Reinsurance Focus

On March 17, 2010 we reported on the decision of a New York intermediate appellate court to apply New York law to disallowed claims under insurance policies issued by Midland Insurance Company, an insolvent multiline insurer placed into liquidation in New York. The appellate court based its decision, in part, on the New York “paramount state interest” of ensuring that distributions from an insolvent insurer are made “in an equitable manner.” The appellate court had reversed the trial court, which had found that New York’s standard choice of law analysis for contracts, known as a “grouping of contacts” or “center of gravity” test, should be conducted to determine which laws to apply to each Midland policy. The New York Court of Appeals has now reversed the appellate court and reinstated the trial court’s decision. The high court explained that because the claims of the policyholders “derive from the insurance policies issued by Midland prior to its insolvency,” choice of law analysis for each policy should be employed. In re Liquidation of Midland Insurance Co., 2011 N.Y. Slip Op. 02716 (N.Y. April 5, 2011).

This post written by Michael Wolgin.

In the course of Ideal Mutual Insurance Company’s rehabilitation proceedings, Allstate Insurance Company, one of Ideal’s reinsurers, objected to a referee’s report, which denied Allstate’s claim of a vested, and therefore priority, right to the distribution of assets, by retroactive application of a New York insurance statute. The trial court denied Allstate’s motion to reject the referee’s report. On appeal, the Appellate Division affirmed, disagreeing with Allstate’s reading of the applicable statute, which Allstate argued could not constitutionally be applied retroactively. The appellate court held that the statute could and should be applied retroactively, because the plain language indicated the legislature’s awareness that it would be so applied. In re Ideal Mutual Ins. Co., No. 40275/85 (N.Y. App. Div. March 15, 2011).

This post written by John Pitblado.

A justice of the UK Companies Court, Chancery Division, recently approved over the objections of policyholder Axa Corporate Solutions Assurance, a scheme under Part 7 of the UK Financial Services & Markets Act 2000 for the transfer of certain insurance business from Sompo Japan Insurance Inc. to Transfercom Ltd. The scheme involved a transfer of predominantly reinsurance contracts made between 1981 and 2003. The contracts suffered from exposure to the September 11, 2001 terrorist attacks and an airplane crash that occurred later that year, and were in run-off since 2003. In sanctioning the scheme, the justice relied heavily on an expert report and determined that the scheme would be fair to the companies’ respective shareholders and the various underlying policyholders. The justice considered, among other factors, the composition of the business to be transferred, the strength of Transfercom and its parent company, National Indemnity Company, the manner in which Transfercom would fund the run-off of the business, and the overall impact on the security of the underlying policyholders that would result from the transfer. In the Matter of Sompo Japan Insurance Inc., [2011] EWHC 260 (Cos. Ct. Feb. 16, 2011).

This post written by Michael Wolgin.

A Wisconsin federal district court has held that it may not interfere with an insurance rehabilitation case proceeding in state court. On January 18, 2011, the federal court ruled that it lacked jurisdiction to consider the legality of a state court’s order made in the context of an insurance rehabilitation proceeding. The state court enjoined the United States from taking certain actions against the claims-paying assets of the segregated accounts of Ambac Assurance. Shortly thereafter, the United States commenced a collateral attack against the state court and others, seeking to enjoin the state court from enforcing its rehabilitation plan or any injunction insofar as it affected the United States. The federal court once again ruled it lacked jurisdiction, holding that the McCarran-Ferguson Act “reverse-preempted” I.R.C. § 7401 (which authorizes injunctions for enforcement of internal revenue laws), the federal-question statute, and the federal-tax-issue jurisdiction statute. An injunction would “impair” or “supersede” state laws authorizing the state court to issue rehabilitation orders. The court also rejected the United States’ argument that the McCarran-Ferguson Act cannot preempt sovereign immunity. The case was dismissed for lack of subject matter jurisdiction. United States v. Wisconsin State Circuit Court for Dane County, Case No. 11-99 (USDC W.D. Wis. Feb. 18, 2011).

This post written by John Black.

Those in the insurance sector may have a much better idea of how the Dodd-Frank Act may affect them soon, as the implementation of the Act continues, and rulemaking is starting to specify some of the requirements of the Act. With this post, we offer a Special Focus article which provides a high level review of relevant recent activities. For further detail, or for advice on particular needs, contact a member of our blog staff.

