Goldberg Segalla’s Reinsurance Review – September, 2011

IN THIS MONTH'S EDITION:

Payments Made in Settlement of Bodily Injury Lawsuit Against Insured Within Primary Insurer's Policy

RESPA Class Action Alleging Illegal Kickback Scheme Involving Reinsurer Dismissed

Subsequent Related Claims Not Excluded Under Claims-Made Reinsurance Treaty

Insurer's Suit Against Investment Manager Relating to "Toxic" Mortgage-Backed Securities Reinstated

Insurer, as Subrogee, Sues Insured's Contractor for Property Damage Caused
During Construction at Insured's Property

Former Teacher Sues Insurer and Claim Administrator for Failing to Pay Disability Benefits

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

UNITED STATES CIRCUIT COURT DECISIONS

FIFTH CIRCUIT

FEDERAL INS. CO. V. NEW HAMPSHIRE INS. CO.

(Civil Action No. 10-30892, July 19, 2011)

2011 U.S. App. LEXIS 14946 [lexis.com / lexisONE]

Payments Made In Settlement of Bodily Injury Lawsuit Against Insured Within Primary Insurer's Policy

Wayne Robins filed a suit against Thomas & Betts Corporation (T&B) alleging that T&B manufactured a product that contributed to an explosion at Kaiser Aluminum Corp., in which he sustained injury.  New Hampshire Ins. Co., T&B's first-layer insurer, had a policy with T&B that required New Hampshire to "pay those sums that T&B becomes legally obligated to pay by reason of liability imposed by law or assumed by T&B under an Insured Contract because of Bodily Injury."  During this time, Federal Ins. Co. was T&B's second-layer excess insurer. 

Robins consolidated his lawsuit with other lawsuits, including a suit brought by Kaiser's property insurer, AXA Global Risks (AXA).  AXA agreed to lend Robins $900,000 in exchange for Robin's cooperation as a joint plaintiff in their law suit against T&B.  The agreement between Robins and AXA contained a provision that stated, if Robins settled with another party without AXA's consent, he would be required to pay the loan back, plus an additional $300,000. 

Before the consolidated trial began, Robins entered into a preliminary settlement agreement with T&B, stating T&B would pay him $5 million as a result of his lawsuit.  The agreement contained a provision that stated T&B and its insurers agreed to hold harmless, indemnify, and defend Robins for any amount owed to AXA not exceeding $1.2 million.  New Hampshire informed Robins that it refused to pay any sums stated in the provision.  Neither party could reach an agreement of payment. As a result of this, T&B deposited the $5 million into the state's court registry.  AXA then sent a request to Robins for $1.2 million for his breach of contract, of which he did not pay. 

Federal paid $990,000 to Robins on behalf of T&B. Federal then filed a suit against New Hampshire, seeking subrogation.  After the case was administratively closed and reopened, New Hampshire filed a motion for summary judgment, asserting the $990,000 was not a covered claim of bodily injury under the New Hampshire policy, thus it was not obligated to subrogate Federal.  The district court granted New Hampshire's motion; Federal appealed. 

On appeal, The Fifth Circuit stated that Federal's claim turned on (1) the limits of the New Hampshire policy, and (2) whether Federal's payment fit within the limits of the policy. The Fifth Circuit agreed with the district court's holding that the phrase "legally obligated to pay" limited the New Hampshire policy to tort liability.  The court concluded on this issue that the district court correctly held that the phrase limited the policy's coverage to damages arising out of tort liability and did not cover any contract damages.  On the second issue, the court held that the entire settlement amount awarded to Robins was within the limits of the policy.  The court concluded that payment was made in consideration for settlement of the bodily injury claim Robins raised; the sole reason for the agreement was to settle this claim. 

The Fifth Circuit concluded that because T&B's payment to Robins was a payment made to settle Robins' bodily injury claim against T&B, the payment made pursuant to the settlement agreement was fully within the scope of the New Hampshire policy. Therefore, Federal was not responsible for paying any amounts that could be attributed to the settlement agreement. In light of this, the court held that Federal was entitled to subrogation.  Summary judgment for New Hampshire was reversed.  

IMPACT-REINSURANCE: Where an insurer makes payments to a claimant who has sued the insured for bodily injury, such payments may be considered "legally obligated to pay ... because of bodily injury" within meaning of insuring agreement, even where portion of the payments is related to a litigation loan agreement made by the claimant.

UNITED STATES DISTRICT COURT DECISIONS

Eastern District of Pennsylvania

ALEXANDER V. WASHINGTON MUTUAL, INC.

