Reinsurance Focus

In a case on which we previously reported, the Third Circuit recently evaluated the legal standard for determining materiality in a claim for rescission of an insurance contract.  The case involved a dispute between two reinsurers in which a federal court awarded the plaintiff $5.6 million based on breaches of the parties’ retrocession agreements.  The district court also entered summary judgment in the plaintiff’s favor on the rescission counterclaim.  The Third Circuit affirmed, ruling that the information plaintiff withheld was not material so as to amount to a breach of the duty of utmost good faith, approving the following definition of materiality under New York law: “A fact is material . . . if, had it been revealed, the insurer or reinsurer would either have not issued the policy or would have only at a higher premium.”  The Third Circuit rejected the other party’s broader definition of materiality – that information is material if it “likely” would have influenced the decision.

Munich Reinsurance Am., Inc. v. Am. Nat’l Ins. Co., No. 14-2045 (3rd Cir. Feb. 3, 2015)

This post written by Catherine Acree.

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As previously reported, the Terrorism Risk Insurance Act (“TRIA” or the “Program”) was re-authorized and signed into law on January 12, 2015 (the “Reauthorization Act”).

On February 4, 2015, the Department of Treasury (“Treasury”) issued Interim Guidance Concerning the Terrorism Risk Insurance Act Reauthorization of 2015 (the “Interim Guidance”), which may be relied upon until superseded by amended regulations or additional guidance, to address implementation of the TRIA Reauthorization. The Interim Guidance addresses documentation of TRIA coverage, disclosures, and new offers of coverage.

Documentation

Recognizing that insurers may require additional time to provide disclosures and offers of coverage that comply to with state insurance rate and form laws, the Interim Guidance establishes an April 13, 2015 deadline for insurers to provide required disclosures and coverage offers.

Disclosures

The Interim Guidance provides the following advice concerning insurer disclosures:

• National Association of Insurance Commissioner (NAIC) Model Disclosure Forms Nos. 1 and 2, as amended in 2015, are consistent with the disclosure requirements required under current TRIA regulations and the Reauthorization Act. Insurers may use these forms pursuant to Interim Section 50.17(c) of the Program regulations.
• Insurers are no longer required to provide to a policyholder certain disclosures at the time of a policy’s purchase; however, insurers must provide such disclosures at the time of offer and renewal The timing of an insurer’s disclosures may conform with either subpart B of the Program’s regulations or Section 103(b)(2) of TRIA, as amended by the Reauthorization Act.
• Insurers that offered coverage for insured losses prior to January 12, 2015, using the then-current NAIC Model Disclosure Form No. 1, NAIC Model Disclosure Form No. 2, or other disclosures consistent with Program regulations, are not required to provide a revised disclosure to the policyholder.
• Disclosures on or after January 12, 2015 provided in connection with a new or mid-term offer of coverage for insured losses should be based on Program regulations and the Reauthorization Act.

New Offers of Coverage

The Interim Guidance expects an insurer to make a new offer of coverage for insured losses with respect to any in-force policy that does not provide coverage for insured losses, except where:

• The policy incorporates a conditional exclusion or change of terms and conditions relating to coverage for insured losses and, because the Program is in effect, the insurer forbears effective January 1, 2015 (or as of the effective date of the policy, if later) on the exercise of the conditional exclusion or change in terms and conditions. The insurer should provide the policyholder written notice no later than April 13, 2015, of the insurer’s forbearance or written notice of the insurer’s withdrawal of any previous exercise of the conditional exclusion or change in terms and conditions. In the written notice, the insurer should state that the insurer’s forbearance or withdrawal, as applicable, is effective January 1, 2015 (or as of the effective date of the policy, if later); or
• The policyholder declined coverage for insured losses, so long as the insurer’s offer did not materially differ in price from that which the insurer would have offered following enactment of the Reauthorization Act.

The Interim Guidance further advises that if a policyholder declined coverage for insured losses but the insurer’s offer materially differed in price from that which the insurer would have offered following enactment of the Reauthorization Act, then the insurer should consider making a new offer to that policyholder.

In response to the Reauthorization Act and the Interim Guidance, the NAIC developed a Model Bulletin to expedite communication of implementation issues concerning the Reauthorization Act. Several states, such as Alabama, Kentucky, Louisiana, Maryland, North Carolina, Oklahoma, Rhode Island, and Wyoming have issued the Model Bulletin tailored to existing state regulatory requirements for each jurisdiction. It is anticipated that additional jurisdictions will issue similar bulletins or memoranda concerning compliance with the Reauthorization Act.

This post written by Kelly A. Cruz-Brown.

