Reinsurance Focus

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.

A reinsurer may proceed with its counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent misrepresentation and violation of the Connecticut Unfair Trade Practices Act, a federal district court held. The reinsurer, Universal, was a “rent-a-captive” under an alternative risk insurance program establishing a loss fund composed of the net premium under the insurance program. The loss fund was to be used to pay claims under the program. After a lawsuit was filed, Universal countersued for breach of contract, alleging that it suffered damages because it was denied access to certain funds for a year, and by virtue of its contingent liability. The plaintiff contended that this alleged breach caused only incidental expenses and unrecoverable attorneys’ fees. Construing the allegations in Universal’s favor on the motion, the court found that damages had been sufficiently alleged, but that attorneys’ fees were unrecoverable. The court next found that the elements of the breach of good faith had been pled, and that the circumstances of the alleged fraudulent misrepresentation had been stated with particularity. Finally, the court ruled that the unfair trade practices claim would survive since Connecticut courts had recognized such claims where a party consciously refuses to honor an agreement by which it is bound. Arrowood Indemnity Co. v. Universal Reinsurance Co., Case No. 06 CV 158 (USDC D. Conn. May 6, 2008).

This post written by Brian Perryman.

In a March 25, 2008 posting, we reported on the Order of a district court which denied a motion to dismiss claims arising out of the refusal to release letters of credit which had been posted as security for a rent-a-captive reinsurance program. Less than two weeks after the entry of that Order, the parties filed a stipulation for dismissal of the action with prejudice. The Order apparently facilitated the resolution of the issues. WEB Management LLC v. Arrowood Indemnity Co., Case No. 07-424 (USDC D. Conn. Mar. 17, 2008).

This post written by Rollie Goss.

The plaintiff, a joint powers self-insured retention pool consisting of numerous California public agencies, sued the defendant, a reinsurer that reinsured plaintiff pursuant to two agreements, after the defendant declined to provide reinsurance coverage. The lawsuit alleged breach of contract and tortious breach of the implied covenant of good faith and fair dealing, and sought declaratory relief. The defendant moved to dismiss the implied covenant claim, arguing that, under California law, reinsureds may not recover tort damages for a breach of the implied covenant of good faith and fair dealing. That motion was granted. The court held that the availability of tort remedies in the context of a contractual dispute depends on whether social policy supports their imposition. While tort remedies for breach of the implied covenant of good faith and fair dealing in insurance policies had previously been recognized by California courts, they were only considered appropriate because the policies were characterized by elements of adhesion and unequal bargaining power, public interest and fiduciary responsibility. The relationship between reinsurer and reinsured does not implicate the same concerns since reinsureds are sophisticated business entities and, in obtaining reinsurance coverage, are merely seeking the commercial advantage of writing more policies than their reserves would otherwise sustain. The court ruled that more was needed before it could justify the imposition of tort damages in a straightforward contractual dispute. California Joint Powers Insurance Authority v. Munich Reinsurance America, Inc., Case No. CV 08-956 (USDC C.D. Cal. Apr. 21, 2008).

This post written by Brian Perryman.

Argonaut Insurance reinsured Global Reinsurance under excess of loss, quota share and facultative reinsurance agreements. A dispute arose as to whether certain commutation payments made by Global and ceded to the reinsurance agreements came within the scope of the reinsurance agreements, and arbitration was demanded. Background is found in the Petition to Confirm the arbitration award (which is redacted). An arbitration panel decided in favor of Argonaut, finding that the commutation payments were not “claims, losses or settlements within the terms, limits and conditions of the Retrocessional Contracts at issue ….” Copies of the reinsurance contracts and the arbitration award are found in a declaration filed in support of confirmation of the award. The award was confirmed with the agreement of all parties. The court denied a request to keep filings in the confirmation proceeding under seal, finding that there had not been a sufficient showing to overcome the presumption that filings in US District Courts are public. Global Reinsur. Corp. v. Argonaut Insur. Co., Case No. 07-8350 (USDC S.D.N.Y. 2008).

This post written by Rollie Goss.

An underlying insured lacks standing to maintain an action against a reinsurer under a contract to which it is not a party, according to a Louisiana district court. Plaintiff, LaSalle Parish School Board, was the insured on a policy of insurance issued by Property Casualty Alliance of Louisiana (“PCAL”). PCAL in turn entered into a contract of reinsurance with Allianz Global Risks. LaSalle Parish School Board filed a complaint against Allianz (and Eagle Adjustment Services) after Allianz failed to pay LaSalle more than $800,000 for tornado damage to LaSalle High School. The complaint alleged claims for breach of contract, detrimental reliance, and negligent misrepresentation. Allianz and Eagle moved to dismiss all claims.