(Civil Action No. 07-4426, June 28, 2011)

2011 U.S. Dist. LEXIS 69906 [lexis.com]

RESPA Class Action Alleging Illegal Kickback Scheme Involving Reinsurer Dismissed

Plaintiffs filed a class action lawsuit under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2607(a) et seq. against Washington Mutual Bank (WMB) alleging it was engaged in an illegal kickback arrangement with its captive reinsurer and wholly owned subsidiary, WM Mortgage Reinsurance Company. WMB allegedly referred its residential mortgage customers to certain providers of private mortgage insurance who would then forward a portion of the PMI premiums for such referrals to WMB's captive reinsurer. This arrangement, plaintiffs alleged, constituted an illegal referral or kickback payments in the form of excessive reinsurance premiums. WMB subsequently failed and was taken over by the FDIC in receivership.

The FDIC-Receiver moved to dismiss the lawsuit arguing the relief sought by plaintiffs, damages under RESPA, was punitive in nature and therefore barred in a suit against the FDIC acting as receiver for a financial institution under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1825(b)(3). FIRREA prohibits recovery of penalties from the FDIC-Receiver. Plaintiffs
asserted the relief they sought was compensatory damages, not penalties, and therefore not precluded by FIRREA.

The District Court agreed with the FDIC-Receiver and dismissed the suit, finding plaintiffs could not recover the type of relief they sought-statutory penalties and treble damages-from the FDIC-Receiver because such damages were meant to punish wrongdoers and in this instance would only deprive other creditors who had claims against WMB from recovering. As such, all such damages sought by Plaintiffs under RESPA were barred by FIRREA as a matter of law.

IMPACT-REINSURANCE: Plaintiffs are barred from recovering penalties, including punitive damages, from FDIC-Receivers who take over control of failing financial institutions.

STATE COURT DECISIONS

Indiana

WELLPOINT, INC. V. NATIONAL UNION FIRE INS. CO.

(Court of Appeals of Indiana, July 20, 2011)

2011 Ind. App. LEXIS 1328 [lexis.com / lexisONE]

Subsequent Related Claims Not Excluded Under Claims-Made Reinsurance Treaty

In November 1999, Anthem Insurance was sued by a group of physicians in Connecticut for allegedly delaying or improperly denying reimbursement for medical services. Anthem reported the suit to its primary reinsurer, National Union. At the time of the suit, Anthem had numerous layers of reinsurance including a third excess layer covered by Reliance, which went bankrupt before the end of the coverage period. Anthem replaced the Reliance policy with new coverage from Twin City in July 2000. Twin City agreed to provide coverage under the same terms of the Reliance policy, effective July 15, 2000 through September 30, 2001. The Twin City policy was a claims-made policy. Anthem was sued again in 2001, and 2002 by multiple plaintiffs in different suits alleging similar allegations as the prior suit involving improperly delaying and denying reimbursement of medical expenses.

Twin City asserted the subsequent suits were excluded from coverage, relying on two policy provisions. The first provision, limit of liability, provided:

If additional claims are subsequently made which arise out of the same Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts as Claims already made and reported to the Insurer, all such Claims, whenever made, shall be considered first made within the Policy Period or the Discovery Period in which the earliest Claim[] arising out of such Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts was first made and reported to the Insurer, and all such claims shall be subject to one such limit of liability.

The court disagreed with Twin City, interpreting this provision not to exclude coverage for the subsequent claims against Anthem but to include all subsequent claims related to the first suit within one limit of liability. Here, where the first claim was made prior to Twin City's policy period, the limit of liability provision could not be interpreted to retrospectively exclude coverage based on claims that preceded the policy. The court explained the parties could have drafted this provision to have a retrospective exclusionary effect, but they did not do so.

Twin City also relied upon a notice/claim reporting provision, which provided, in part:

If written notice of a Claim has been given pursuant to Clause 8(a) above, then a Claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based upon or attributable to the facts alleged in the Claim for which such notice has been given, or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim of which notice has been given, shall be considered made at the time such notice was given.

The Court determined that, like the Limit of Liability provision, this Notice provision did not contemplate retrospective exclusion of coverage based on notice of claims made prior to inception of the policy. Twin City argued that it owed no coverage for the subsequent claims because its policy with Anthem began after cancellation of the Reliance policy. The court described this argument as "attempting to uperimpose the so-called 'prior notice exclusion' onto the policy." This policy, however was not so worded and did not express any such exclusion. The Court of Appeals reversed the trial court and found the policy provided coverage for the subsequent suits against Anthem.

IMPACT-REINSURANCE: The policy at issue was a claims-made policy that became effective after suits had already been filed against Anthem, and yet there was no exclusionary language in the policy to apply specifically to claims or suits relating to the already-pending suit against Anthem. Reinsurers with claims- made policies should be aware of the nature of suits pending against their insureds at the time of policy inception and be careful that appropriate exclusions are in the policy.

