Reinsurance Focus

The Scottish Court of Session, Inner House, has reversed a ruling of its Outer House refusing to approve a scheme of arrangement under the U.K. Companies Act of 2006.

A scheme of arrangement is a reorganization device through which a company may compromise its creditors’ claims with the approval of at least three-quarters of its creditors. A scheme of arrangement generally involves three stages. First, there must be a judicial application for an order summoning a meeting of creditors. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Finally, if the scheme is approved at the meeting, there must be a further application to the court for sanction of the arrangement.

In Petition of Scottish Lion Insurance Company, Scottish Lion, in runoff since late 1994, proposed in 2008 a scheme of arrangement to terminate exposures under short- and long-tail policies. The scheme was opposed by U.S.-based creditors insured under general liability or general aviation insurance policies with Scottish Lion. The Outer House declined to approve the scheme, concluding that sanctioning the scheme smacked of “unreasonableness” to minority creditors, and asking rhetorically, “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?” The Inner House disagreed. Although the court acknowledged that insureds who were being required to accept current estimated values in lieu of their contingent claims may “possibly with other arguments, win the day,” it concluded that such circumstance alone was not so overwhelming a factor against the sanction. The case was remitted to the Outer House for further proceedings.

This post written by Brian Perryman.

In an ongoing fraudulent conveyance dispute, the district court denied cross-motions for certificates of interlocutory appeals of summary judgment orders against the plaintiff rehabilitator of an insurance company and one of the two defendants. We previously reported on the court’s denial of cross-motions for reconsideration of the summary judgment orders in a July 22, 2009 post. The rehabilitator sought to appeal the order finding there was no evidence that payments made to the reinsurer were “disproportionately small” or not the result of arms-length negotiations. The court denied this motion principally on the grounds that it would embroil the appellate court in a fact-intensive analysis. The defendant’s cross-motion also was denied. It sought an appeal of whether it was a direct or initial transferee under fraudulent conveyance law. Noting that courts usually do not allow interlocutory appeals of denials of summary judgment, the court found there were disputed issues of fact that would be better determined by a jury before proceeding to an appeal. Mills v. Everest Reinsurance Co., Case No. 05-8928 (USDC S.D.N.Y. October 28, 2009).

This post written by Brian Perryman.

In his capacity as Liquidator of Midland Insurance Company, the Superintendent of Insurance of the State of New York brought suit in New York Supreme Court against Dunav Re, a Serbian reinsurance company, seeking reinsurance monies owed. Dunav Re removed the action to federal court based on diversity jurisdiction, and the Superintendent subsequently moved to remand based on the ground that Dunav Re had consented to the jurisdiction of any competent court pursuant to the service of suit clause in the reinsurance agreements. Dunav Re argued that removal was proper because the service of suit clause’s language was ambiguous and the waiver of the right to removal had to be clear and unequivocal. The court found no ambiguity, citing a New York Court of Appeals decision stating the reinsurance industry has known since a 1949 decision that a service of suit clause waived removal, and granted the motion to remand. Dinallo v. Dunav Ins. Co., Case No. 09-5575 (USDC S.D.N.Y. Nov. 19, 2009).

This post written by Dan Crisp.

In a recent action, Granite Re filed suit against Federal Crop Ins. Corp., Risk Management Agency and Ann Frohman, in her capacity as Liquidator for the insolvent insurer, American Growers Ins., alleging that Growers owes unpaid reinsurance premiums to Granite Re. Following removal to Federal Court, the Liquidator moved to dismiss, advising that she claims no interest in the outcome of Granite Re’s litigation against FCIC/RMA and she will therefore forego any right she may have had to remain in the litigation as an interested or intervening party. Though the case was properly removed, the Court explained that a Nebraska statute prevented the federal court from entering a judgment against the Liquidator, and that the McCarran-Ferguson Act prevented the Court from entering an order for distribution of any FCIC/RMA judgment proceeds. Rather than dismissing the claim against the Liquidator, the District Court remanded the claim to Nebraska state court while also granting FCIC/RMA’s request to transfer the claims against those parties to the District Court for the District of Columbia. Granite Reinsurance Co., LTD v. Ann M. Frohman, Case No. 08-410 (D. Neb. Oct. 26, 2009).

This post written by John Black.

This dispute has spanned over two decades, and we have previously reported on: (1) the award of attorney’s fees and costs for an improper bankruptcy filing by the Superintendent of the New York State Insurance Department; and (2) the dismissal of Mrs. Di Loreto’s complaints that sought to prevent the execution of a $20 million judgment obtained against her for reinsurance moneys owed. In this latest installment, Mrs. Di Loreto has appealed the dismissal of her complaints, arguing that the $20 million judgment was obtained in violation of her due process rights. The Third Circuit disagreed, finding that the proceedings bore all the hallmarks of due process. The court thus affirmed the dismissal of her complaints. Di Loreto v. Costigan, No. 09-1812 (3d Cir. Nov. 6, 2009).