The court granted Allianz's motion to dismiss the breach of contract claim, finding that “LaSalle has no standing to sue Allianz under the reinsurance contract, absent an intent to stipulate an advantage for LaSalle.” The Court also concluded that none of the state statutory exceptions allowing an insured to proceed directly against a reinsurer of its own insurer applied. The court denied the defendants’ motion to dismiss the detrimental reliance and negligent misrepresentation claims due to Allianz’s direct involvement in working with the insurance adjuster who dealt directly with the school system in adjusting the claim. LaSalle Parish School Board v. Allianz Global Risks U.S. Ins. Co., Case No. 1:07-cv-00399 (USDC W.D. La. April 24, 2008).

This post written by Lynn Hawkins.

The Workers’ Compensation Reinsurance Association and the Minnesota Workers’ Compensation insurance Association sued nine insurers, alleging violation of the federal RICO statute and unjust enrichment due to the intentional underreporting of the amount of workers’ compensation insurance they had written in order to minimize assessments and reinsurance premiums. Disagreeing with a Magistrate Judge, a District Judge granted a motion to dismiss, dismissing the RICO claims with prejudice and the unjust enrichment claims for lack of jurisdiction. The court found that allegations focusing on the participation of the defendants in their own business, rather than the business of an enterprise, failed to allege a RICO violation. The unjust enrichment claim failed due to the failure properly to allege diversity jurisdiction. The RICO claims were dismissed with prejudice, and the unjust enrichment claims were dismissed without prejudice. Workers’ Compensation Reinsurance Association v. American International Group, Inc., Case No. 07-3371 (USDC D. Minn. Mar. 28, 2008).

This post written by Rollie Goss.

The English Commercial Court has ruled that Standard Life Assurance Ltd can not recover damages from its underwriters arising out of the improper sales of mortgage endowment policies, but could claim against its insurance broker, Aon. Standard Life subscribed to a policy with a liability cover of £75 million in excess of £25 million. The policy contained a provision permitting the aggregation of claims arising from an originating cause or source. The insured aggregated 97,000 small claims and sought to recover the full £75 million excess of £25 million. The underwriters claimed that even if the claims did arise from a single originating cause, the claims could not be aggregated because the policy schedule and slip contained the wording “excess: £25million each and every claim and/or claimant.”

The court agreed with the underwriters, finding that the policy did not allow for the claims to be aggregated together, meaning the excess limit could not be reached. Specifically, the court found no “plausible purpose for the inclusion of the words ‘and/or claimant’ in the excess provision in the slip other than the attempted achievement of a per claimant excess.”

Prior to the court’s ruling, Aon brought its own negligence claim against Reynolds Porter Chamberlain (“RPC”) as a third party to the proceedings. Aon’s claim against RPC argues that the firm did not recognize that the wording of the policy meant the claims could not be grouped together. Standard Life Assurance Ltd. – and – Oak Dedicated Ltd. – and – Aon Ltd., Reynolds Porter Chamberlain, [2008] EWHC 222 (Comm. Feb. 13, 2008).

This post written by Lynn Hawkins.

In a May 23, 2007 post, we reported on a UK decision denying reinsurance coverage despite a follow the fortunes provision based on a finding that the damages occurred outside the coverage period of the reinsurance, despite the conclusion of a US court on the underlying claim finding liability for damage occurring outside the coverage period of the underlying policy. The UK Court of Appeals has allowed an appeal, finding that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance.

The English appellate court agreed that the insurance and reinsurance contracts were not entirely “back to back” in terms of the coverage periods, but concluded that although there were some differences in the contracts, the parties intended that they should have the same effect and therefore, the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract. Despite the fact that the reinsurance appeared only to cover damage that occurred during the period of the reinsurance, and the trigger of coverage used by the US court permitted a broader recovery from the insurer, the Court of Appeals accepted the proposition that “the same or equivalent [coverage] wordings should be given the same meaning in the reinsurance contract as in the insurance contract.”

Explaining that the UK reinsurer had taken certain known risks in reinsuring a US insurer, the Court concluded that although the judgment against the insured was not one which the reinsurers expected, nevertheless it was one which was a possibility that they agreed to cover. This decision marks a departure from previous ‘follow the settlement’ cases involving differences in the insurance and reinsurance contracts, which have typically been resolved in favor of the reinsurers. Wasa International Ins. Co. v. Lexington Ins. Co., [2008] EWCA Civ 150 (Feb. 29, 2008).

This post written by Lynn Hawkins.

A district court has interpreted the liability limit of a reinsurance agreement in a summary judgment setting, finding the language to be unambiguous, and finding in favor of the position advanced by the reinsured. The opinion contains a good discussion of the rules for interpreting reinsurance agreements. Princeton Ins. Co. v. Converium Reinsurance (North America) Inc., Case No. 06-599 (USDC D. N.J. Mar. 27, 2008).

This post written by Rollie Goss.