Reinsurance Focus

A federal district court has denied a cedent’s motion to dismiss a negligence claim brought against it by its reinsurer, Old Republic National Title Insurance. The dispute between Old Republic and First American Title arose out of a reinsurance agreement where Old Republic agreed to assume a specified share of First American’s contractual liability under certain title insurance policies. First American negotiated a settlement of claims brought under those title policies and then asserted that Old Republic was obligated under the reinsurance agreement to pay its proportionate share of that sum. Old Republic paid the amount under a full reservation of rights, then sued First American for several causes of action, including negligence. The negligence claim alleged that when Old Republic made the offer for the reinsurance agreement, “First American undertook a duty to underwrite the Title Policies in a reasonably prudent manner and created a special relationship” with Old Republic that First American then breached.

First American moved to dismiss the negligence claim, arguing that the “gist of the action” doctrine precludes it. That doctrine states that an action in tort will not arise for breach of contract unless the tort action arises independent of the existence of the contract. First American argued that its liability stems from the parties’ reinsurance agreement and any duty owed by First American to Old Republic arises solely out of that contractual relationship. The court rejected that argument and the doctrine’s application, stating that the nature of the relationship between reinsurers and cedents, including the exercise of utmost good faith between them, supported a duty grounded in social policy, not solely in contract. The court further found that irrespective of the source of the duty owed, the negligence claim would not be dismissed because Old Republic, in the alternative, sought to rescind the reinsurance agreement and if the rescission claim ultimately prevailed, then the “gist of the action” would no longer be contractual. Old Republic National Title Insurance Co. v. First American Title Insurance Co., No. 8:15-cv-126 (USDC M.D. Fla. March 25, 2015).

This post written by Renee Schimkat.

See our disclaimer.

In a lengthy opinion detailing extensive findings of fact and law, a New York federal district court entered its order in favor of Harbinger F&G, LLC and against OM Group (UK) Limited in an action stemming from claims arising from the stock purchase agreement for the purchase of Old Mutual Financial Life Insurance Company by Harbinger from OM Group. Under the Agreement, Harbinger was entitled to a $50 million purchase price reduction if the Maryland insurance regulators did not approve a post-closing transaction between Old Mutual and Front Street Re, a reinsurance company owned indirectly by Harbinger, and if Harbinger fulfilled certain other conditions precedent. Harbinger was required to prepare and file certain approval documentation in the form agreed to by the parties, to use reasonable best efforts to obtain governmental approval for the reinsurance transaction and, if the transaction was not approved, Harbinger was required to engage in certain remedial efforts. When the post-closing transaction was not approved but OM Group failed to make the purchase price reduction payment, Harbinger sued. After holding a bench trial on those issues not disposed of on summary judgment, the trial court entered judgment in favor of Harbinger but found OM Group was entitled to the payment of certain fees from Harbinger. “>Harbinger F&G, LLC v. OM Group (UK) Limited, Case No. 12 Civ. 05315 (CRK) (USDC S.D.N.Y. Mar. 18, 2015).

This post written by Leonor Lagomasino.

See our disclaimer.

In a putative class action alleging violation of Pennsylvania labor laws, unfair trade practices, and other state law claims brought by a franchisee against the franchisor and two subsidiaries, the court stayed the proceedings and compelled individual arbitration. The franchise agreement contained an arbitration clause and a class arbitration waiver provision, among other provisions limiting litigation, discovery, and certain damages, and shifting certain fees and costs. The plaintiff franchisee argued that the arbitration provision was unenforceable because it prevented him from effectively vindicating his state statutory rights. The court rejected this argument, holding that Concepcion and other U.S. Supreme Court precedent confirmed that there is “absolutely no rule that prevents arbitration when a person cannot effectively vindicate his or her state statutory rights,” and that the “effective-vindication” rule may apply only when the FAA is alleged to conflict with another federal law. The court also applied equitable estoppel to reject the franchisee’s alternative argument that only the franchisor, the sole signatory to the franchise agreement, could compel arbitration; the court found that the franchisee relied on the franchise agreement in his pleading, and that a close relationship existed among the defendant entities. The court also construed the agreements between the parties to find that the claims asserted by the franchisee fell within the scope of the arbitration agreement. Last, the court construed the scope of the arbitration provision and held that it applied to the franchisee’s claims, notwithstanding the franchisee’s argument that his claims did not arise out of the franchise agreement. The provision covered disputes “arising out of or relating to” the “rights and obligations of the parties,” which clearly applied. Moreover, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so” (citing Stolt-Nielsen). Torres v. Cleannet, U.S.A., Inc., et al., Case No. 2:14-cv-02818 (USDC E.D. Pa. Feb. 5, 2015).

This post written by Michael Wolgin.

See our disclaimer.

