Reinsurance Focus

A court granted in part and denied in part a motion for judgment on the pleadings in a case involving claims by a reinsurer of automobile insurance policies (Lincoln General) against its cedent (U.S. Auto) and the cedent’s affiliates for allegedly intentionally miscalculating amounts owed under certain agreements between Lincoln General and U.S. Auto. Lincoln General argued that it had been underpaid, and was owed millions of dollars from U.S. Auto, and that the affiliates were also liable for U.S. Auto’s actions under various theories of direct and vicarious liability. The court denied that part of the defendants’ motion arguing that Lincoln General failed to set forth facts forming the basis of a viable veil-piercing claim; Lincoln General’s complaint adequately pled an alter ego theory. The court also allowed a tortious interference with contract claim to proceed against some of the defendants. However, the court granted that part of the motion arguing that non-signatories to the guaranty agreements between Lincoln General and U.S. Auto could not be held liable as guarantors, and that Lincoln General’s unjust enrichment claim failed as to those defendants who had written agreements with Lincoln General. Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Servs., Inc., Case No. 07-1985 (USDC N.D. Tex. Apr. 29, 2009).

This post written by Brian Perryman.

As reported in our previous posts on November 19, 2007 and July 8, 2008, Midwest Employers Casualty Company (“Midwest”) sued Legion Insurance Company (“Legion”), in connection with 43 separate reinsurance certificates issued by Midwest to Legion between 1994 and 2001. The crux of Midwest’s position is that the certificates each establish that the coverage was provided on a “loss occurring basis” rather than a “risk attaching basis,” and also that the agreements contain no agreement to arbitrate. Midwest moved for summary judgment on those bases. However, the federal court agreed with Legion that the nature of the agreements could not be ascertained from the face of the documents submitted, and that the parties’ various oral agreements and understanding as to how the agreements operated potentially conflicted with the certificates, leaving fact questions to be reserved for trial. The court denied the motion and instructed the parties to prepare for trial. Midwest Employers Cas. Co. v. Legion Ins. Co., Case No. 07-870 (USDC W.D. Mo. Mar. 24, 2009).

This post written by John Pitblado.

The Third Circuit has determined it lacked jurisdiction to hear the appeal of parties disputing their obligations in connection with certain reinsurance guarantees. In a breach of contract action, an insurer (Everest) alleged that certain guarantors failed to fulfill their obligations following the reinsurer’s (Founders) refusal to pay over $76 million to Everest under a reinsurance agreement. The guarantors filed counterclaims, in part seeking a declaration that no monies are due and owing under the guarantees because Everest unnecessarily reimbursed lenders for certain claims. In connection with a separate arbitration between Everest and Founders, an arbitral panel ordered Founders to post $70 million in favor of Everest as security. Founders failed to comply. Everest then moved for partial summary judgment in the lawsuit, seeking an order requiring the guarantors to satisfy Founders’s obligation to post security. Everest also moved to dismiss the counterclaims. The district court granted Everest’s motion for partial summary judgment and granted, in part, Everest’s motion to dismiss.

The appellate court found it lacked jurisdiction to hear the appeal on the one remaining counterclaim and on Everest's breach of contract claim, as there was no final order being appealed from, and because the district court’s award was merely one for the payment of money, and not an injunction (which would have accorded the guarantors the right to an interlocutory appeal). The appeal was dismissed. Everest Nat'l Ins. Co. v. Sutton, No. 08-4643 (3d Cir. Apr. 7, 2009).

This post written by Brian Perryman.

Plaintiff, the assignee of remaining reinsurance claims possessed by the estate of the insolvent insurer, originally brought an action against the defendants in state court, but the defendants removed to federal district court by alleging that the New York Convention (the “Convention”) and the Federal Arbitration Act governed the arbitration clauses in the excess-of-loss reinsurance contracts. Plaintiff then moved to remand and defendants moved to stay the action and compel arbitration. In granting the defendants’ motion, the district court ruled that the parties’ dispute was encompassed by the arbitration clauses and thus fell under the Convention, the liquidator’s right not to be compelled to arbitrate was not assigned to the plaintiff, and the service-of-suit clauses in the reinsurance contracts did not constitute a waiver of the defendants’ right to removal. B.D. Cooke & Partners Ltd. v. Certain Underwriters at Lloyds, London, Case No. 08-3435 (USDC S.D.N.Y. Mar. 31, 2009).