New York

AMBAC ASSURANCE UK LIMITED V. J.P. MORGAN INVESTMENT MANAGEMENT, INC.

(New York Appellate Division, First Department, July 14, 2011)

2011 NY Slip Op 5942 [lexis.com / lexisONE]

Insurer's Suit Against Investment Manager Relating to "Toxic" Mortgage-Backed Securities Reinstated

Ambac Assurance UK Limited, Inc. (Ambac) insured more than $2 billion in notes issued by Ballantyne, a special purpose vehicle established to reinsure term life insurance policies. Ballantyne had issued the notes to capitalize itself and fund its reserves. Ballantyne contracted with J.P. Morgan Investment Management Inc. (J.P. Morgan) to manage more than $1.65 billion of the proceeds. J.P. Morgan invested a portion of the proceeds in mortgage-backed securities and home equity loan asset-backed securities. Meanwhile, J.P. Morgan's parent company, J.P. Morgan Chase, reduced its exposure to the same type of securities based on its knowledge that they could "go up in smoke."

In less than 30 months, Ballantyne's accounts allegedly lost $1 billion. Ballantyne then failed to make scheduled payments on the notes and Ambac's guarantees were called in. Ambac then sued J.P. Morgan alleging breach of fiduciary duty, gross negligence and other claims. The complaint alleged, in part, that an article published in Fortune magazine in September 2008 quoted the CEO of J.P. Morgan Chase as having concluded as early as October 2006 that the subprime securities market could "go up in smoke" and described instructions to his subordinates to "watch out for subprime" and to "sell a lot of our positions." J.P. Morgan filed a motion to dismiss, which was granted.

The appellate court reversed, finding the statements made by J.P. Morgan Chase's CEO that subprime securities "could go up in smoke" supported an inference in favor of Ambac that its complaint evidenced a cognizable cause of action. At the pleading stage, the allegations supported an inference that J.P. Morgan did not meet Ballantyne's investment guidelines and were sufficient to survive a motion to dismiss.  The complaint was reinstated in its entirety.

IMPACT-REINSURANCE: The subprime securities investment debacle created massive losses and the litigation stemming therefrom will likely continue for a significant amount of time. Insurers of financial institutions involved may be on the hook for years to come.

NEW SUITS

Eastern District of New York

EVEREST REINSURANCE CO. V. COVA CONCRETE CORP.

(Civil Action No. 11-3427, July 15, 2011)

Insurer, as Subrogee, Sues Insured's Contractor for Property Damage Caused During Construction at Insured's Property

An insurer as subrogee of its insured property owner commenced an action to recover damages sustained as a result of property damage against owners, contractors and professionals involved in a renovation project at the adjacent property. In the course of defendants' renovation project, wet concrete from their construction site smashed into the adjacent property of the insured. Under a master property and casualty insurance policy, plaintiff insurer paid its insured for property damage and other related losses.

Plaintiff alleges that defendants, by acting in a careless, negligent and reckless manner, breached the duty to use the care and skill customarily employed by people in defendant's profession, trade or business. Plaintiff further alleges that defendants are strictly liable as their operations were unduly hazardous and/or abnormally dangerous. Plaintiff also argues that defendants' operations violated Section 3309 of the NYC Building Code, which allegedly imposes liability on defendants for protecting adjacent property.

Southern District of Indiana

MCCLAIN V. MADISON NAT'L LIFE INS. CO

(Civil Action No. 1:11-cv-0935-SEB-MJD, July 14, 2011)

Former Teacher Sues Insurer and Claim Administrator for Failing to Pay Disability Benefits

A former elementary teacher filed a claim against her insurer and its third-party administrator, Disability Reinsurance Management Services, Inc., in a coverage dispute over long-term disability benefits. Plaintiff insured suffered a brain aneurysm in 2006 when she had been employed as a teacher. Although plaintiff attempted to return to work in 2007, she struggled to perform her duties as a teacher. In 2010, she was no longer able to work at all because of the residual neuropsychological effects and hearing loss caused by the traumatic event in 2006. During the time of her illness, plaintiff was provided disability coverage under defendant insurer's policy. Plaintiff submitted a claim for long-term disability benefits and defendant denied the claim.

Plaintiff alleges that, under the policy, defendant insurer agreed to pay monthly disability benefit payments in the event she is unable to work due to an illness. Plaintiff also argues that she satisfies the requirements of her disability policy as she provided defendant with physician's reports establishing her total disability. The insurer's refusal to pay disability benefits, plaintiff argues, constitutes a breach of contract. Plaintiff also argues that defendant's denial of benefits without any reasonable basis and its disregard of her physician's statements, among other things, constitute a breach of covenant of good faith and fair dealing. Plaintiff seeks judgment for the unpaid disability benefits as well as damages for the insurer's bad-faith refusal to pay her legitimate claim.    

