Reinsurance Focus

On April 24, 2015, the Internal Revenue Service proposed regulations directed to “situations in which a hedge fund establishes a purported foreign reinsurance company in order to defer and reduce the tax that otherwise would be due with respect to investment income.” The IRS proposed regulations designed to clarify its applicable tax rules, by attempting to define exceptions to “passive income” from foreign insurance companies. Such income (earned from investments) is taxed at higher rates than income from insurance business, which is taxed only when it is realized, and at lower capital gains rates. The proposed regulations seek to clarify when investment income earned by a foreign insurance company is derived in the “active conduct” of an “insurance business,” and thus whether it qualifies for the passive income exception.

The proposal provides that “insurance business” means “the business activity of issuing insurance and annuity contracts and the reinsuring of risks underwritten by insurance companies, together with those investment activities and administrative services that are required to support or are substantially related to insurance and annuity contracts issued or reinsured by the foreign insurance company.” The proposed regulations “do not set forth a method to determine the portion of assets held to meet obligations under insurance and annuity contracts.” The IRS requests comments by July 23, 2015, “on appropriate methodologies for determining the extent to which assets are held to meet obligations under insurance and annuity contracts.”

This post written by Michael Wolgin.

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In late April, a district court in New York granted plaintiff Utica Mutual Insurance Company’s (“Utica”) motion to remand, implicating the voluntary-involuntary removal rule. Utica originally filed a breach of contract lawsuit against defendant American Re-Insurance Company (“American”). The lawsuit also named as co-defendant, Transatlantic Reinsurance Company (“Transatlantic”), a corporation domiciled and with a principal place of business in New York. American was initially unable to remove the case to federal court due to lack of diversity among the co-defendants.

A New York state court severed the claims against American and Transatlantic, thereby eliminating the diversity impediment for removal. Utica argued that “removability can only be created by Utica’s voluntary conduct,” and not by the court’s involuntary severance order. American argued that the voluntary-involuntary rule’s fraudulent misjoinder exception applied, as Transatlantic was improperly joined. The court found—citing second circuit precedent—that an action was not removable when non-diverse parties were made diverse by a court’s involuntary severance order. The voluntary-involuntary rule was designed to “protect against the possibility that a party might secure a reversal on appeal in state court of the non-diverse party’s dismissal, producing renewed lack of complete diversity in the state court action….in order to be removable, be one which could have been brought in federal court in the first instance.” The case turned on whether the order was final, and not simply voluntary.

As Utica’s severance order appeal was not yet final, a requirement under the voluntary-involuntary rule, the district court remanded the case back to the New York State Supreme Court. The court noted that American’s fraudulent misjoinder claim was “time barred” as defendants failed to file within thirty days after receipt. The court also noted that American understood “Utica’s motivation for joining Transatlantic and [American] as defendants in the same action,” an admission that went against their claim for fraudulent misjoinder.

Utica Mutual Ins. Co. v. American Re-Ins. Co., No. 6:14-CV-1558 (USDC N.D.N.Y. Apr. 27, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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On April 21, 2015, the Council of the European Union (“Council”) issued a mandate to the European Commission (“Commission”) to negotiate an agreement with the United States on reinsurance. The mandate consists of a decision authorizing the opening of talks and directives for the negotiation of the agreement. The Commission will negotiate on the EU’s behalf, in consultation with a Council committee. The agreement will be concluded by the Council with the consent of the European Parliament.

These negotiations would be initial steps towards possible removal of collateral requirements in both jurisdictions in order to ensure a risk-based determination for all reinsurers in relation to credit for reinsurance. The Commission likely will negotiate with the Federal Insurance Office (“FIO”), which has authority under the Dodd-Frank Act to negotiate international agreements on behalf of the United States. Any such agreement reached by the FIO would pre-empt state laws, in this case the Model Credit for Reinsurance Act. It will be interesting to see how the NAIC reacts to this development.

This post written by Kelly A. Cruz-Brown.

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The Court of Common Pleas of Philadelphia County denied defendant OneBeacon Insurance Company’s (“OneBeacon”) motion for summary judgment against plaintiffs Century Indemnity Company (“Century”) and Pacific Employers Insurance Company (“Pacific”). Century and Pacific, which held reinsurance policies issued by OneBeacon, sued the reinsurer to recover expenses in addition to the stated policy limits and to recover an award of interest on the payments received. OneBeacon  sought summary judgment on two grounds: 1) that the limit stated in the parties’ reinsurance certificates placed a total cap on its liability, and 2) that plaintiffs were not entitled to an award of interest on payments. The court denied OneBeacon’s motion.  First, the court determined that certain conditions placed on premiums in the reinsurance certificates meant that the premium was subject to a condition that excluded expenses in calculating the total loss limit. “If anything,” the court noted, “the terms of the certificates may have created a presumption of expense-exclusiveness.”

