Reinsurance Focus

In this contract construction case, the parties disagreed over whether a “claims start up fee” paid pursuant to an administrative services agreement should be included in calculating the losses incurred under a reinsurance contract. Both parties filed motions for partial summary judgment on the issue. The trial court granted American Southwest’s motion, and Employers appealed. In reversing the trial court and granting Employers’ motion for partial summary judgment, the appellate court held that the fee should be included in calculating Employers’ losses incurred. The decision turned on the characterization of the fee. The court ruled that the fee was a compensable loss adjustment expense. Employers Reinsurance Corp. v. Am. Sw. Ins. Managers, Inc., No. 05-06-01284 (Tex. App. Aug. 14, 2008).

This post written by Dan Crisp.

Tall Tree insured Hewlett Packard, and was reinsured by Munich Reinsurance for amounts Tall Tree was required to pay to Hewlett Packard. Hewlett Packard was involved in litigation under which liabilities arose. Rather than first indemnifying Hewlett Packard, Tall Tree sued Munich Reinsurance in federal district court, seeking a declaratory judgment that Tall Tree was obligated to pay Hewlett Packard and that, in turn, Munich Reinsurance was obligated to pay Tall Tree. The court would not entertain the case: Tall Tree lacked standing to assert its claims. As to the question of whether Tall Tree was obligated to pay Hewlett Packard, the court noted that there was no live controversy before it; Tall Tree “can simply pay HP.” There was also no live controversy on the question of whether Munich Reinsurance was obligated to pay Tall Tree. The “follow the fortunes” doctrine did not apply because Tall Tree had not yet paid Hewlett Packard; there was essentially no “fortune” yet to follow, and the request for declaratory relief hence was premature. The case was dismissed. The Tall Tree Insurance Co. v. Munich Reinsurance America, Inc., Case No. C-08-1060 (USDC N.D. Cal. July 29, 2008).

This post written by Brian Perryman.

“The Corporation shall reimburse the Reinsured or its legal representative promptly for loss against which indemnity is herein provided.” Is this a “follow the fortunes” clause in a reinsurance treaty? Undoubtedly, a federal district court answered on Mass Mutual’s (the cedent) motion for summary judgment against its reinsurer, Employers Reinsurance Corporation. “Nowhere in the Treaty does it state that ERC may question claims once those losses are incurred and paid.” The fact that ERC had a right of joint participation in adjusting the claims did not undermine this conclusion. Mass Mutual retained the right to be the final decision maker in all determinations. The court found additional support in the parties’ thirteen-year course of conduct, inasmuch as during most of that period ERC “consistently and continually” paid out claims without questioning Mass Mutual’s handling of those claims. The court found for Mass Mutual again on the question of whether ERC breached the treaty’s offset provision by withholding disputed reimbursements to Mass Mutual. The provision stated that the parties could offset loss or claim expenses due from one to the other; disputed sums did not count.

As a consolation prize, the court dismissed Mass Mutual’s counterclaim against ERC for violations of the Connecticut Unfair Trade Practices Act: “A simple breach of contract claim is not in and of itself a violation of CUTPA.” The court previously had dismissed other claims that Mass Mutual had asserted, including a claim for breach of fiduciary duty. (See April 24, 2007 post to this blog.) The court essentially brought the dispute down to a simple breach of contract dispute, which was determined based upon the follow the fortunes doctrine. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Company , Case No. 06-0188 (USDC W.D. Mo. Aug. 19, 2008).

This post written by Brian Perryman.

In a September 19, 2007 posting, this blog reported that a district court allowed a case against Directors of Mississippi Windstorm Underwriters Association (MWUA) to proceed on the theory that the directors breached a fiduciary duty to their members by failing to secure sufficient reinsurance to cover the 2004 and 2005 hurricane seasons.

Recently, the same court denied plaintiffs’ motion for class certification. Plaintiffs sought certification of a class of over 100 insurance company members and alleged claims for breach of fiduciary duty, negligence, and declaratory judgment. As the court explained, the “lynchpin of the plaintiffs’ argument for class certification is that the Board’s decision regarding the amount of reinsurance to purchase allegedly was tainted by self-dealing, in that the Board members had a financial incentive to under-reinsure the MWUA’s risks.” The defendants responded by stating that the plaintiffs’ self-dealing theory was based on their erroneous assertion of how the costs of reinsurance were charged to the MWUA’s members. The defendants contended that most of the defendant companies bore none of the costs of reinsurance and therefore had no incentive to under-reinsure.