This post written by Dan Crisp.

G-I Holdings, Inc. purchased directors & officers liability coverage from Reliance Insurance Company, covering claims made from 1999 – 2002. Due to Reliance’s putatively impending insolvency at that time, it reached an agreement with Hartford Fire Insurance Company, whereby Hartford agree to take over some of Reliance’s claims administration, and agreed to reinsure obligations under Reliance policies for claims made after July 15, 2000. Reliance remained responsible for covering claims made under its policies prior to July 15, 2000. Thereafter, Reliance became insolvent and went into liquidation. G-I Holdings asserted a claim for coverage for three fraudulent conveyance suits against its CEO and Chairman. The first suit was brought during the Reliance coverage period, and the other two were brought during the period covered by Hartford. However, Hartford declined coverage, and the parties litigated, based on the question of whether the two later suits related back to the Reliance coverage period. The district court agreed with Hartford, finding that all three suits were Reliance’s responsibility. The Third Circuit affirmed. G-I Holdings, Inc. v. Reliance Ins. Co., No. 07-2510 (3d Cir. Oct. 26, 2009)

This post written by John Pitblado.

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.

The District Court for the District of New Jersey recently granted defendant AIG’s motion to dismiss Robert Plan Corporation’s claims arising out of a series of reinsurance agreements between the parties. The procedural history of the action is complex, and it involves underlying state court action, financial rehabilitation and bankruptcy proceedings. Robert Plan filed a Notice of Removal in January, 2009, and AIG subsequently moved to dismiss for lack of subject matter jurisdiction. The court granted the motion to dismiss, finding that that there was no case or controversy for the court to decide because the underlying state court action had been dismissed by the time plaintiffs filed their notice of removal. Additionally, because the Court found subject matter jurisdiction lacking, it denied as moot Robert Plan’s Motion to Transfer Venue. The Robert Plan Corp. v. American Int’l Group, Case No. 09-200 (D.N.J. Aug. 10, 2009).

This post written by John Black.

General Electric (“GE”) brought an action for breach of contract against the joint liquidators of the entity formerly known as Electric Mutual Liability Insurance Company (“EMLIC”). Years ago, a solvent EMLIC had refused to defend and indemnify GE in regards to liability for environmental contamination. OneBeacon America Insurance Company (“OneBeacon”), whose predecessor reinsured EMLIC in connection with GE’s claims, intervened as the defendant and asserted three counterclaims. GE then filed a motion for summary judgment on the third counterclaim, which alleged a breach of fiduciary duty by GE regarding EMLIC’s wrongful redomestication to Bermuda to declare itself insolvent and to pursue liquidation. The court granted GE’s motion, ruling that GE, as sole policyholder, shareholder, and creditor to EMLIC, owed no fiduciary duty to EMLIC. The court then stated that, even if GE owed a fiduciary duty, no breach occurred because EMLIC was not harmed by the redomestication. Finally, the court denied OneBeacon, standing in EMLIC’s shoes, equitable relief from its contractual obligations because EMLIC was complicit in the wrongful redomestication. General Elec. Co. v. Lines, Case No. 2006-3106 (Mass. July 2009).

This post written by Dan Crisp.

General Electric (“GE”) brought an action for breach of contract against the joint liquidators of the entity formerly known as Electric Mutual Liability Insurance Company (“EMLIC”). Years ago, a solvent EMLIC had refused to defend and indemnify GE in regards to liability for environmental contamination. OneBeacon America Insurance Company (“OneBeacon”), whose predecessor reinsured EMLIC in connection with GE’s claims, intervened as the defendant and asserted three counterclaims. GE then filed a motion for summary judgment on the third counterclaim, which alleged a breach of fiduciary duty by GE regarding EMLIC’s wrongful redomestication to Bermuda to declare itself insolvent and to pursue liquidation. The court granted GE’s motion, ruling that GE, as sole policyholder, shareholder, and creditor to EMLIC, owed no fiduciary duty to EMLIC. The court then stated that, even if GE owed a fiduciary duty, no breach occurred because EMLIC was not harmed by the redomestication. Finally, the court denied OneBeacon, standing in EMLIC’s shoes, equitable relief from its contractual obligations because EMLIC was complicit in the wrongful redomestication. General Elec. Co. v. Lines, Case No. 2006-3106 (Mass. July 2009).

This post written by Dan Crisp.