Reinsurance Focus

In a case pending in English court brought by a property insurer against Swiss-based Glacier Reinsurance AG, another reinsurer, and an English reinsurance brokerage, Glacier moved to dismiss, contending that the proper venue for the claims against it was a court in Switzerland, its domicile. The English court denied Glacier’s motion and the English Appellate Court affirmed. The court applied Article 6 of the Lugano Convention and applicable interpretive case law, which provide that a defendant may be sued in the state of domicile of one of its co-defendants when necessary to avoid the risk of irreconcilable judgments. The court explained that this risk exists when the same situation in law and in fact applies to the claims of multiple defendants. The court held that English Law governed the claims against Glacier because Glacier made a “demonstrable choice” of English law when, among other things, it participated in the London market. The court noted that the reinsurance agreement, which was presented to Glacier and accepted by Glacier in Switzerland, should not be construed as a separate placement in the Swiss market. The court also stressed the “commercial need” for a dispute involving multiple parties to be determined by one tribunal. Gard Marine & Energy Ltd. v. Lloyd Tunnicliffe, [2009] EWHC 2388 (Ct. App. Oct. 6, 2010).

This post written by Michael Wolgin.

Recently, Ontario Municipal Insurance Exchange applied for an order from the UK Royal Court of Justice dismissing an action against it, arguing that England was not the proper forum for the action brought against it by Stonebridge Underwriting Limited (a Lloyd’s underwriter). The claim arose out of an alleged failure by Stonebridge to pay under a 2001-2002 reinsurance contract. The Judge denied Ontario’s request, finding that the concurrent proceedings initiated by Ontario against JTL Canada (on issues directly related to this case) in Canadian Court did not provide a decisive reason for the UK Court to decline jurisdiction. The Court was mindful of the fact that many of the witnesses and much of the evidence were present in Canada, but that these issues were outweighed by the factors in favor of English jurisdiction. The Court noted that a great deal of London reinsurance relates to risk around the globe, and that often, the UK is still the most appropriate jurisdiction. Stonebridge Underwriting Ltd. v. Ontario Mun. Ins. Exchange, [2010] EWHC 2279 (Queen’s Bench Oct. 9, 2010).

This post written by John Black.

In a dispute stemming from various reinsurance claims arising from the Claimant’s participation in an excess of loss reinsurance program which protected the Respondent’s casualty book of business, IRA Brasil Resseguros challenged an arbitration panel’s ruling in favor of CX Reinsurance Company before the UK High Court of Justice, Queen’s Bench Division. Mr. Justice Burton granted leave to hear four issues on appeal: (1) the standard of proof required for a reinsured to prove his case under a “double proviso” follows settlements clause; (2) the correct approach to considering the question of proof of loss under such a follow settlements clause; (3) what proof is required in relation to a “losses occurring during” clause; and (4) the test for whether a loss was a loss “arising out of an event.” The court, after considering and applying both UK precedent (for issues 1 and 2) and US case law (for issues 3 and 4) determined that the arbitrators had correctly applied applicable law and dismissed the appeal accordingly. IRB Brasil Resseguros SA v. CX Reinsurance Co. Ltd., Case No. 2010 Folio 12 (Q.B. May 7, 2010).

This post written by John Black.

This post is our fourth installment covering this convoluted, international lawsuit involving the Seaton Insurance Company (“Seaton”) and Stonewall Insurance Company (“Stonewall”). The dispute centers around the interpretation of a term sheet that details the termination of the parties’ relationship with respect to the run-off of Seaton’s and Stonewall’s insurance business (see our July 23, 2008, December 22, 2008, and January 20, 2009 posts for more information). Interpreting this term sheet, an English court concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of English courts and that the carve-out provision for “fraud” had only the primary meaning of deceit. Seaton and Stonewall appealed. On the jurisdiction issue, the Court of Appeals affirmed the ruling that any claims for fraud must be brought in England and agreed with the lower court judge who called the prospect of a New York court applying the English concept of fraud a “judicial nightmare.” On the “fraud” issue, the Court of Appeals stated that, in the commercial context, the concept of fraud is broader than the concept of deceit which requires a fraudulent misrepresentation, or an equivalent to fraudulent misrepresentation. The Court of Appeals then set aside the judge’s ruling and substituted a declaration that the “fraud” exception is not limited to claims of deceit; the exception extends in some instances to cases of the dishonest abuse of a fiduciary position. Cavell USA, Inc. v. Seaton Ins. Co. [2009] EWCA 1363 (Dec. 16, 2009).

