Goldberg Segalla’s Reinsurance Review – October, 2011

Goldberg Segalla’s Reinsurance Review – October, 2011

 

Lexis.com subscribers may access the enhanced versions of the cases below. Non-subscribers may access the free, unenhanced versions on lexisONE, if available. 

 U.S. CIRCUIT COURT DECISIONS

EIGHTH CIRCUIT

EMPLOYERS REINSURANCE CO. V. MASSACHUSETTS MUT. LIFE INS. CO. No. 10-3099; Sept. 7, 2011) [lexis.com / lexisONE]  

Reinsurer's Conduct by Withholding Payments to Reinsured Was Bad Faith

Employers Reinsurance Company (ERC) entered into a reinsurance treaty with Massachusetts Mutual Life Insurance Company (Mass Mutual) whereby, among other things, ERC agreed to promptly pay a portion of each "loss" actually paid by ERC in settlement of claims or in satisfaction of judgment relating to disability benefits. Under a 2003 Claims Review Agreement, ERC discovered what it alleged were "serious breaches" of the treaty by Mass Mutual, whereby ERC alleges Mass Mutual sought reimbursement for claims that were not subject to the treaty and mishandled claims. ERC eventually sued Mass Mutual seeking reimbursement of certain claims paid to Mass Mutual and a declaration that ERC was not obligated under the treaty to follow Mass Mutual's settlement actions. ERC thereafter began rejecting Mass Mutual's requests for reimbursement.

Mass Mutual counterclaimed, suing ERC for breach of the treaty and bad faith alleging, among other things, ERC failed to reimburse Mass Mutual for losses in accordance with the treaty. Mass Mutual alleged that ERC unilaterally withheld payments for more than two years, in bad faith. Mass Mutual moved for summary judgment on its counterclaims for breach of contract and bad faith. The court analyzed the treaty and determined it included a "follow-the-settlements" provision which bound ERC to Mass Mutual's good faith claim settlement decisions. The court explained, "a follow-the-settlements clause requires a reinsurer to indemnify the cedent for a settlement as long as that settlement is reasonable and made in good faith." 

The court also ruled that, where ERC "unilaterally withheld all reimbursements to Mass Mutual for more than two years, ... there was no genuine issue of fact that this did not constitute good faith or fair dealing." The district court granted Mass Mutual's summary judgment motion as to both its breach of contract and bad faith claims, a decision affirmed by the Eighth Circuit.

IMPACT - REINSURANCE: This case upholds the rule that a reinsurer is bound to follow its reinsured's decision in the underlying suit in accordance with "follow the fortunes" or "follow the settlements" provisions in a reinsurance treaty. Further, a reinsurer may not unilaterally refuse to abide by reimbursement provisions in an agreement, even in the face of a dispute over prior claims, without risking a bad faith judgment against it. 

DISTRICT COURT DECISIONS 

EASTERN DISTRICT OF CALIFORNIA

MUNOZ V. PHH CORP.

(1:08-cv-759; Sept. 9, 2011) [[lexis.com]

RESPA Claim Against Captive Reinsurer Stayed Pending U.S. Supreme Court Decision 

PHH, a residential mortgage lender, referred its mortgage customers to private mortgage insurers who had reinsurance agreements with Atrium Insurance Corporation, a captive reinsurer affiliated with the lender. Plaintiffs, PHH's loan customers, sued the lender, insurer and Atrium alleging the captive reinsurance arrangement resulted in Atrium receiving illegal kickbacks and unearned fees in violation of the Real Estate Settlement Procedures Act of 1974 (RESPA). Plaintiffs sought damages in an amount equal to three times the amounts paid or to be paid for private mortgage insurance as of the date of judgment.

Defendants contend that plaintiffs have no standing to sue under RESPA because they have not suffered an injury-in-fact. Defendants sought a stay of the suit pending a decision by the U.S. Supreme Court in a substantially similar case, First American Financial Corp. v. Edwards, No. 10-708. Plaintiffs opposed the stay, but the court stayed the case pending a decision in Edwards in the interest of judicial economy.

