Reinsurance Focus

We previously posted on July 24, 2007 about a case brought by Jurupa Valley Spectrum, LLC (“Jurupa”) against its insurer’s reinsurer, National Indemnity Company (“NICO”). NICO reinsured Frontier Insurance Company, which was declared insolvent, and against whom Jurupa had an outstanding claim under a surety bond which Frontier issued to Jurupa. The case was dismissed by a New York federal court.

On February 4, 2009, the Second Circuit Court of Appeals affirmed the decision, agreeing with the trial court that (1) the contract between Frontier and NICO did not contemplate direct action by Frontier’s insureds against NICO; (2) the contract could not fairly be read to contain a “cut through” provision, as the contract made clear that all rights against the reinsurer inhered only with the insurer; and (3) the contract did not violate of a New York statute, which requires reinsurance contracts to contain “cut through” provisions when an insurer issues a surety bond in an amount exceeding ten percent of its surplus, because at the time of issuance of the surety bond, Frontier’s surplus exceeded ten percent of the value of Jurupa’s bond. Jurupa Valley Spectrum, LLC v. National Indemnity Co., No. 07-3211 (2d Cir. Feb. 4, 2009).

This post written by John Pitblado.

The Louisiana Safety Association of Timbermen – Self Insurers Fund (the “Fund”) is a self-insurance group formed by member companies as a means of securing workers compensation coverage for their employees. In 1998, the Fund obtained statutorily required excess coverage from Reliance Indemnity Company, and in 2001 Reliance became insolvent. The Fund filed proofs of claim against Reliance with the Louisiana Insurance Guaranty Association (“LIGA”). LIGA denied the claims, asserting that the Fund was an insurer and the excess coverage was reinsurance, thus removing the claims from coverage by LIGA under the terms of governing state statutes. The fund brought suit to establish coverage for all past and future claims.

The trial court granted summary judgment to the Fund. The Louisiana Appellate Court affirmed, citing the terms of applicable workers compensation and insurance guaranty association statutes to support its determination that the excess coverage the Fund obtained was not “reinsurance” as that term is used under applicable statutes and that the Fund is not an “insurer” causing it to become statutorily exempt from coverage through LIGA. The Court also rejected LIGA’s argument that a statutory exclusion of coverage to any self-insured corporation with a net worth above $25,000,000 should apply to the Fund’s member companies in the aggregate. The court found that the member companies were not “affiliates” of one another as the term is used in the statute and thus held that their net worth should not be aggregated for purposes of the statutory exclusion. Louisiana Safety Assoc. of Timbermen – Self Insurers Fund v. Louisiana Ins. Guaranty Assoc., No. 43,615–CA (La. Ct. App. Dec. 3, 2008).

This post written by John Pitblado.

PEO Services provided SMJ Environmental with laborers to perform asbestos removal at construction sites. SMJ hired Feliz Amado Jara as one such laborer, retained the right to control and direct his work, and furnished him with the equipment necessary to do his job. When PEO could no longer provide SMJ with workers’ compensation coverage, SMJ obtained a policy from Frontier Insurance, which was reinsured by Clarendon National.

Jara was injured on the job and submitted a claim for workers’ compensation to SMJ. The workers’ compensation law judge determined that SMJ was Jara’s sole employer and that Clarendon National, as the reinsurer of Frontier, was liable for the payment of benefits. On appeal, the court affirmed the finding regarding the employment relationship as having been supported by substantial evidence. The court also rejected the insurers’ argument that the workers’ compensation coverage covered only four employees, since the only specific exclusion was in the policy was for SMJ’s president. Jara v. SMJ Environmental, Inc., Case No. 500512 (N.Y. App. Div. Oct. 30, 2008).

This post written by Brian Perryman.

This is the latest chapter in the transatlantic saga involving the Seaton Insurance and Stonewall Insurance companies. We blogged earlier about related lawsuits in the United States (see our December 22, 2008 post), and an English court’s decision denying those insurance companies’ application for a stay for proceedings pending resolution of a motion to dismiss in the United States District Court for the Southern District of New York (see our July 23, 2008 post). This complex case presents interesting issues of the interface between US and UK courts and between US and UK law.