Second, the court denied defendant’s motion for summary judgment on collateral estoppel grounds. OneBeacon cited two prior district court cases that considered the “limit-of-liability” issue, but the court held that this legal authority did not “hold the necessary weight of final judgments at this juncture in order to apply collateral estoppel against plaintiffs.”  Finally, because the court had already granted plaintiffs’ separate motion for summary judgment on payments of interest, it denied OneBeacon’s motion on that issue as well.  Century Indem. Co. v. OneBeacon Ins. Co., No. 02928 (Pa. Com. Pl. Mar. 27, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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A federal district court has confirmed a $14 million arbitration award entered in favor of Amerisure against its reinsurer Everest. As we earlier reported, the court had previously denied the motion to seal briefing associated with Amerisure’s motion to confirm the award. Now at issue was the confirmation, modification, or vacatur of the award, which directed Everest to indemnify Amerisure for its share of asbestos losses that fell within the parties’ reinsurance treaties. Everest moved to vacate the award on several grounds, including an arbitrator’s “evident partiality” in the proceedings and the panel’s allegedly erroneous procedural and evidentiary rulings. At the core of the reinsurance dispute was whether Amerisure could aggregate individual asbestos losses into a single occurrence in order to exceed the applicable retention and thereby qualify for indemnification under the reinsurance treaties. The panel held that Amerisure could aggregate the losses by relying, in part, on what it found to be the “commonly accepted” business of treating multiple asbestos losses as a single occurrence. The panel rejected the argument that Amerisure’s claim was precluded or undercut by the fact that the underlying claims were settled as individual losses and further discounted the expert opinion testimony offered by Everest as unpersuasive. The district court, in turn, affirmed the award, rejecting all arguments of partiality or erroneous rulings. While Everest had established the panel exceeded its powers in one respect, it did not find that warranted vacatur or modification of the award. Amerisure Mutual Insurance Co. v. Everest Reinsurance Co., Case No. 14-cv-13060 (USDC E.D. Mich. Mar. 18, 2015).

This post written by Renee Schimkat.

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In a case involving a dispute arising from a fire at the Wisconsin County Courthouse, a Wisconsin federal court issued an order denying Lexington Insurance Company’s motion to participate in an arbitration between the two insurers primarily responsible for the losses. Lexington argued it was an excess insurer (or reinsurer – the parties disagreed) for the policy issued by the State of Wisconsin Local Government Property Insurance Fund insuring the county. In addition to coverage afforded by the Fund, the county was also insured by Cincinnati Insurance Company for losses to cover machinery and equipment that might not otherwise be covered by the Fund’s policy.

The Fund and the Cincinnati policies included a joint loss agreement (“JLA”) which provided that in the event of a dispute, the insurers would pay half of the disputed amount to their insured, the county, and arbitrate the dispute thereafter. The county took advantage of this provision. Lexington then sought to intervene in the ensuing arbitration, arguing that while its policy did not include a joint loss agreement, it was a follow-form policy which included that provision. The court agreed with Lexington, finding that although the Lexington policy was “a little strange,” it expressly stated it was a follow-form policy to the Fund’s policy and, further, it did not expressly exclude or supersede the joint loss agreement. The court, however, disagreed with Lexington’s view that it was entitled to participate in the arbitration between the Fund and Cincinnati. The joint loss agreement did not apply in this case because it did not apply to Lexington or allow for Lexington’s participation in the arbitration. State of Wisconsin Local Government Property Insurance Fund v. Lexington Insurance Co., Case No. 15-CV-142-JPS (USDC E.D. Wis. Apr. 17, 2015).

This post written by Brian Perryman.

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In a construction loss coverage litigation brought by Indianapolis Airport Authority (IAA) against its builders risk insurer, Travelers Property Casualty Company, IAA unsuccessfully attempted to issue a subpoena to Travelers’s reinsurer. The subpoena sought various reinsurance agreements, premium and underwriting information, analysis, communications, and loss reports. Travelers moved for a protective order and to quash IAA’s subpoena on the grounds that the discovery of reinsurance information was overly broad, unduly burdensome and not discoverable. Travelers argued that the material requested contains “sensitive business information typically not relevant to coverage itself.” The court agreed that the discovery requested was overbroad in that “IAA requests reinsurance discovery from 2005 through July 10, 2013, despite the fact that the steel tower collapse at issue in this litigation occurred January 24, 2007.” The court further found that the communications requested were irrelevant because they did “not speak to Travelers’ intent and do not clarify any ambiguous terms of the policy.” The court quashed the subpoena and entered a protective order precluding IAA “from obtaining any discovery of reinsurance documentation.” Indianapolis Airport Authority v. Travelers Property Casualty Co. of America, Case No. 1:13-cv-01316 (USDC S.D. Ind. April 7, 2015).

This post written by Michael Wolgin.