The court explained that the power to stay an action is "incidental to the power inherent in every court to control the disposition of the causes on its docket, with economy of time and effort for itself, for counsel, and for litigants." The court weighed the possible damage resulting from granting a stay, the hardship or inequity imposed on a party by a stay, and the orderly course of justice measured in terms of simplifying or complicating the issues, proof and questions of law which could be expected to result from a stay. Ultimately, the court found no hardship or damage would result from a stay and, instead, the guidance to be provided by the pending Supreme Court decision would further the orderly course of justice, promote judicial economy, and avoid the waste of judicial and party resources. 

IMPACT - REINSURANCE: The U.S. Supreme Court will be deciding whether loan customers may bring RESPA claims against PMI insurers and reinsurers in an upcoming case of First American Financial Corp. v. Edwards, No. 10-708. We will monitor this action for further developments. 

DISTRICT OF COLUMBIA

CERTAIN UNDERWRITERS AT LLOYD's London V. GREAT SOCIALIST PEOPLE'S LIBYAN ARAB JAMAHIRIYA

(No. 06-cv-731, No. 08-cv-504; Sept. 2, 2011) [lexis.com]

Reinsurers Awarded Judgment Against Syria for 1985 Hijacking of EgyptAir Flight 648

On November 23, 1985, EgyptAir Flight 648 was hijacked shortly after takeoff from Athens, Greece, bound for Cairo, Egypt by terrorist operatives of the Abu Nidal Organization (ANO), a brutal terrorist organization sponsored and funded by the Syrian government. More than 60 passengers were killed in the hijacking, including three American citizens. In an attempt by Egyptian security forces to end the hijacking, the airplane was totally destroyed. The plane was insured under a hull war risk policy issued by MISR Insurance Company, which in turn had secured numerous reinsurance agreements with Certain Underwriters at Lloyd's London (Lloyd's) and other reinsurers.

Lloyd's sued the government of Syria under the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. §1602 et seq. Syria failed to appear and the court considered the evidence presented by Lloyd's to establish a prima facie case in order to obtain default judgment under FSIA. The court granted judgment in favor of Lloyd's for its reinsured share of the loss. The loss included approximately $10.5 million for the value of the plane minus the offsetting salvage recovery, nearly $500,000 in claims-related expenses, prejudgment interest at the rate of 7 percent per year, and post-judgment interest.

In determining whether Lloyd's could recover under FSIA against Syria, the court considered various jurisdictional issues. The court explained that FSIA allows a foreign state that is a sponsor of terrorism to be held liable to a United States citizen for personal injury or death and for reasonably foreseeable property loss. The killing of three U.S. citizens in the hijacking provided jurisdiction under FSIA for the U.S. court to entertain Lloyd's collateral claim for property damage to the plane incurred as a result of the hijacking. The court ruled that FSIA creates a federal cause of action against a foreign state that provides material support or resources for an act of terrorism, including for reasonably foreseeable property damage resulting from such a terrorist act. Considering the uncontested evidence presented by Lloyd's in a five-day hearing, the court found that Syria indisputably supported the ANO, was fully aware that ANO was a brutal terrorist organization, and that the damages sought by Lloyd's for destruction of the airplane were reasonably foreseeable from such support as required to recover under FSIA. 

IMPACT - REINSURANCE: Terrorist attacks remain a seemingly ever-present risk worldwide. The FSIA creates a cause of action against state sponsors of terrorism, providing a useful tool for insurers and reinsurers to recover assets of state sponsors of terrorism for reasonably foreseeable injuries, death and property damage. 

SOUTHERN DISTRICT OF NEW YORK

LEXINGTON INS. CO. V. TOKIO MARINE 7 NICHIDO FIRE INS. CO. LTD.

