Ill. June 30, 2010).

This post written by Brian Perryman.