Reinsurance Focus

A US Bankruptcy Court has approved a settlement with a London market insurer that includes that insurer in an earlier approved settlement with insurers providing a bankrupt copper company with coverage for asbestos-related claims. The London market insurer is itself a party to a scheme of arrangement being administered in London. This opinion is an interesting intersection of the UK scheme of arrangement process and US bankruptcy laws. The motion seeking approval of the settlement contains details of the settlement and attaches copies of pertinent documents. In re ASARCO LLC, Case No. 05-21207 (US Bank. Ct. S.D. Tex. Mar. 23, 2007).

Frontier Insurance Company, as surety, issued a performance bond and a payment bond for the construction of a movie theater, and reinsured its obligations with National Indemnity Company. When Frontier was declared insolvent, the holder of the bonds sued National Indemnity. The US District Court dismissed the action, finding that there was no cut through provision in the reinsurance agreement, that the reinsurance agreement explicitly prohibited non-parties from obtaining rights under the reinsurance agreement and that New York law did not provide for a direct cause of action against a reinsurer in the circumstances presented. Jurupa Valley Spectrum, LLC v. National Indemnity Company, Case No. 06-4023 (USDC SD NY June 29, 2007).

This controversy involved a reinsurance dispute between ERC, a reinsurer, and Laurier, an insurer incorporated in Bermuda. ERC declined to indemnify Laurier for the settlement costs of a wrongful death suit. The present matter came before the court on the parties’ motions for reconsideration of a magistrate’s rulings on the parties’ cross-motions for summary judgment.

ERC moved for summary judgment based on Laurier’s failure to provide prompt notice of the claim, and contended that the delay was unreasonable as a matter of law and that it suffered prejudice as a result. ERC also claimed entitlement to partial summary judgment because “follow the fortunes” clauses are not implied in reinsurance contracts.

The reinsurance contracts at issue did not contain a “follow-the fortunes” clause. Laurier argued that the absence of the clause constituted an ambiguity in the contract and that the Court should allow custom to imply the clause into the reinsurance contract. The court disagreed, concluding that it could not “go outside the laws of contract construction and outside the four corners of an unambiguous contract to add a clause that was not bargained for.” As such, the court granted partial summary judgment for ERC on the issue of the “follow the fortunes” clause.

The court denied summary judgment on the remaining issues, including allocation of loss, waiver of the late notice defense, and the timeliness of the notice, finding that genuine issues of material fact existed as to those issues. ERC v. Laurier Indemnity Co., Case No. 8:03-cv-1650 (M.D. Fla. June 25, 2007). [The choice of law dispute in this case was addressed in an earlier posting on this blog on June 16, 2006.]

This case arose out of reinsurance agreements between BCS and a third party, Insurance Specialists. The agreements were negotiated by BCS’ former reinsurance intermediary, Guy Carpenter & Company Inc. (“Guy Carpenter”). BCS alleged that Guy Carpenter failed to obtain adequate reinsurance for BCS and that Guy Carpenter’s actions resulted in an arbitration award against BCS in favor of its London reinsurers, exceeding $4.8 million dollars.

The district court granted summary judgment for Guy Carpenter, finding that five of the six claims asserted by BCS fell within the purview of the Illinois Insurance Producers Limitations Act (IPLA) and were barred by IPLA’s two-year statute of limitations. The district court also granted summary judgment for Guy Carpenter on the sixth claim, for implied indemnity, because BCS was unable to show it was derivatively liable in the arbitration for Guy Carpenter’s actions.

In a de novo review, the Seventh Circuit reversed the district court’s finding that five of BCS’ claims were governed by IPLA. Relying on briefing from the Illinois Attorney General, the Court concluded that “IPLA does not apply to reinsurance intermediaries and therefore does not govern the disputed agreements between BCS and Guy Carpenter.” The Seventh Circuit affirmed the district court’s finding that BCS failed to state a claim for implied indemnity because BCS failed to demonstrate that its liability resulted solely from the actions of Guy Carpenter. BCS Ins. Co. v. Guy Carpenter & Co. Inc., No. 06-1050 (7th Cir. June 18, 2007).

Mount Mansfield, a captive insurance company for workers’ compensation claims, filed a Complaint against its reinsured, American International Group (AIG) and several of its affiliates alleging that AIG and its affiliates improperly handled workers’ compensation claims, inflated the value assigned to Mount Mansfield’s reserve requirements, and unnecessarily forced Mount Mansfield into rehabilitation, resulting in damage to the corporation.