A New York appellate court affirmed the denial of summary judgment but with modifications. New Hampshire Insurance Company (“New Hampshire”) together with other insurers, settled with Kaiser Aluminum & Chemical Corporation (“Kaiser”) for asbestos personal injury related claims. The settlement allocated 100% of the asbestos liability to New Hampshire and their excess reinsurance carrier, Clearwater Insurance Company (“Clearwater”). New Hampshire sought indemnification from Clearwater pursuant to a reinsurance agreement.

Clearwater challenged the allocation in the settlement arrangement alleging that it forced New Hampshire to bear costs associated with other settled claims including bad faith, which was not covered in the excess policy. Clearwater further alleged that New Hampshire breached its notice and reporting duties under the terms of the reinsurance contract. In the very early stages of discovery, New Hampshire moved for summary judgment, arguing in part that Clearwater was bound by the allocation settlement under reinsurance principles. The trial court denied summary judgment and the appellate court affirmed, finding an allocation decision was not immune from scrutiny. Therefore, New Hampshire’s settlement would be judged on its reasonableness, which at this stage of the litigation was “undeveloped.”

Furthermore, the court found another triable issue as to New Hampshire’s notice to Clearwater on loses sustained by Kaiser. Clearwater alleged that it had been prejudiced by New Hampshire’s late notice resulting in “disadvantageous communication agreements” with its reinsurers. Based on these facts, the appellate court found New Hampshire’s summary judgment motion premature.

New Hampshire Ins. Co. v. Clearwater Ins. Co., No. 12779 (N.Y. App. Div. Mar. 24, 2015).

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

See our disclaimer.

House Bill 1180 (2015), signed into law February 27, 2015, amends Chapter 56-46 of the South Dakota Insurance Code, Captive Law, to allow the formation and regulation of agency captive insurance companies in South Dakota. As defined in House Bill 1180, an agency captive insurance company is either: i) an insurance company that is owned, controlled or under common ownership or control by an insurance agency, brokerage, or reinsurance intermediary that only insures the risks of insurance or annuity contracts placed by or through the agency, brokerage or reinsurance intermediary; or ii) owned or controlled by a producer of service contracts or warranties that only reinsures the contractual liability arising out of service contracts or warranties sold through such producer. An agency captive insurance company may be formed as in the same manner as a pure captive insurance company. An agency captive insurance company must comply with the following financial reporting requirements:

• Submit annually no later than six months after the close of its financial year to the director a report of its financial condition using statutory accounting principles certified under oath by two of its officers. An agency captive insurance company may make written application for permission to file the annual report on a fiscal year end date that is consistent with its parent company’s fiscal year;
• Provide a report of its financial condition audited by an independent certified public accountant every five years pursuant to Chapter 58-43 if it has annual direct premiums written of less than $2.5M dollars;
• If an agency captive insurance company has $2.5M dollars or more of annual direct premiums written, it shall provide a report of its financial condition audited by an independent certified public accountant every three years pursuant to Chapter 58-43; and,
• File an actuarial opinion following the year of operation and in connection with its audited statement of financial condition.

Regarding financial and business operations, an agency captive insurance company is not subject to any restrictions on allowable investments and may make a loan to its parent or affiliated entities. However, any investment that threatens the agency captive insurance company’s solvency or liquidity may be limited or prohibited by the Director of the Division of Insurance. Furthermore, loans to parents or affiliated entities of an agency captive insurance company is subject to prior approval by the Director of the Division of Insurance. Finally, an agency captive insurance company may enter into any arrangement to provide risk management services to a controlled unaffiliated business or an unaffiliated business; however, it may not accept any insurance risk from an unaffiliated business.

This post written by Kelly A. Cruz-Brown.

See our disclaimer.

A federal judge in North Carolina recently examined a reinsurance policy provision excluding loss “resulting from any claim for . . . any actual or alleged lack of good faith or unfair dealing in the handling of any claim or obligation under any insurance contract.” The case involved a request for coverage under a reinsurance policy for a lawsuit filed by a doctor against his medical malpractice carrier, the reinsured. The doctor, against whom an excess verdict had been entered, asserted a number of causes of action including bad faith refusal to settle within the policy limit. The reinsurer filed a motion for summary judgment arguing that there was no coverage for the doctor’s lawsuit based on the exclusion mentioned above because all potential loss resulted from the reinsured’s alleged lack of good faith in refusing to settle the underlying matter within the underlying policy limit. Applying North Carolina law, the court agreed with the reinsurer, concluding that all the causes of action alleged a single course of conduct involving a lack of good faith in refusing to settle within the limit. Because all potential loss “resulted from” and was “inextricably intertwined” with the bad faith allegations, the reinsurer had no duty to defend or indemnify.