This post written by Dan Crisp.

This dispute concerns indemnity for losses stemming from the Exxon Valdez oil spill in 1989 and the loss of aircraft at the Kuwait International Airport when Iraq invaded Kuwait in 1990. Equitas Ltd. (“Equitas”), as the assignee of the rights of Lloyd’s syndicates, brought claims against R&Q Reinsurance Company Ltd. (“R&Q”) under reinsurance contracts written by R&Q within the London Market Excess of Loss spiral. Equitas argued that recoverable losses were capable of being proved, Equitas had succeeded in proving these losses to a standard of the balance of probabilities through the use of actuarial modeling, and, therefore, Equitas was entitled to recovery. R&Q argued against any recovery unless Equitas could prove contract by contract, at each level of the spiral, that the sums claimed were properly due. The High Court sided with Equitas, ruling that how Equitas proved losses was one of fact or evidence. Equitas was not required to prove losses contract by contract at each level of the spiral. The High Court next ruled that actuarial modeling, although imperfect, was an acceptable solution to prove properly recoverable losses incurred by the syndicates. Equitas Ltd. v. R&Q Reins. Co. Ltd., [2009] EWHC 2787 (Comm. Ct. Nov. 11, 2009).

This post written by Dan Crisp.

The Scottish Court of Session Decisions has nixed a scheme of arrangement under the UK Companies Act of 2006, stating it could not be judicially sanctioned without the assent of all creditors. A scheme of arrangement is a reorganization device in which, with the approval of at least three-quarters of a company’s creditors, the company may compromise the claims of all its creditors. A somewhat analogous device might be a “cram-down” under U.S. bankruptcy law, with the important distinction that a scheme of arrangement may be used even by a solvent company. This procedure has been criticized by US insurance companies. There are three stages to a scheme of arrangement. First, there must be an application to the court for an order that a meeting of creditors be summoned. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Third, if approved at the meeting, there must be a further application to the court to obtain the court’s sanction to the arrangement.

In the case before the Court of Session Decisions, Scottish Lion Insurance Company had been in runoff since late 1994, and in 2008 had proposed a scheme of arrangement to terminate its exposures under short- and long-tail policies. The scheme was opposed by various U.S.-based creditors which were insureds under general liability or general aviation insurance policies with Scottish Lion. The court, noting it was not bound to sanction a scheme which had achieved the statutory majority at the creditors’ meeting, declined to exercise its discretion to approve the scheme. Scottish Lion was solvent and appeared to have made provision to meet its potential liabilities in the future. Thus, the court asked rhetorically, “in a situation where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?” In such a case, sanctioning a solvent scheme smacked of “unreasonableness” to the minority. In the Petition of Scottish Lion Insurance Company, Ltd. [2009] CSOH 127.

This post written by Brian Perryman.

A UK court has entered judgment in an application brought by Equitas Ltd. and Equitas Insurance Ltd. for an order under section 111 of the Financial Services and Markets Act 2000 sanctioning a scheme for the transfer to Equitas Insurance Ltd. of the 1992 and Prior Business carried on at Lloyd’s. Section 111 is concerned with business transfer schemes. Per the court, the scheme is intended to bring finality to a process which began with a reconstruction and renewal plan promoted and implemented by Lloyd’s in the second half of 1996. In the Matter of the Names at Lloyd’s for the 1992 and Prior Years of Account, Represented by Equitas Ltd., [2009] EWHC 1595 (Ch. Ct. July 7, 2009).

This post written by John Black.

In an April 8, 2008 post, we reported on a UK Court of Appeals decision, Wasa International Insurance Co. v. Lexington Ins. Co., [2008] EWCA Civ. 150 (Feb. 29, 2008), reversing a lower court’s 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, and 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 Court of Appeals found that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance. The Court of Appeals 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, so the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract.