NEWS AND NOTES

Former Gen Re, AIG Executives Win Reversal of Insurance Fraud Convictions

The Second Circuit reversed the 2008 convictions of four former executives of General Reinsurance Corp. and one execute at AIG on charges that they defrauded investors of nearly $600 million. The convictions stem from an alleged sham transaction to inflate AIG's loss reserves by $500 million. The Second Circuit tossed the convictions, finding that the trial judge improperly allowed prosecutors to show jurors three charts with AIG stock-price data and improperly instructed the jury on causation.

Top 25 U.S. Reinsurers Named

National Underwriter P&C released a chart of the top 25 reinsurers in the U.S., based on underwriting results, with information gleaned from the NAIC Annual Statement Database via Highline Data. Topping the list were Swiss Reinsurance America Corp., Transatlantic Reinsurance Co., and National Indemnity Co., respectively.

Japanese Mutual Zenkyoren Poised to Test Reinsurers' Claim-Processing Abilities

In the wake of the March 2011 earthquake in Japan, Zenkyoren, the giant Japanese mutual, is prepared to send out collection notifications to 80-plus reinsurers. With its estimated $7.9 billion loss, the magnitude of Zenkyoren's claims will test the processing speed and abilities of the reinsurance industry.

Arch Capital Profits Pummeled by Catastrophes

Arch Capital Group Ltd., a Bermuda-based (re)insurer, reported that its first-half profit fell by 75 percent to $111.2 million from $447.5 million of the previous year. The tornado activities in the U.S. and the New Zealand earthquake, among other things, contributed to $95 million in catastrophe losses in the second quarter, which compares with $7 million for the same period in 2010.  

Beachcroft-Davies Arnold Cooper Merger

Beachcroft LLP and Davies Arnold Cooper LLP, U.K. law firms specializing in insurance, announced their merger to create a full-service international firm. The new law firm will have 230 partners and more than 2,000 staff members generating $285 million in revenue.

Validus' $3.2B Transatlantic Bid Goes Hostile

Validus Holdings Ltd. is taking its $3.2 billion bid for merger with Transatlantic Holdings Ltd. directly to shareholders after the target firm's board allegedly insisted on having veto power. Validus' offer allows Transatlantic shareholders to get 1.5564 voting common shares and $8 cash for each share they own.

New Space Era Opens New Opportunities for Insurers

NASA has awarded contracts and funding to numerous commercial space companies as its shuttle program comes to an end. Underwriters are currently reviewing the feasibility of insurance products to cover third-party liabilities and damage to the spacecraft and astronauts, which are required for commercial flights in the U.S.

Lancashire to Move Tax Base from Bermuda to U.K.

Bermuda-based insurer Lancashire Holdings Ltd. announced a plan to move its tax base to U.K. The decision came after the proposed reforms to the U.K.'s controlled foreign companies (CFC) rules were recently announced.      

U.S. House of Representatives Votes for Flood Insurance Reform Act

The U.S. House of Representatives approved the Flood Insurance Reform Act of 2011 to overhaul the much-troubled Federal Emergency Management Program's flood insurance program. The reform, among other things, would limit the number of flood insurance policies that government can manage.

RenaissanceRe Profits Plummet Due to Catastrophic Losses

Bermuda-based (re)insurer RenaissanceRe reported that its first-half net profit fell 41 percent to $223 million from $375 million last year, while second-quarter profit fell 88 percent. The net profits for the quarter were impacted by $71 million of catastrophe losses from the tornadoes in the U.S., according to the (re)insurer's CEO.

AQR Capital Management Forms a New Reinsurance Group

Investment management firm AQR Capital Management has created a reinsurance group. The new group is reviewing investment strategies uncorrelated with traditional markets and hedge funds.

Aon Corp. Ranks No. 1 on World's Largest Insurance Brokers

According to Business Insurance, Chicago-based Aon Corp. ranked No. 1 on its 2011 ranking of the world's largest insurance brokers. Aon's 2010 revenue was approximately $10.61 billion, a 43.1 percent increase from the previous year, pushing the former champ Marsh & McLennan Cos. Inc. to the second spot for the first time since the ranking began in the '70s.

Top 5 Reinsurance Companies with the Highest Debt-to-Equity Ratio

Greenlight Capital Re, Reinsurance Group of America, Maiden Holdings, Flagstone Reinsurance, and Transatlantic Holdings are the top five companies in the reinsurance with the highest debt-to-equity ratio. The ratio generally indicates that a company has financed its growth largely with debt.

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.

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