Reinsurance Focus

In the latest development in the ongoing dispute between Employers Reinsurance and its reinsured Mass Mutual, ERC asks the US District Court for the Western District of Missouri to amend its prior rulings to certify the “follow the settlements” and statutes of limitations issues for immediate interlocutory appeal under 28 U.S.C. § 1292(b). Noting the heavy burden required to certify a question for interlocutory appeal, the District Court incorporated its prior ruling on the “follow the settlements” issue and denied ERC’s request for certification as to that issue, since it had denied certification of that issue previously. The court also refused to certify the statute of limitations issue for interlocutory appeal finding that the issue was not a purely legal question as required by § 1292(b). Employers Reinsurance Corp. v. Massachusetts Mut. Life Ins. Co., Case No. 06-0188 (USDC W.D. Mo. June 16, 2010).

This post written by John Black.

In a recent opinion, the United States Court of Appeal for the Third Circuit addressed the applicability of the follow-the-fortunes doctrine to the post-settlement allocation of a settlement amount to a multi-layer insurance program, upon a challenge to the allocation by a reinsurer. Rollie Goss offers an expanded analysis of this case. Travelers Cas. and Surety Co. v. Ins. Co. of North America, Nos. 06-4100 and 08-1032 (3d Cir. June 9, 2010).

This post written by Rollie Goss.

National Union Fire Insurance Company of Pittsburgh, Pa. sued Scottsdale Insurance Company in October 2009, alleging that Scottsdale breached the parties’ reinsurance agreement by failing to reimburse National Union for certain costs and expenses in connection with an underlying settlement National Union entered into with its insured, arising from damage to two gas turbines. National Union and Scottsdale have now pulled the matter out of court by joint stipulation of dismissal, which was recently entered and ordered by the court. National Union Fire Ins. Co. of Pittsburgh, Pa. v. Scottsdale Ins. Co., No. 09-8635 (USDC S.D.N.Y. May 17, 2010).

This post written by John Pitblado.

A California appellate court reversed a grant of summary judgment for defendant on a claim for equitable contribution for sums expended in defending a construction defect action. Defendant North American contended that its duty to defend never arose because the underlying insured never paid the $25,000 “per claim” self-insured retention for each of the eight covered homes at issue. The plaintiff, Clarendon America, countered that “per claim” required only one $25,000 payment for the entire action. In an unpublished opinion, the appellate court held that the phrase “per claim” was ambiguous, and that North American failed to show that the developer did not have an “objectively reasonable expectation” that the $25,000 payment would apply only once to the construction defect action as a whole, rather than to each of the eight covered homes. Clarendon Am. Ins. Co. v. North Am. Capacity Ins. Co., No. CIVRS701868 (Cal. App. Ct. June 15, 2010).

This post written by Michael Wolgin.

This case focused on whether the entire amount of a $3.2 million settlement of medical malpractice claims that was reached in an arbitration was covered by a primary insurance policy issued by Texas Farmers Insurance. The determining factor was whether the claim occurred during a policy period in which there was $5 million in primary coverage, or during a renewal period in which there was $1 million in primary coverage and $10 million in excess coverage. Lexington Insurance had issued a “following form” facultative reinsurance policy to the excess insurer.

The court held that the loss occurred while the $5 million limit was in effect. Even though Lexington had not provided reinsurance for that policy year, and never reinsured Texas Farmers, Texas Farmers sought to recover from Lexington, as reinsurer, based upon the “follow the settlements” doctrine. The District Court denied this recovery, holding that the doctrine did not apply, and the Court of Appeals agreed, finding that Lexington was not Texas Farmer’s reinsurer. Texas Farmers Insurance Co. v. Lexington Insurance Co., No. 08-55835 (9th Cir. May 21, 2010).

This post written by Brian Perryman.

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.