Greenwich Ins. Co. v. Medical Mutual Ins. Co. of North Carolina, No. 5:14-cv-295 (USDC E.D.N.C. Jan. 27, 2015).

This post written by Catherine Acree.

See our disclaimer.

M&T Bank Corporation, M&T Bank, and M&T Mortgage Reinsurance Company unsuccessfully sought to stay all discovery in a suit brought against it in a putative class action involving allegations that M&T violated the federal Real Estate Settlement Procedures Act. The named plaintiffs were individual borrowers who entered into loan transactions with M&T and paid private mortgage insurance through M&T. M&T placed the private mortgage insurance with certain insurers who then reinsured the policies with M&T’s captive reinsurer. This scheme was allegedly an illegal sham because it did not create a bona fide reinsurance relationship. Moving to dismiss, M&T argued the entire case was barred under RESPA’s one-year limitations period. Plaintiffs countered that, under the doctrine of equitable tolling, M&T’s fraudulent conduct prevented them from discovering the RESPA violation within the one-year period.

The court allowed the plaintiffs to conduct limited discovery related to the equitable tolling argument. This ruling was in part informed by the ruling from a different judge in a companion case, Riddle v. Bank of America. The Riddle court subsequently entered an order in favor of the defendants which the plaintiffs in that case appealed. M&T thus moved for stay of all discovery pending the outcome of the appeal of the Riddle case. The motion was denied. Although some overlap existed, the court found that the Riddle court had too narrowly limited the issue as to whether plaintiffs in that case engaged in due diligence following execution of their mortgages. Cunningham v. M&T Bank Corp., Case No. 1:12-cv-1238 (USDC M.D. Pa. Jan. 14, 2015).

This post written by Leonor Lagomasino.

See our disclaimer.

A federal district court in New York confirmed an arbitration panel’s final award, but directed the parties to brief the issue of whether the continued sealing of supporting documents, filed in connection with the petition to confirm that award, was appropriate. Clearwater Insurance and the respondent insurance companies were parties to multiple reinsurance contracts and arbitrated their dispute concerning amounts billed under those contracts. Clearwater’s petition to confirm the arbitration award was unopposed and the court found no basis for vacating, modifying, or correcting it. The court did, however, question whether the continued sealing of documents, requested by both parties, was warranted. The documents were filed under seal because their public filing would allegedly violate a confidentiality agreement between the parties. This, the court found, did not justify the sealing nor overcome the strong presumption of public access to judicial documents. The parties were directed to submit additional briefing to the court on this issue. Clearwater Insurance Co. v. Granite State Insurance Co., No. 1:15-cv-00165 (USDC S.D.N.Y. Feb. 5, 2015).

This post written by Renee Schimkat.

See our disclaimer.

At the November 17, 2014 meeting of the Valuation of Securities Task Force of the NAIC’s Financial Condition (E) Committee, a proposal was received from the North American CRO [Chief Risk Officers] Council to modify the capital treatment for catastrophe bonds held by life insurance companies, to encourage life insurance companies to purchase cat bonds.  A slide presentation accompanied the proposal.  The proposal contended that a revised RBC treatment for cat bonds might have the following benefits:

• property and casualty insurers would benefit from a larger and more stable source of capital, thereby reducing their cost of capital;
• life insurers would benefit from improved risk-adjusted asset returns as natural catastrophe risk and systemic investment risk are largely uncorrelated and, as a result, can provide a diversification benefit;
• a lower cost of capital for property and casualty insurers could improve the availability and affordability of insurance products, thereby benefiting property and casualty customers;
• life insurance customers would benefit from improved risk-adjusted returns; and
• regulators’ solvency concerns would diminish as greater diversification is introduced into the system.

The task force exposed this proposal for comment for a sixty day period expiring January 16, 2015.  It is not clear whether the Task Force will revisit this proposal at its March meeting.

This post written by Rollie Goss.

See our disclaimer.

On November 18, 2014, we reported on the Seventh Circuit’s decision in Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, in which Pine Top claimed that Banco de Seguros owed it $2,352,464.08 under certain reinsurance contracts.  The Seventh Circuit affirmed the trial court’s ruling denying Pine Top’s motion to compel arbitration, agreeing that Pine Top’s assigned rights under the reinsurance contracts were limited to the collections of certain debts and did not include the right to arbitrate.  The Seventh Circuit also had affirmed the trial court’s denial of a motion to strike Banco Seguros’s pleading for failure to post security, holding that such pre-judgment security is a form of attachment that violates the Foreign Sovereign Immunities Act.  On December 22, 2014, the Seventh Circuit denied Pine Top’s petition for rehearing and rehearing en banc, as no judge requested a vote on the petition, and the judges on the prior panel voted to deny rehearing.  Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 13–1364 (7th Cir. Dec. 22, 2014).

This post written by Michael Wolgin.

See our disclaimer.