The underlying facts and procedural history of the disputes are tortuously complex. At the risk of understatement, it suffices to say that Seaton and Stonewell became involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes (the “Term Sheet”), which contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.” The Term Sheet included a “carve-out” provision for “fraud” on the part of former managers, related companies and individuals.

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurer in the United States, National Indemnity Company (“NICO”), and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the United States District Court for the Southern District of New York, alleging what was said to be “fraud” under New York law. The gist of the fraud claim focused on the delegation by Cavell of claims handling for Seaton and Stonewall to NICO pursuant to a Collaboration Agreement; it was alleged that Cavell and Randall “fraudulently” subordinated the interests of Seaton and Stonewall to those of NICO by entering into, operating and concealing the Collaboration Agreement.

Cavell and Randall then separately sued Seaton and Stonewell in the United Kingdom, seeking a declaration that all of their disputes had been compromised by the Term Sheet, as well as damages resulting from Seaton and Stonewell involving them in the United States arbitration and litigation. Seaton and Stonewell challenged the jurisdiction of the English court, and sought the aforementioned (denied) stay of the English lawsuit pending a decision on a motion to dismiss the United States lawsuit they had filed.

In May 2008, the English court ordered a trial of preliminary issues, which included: “(1) whether the parties have agreed to submit all their disputes, including claims in fraud to the exclusive jurisdiction of the English Court; (2)(i) what is meant by fraud; and (ii) whether claims advanced in the New York Court are claims in fraud, within the meaning of the carve-out.” The claimants, Cavell and Randall, submitted that the answer to issue (1) was “yes,” since any proceedings brought other than in the English court system are in breach of the Term Sheet. They also submitted that the answer to issue (2)(i) was that “fraud” meant “deceit,” as in the English tort of deceit, “and no more.” Finally, the claimants argued that the answer to (2)(ii) did not arise but, if so, it was “no.” The English court agreed with the claimants on both issues (1) and (2)(i). It found a determination of issue (2)(ii) to be unnecessary in light of its predicate determinations.

Reaching the first delineated issue, the court observed that resolution turned on a “double actionability” test: any claim brought must constitute “fraud” both within the meaning of the Term Sheet, as construed under English law (there was no dispute that English law governed interpretation of the Term Sheet), and as a matter of the law governing the “antecedent transactions,” that is, the alleged “fraudulent” conduct itself. Thus, the court would – in both sides’ views – be required to determine whether a particular claim is or is not a claim of “fraud” within the meaning of the carve-out. “The critical difference between the parties was that, on the Claimants’ case, this Court would be dealing, in addition, with the substance of any surviving claim; whereas, on the Defendants’ case, determination of the substance of any claims would rest with some other court or tribunal.” The court, as noted, concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of the English courts, principally finding that a provision for all disputes not otherwise resolved to be dealt with in a single jurisdiction was consistent with the Term Sheet’s overall purpose of achieving an orderly termination of the parties’ relationships. The court further observed that the plain language of the jurisdiction clause (“and the parties submit to the exclusive jurisdiction of the English Courts”) “is wide rather than restricted,” and did not exclude claims sounding in fraud.

The court next turned to what was meant by “fraud” in the carve-out, beginning with the natural meaning of “fraud” in an English contract. Fraud has the “ordinary and primary meaning of deceit,” although it was observed that fraud was also capable of a wider meaning, referring generally to “dishonesty” as required by the context. However, the context did not require such a broad meaning in the court’s view, as it would have eviscerated the Term Sheet’s purpose, allowing virtually any claim permitted by clever pleading. “Indeed, once the safe ground of the primary meaning of ‘fraud’ is abandoned, it is not at all clear where to stop.” Thus, the court concluded that “fraud,” as was meant by the carve-out, had only the primary meaning of deceit. Cavell USA Inc. v. Seaton Insurance Co. [2008] EWHC 3043 (Nov. 12, 2008).

This post written by Brian Perryman.