The UK House of Lords allowed consolidated appeals from the Court of Appeals. These appeals raised the question of the extent to which the coverage under a proportional facultative reinsurance contract is, or should be construed as being, coextensive with the coverage under the insurance contract. The House of Lords, as articulated by Lord Collins, found that the reinsurer takes a proportional share of the premium and bears the risk of the same share of any losses. Normally reinsurance of that kind is back-to-back with the insurance, and the reinsurer and the original insurer enter into a bargain that if the insurer is liable under the insurance contract, the reinsurer will be liable to pay the proportion which it has agreed to reinsure. Any loss within the coverage of the insurance will be within the coverage of the reinsurance. In the view of Lord Phillips, the result of the appeals was dictated by the fact that the subject reinsurance contract was governed by English law and by the principle under English law that a reinsurance contract in relation to property is a contract under which the reinsurers insure the property that is the subject of the primary insurance; “it is not simply a contract under which the reinsurers agree to indemnify the insurers in relation to any liability that they may incur under the primary insurance.” Lexington Insurance Co. v. AGF Insurance Ltd., [2009] UKHL 40 (July 30, 2009).

This post written by John Black.

The UK Commercial Court recently considered the ambit and extent of insurance coverage between Flexsys America LP and XL International Corp. In particular, the court was left to interpret whether a reinstatement provision (which are sometimes found in reinsurance agreements) in the master insurance policy should be made to provide additional coverage for a claim governed by a local policy extended to Flexsys by a company related to XL. In 2006, a Korean company (KKPC) filed a complaint alleging improper and illegal conduct by Flexsys. Flexsys claimed indemnity under a provision in the local policy. Flexsys settled the claim and incurred legal costs of over $2 million. The local policy carriers (who expressly denied liability) settled with Flexsys for the policy limit of $1 million. Flexsys sought recovery of the balance from the master policy insurers (the Defendants) alleging that the “Drop Down Clause” included in the master policy provided “umbrella” coverage that would provide a higher limit of indemnity.

The judge, Lord Tomlinson, rejected Flexsys’ argument, and interpreted the language of the Drop Down Clause to provide for a reinstatement of the local policy for “subsequent claims” and not, as Flexsys asserted, for the same claim. Further, the judge rejected Flexsys’ position that such a low level of coverage ($1M) was commercially unreasonable. The court could not address this question without dramatically altering the scope of the lawsuit to determine the range of commercial considerations necessary for such a decision. Finally, Lord Tomlinson concluded that Flexsys would not be reimbursed for additional legal expenses under the local policy because the claim at issue by the Korean company (product disparagement) was subject to an exclusion under the local policy. Flexsys Am. L.P. v. XL Ins. Co. Ltd., [2009] EWHC 1115 (Comm. Ct. May 20, 2009).

This post written by John Black.

A UK appellate court recently dismissed a French insurer’s jurisdictional challenge to a lawsuit initiated against it by an English insurer. After settling a personal injury claim, the French insurer sought to recover $2.45 million from the English insurer as its proportionate share of the settlement. The English insurer, however, denied coverage for the claim, and commenced proceedings in England for a declaration of non-liability. In response, the French insurer argued that the English court lacked jurisdiction because of an arbitration clause in the insurance policy that required all disputes to be arbitrated in Paris. It further noted that European Union Regulation 44/2001 has an arbitration exclusion that precluded English jurisdiction. The lower court rejected this argument, and the French insurer appealed.

The appellate court rejected the French insurers’ jurisdictional argument, holding that—under the EU Regulation—both the subject matter of the claim and the preliminary issue of the enforceability of the arbitration clause were within the English court’s jurisdiction. The court reasoned that “the mere fact that a claim is the subject of an arbitration agreement does not deprive a court of its jurisdiction to determine the dispute.” Rather, a court has to look at the subject matter of the proceeding to decide whether it is within the scope of the arbitration agreement or the EU Regulation. Applying this standard, the court found that the English insurer’s claim did not arise from the insurance policy’s arbitration agreement; instead, it arose out of a separate liability agreement between the co-insurers. Youell v. La Reunion Aerienne [2009] EWCA Civ 175.

This post written by John Black.