The court concluded that plaintiffs failed to satisfy the requirements of Rule 23. Specifically, the court found that plaintiffs did not meet their burden of showing that the number of putative class members was so numerous as to make their joinder impractical. Additionally, the court found that the plaintiffs failed to show that common issues predominated over individual issues with respect to the self-dealing aspect of the plaintiffs’ claims. Association Casualty Ins. Co., et. al. v. Allstate Ins. Co., et. al, Case No. 3:07cv525 (S.D. Miss. July 29, 2008).

This post written by Lynn Hawkins.

We reported on April 7, 2008 on an order entered by a court interpreting a reinsurance agreement in favor of a reinsured. The court has entered an Amended Order and Judgment providing for a total award of $1,707,698.62, consisting of $1.5 million in damages and $207,698.62 in pre-judgment interest. Princeton Insurance Company v. Converium Reinsurance (North America) Inc., Case No. 06-599 (USDC D. N.J. July 2, 2008).

This post written by Rollie Goss.

In a 40 page opinion, the UK Commercial Court considered a situation in which a Venezuelan insurer, Multinacional de Seguros, provided insurance for a producer of liquid aluminum, aluminum ingots and aluminum cylinders. Multinacional obtained reinsurance from three reinsurers. An adjuster was retained to assist in processing claims, and during negotiations with the insured the Venezuelan three year limitation period expired. The Venezuelan Superintendent of Insurance provided an opinion that the limitation period had not expired, but the reinsurers decided to commence a declaratory action in London seeking a declaration that they were not responsible for the losses, and instructed the insurer to take the same position with the insured. Multinacional sent the insured a letter, however, which the Court found waived any potential limitation defense. The Court found that this action breached the cooperation clause of the reinsurance agreements. Lexington Insurance Company v. Multinacional de Seguros, S.A. [2008] EWHC 1170 (Comm. May 23, 2008).

This post written by Rollie Goss.

On July 18, 2007, we reported on a ruling by the New York Supreme Court’s Appellate Division in a case in which it described the conduct of the insured, American Home Assurance, as “manifest manipulation,” based upon its taking inconsistent positions on the number of insured occurrences of environmental pollution in order to minimize its liability to its insured but maximize its reinsurance recovery. The result of the ruling was the complete loss of American Home’s reinsurance cover. Without opinion, the New York Court of Appeals has denied a motion for leave to appeal, apparently ending the case. Allstate Insurance Company v. American Home Assurance Co., Mo. No. 213 (NY June 3, 2008).

This post written by Rollie Goss.

A jury in state court in San Francisco, California has found, by special verdict, that a reinsured waited too long to sue its reinsurer for failure to pay claims under two facultative reinsurance certificates. The jury rejected the contention that the running of the statute of limitation was tolled due to the ongoing investigation and negotiations between the parties. Background on the dispute is found in the Complaint. Transport Insurance Company v. TIG Insurance Company, No. CGC-06-448898 (Cal. Super. Ct. June 9, 2008).

This post written by Rollie Goss.

In two prior posts (February 28 and October 1, 2007), we reported on discovery disputes in a case in which a reinsurer contended that it was not liable on trucking risks due to the improper placement of the risks by a broker. The reinsurer has now prevailed on summary judgment, having established that trucking risks could not be ceded to its reinsurance without specific permission or special acceptance, and that the broker did not seek such permission or acceptance. Scottsdale Ins. Co. v. American Re-Insurance Co., Case No. 06-16 (USDC D. Neb. May 6, 2008).

This post written by Rollie Goss.

This lawsuit addresses the responsibility of several insurers to cover the settlement of a medical malpractice claim. Texas Farmers Insurance provided primary coverage, Ordway Indemnity provided excess coverage and Lexington Insurance provided reinsurance to Ordway. Texas Farmers contended that it had paid amounts in excess of its coverage, and sought reimbursement from Lexington, as Ordway's reinsurer. Texas Farmers contended that the follow the settlements doctrine applied, and required reimbursement by Lexington. The court disagreed, finding that the doctrine did not apply since Lexington was not Texas Farmer's reinsurer, and found in any event that the entire settlement amount fell within the limits of Texas Farmer's coverage. Since the primary coverage was not exhausted, the excess cover was not triggered, and Lexington had no payment obligation. Texas Farmers Insur. Co. v. Lexington Insur. Co., Case No. 06-8220 (USDC C.D. Cal. Apr. 21, 2008).

This post written by Rollie Goss.