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Organizational Strategies Inc. (OSI) had entered into an agreement with Capstone Associated Services Ltd. for the latter to form three captive insurance companies for OSI. Included in the contract was an arbitration clause that required any disputes to be resolved under American Arbitration Association rules. PoolRe (a third-party insurer), and the three captive insurers separately entered into contracts that included different arbitration provisions requiring application of International Chamber of Commerce rules. Ultimately, all of the agreements were cancelled, and Capstone demanded arbitration for breach of contract against OSI under AAA rules. When PoolRe sought to compel a separate arbitration and was unable to appoint an Anguilla-based arbitrator through the mechanism envisioned under its contracts, PoolRe intervened in the OSI arbitration for the “limited purpose of having [the arbitrator] appoint an Anguilla-based arbitrator.” Instead of appointing an Anguilla arbitrator, however, the OSI arbitrator applied AAA rules and exercised jurisdiction over PoolRe’s claims, finding that PoolRe had waived its right to arbitration in Anguilla by intervening. An award later issued, finding that OSI had breached its contracts with Capstone, PoolRe, and a law firm involved with the captive insurance program. The arbitrator granted Capstone, PoolRe and the firm more than $450,000 in attorneys’ fees, expenses and costs.

OSI moved to vacate the entire award in Texas federal court on the grounds that the arbitrator exceeded his authority by including PoolRe in the arbitration; the arbitrator was not authorized under the contracts to appoint himself as the arbitrator of PoolRe’s claims nor to apply AAA rules instead of ICC rules. The court agreed and vacated the entire award, reasoning that PoolRe’s intervention had “tainted the entire process.” The Fifth Circuit affirmed, holding that because the arbitrator “acted contrary to the express arbitrator- and forum-selection clauses in the arbitration agreements to which PoolRe was a party” the district court’s holding that the arbitrator exceeded his authority would be affirmed. The Fifth Circuit further explained that a district court does not err “by failing to vacate in part, particularly where the arbitrator awarded a lump sum ‘to be divided among the parties as they see fit.’” PoolRe Insurance Corp. v. Organizational Strategies Inc., No. 14-20433 (5th Cir. April 7, 2015).

This post written by Michael Wolgin.

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In First State Insurance Company v. National Cas. Co., 2015 WL 1263147, No. 14-1644 (1st Cir. March 20, 2015), the U.S. Court of Appeals for the 1st Circuit (the “Court of Appeals”) affirmed the lower court’s refusal to vacate an arbitration award involving contract interpretation and addressed the operation and effect of an “honorable engagement provision” in an arbitration clause.

In this case, the Appellant/Reinsurer sought to vacate a contract interpretation award involving eight reinsurance and retrocessional agreements because the arbitrators exceeded their scope of powers by re-writing the terms of the parties’ agreements. Specifically, the Appellant/Reinsurer asserted that the payment protocol set forth in the arbitration award was not based on the parties’ agreements and obligated Appellant/Reinsurer to pay billings that may not fall within the terms and conditions of the agreements. The Appellant/Reinsurer further asserted that the payment protocol would foreclose or impair its broad access rights under certain inspection and audit provisions of the agreements by conditioning those rights on the transmittal of an appropriate time-of-payment reservation of rights.

Regarding the payment protocol, the Court of Appeals determined that the payment protocol in the award tracked the plain language of the relevant portions of the parties’ reinsurance agreements. Concerning the challenge to the reservation of rights procedure, the Court of Appeals noted that the arbitration clauses for the reinsurance agreements contained an honorable engagement provision, which directed the arbitrators to consider each agreement as an “honorable engagement rather than merely a legal obligation” and further stated that the arbitrators “are relieved or all judicial formalities and may abstain from following the strict rules of law.” The Court of Appeals held that the honorable engagement provisions empowered arbitrators to grant forms of relief, including equitable remedies not explicitly mentioned in the underlying agreement. The Court of Appeal viewed the honorable engagement provisions as enhancing the prospects for a successful arbitration because they provided the arbitrators with the flexibility to custom-tailor remedies to fit particular circumstances.

This post written by Kelly A. Cruz-Brown.

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Granite State Insurance Company (“Granite State”) brought an action against Clearwater Insurance Company (“Clearwater”) regarding a dispute over reinsurance claims Granite State made, and which Clearwater denied based on late notice. The claims pertained to underlying settlements of a large number of asbestos claims. The reinsurance certificates required prompt notice “of any event or development” which Granite State “reasonably believe[d] might result in a claim.” The district court found that Granite State’s notice to Clearwater under the reinsurance certificates at issue was untimely, and the Second Circuit affirmed.

In particular, the Second Circuit resolved a question raised on appeal pertaining to which state law applied. The parties agreed that, if there was a conflict of laws, Illinois law would apply under a “significant contacts” analysis, versus the law of the state where the action was pending – New York. But Granite State argued that Illinois law did not clearly conflict with New York law, and that therefore the New York federal court should have applied New York’s late notice rule, which requires an affirmative showing of prejudice on the part of the party asserting late notice as a bar to recovery.

The Second Circuit affirmed, finding that Illinois law was sufficiently clear on the issue, and does not require a showing of prejudice. Therefore, the laws were truly in conflict, and conflict of law analysis required application of Illinois law. Clearwater was thus not required to demonstrate that it was prejudiced by Granite State’s late notice in order to refuse to pay Granite State’s claims for reinsurance coverage.  Granite State Ins. Co v. Clearwater Ins. Co., No. 14-1494 (2d Cir. April 2, 2015).

This post written by Catherine Acree.

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