Various AIG entities filed an action against their reinsurers seeking a declaration of coverage for portions of a settlement AIG made in a coverage dispute with its insured, Monsanto Corporation. Monsanto faced extensive litigation in underlying chemical pollution cases against it, which it ultimately settled for approximately $600 million. AIG sought reinsurance coverage for portions of its payments to Monsanto. The reinsurers denied AIG’s claims on the basis that AIG’s payments to Monsanto were “ex gratia” and not covered under AIG’s policies, citing the pollution exclusion, exclusions for punitive damages, and allocation issues with other underlying insurers. In defending against the reinsurers’ motions for summary judgment, AIG raised the “follow the settlements” doctrine, which binds a reinsurer to a settlement agreed to by the ceding company if the underlying risk is “reasonably within the terms of the original policy” even if not technically covered. The court granted the reinsurers’ motions and dismissed AIG’s case. It found that, even affording AIG the greater leeway of the “follow the settlements” doctrine, the claims were not reasonably within the coverage of AIG’s underyling policies, and AIG, in entering into the settlement with Monsanto, failed to conduct a reasonable investigation of the Monsanto claims by glossing over critical coverage issues, unnecessarily exposing its reinsurers to non-covered claims. American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010).

This post written by John Pitblado.

In a dispute stemming from various reinsurance claims arising from the Claimant’s participation in an excess of loss reinsurance program which protected the Respondent’s casualty book of business, IRA Brasil Resseguros challenged an arbitration panel’s ruling in favor of CX Reinsurance Company before the UK High Court of Justice, Queen’s Bench Division. Mr. Justice Burton granted leave to hear four issues on appeal: (1) the standard of proof required for a reinsured to prove his case under a “double proviso” follows settlements clause; (2) the correct approach to considering the question of proof of loss under such a follow settlements clause; (3) what proof is required in relation to a “losses occurring during” clause; and (4) the test for whether a loss was a loss “arising out of an event.” The court, after considering and applying both UK precedent (for issues 1 and 2) and US case law (for issues 3 and 4) determined that the arbitrators had correctly applied applicable law and dismissed the appeal accordingly. IRB Brasil Resseguros SA v. CX Reinsurance Co. Ltd., Case No. 2010 Folio 12 (Q.B. May 7, 2010).

This post written by John Black.

A plaintiff insurance company (General Star National Insurance Company) unsuccessfully moved for entry of a writ of execution and restraining notice against the Romanian Bank of Foreign Trade and its purported successors-in-interest. In an underlying action in an Ohio federal district court, General Star alleged that a Romanian company (Astra) acquired the reinsurance obligations a state-owned Romanian insurance company, but failed to remit funds owed to General Star under certain reinsurance contracts. The Ohio court found that the Romanian goverment was Astra’s alter ego and permitted General Star to attach the government’s assets to satisfy a default judgment in General Star’s favor.

Unable to satisfy its judgment in Ohio, General Star sought to execute the judgment in New York, arguing that the Romanian Bank of Foreign Trade and its successors were alter egos of the Romanian government. The argument was rejected, as General Star could not demonstrate grounds for disregarding the Bank of Foreign Trade’s or its successors’ corporate forms. Among other things, there was no proof the Romanian government exercised daily control over these entities. Moreover, although the corporate form may be disregarded if necessary to prevent fraud or injustice, General Star failed to persuade the Court that the equities weighed in favor of piercing the corporate veil. There was no showing that the corporate form was used by the Romanian government to avoid payment. The writ of execution and restraining notice were denied. General Star National Insurance Co. v. Administratia Asigurarilor de Stat, Case No. 18 MS 302 (USDC S.D.N.Y. May 12, 2010).

This post written by Brian Perryman.

Acting as Rehabilitator of Centaur Insurance Company, the Director of the Illinois Department of Insurance, Michael McRaith, brought suit against two reinsurers, seeking a declaration that they are obligated to reimburse Centaur for portions of a $32 million settlement it agreed to in resolving underlying asbestos litigation. The reinsurers had removed the case to federal court, but McRaith sought a remand based on the doctrines of McCarran-Ferguson reverse preemption and Burford abstention. The court denied the motion to remand under both theories, finding that none of the McCarran-Ferguson reverse preemption criteria had been met, as the state law issues pertaining to the rehabilitation proceedings did not specifically relate to the business of insurance, and there was not a clear conflict with federal law vis-à-vis state insurance solvency rehabilitation procedure. Burford abstention was also inappropriate because the dispute pertained less to the “complex [state] regulations pertaining to insolvent insurers” than to a simple breach of contract dispute between the parties under certain reinsurance certificates. McRaith v. American Re-Insurance Co., No. 09-C-4027 (USDC N.D. Ill. Feb. 17, 2010).

This post written by John Pitblado.