The circuit court dismissed the Complaint, finding that the claims were barred by the doctrine of res judicata based upon a prior lawsuit. The prior proceeding involved a dispute between Mount Mansfield’s sole shareholder, MMIG, and AIG. The Illinois Court of Appeals reversed the circuit court’s ruling, concluding that Mount Mansfield was not a party to the prior action nor in privity with the parties that brought that action. Under Illinois law, privity is said to exist between parties who adequately represent the same legal interests.

In reaching its decision, the court explained that “a shareholder of a corporation has no personal or individual right to pursue an action against third parties for damages resulting indirectly to the shareholder because of an injury to the corporation.” Because MMIG was unable to establish its right to bring an action on Mount Mansfield’s behalf, MMIG could not adequately represent the legal interest of Mount Mansfield in those proceedings. Mount Mansfield Ins. Group v. American International Group, Inc., No. 05-L-6662 (Ill. Ct. App., Third Division, March 30, 2007).

American Re-Insurance provided a facultative reinsurance certificate to Specialty National Insurance (now known as American Motorists Insurance Co.), which had reinsured the Montana Municipal Insurance Authority, a municipal insurance pool that provides insurance to its member entities, including the city of Great Falls, Montana. A dispute arose under the facultative reinsurance when a claim was paid and American Re disagreed as to the interpretation of some of the coverage underlying its reinsurance. Although the facultative certificate did not contain a typical “follow the settlements” provision, American Motorists contended that language in the certificate had the same effect. Interpreting the facultative certificate, the district court disagreed, finding that there was no follow the settlements provision in the certificate. The court therefore granted summary judgment to American Re with respect to a declaratory judgment claim that sought a declaration that American Re was obligated to indemnify American Motorists under the certificate pursuant to the follow the settlements doctrine. American Motorists ins. Co. v. American Re-Insurance Co., Case No. 05-5202 (USDC N.D. Cal. May 29, 2007).

On June 6, we reported on a settlement reached with a number of insurers with respect to the destruction of New York’s World Trade Center towers. SCOR, which provided reinsurance to one of the settling insurers, Allianz Global Risks, has issued a press release stating that the settlement agreement “does not respect the terms and conditions of the Certificate of Reinsurance between SCOR and Allianz,” and stating that SCOR has requested that the issue of whether the settlement is within the coverage of its reinsurance be referred to arbitration.

New York Governor Eliot Spitzer and Insurance Superintendent Eric Dinallo have assisted in negotiating a settlement of all outstanding insurance claims arising from the destruction of the World Trade Center with seven insurers: Travelers Companies; Zurich American Insurance Company; Swiss Reinsurance Company; Employers Insurance Company of Wausau; Allianz Global Risks US Insurance Company; Industrial Risk Insurers; and Royal Indemnity Company. The amount of the settlement is $2 billion. A press release announcing the settlement states that this will clear the way for construction on the site.

PriceWaterhouse Coopers has published an interesting report on a survey that it conducted relating to US run-off operations. The report covers various aspects of run-off operations and strategies. Especially combined with the recent Lloyd’s report on capitalization and operation of Lloyd’s run-off syndicates, which was the subject of a post on this blog on May 28, this makes interesting reading.

This case involves a situation in which a U.S. court found that an insurance policy covered a portion of damages incurred prior to and after a policy period based upon a manifestation coverage trigger. The insured then entered into a settlement agreement, and sought coverage from its reinsurers for the amount of the settlement. The resulting reinsurance dispute was litigated in a UK court. The UK court found that even though it was apparent that the insured had acted in good faith and prudently in negotiating the settlement to minimize its loss, the reinsurance did not cover damage that occurred outside the time period of the coverage of the reinsurance agreement. This decision illustrates an important area of risk for companies which may have their insurance and reinsurance governed by different applicable law, whether the laws of different U.S. states, which may have different coverage trigger or damage allocation theories, or the laws of a U.S. state and the UK. Care should be taken in establishing reinsurance programs to attempt to avoid such a scenario. Wasa International Ins. Co. v. Lexington Ins. Co., [2007] EWHC 896 (Queen’s Bench Commercial Court April 25, 2007).