(11 Civ. 391 (DAB); September 7, 2011) [lexis.com]

Dispute Over Coverage Under Reinsurance Agreement Not Subject to Claim for Unjust Enrichment 

Lexington Insurance Co. (Lexington) issued parts of two layers of excess property coverage to Port Authority. Lexington's First-Layer Coverage provided a per-occurrence limit equal to an $11.5 million part of a $40 million insurance layer that covered property damage in excess of $10 million. Lexington's Second-Layer Coverage provided a per-occurrence limit equal to $9.5 million part of a $50 million insurance layer for property damage in excess of $50 million. Lexington's coverage was a "fronting" policy for Tokio Marine, which agreed to reinsure 100 percent of Lexington's risk under a reinsurance agreement. 

As a result of the September 11, 2001 attacks, Port Authority sustained damage in excess of $1 billion, which was more than twice the value of the Port Authority's per-occurrence insurance tower. A jury deemed the September 11 attacks to be two separate occurrences and thus the tenants of the World Trade Center Tower, as well as the Port Authority, were entitled to two times their property insurers' limits. The Second Circuit affirmed the judgment that the attacks constituted two occurrences. Lexington paid one per-occurrence limit to Port Authority and submitted a reinsurance claim to Tokio Marine, for which it was completely reimbursed.

Port Authority engaged in coverage litigation with its primary insurer (American Home) and Lexington as to the occurrence issue. Ultimately, the parties settled the dispute and allocated the $11 million settlement pro rata by limits between the American Home policy and Lexington's First and Second Layer Coverage. Port Authority forever released all claims against Lexington and Lexington then submitted a reinsurance claim to Tokio Marine for its portion of the settlement, claiming $4 million under the First Layer and $3 million under the Second Layer. Disputing Lexington's allocation of the $11 million settlement to its policies, Tokio Marine rejected the claim maintaining that $10 million of the settlement should have been allocated to the American Home policy. 

Lexington brought a four-count action on against Tokio Marine, including claims for breach of the reinsurance agreement and, in the alternative, unjust enrichment. Tokio Marine moved to dismiss the unjust enrichment claim under FRCP 12(b)(6), arguing that Lexington could not recover under unjust enrichment because this was a straightforward breach of contract case.

The court granted the motion, following the well-established rule that unjust enrichment is only applicable in quasi-contract situations, that is, in the absence of a contract. The court noted that when a "valid and enforceable written contract governs the subject matter in dispute, a plaintiff may not recover under a theory of unjust enrichment." As the parties' relationship was governed by a valid, written reinsurance agreement, Lexington's claim for unjust enrichment is not viable. 

IMPACT - REINSURANCE: Reinsurance agreements are often the subject of declaratory judgment and breach of contract claims. In such disputes, recovery is properly grounded in theories of contract, not equitable claims such as unjust enrichment.  

DISTRICT OF NEVADA 

OLIN CORP. V. CONTINENTAL CASUALTY

(2:10-cv-00623-GMN-RJJ; August 30, 2011) [lexis.com] 

Reinsurance Information Discoverable in Dispute Between Insured and Insurer 

In this coverage dispute, the insured, Olin Corp. (Olin), was able to obtain through discovery from its insurers information relating to the insurers' available reinsurance and communications with their reinsurers relating to Olin's claim. Olin purchased general insurance policies from a group of insurers (the property insurers) relating to a chlor alkali manufacturing plant. The plant suffered breakdowns and physical damage along with loss of income and production. Olin submitted a claim to its insurers and initiated a declaratory judgment action before the property insurers made a coverage decision. Olin then sought discovery of the property insurers' claim files, reserve information, and certain information relating to the property insurers' reinsurance. 

The property insurers moved for a protective order and Olin made a subsequent motion to compel the property insurers to respond fully to discovery requests. The property insurers argued that they should be protected from providing any discovery related to reinsurance because such information was irrelevant to Olin's coverage action because it had not alleged breach of contract or bad faith and that such requests were untimely because the insurers had not yet made a coverage determination. 