This post written by Rollie Goss.

Granite Reinsurance Company won an award for unpaid premiums from Acceptance Insurance Company (in rehabilitation) in a bankruptcy adversary proceeding. The unpaid premiums amounted to $9 million on a $15 million dollar policy that was purchased to cover Acceptance for five years. The parties had agreed to a $3 million per year premium payment schedule, due at the beginning of each of the five years covered under the reinsurance agreement. However, a dispute arose as to the calculation of pre-judgment interest on the award. The bankruptcy court awarded Granite Re pre-judgment interest calculated from the date each $3 million dollar premium payment became due (a different date for each of the three unpaid premium payments), and also awarded post-judgment interest from the date of judgment. In Re Acceptance Ins. Cos., Inc. No. BK-of-80059 (USDC Bankr. D. Neb. Jan. 19, 2011).

This post written by John Pitblado.

A bill that would establish a Federal license for national reinsurers was introduced on December 16, 2010 in the U.S. House of Representatives by Representative Dennis Moore, a six term Democrat from Kansas who is the outgoing chair of a subcommittee of the House Financial Services Committee. The bill – “Federal License for Reinsurers Act of 2010” (H.R. 6529) – seeks to create a more harmonized reinsurance regulatory system that would apply to the operation of both U.S. and foreign domiciled reinsurers. The bill creates a licensing scheme for national reinsurers that would be administered by the Director of the Federal Insurance Office (“FIO”). Under the bill, FIO’s Director is charged with setting criteria for the licensing and operation of a national reinsurer. Both U.S. entities and non-U.S. entities that establish a branch may apply for a Federal license to transact reinsurance business provided the entity has satisfied unspecified eligibility requirements.

Under the bill, FIO’s Director may revoke, suspend or restrict a Federal license whenever he determines that a national reinsurer is no long operating in a manner consistent with the criteria for licensing and operation. The bill also allows for conversion to a State reinsurance license, subject to notification and approval by FIO’s Director. Additionally, the bill subjects the provisions of Title 11 of the U.S. Bankruptcy Code to a delinquency proceeding for the liquidation or reorganization of a U.S. national reinsurer.

The operation of licensed foreign domiciled reinsurers would be subject to supervisory arrangements negotiated by the Secretary of Commerce and the U.S. Trade Representative with qualified supervisory authorities of non-U.S. jurisdictions that maintain and apply legal standards, regulatory requirements, and enforcement capabilities substantially equivalent to those applied by FIO’s Director, and in which the awards of arbitration panels and judgments of appropriate U.S. courts are enforceable and collectible. An authorized foreign reinsurer will be authorized to transact reinsurance business to the extent authorized by the applicable supervisory arrangement, which must explicitly include certain enumerated conditions relating to reciprocity, dispute resolution, insolvency, among other things.

The bill contains provisions preempting State laws that are contrary to or inconsistent with the purposes of the bill (except those which may be applicable to corporate taxes generally), including state laws that create disparate treatment between national reinsurers or authorized foreign reinsurers and State licensed insurers or reinsurers solely on the basis of the entity’s status. Preemption of State law will be determined by FIO’s Director, which can be judicially reviewed.

The bill prohibits States from interfering, directly or indirectly, with a U.S. insurer or reinsurer (i) applying for a Federal license or operating as a national reinsurer; or (ii) ceding insurance to a national reinsurer or an authorized foreign reinsurer. It also prohibits States from denying credit, either as an asset or a reduction of liabilities, on account of reinsurance ceded to a national reinsurer or an authorized foreign reinsurer. These provisions conflict with: (1) the clear provisions of the Dodd-Frank Act, which explicitly commits decisions as to reinsurance credit to the State of domicile of ceding insurers; (2) guidelines adopted by the NAIC concerning reinsurance credit and collateral; and (3) regulations adopted by Florida and New York concerning reinsurance credit and collateral. If the requirements for a federal reinsurance license do not include financial strength or other risk-based factors, this bill may turn out to be an attractive alternative for reinsurers who wish to operate with relatively modest regulation.