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A legal dispute stemmed from Utica Mutual Insurance Company’s late notice of claim to Fireman’s Fund Insurance Company, Utica’s reinsurer. Although the parties’ facultative reinsurance certificate required Utica to provide prompt notice “of any occurrence or accident which appears likely to involve reinsurance,” Utica did not provide notice of its claim until 2008 after it entered into a settlement agreement with its own insured surrounding litigation which commenced in 1997. Fireman’s Fund argued that it was prejudiced by Utica’s late notice of its $35 million claim because Fireman’s Fund did not take the claim into account when it negotiated thirteen commutation agreements with retrocessionaires. According to Fireman’s Fund, the retrocessionaires would have been responsible for almost $20 million of the $35 million claim had Fireman’s Fund known of the claim because those claims would have been part of their negotiations. Utica maintained that the commutations were collateral matters which did not constitute prejudice and sought partial summary judgment on the issue of late notice. The court concluded that a reinsurer may be prejudiced by its ceding insurer’s late notice which caused it to make disadvantageous commutations. However, the reinsurer must prove that it suffered tangible loss. If it can do so, then the reinsurer is entitled to complete relief from its duty to indemnify and not merely for those damages caused by the prejudice. The court also denied Utica’s motion for partial summary judgment on Fireman’s Funds bad faith defense. Genuine issues of material fact existed as to whether Utica was grossly negligent or reckless in failing to provide prompt notice to Fireman’s Fund. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 6:09-CV-853 (USDC N.D.N.Y. Feb. 9, 2015).

This post written by Leonor Lagomasino.

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The dispute continues between Utica Mutual and Clearwater Insurance in the Northern District of New York where the court recently denied, in large part, the parties’ respective motions to compel discovery of insurance and reinsurance documents unrelated to the specific facultative reinsurance policies at issue in the action. In this case, on which we have previously reported, the issue is whether reinsurance is due under contracts between Utica Mutual and Clearwater for a reinsurance claim relating to a settlement with one of Utica Mutual’s insureds. Utica Mutual sought to compel Clearwater to produce unrelated reinsurance contracts, claim notices, claim files, claim billing information, and other documents concerning contractual relationships with non-parties, arguing these documents were relevant to Clearwater’s defenses and counterclaim that it was misled into paying amounts toward that settlement. Clearwater, in turn, sought to compel Utica Mutual to produce information about primary commercial insurance policies issued by Utica Mutual to a number of its commercial insureds, claiming the information was needed, in part, to determine damages relating to the underlying settlement.

The court denied the parties’ motions, finding the documents sought were not relevant and noting that any issues as to the underlying settlement were already litigated and resolved. Discovery of entirely different contracts and documents that are “not germane or are only faintly relevant” would create confusion and diversion. The court did grant that part of Utica Mutual’s motion seeking to compel Clearwater to respond to an interrogatory requesting the factual and legal bases for Clearwater’s assertions that the amounts it paid to Utica Mutual were not due and payable. That single interrogatory, the court found, sought relevant information. Utica Mutual Insurance Co. v. Clearwater Insurance Co., No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2015).

This post written by Renee Schimkat.

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One hot topic in the reinsurance industry over the last year or two has been the influx and role of alternative capital.  In a Special Focus article titled Alternative Capital Proving That For Reinsurers, Size Does Not Matter, Bob Shapiro and Scott Shine explore some of the issues in this area.

This post written by Rollie Goss.

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The California Court of Appeals recently held that the Federal Arbitration Act (“FAA”) preempts California’s Broughton-Cruz rule, which states that arbitration agreements for injunctive relief under California’s unfair competition and false advertising laws are against public policy and invalid.

In McGill v. Citibank, plaintiff sued Citibank for state law claims of unfair competition and false advertising, alleging that Citibank had violated her rights as a consumer in offering a credit insurance plan she purchased to protect her credit card account. Citibank moved to compel plaintiff to arbitrate her claims pursuant to the arbitration provision in her account contract. The trial court granted the motion with regard to plaintiff’s claims for monetary damages and restitution but refused to order arbitration of the claim for injunctive relief. Citibank appealed the decision as to the damages and restitution claims.

California’s appellate court held that the California Broughton-Cruz rule did not survive the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, __ U.S. __, 131 S. Ct. 1740 (2011). In Concepcion, the Court held that the FAA preempts state laws, such as laws that prohibit class arbitration waivers in certain contexts or otherwise impede the FAA’s objective of enforcing arbitration agreements according to their terms. The California court reversed and remanded the case for the trial court to order all of plaintiff’s claims to arbitration. McGill v. Citibank, N.A., No. G049838 (Cal. Ct. App. Dec. 18, 2014).