Clark & Co. was a managing general agent for high risk automobile policies, and serviced the policies pursuant to a General Agency Agreement. A St. Paul affiliate reinsured the risks. Disputes arose with respect to the policies and the GA Agreement, and Clark’s withdrawal of almost a million dollars from a premium trust account. There were a series of amendments to claims and counterclaims, and changes to which affiliates of the parties were named in the lawsuit. In the latest round of these disputes, the trial court struck Clark’s amended claims and severed St. Paul’s counterclaims, for prosecution in a separate case. The Court of Appeal reversed the severance order and remanded with instructions to consolidate the claims once again. The Court found that the severance was in violation of the Texas Rules of Civil Procedure, and was ordered by the trial court for the improper purpose of obtaining an advisory opinion from the Court of Appeals, essentially doing an end run around the Texas requirements for an interlocutory appeal. Clark & Co. v. St. Paul Fire & Marine Ins. Co., No. 05-07-1097 (Tex. Ct. App. Oct. 21, 2008).

This post written by Rollie Goss.

A group of litigants involved in two reinsurance-related lawsuits agreed to de-escalate the disputes by voluntarily withdrawing certain motions and claims in each case.

In the first lawsuit (National Indemnity Co. v. Stonewall Insurance Co., Case No. 08 Civ. 3718 (USDC S.D.N.Y.)), National Indemnity sued Stonewall Insurance and Seaton Insurance for allegedly violating confirmed arbitration awards and judgments by, among other things, demanding rearbitration of a claim for rescission of a reinsurance agreement. National Indemnity sought declaratory and injunctive relief precluding Stonewall and Seaton from further violating the awards and judgments and from rearbitrating the matter. In response, Stonewall and Seaton filed a motion to stay and to compel arbitration. The motion argued that “NICO’s complaint should be seen for what it is: an attempt to preempt arbitration by masquerading as arbitrable defense as an affirmative claim for relief.”

In the second lawsuit (National Indemnity Co. v. Greenwich Street Investments II, LLC, Case No. 08 Civ. 4067 (USDC S.D.N.Y.)), National Indemnity claimed that a group holding companies (collectively, the “Dukes Place” companies) operating under the domination of Greenwich Street Investments – a group of private equity/hedge fund investors – purchased Seaton during Seaton’s run-off, and agreed to purchase Stonewall if National Indemnity agreed to provide retroactive reinsurance agreements similar to that issued to Seaton. Although National Indemnity assumed Seaton’s and Stonewall’s liabilities, according to National Indemnity, Dukes Place and Enstar Group hatched a scheme to coerce National Indemnity into relinquishing its contractual right to be claims servicer of Seaton and Stonewall in the event of a change of control of Seaton or Stonewall, notwithstanding Duke Place’s and Enstar’s alleged fiduciary duties to National Indemnity.

In the second lawsuit,National Indemnity asserted claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, interference with a contract, and inducing a breach of contract. The defendants Dukes Place and Enstar subsequently filed a motion to dismiss the fiduciary duty claims.

As noted, however, agreements were reached to reduce the litigation. In the first lawsuit, the parties stipulated that any reply papers filed in support of the motion to stay and to compel arbitration would be adjourned until February 1, 2009, or fourteen days after a decision by the court on any motion to dismiss the counterclaims that would be filed in the second lawsuit. In the second lawsuit, National Indemnity agreed to withdraw its claim for inducing a breach of contract, and Dukes Place and Enstar withdrew their motion to dismiss the breach of fiduciary duty claims without prejudice.

This post written by Brian Perryman.

The saga of Korea National Insurance Corporation’s claim to its reinsurers (profiled several times in posts on this blog), arising out of a helicopter crash, apparently has finally come to an end. The insurers’ action to enforce a judgment obtained in a North Korean court went to trial last month. During the trial, the court struck certain of the reinsurers’ fraud-related defenses as being non-justiciable. Korea National Ins. Co. v. Allianz Global Corporate & Specialty AG [2008] EWHC 2829 (Comm. Nov. 18, 2008). The Court declined to stay the trial pending an appeal, and the trial continued while the reinsurers appealed the decision. The Court of Appeals allowed the appeal, reversing the decision. The parties then settled the case, with the reinsurers paying the equivalent of 95% of the amount claimed. Korea National Ins. Co. v. Allianz Global Corporate & Specialty AG [2008] EWCA 1355 (Ct.App. Dec. 2, 2008).