The Court first decided that Olin's discovery requests were timely even though Property Insurers had yet to make a coverage determination. Further, because the parties had conferred with each other, as required by FRCP 26(f), Olin's discovery requests were not premature. 

Turning to the relevancy issue, the court noted that FRCP Rule 26(a)(1)(A)(iv) requires disclosure of any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments. "Therefore if the Property Insurers have any agreements with reinsurers that might be liable to satisfy all or part of the possible judgment or to indemnify or reimburse Property Insurers ... then that agreement must be disclosed." 

The court also noted that communications with reinsurers are only discoverable if they are relevant. The communications in this case were deemed relevant because the communications may contain information related to the property insurers' analysis regarding Olin's proof of loss and satisfaction of contractual prerequisites. Therefore the court found no good cause to support a protective order.

IMPACT - REINSURANCE: An insured may obtain discovery information from insurers related to its reinsurance policies prior to a coverage decision being made if the information may be relevant to the claim. If reinsurance is available to satisfy part of the judgment or reimburse the insurer, agreements between an insurer and its reinsurer may be subject to discovery by the underlying insured.  

NORTHERN DISTRICT OF OKLAHOMA 

CANAL INS. CO. V. MONTELLO, INC.  

(No. 10-cv-411; Sept. 26, 2011) [lexis.com]

Reinsurer Not Directly Liable to Cedent's Insured

Montello, Inc., a manufacturer and distributor of asbestos-containing products, was the subject of numerous asbestos-related personal injury lawsuits. Montello was insured by a number of insurers at various times, including CNA. CNA subsequently entered into a retroactive reinsurance agreement with National Indemnity Co. (NICO) whereby NICO assumed CNA's asbestos liabilities, up to an aggregate limit of $4 billion. NICO also agreed to deposit $2.2 billion in a collateral trust for the benefit of CNA. Montello sued NICO, alleging NICO was directly liable to Montello for its asbestos-related litigation costs pursuant to the CNA-NICO reinsurance agreement. NICO filed a motion for judgment on the pleadings, which the court granted. 

The court explained it is a basic rule of insurance that a reinsurance contract typically does not allow an underlying insured to proceed directly against a reinsurer. This rule, though, has two exceptions, both of which Montello argued were triggered, giving it a direct action against NICO. The first exception creates a direct action against the reinsurer where the reinsurance agreement contains a "cut through" clause, that is, a clause that confers upon the original insured direct rights against the reinsurer. The court determined the CNA-NICO agreement contained no such clause. To the contrary, the agreement contained an "express negation clause," which unequivocally stated that the agreement gave no rights to any third parties under the agreement: "Nothing in this Reinsurance Agreement is intended or shall be construed to give any Person, other than the Parties, any legal or equitable right, remedy, or claim under or in respect of this Reinsurance Agreement or any provision contained herein." As the court explained, the existence of such a negation clause is dispositive of the issue - Montello has no direct rights against NICO under the reinsurance agreement.  

Under the second exception to the general rule, a reinsurer may be directly liable to an original insured where the reinsurer "steps into the shoes" of the reinsured by accepting all premiums and assuming all liabilities with respect to the reinsured policy. The court determined this exception did not apply because NICO did not accept all of CNA's liabilities - NICO's liability was capped at $4 billion, and NICO agreed to pay CNA's liabilities less amounts paid by other reinsurers. Thus, NICO could not be directly liable to Montello under the second exception.  

IMPACT - REINSURANCE: This case follows the general rule that, absent some provision in the reinsurance treaty, an original insured has no direct rights for payment of a claim against the reinsurer unless the reinsurer assumes the responsibilities of the cedent.

OTHER NEWS AND NOTES  

First Half of 2011 Costliest on Record for Lloyd's

Lloyd's of London, the 323-year old insurance market, reported losses of £697 million in the first half of 2011, due to an unprecedented amount of natural catastrophes that led to £6.7 billion in claims. Lloyd's enters the second half of 2011 with £57 billion in assets to support business and pay claims.