This post written by Dan Crisp.

A California appellate court recently affirmed the dismissal of a cedent’s legal malpractice and breach of fiduciary duty claims pursuant to California's one-year statute of limitations. This dispute involved the legal representation of the cedent insurer with regard to the coverage of a claim tendered to the insurer by one of its insureds. In affirming the dismissal, the court found that the insurer sustained “actual injury” more than one year prior to bringing suit. The statute of limitations was not tolled because representation of the cedent ended more than one year prior to bringing the suit, and the claim for breach of fiduciary duty is also governed by the one-year statute of limitations. Norcal Mut. Ins. Co. v. Sedgwick, Detert, Moran & Arnold, Case No. B203357 (Cal. Ct. App. Mar. 19, 2009).

This post written by Daniel Crisp.

As reported in our post on March 27, 2008, The National Council on Compensation Insurance, Inc. (“NCCI”), as attorney-in-fact for participating companies of the National Workers Compensation Reinsurance Pool (collectively “The Pool”) sued AIG and certain of its subsidiaries for allegedly engaging in a fraudulent scheme to avoid paying their proportionate share of the insurance costs in the residual market for workers compensation insurance.

AIG asserted a number of special defenses and counterclaims to NCCI’s complaint, and asserted third-party claims against certain members of the Pool. The defenses and claims were all generally based on the theory that various Pool members engaged in a premium accounting methodology similar to that utilized by AIG and found by the New York Attorney General to have been unlawful in various respects in its investigation of AIG. NCCI moved to strike the special defenses, and moved to dismiss the counterclaims. Affected members of the Pool moved to dismiss the third-party claims. The Court granted NCCI’s motion to strike each of the special defenses, but denied its motion to dismiss the counterclaims, finding that NCCI is itself a party, and not merely a representative of Pool members. The Court granted in part and denied in part the Pool members’ motion to dismiss, allowing AIG to maintain claims for breach of fiduciary duty, fraud, and unjust enrichment against specified Pool members. The Court held that New York law applies to these common law claims. National Council on Compensation Ins., Inc. v. American International Group, Inc., Case No. 07-2898 (USDC N.D.Ill. Feb. 23, 2009).

This post written by John Pitblado.

A federal court granted summary judgment to Northfield Insurance Company (“Northfield”) on claims brought by the Pennsylvania Counties Risk Pool (“PCORP”), and the Counties of Monroe and Beaver, Pennsylvania (“the Counties”), after Northfield declined a claim under a reinsurance agreement with PCORP, which reinsured insurance issued by PCORP to the Counties. The plaintiffs sought coverage pertaining to an underlying class action suit brought by residents against the Counties, which suit alleged that various county officials failed to provide state-mandated per diem foster care payments to “kinship caregivers” of special needs foster children. The suit sought declaratory and injunctive relief, as well as costs and attorneys fees. The underlying suit eventually settled, with the result that PCORP paid an amount which “include[ed] the settlement and attorneys fees and litigation expenses,” of $213,799.71.

Northfield denied the reinsurance claim based in part on an endorsement to the underlying policy which excluded coverage for “any costs or expenses incurred by the Assured in any claim or suit seeking solely declaratory, injunctive, or equitable relief, including but not limited to any attorney’s fees or expenses incurred to defend the claim.” The Court agreed with Northfield that, strictly confined to the four corners of the operative pleading, the underlying suit did not seek compensatory damages or any other form of legal relief, but was limited in its demand to solely declaratory and injunctive relief, both of which are strictly equitable forms of relief. The Court disagreed with the plaintiffs that the catch-all claim for relief alleged in the underlying suit for “such additional or alternative relief which [the] Court deems just, proper, or equitable” did not negate the proper application of the exclusion. Pennsylvania County Risk Pool v. Northland Insurance, Case No. 07-00898 (USDC M.D. Pa. Feb. 27, 2009).