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

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The trial court had granted the motion to compel arbitration of Flintkote Company against one of its asbestos liability insurers, Aviva PLC, despite the fact that Aviva was a non-signatory to the subject Alternative Dispute Resolution Agreement (“ADR Agreement”). Flintkote had entered into the ADR Agreement with its other asbestos liability insurers, but not with Aviva, which would not accept the ADR Agreement’s arbitration provision. The trial court compelled arbitration based on equitable estoppel, reasoning that Aviva had agreed to participate in mediation with Flintkote and the other insurers (which had been initiated further to the ADR Agreement). On appeal, the Third Circuit reversed. The court held that there was “simply no evidence that Aviva embraced the [ADR] Agreement when it opted to participate in mediation alongside the other London insurers.” The court also ruled that certain correspondence sent by the joint mediation counsel that referenced the ADR Agreement or suggested joint action with Aviva did not constitute sufficient reliance on the ADR Agreement to compel Aviva to arbitrate. The court further held that Flintkote could not have reasonably relied on an “unspoken” agreement with Aviva to arbitrate, given that Aviva had previously “negotiated for and specifically reserved the right to resolve all disputed issues through litigation.” Flintkote Co. v. Aviva PLC, No. 13-4055 (3d Cir. Oct. 9, 2014).

This post written by Michael Wolgin.

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In In Re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015), the Ninth Circuit determined that the district court erred in holding that its decision to intervene mid-arbitration was justified under Aerojet-General Corp. v. Am Arbitration Ass’n, 478 F.2d 248 (9th Cir. 1973). Specifically, the panel held that the district court erred in predicting that an award issued by the arbitrator would likely be vacated because of his evident partiality under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2). The panel determined that undisclosed facts regarding the arbitrator’s efforts to start a company to attract investors for litigation financing did not give rise to a reasonable impression that the arbitrator would be impartial toward either party. The panel, quoting Commonwealth Coatings v. Continental Cas. Co., 393 U.S. 145, 150 (1968) emphasized that an arbitrator must disclose facts showing that they might be reasonably biased against one litigant and favorable to another. In this case, the panel found that the arbitrator’s financial effort regarding his efforts to start a litigation finance company in relation to the parties and issues in the case were contingent, attenuated, and speculative. Furthermore, the panel held that even if the arbitrator’s activities created a reasonable impression of partiality, the district court’s equitable concern that costs and delays would result if the arbitration award were vacated was inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of arbitration.

This post written by Kelly A. Cruz-Brown.

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A federal judge in the Southern District of New York recently denied a motion to vacate an arbitration award in a reinsurance dispute, scolding the movant for complaining that the arbitrators reached a compromise verdict. The movant, the ceding insurer, argued that two of the three members of the arbitration panel had engaged in “manifest disregard of the law” by failing to properly apply the “follow the fortunes” doctrine when they disallowed reimbursement for several claims. The movant challenged a portion of the award holding that the reinsurer was not required to reimburse the movant for certain claims due to negligent claims handling and/or late notice. In a somewhat gruff opinion (“Petitioner’s argument is manifestly wrong . . . .”), the court stated that the movant “asks this court to do what it cannot do – review the award for correctness.” The court noted that all the relevant legal issues were placed squarely before the panel, that considerable evidence and argument was presented on those issues during a five-day hearing, and the evidence on the disputed issues “could be read either way.” In denying the motion to vacate and confirming the award, the court noted that the arbitrators were not required to follow “judicial formalities” in making their decision, and therefore were not required to predict what a court would hold. Rather, all that was required of them was that the decision have “colorable justification.” Apparently frustrated by the movant’s “manifest disregard of the law” argument, the court lectured: “If parties want the luxury of judicial review and reasoned results that require strict application of the law, without the sort of compromises that often characterize arbitral awards, they should not agree to arbitration clauses. Having done so, they should not be heard to complain when the arbitrators do what arbitrators so often do – reach compromise verdicts that can easily be justified by taking a particular view of the evidence.”

Associated Industries Ins. Co., Inc. v. Excalibur Reinsurance Corp., Case No. 1:13-cv-08239 (USDC S.D.N.Y November 26, 2014)

This post written by Catherine Acree.

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Following the rejection by a Florida jury of all claims made by Instituto Nacional de Seguros (as we reported on July 9, 2014), a Costa Rican insurer, against two reinsurance brokers, Hemispheric Reinsurance Group and Howden Insurance Brokers, the trial court entered final judgment in defendants’ favor. The court conducted an evidentiary hearing to determine reasonable attorneys’ fees and costs. It entered judgment in the amount of $3,134,459.30, which included an award of $2,456.131.10 for attorneys’ fees, $497,469.32 for taxable costs, $96,297.00 for expert fees, and $84,561.98 for prejudgment interest. Instituto Nacional de Seguros v. Hemispheric Reinsurance Group, Case No. 10-33-653 CA 04 (Fla. Cir. Ct. Jan. 5, 2015).

This post written by Leonor Lagomasino.

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