Harleysville Insurance to Merge With Nationwide Mutual 

Nationwide Mutual will acquire Harleysville Mutual Insurance Co. and Harleysville Group will merge for a price of $60 per share. The deal, subject to shareholder and regulators' approval, will expand Nationwide's distribution footprint and increase its property and casualty commercial and business lines business.  

Business Insurance Ranks World's Largest Reinsurers 

Business Insurance issued a list of rankings of the world's 10 largest reinsurers. Topping the list are Munich Re followed by Swiss Re, Berkshire Hathaway Re, General Re and Hannover Re. 

Canopius Preparing Offer for Omega Insurance 

Canopius Group Ltd., one of three insurers attempting to buy Lloyd's of London syndicate Omega Insurance Holdings Ltd., is completing its due diligence and preparing to make an offer to buy the insurer and reinsurer. Other potential buyers include Barbican Group Holdings Ltd. and Haverford (Bermuda) Ltd. 

Soft Reinsurance Market May Be the Norm, Says Willis Deputy Chairman

Speaking at an event in Monte Carlo, Willis Group Holdings P.L.C. deputy chairman Martin Sullivan warned that the continuing soft reinsurance market may be the norm. Sullivan also predicted more merger and acquisition activity in 2012. 

Barbican Proposes All-Share Transaction for Omega 

Barbican Insurance Group, a Lloyd's syndicate, extended a stock buy-back tender offer to Omega Insurance Holdings Ltd., making a competing offer to Canopius Group Ltd.'s offer. Omega lost more than $49 million in the first half of the year, primarily from catastrophe-related losses. 

Transatlantic Rejects Renewed Bid by National Indemnity 

Warren Buffet's National Indemnity Co. renewed a $52 per share cash offer for Transatlantic Holdings Inc., an offer that was rejected by Transatlantic's Board. Transatlantic indicates the offer is well below its per share book value of $69 - $70. 

PricewaterhouseCoopers Report: Most Reinsurers Undervalued 

In a study launched at the Monte Carlo Reinsurance Rendezvous, PricewaterhouseCoopers indicates 89 percent of reinsurers are undervalued. The report suggests reinsurers' strategies of building on diversification has led to shares trading below book value and must be rethought.

Allianz Appoints Amer Ahmed as CEO of Reinsurance Business

German reinsurer Allianz S.E. named Amer Ahmed as CEO of its reinsurance business, effective Jan. 1, 2012. Ahmed has been serving as chief risk officer and a member of Allianz's executive committee since 2007.

PartnerRe Names Andrew Turnbull as Strategy and Business Development Director

Bermuda-based PartnerRe Ltd. has named Andrew J. Turnbull to the newly created position of group strategy and business development officer. Turnbull, who will report directly to CEO and President Costas Miranthis, most recently served as chief actuary and chief operating officer of Torus Insurance Holdings Ltd.

This edition of Reinsurance Review was originally published in The Insurance and Reinsurance Report blog.

Goldberg Segalla's Reinsurance Review provides timely summaries of and access to the latest reinsurance law developments worldwide, and is published monthly. Cases are organized by court and date. In addition, it provides the latest information regarding news in the insurance and reinsurance industries. Reinsurance Review is the collaborative effort of Goldberg Segalla LLP's Global Insurance Services Practice Group, as is its blog The Insurance and Reinsurance Report. Goldberg Segalla's Global Insurance Service Group is comprised of over 25 attorneys throughout 10 offices in the firm's four states (New York, New Jersey, Connecticut, and Pennsylvania). The Global Insurance Services Group routinely handles matter of national and international importance for both domestic and foreign insurers, cedents, and reinsurers. This includes: a comprehensive audits, policy reviews, regulatory advice, positioning dispute for resolution at the business level (either through interim funding or non-waiver agreements), negotiations among counsel, mediation or fully-involved arbitration or litigation.

The editors, Daniel W. Gerber, Thomas F. Segalla, Jeffrey L. Kingsley, and Patrick B. Omilian appreciate your interest and welcome your feedback.