This post written by John Pitblado.

In two prior posts, this blog reported on a breach of fiduciary duty case filed against Directors of the Mississippi Windstorm Underwriters Association (MWUA) for failing to secure adequate reinsurance to cover the 2004-2005 hurricane seasons. (MWUA is composed of all insurers who write property insurance on a direct basis anywhere in Mississippi). The defendants filed a motion for summary judgment arguing that they did not owe any fiduciary duty to the plaintiffs and asserted that, regardless, the decisions made by the alleged Board members relating to the 2004-2005 reinsurance purchase met the applicable standard of care and are protected from liability by the business judgment rule.

The district court agreed that the business judgment rule applied, but denied summary judgment concluding that there were “myriad factual disputes regarding whether the decisions regarding reinsurance were indeed an exercise of good business judgment.” Association Casualty Ins. Co., et. al. v. Allstate Ins. Co., et. al, Case No. 07-525 (USDC S.D. Miss. July 29, 2008).

This post written by Lynn Hawkins.

In a previous post dated August 13, 2008, we noted that a federal court dismissed a complaint brought by Swiss Reinsurance America Corporation (“Swiss Re”) against the Access General Agency, Inc., Access Claims Administrators, Inc., and Access General Insurance Agency of California (“Access Entities”), alleging that the Access Entities failed to manage and administer claims properly under Swiss Re’s predecessors’ reinsurance program. The Court's opinion granted the motion to dismiss on the basis that Swiss Re’s earlier complaint failed to differentiate claims and allegations between the related but separate Access Entities.

Swiss Re amended its complaint and the defendants again filed a motion to dismiss. This time, the Court denied the defendants’ motion, finding that Swiss Re adequately cured its previous pleading by: (1) separating counts against the various Access Entities and identifying the various contracts under which claims were brought against each defendant; and (2) by pleading sufficient facts in support of its claim that the Access Entities should be jointly liable under an “alter ego” theory. Swiss Reinsurance America Corp. v. Access General Agency, Inc., Case No. 07 -3954 (USDC N.D. Ill. Jan. 26, 2009).

This post written by John Pitblado.

Two reinsurance companies have prevailed on motions to dismiss in shareholder securities law putative class actions over the restatements of loss levels from cat events, illustrating that the process of estimating cat losses accurately may be challenging, and that companies are not guarantors of the completeness and accuracy of that process. PXRE prevailed in a lawsuit alleging a scheme to understate losses arising out of a series of hurricanes that devastated the Gulf Coast in 2005, restating the amount of losses several times. Judge Sullivan granted PXRE’s motion to dismiss, finding that plaintiffs “failed to plead that defendants were reckless in not knowing about the flaws in PXRE’s calculation of its loss estimates.” In re PXRE Group, Ltd., Securities Litigation, No. 06 CIV 3410 (S.D.N.Y. March 5, 2009). Judge Sullivan issued an order in a similar individual case filed against PXRE implying that he will follow the same course in that action. Anegada Master Fund Ltd v. PXRE Group Ltd., No. 08 Civ 10584 (S.D.N.Y. March 5, 2009).

Quanta Capital Holdings Ltd. (“Quanta”) issued several estimated loss projections relating to Hurricanes Katrina and Rita that ranged from $42-$68.5 million, resulting in multiple rating downgrades, forcing Quanta to cease writing new insurance and reinsurance business and to sell its remaining insurance and reinsurance portfolios. Noting the conjectural nature of insurance reserves established for losses that have been incurred but not yet reported, the court ruled that the Complaint did not put forth sufficient factual allegations such that the court could plausibly find that the loss estimate included in the offering documents was a material untruth at the time it was made, especially since the adjusted estimate was based on a single business interruption claim. The district court also held that the Complaint did not meet applicable heightened pleading requirements, and that some of the claims failed because the $68.5 million preliminary loss estimate was protected by the “bespeaks caution” doctrine. Zirkin v. Quanta Capital Holdings Ltd., Case No. 07-851 (USDC S.D.N.Y. Jan. 22, 2009).

This post written by Rollie Goss.