This post written by Rollie Goss.

In this English case, the claimant reinsurer, Markel, applied for the UK equivalent of summary judgment against two defendant German reinsureds, seeking a declaration that it was not liable under a contract of reinsurance. The primary issue was whether the contract provided in a claims cooperation clause that it was a condition precedent to any liability under it that if the reinsureds knew of any circumstances which may give rise to a claim against them, they should advise Markel within thirty days. Conflicting evidence was submitted as to whether the parties had agreed to the clause as suggested by Markel. Consequently, the court stated it was unable to accept Markel’s submission that there should be summary judgment since the issue involved questions of fact to be determined at trial. The court further addressed the separate issue of whether knowledge of the manager of the reinsurance pool (VOV) amounted to knowledge of the reinsureds for purposes of the claims cooperation clause. The court rejected Markel’s construction of the clause, holding that under the terms expressed, knowledge of VOV would not be imputed. Summary judgment was denied on all issues. Markel Capital Ltd. v. Gothaer Allgemeine Versicherung AG [2008] EWHC 2517 (Comm. Oct. 24, 2008).

This post written by Brian Perryman.

Plaintiff Samuel Brand sued his disability insurer, AXA Equitable Life Insurance Company (“AXA”), for failing to pay and improperly handling his disability claim. Brand also sued the third party administrator who handled the claim, Disability Management Systems, Inc. (“DMS”), and Centre Life Insurance Company (“Centre”), AXA’s reinsurer for its disability claims. Centre and DMS moved to dismiss Brand’s breach of contract and statutory bad faith claims on the basis that they had no contractual relationship with the plaintiff.

The district court agreed with the defendants, noting that the breach of contract claims failed because Brand was not a party to any contract with DMS or Centre. The court also rejected Brand’s theory that he was a third-party-beneficiary of AXA’s contracts with DMS and Centre, holding that the defendants’ contracts with AXA did not reflect an expectation that DMS or Centre would have a direct obligation to any AXA policyholder such as Brand. The court dismissed the statutory bad faith claims because neither DMS nor Centre qualified as Brand’s “insurer” as that term is defined and construed under Pennsylvania’s insurance bad faith statute. Brand v. AXA Equitable Life Ins. Co., No. CV-08-2859 (USDC E.D. Pa. Sept. 16, 2008).

This post written by John Pitblado.

A reinsurer successfully appealed a Connecticut court’s ruling granting plaintiffs, the underlying insured, a bill of discovery. In December 2000, the plaintiff, H&L Chevrolet, purchased an insurance policy from National Warranty Insurance Group (“National Warranty”). At that time, the defendant, Berkley Insurance Company, reinsured National Warranty for certain losses, including losses that might arise from the policy issued to H&L. Unbeknownst to H&L at the time it purchased coverage, the reinsurance policy issued by the defendant was scheduled to expire (and did expire) on January 1, 2001. In mid-2003, National Warranty filed a petition for bankruptcy and ceased making payments to H&L for claims made.

Plaintiffs filed a petition for a bill of discovery, seeking from the defendant disclosure of documents and other information concerning its reinsurance agreement with National Warranty. The appellate court concluded that plaintiffs did not meet their burden of demonstrating that probable cause existed to bring a cause of action for breach of contract, fraud, or violation of the Connecticut Unfair Trade Practices Act against the defendant, nor did plaintiffs demonstrate that they were third party beneficiaries to the reinsurance contract. The court’s based its decision largely on the fact that the reinsurance contract expired on January 1, 2001, more than two years prior to the time National Warranty ceased making payments. H and L Chevrolet, Inc., et al., v. Berkley Ins. Co., No. 27670 (Ct. App. Ct. September 23, 2008).

This post written by Lynn Hawkins.