The bill requires cooperation between FIO’s Director and State insurance regulators, requiring the FIO’s Director to: (1) consult, as he deems appropriate, with the relevant State insurance regulators concerning regulatory matters; (2) notify all State insurance regulators of supervisory arrangements entered into; and (3) notify the relevant State insurance regulators of a change in the status of, or any administrative action taken against, a national reinsurer or an authorized foreign reinsurer. It is notable that two of these three “cooperation” requirements merely provide for the FIO’s Director to inform State insurance regulators of actions taken by the FIO, and the third leaves the decision of whether to “consult with” State insurance regulators at all to the discretion of the FIO’s Director. This is not robust consultation or “cooperation.”

In addition, the bill provides that there shall be no determination whether to subject an entity to supervision by the Board of Governors and heightened prudential standards under Section 113 of the Dodd-Frank Act on account of an entity’s status as a national reinsurer or authorized foreign reinsurer.

If the bill is adopted, FIO’s Director must commence licensing of national reinsurers and the entry into supervisory arrangements after the promulgation of regulations, which must occur not later than 2 years from the date of the enactment of the bill.

The bill was referred to the House Committee on Financial Services. The bill does not have any co-sponsors as of the writing of this post, and it is not known whether it is being sponsored by any trade associations.

This post written by Karen Benson.

On July 15, 2010, the Senate passed the Dodd-Frank Act (“DFA”), the financial regulatory modernization act that has been in the process of development and consideration by the Congress for over a year. Rollie Goss presents a Special Focus analysis of the potential impact of the DFA on the insurance and reinsurance industries and markets.

Jorden Burt will present a free webinar for Reinsurance Focus subscribers and Jorden Burt clients on the DFA’s potential impact on the insurance and reinsurance industries and markets. The webinar also will cover the potential impact of the DFA on actions by New York, Florida and potentially other states with respect to the requirement of collateral for reinsurance transactions, and the NAIC’s proposals for the regulation of reinsurance. Webinar login information will be sent to Reinsurance Focus subscribers by e-mail. To subscribe and participate in this webinar, go to our subscription page.

This post written by Rollie Goss.

Acting as Rehabilitator of Centaur Insurance Company, the Director of the Illinois Department of Insurance, Michael McRaith, brought suit against two reinsurers, seeking a declaration that they are obligated to reimburse Centaur for portions of a $32 million settlement it agreed to in resolving underlying asbestos litigation. The reinsurers had removed the case to federal court, but McRaith sought a remand based on the doctrines of McCarran-Ferguson reverse preemption and Burford abstention. The court denied the motion to remand under both theories, finding that none of the McCarran-Ferguson reverse preemption criteria had been met, as the state law issues pertaining to the rehabilitation proceedings did not specifically relate to the business of insurance, and there was not a clear conflict with federal law vis-à-vis state insurance solvency rehabilitation procedure. Burford abstention was also inappropriate because the dispute pertained less to the “complex [state] regulations pertaining to insolvent insurers” than to a simple breach of contract dispute between the parties under certain reinsurance certificates. McRaith v. American Re-Insurance Co., No. 09-C-4027 (USDC N.D. Ill. Feb. 17, 2010).

This post written by John Pitblado.

In this long-running legal saga surrounding the liquidation of Midland Insurance Company (“Midland”), the Superintendent of Insurance, Midland’s reinsurers, and certain major policyholders stipulated to a case management order for determining the issue of whether New York substantive law controlled the interpretation of the Midland insurance policies at issue or whether the New York choice-of-law test must be conducted for each policy to determine the applicable substantive law. The trial court granted the policyholders’ motion for partial summary judgment, declaring that a choice-of-law review for each policyholder must be undertaken. This appeal followed. The New York appellate court first recounted its 1990 decision involving Midland and another policyholder where the choice-of-law issue was not litigated but the court stated that New York substantive law applied so that Midland’s creditors would receive equal treatment. The appellate court then reversed the trial court’s order for the following reasons: (1) the application of New York law in the prior case is binding on the trial court under the doctrine of stare decisis; (2) the “law of the case” precluded the policyholders from re-litigating an issue decided in an ongoing proceeding, finding that the policyholders in this case had identical interests with the policyholder in the 1990 case; and (3) that public policy required the equal treatment of all creditors in a liquidation proceeding. Finally, the court granted the intervening reinsurers’ cross motion, declaring that New York substantive law controlled the interpretation of the Midland insurance policies. In re Liquidation of Midland Ins. Co., 2010 NY Slip Op 00209 (N.Y. App. Div. Jan. 12, 2010).

This post written by Dan Crisp.