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Insurance Law

Goldberg Segalla’s Reinsurance Review – February, 2011


Circuit Court Reverses District Court and Determines that there is No Right to Injunction to Stop Arbitration Because No Showing of Irreparable Injury

District Court Dismisses Case against British American Sua Sponte For Lack of Subject Matter Jurisdiction

District Court Concludes that Insurer Cannot Avoid Stay of Litigation in Favor of Arbitration Where Arbitration Was Between the Insured-Contractor and Owner of Construction Project and Arbitration Was Demanded Immediately After Answers Were Filed

First Department of New York Reinstates Reinsurance Action

Insurer Sue Three Reinsurers to Recover Amounts Paid in Loss Settlements For Asbestos-related Injuries on Behalf of ACandS subscribers may access the enhanced versions of the cases above. Non-subscribers may access the free, unenhanced versions on lexisONE, if available.



(CIVIL ACTION NO. 09-3682, JANUARY 31, 2011)
2011 U.S. App. LEXIS 1931
[ / lexisONE]

Circuit Court Reverses District Court and Determines that There is No Right To Injunction To Stop Arbitration Because No Showing Of Irreparable Injury

This case involves a dispute between the risks covered by a reinsurance agreement.  Initially, the parties submitted their dispute to arbitration under the contracts broad arbitration clause.  The arbitrator made an award to the insurance companies and the award was confirmed by the district court.  The reinsurer was dissatisfied and refused to pay which led to a new arbitration.  For its arbitrator, the insurance company chose the same arbitrator who was involved in the first arbitration.  Before the panel commenced its hearing, the reinsurer filed this suit.

The reinsurer initially asked to vacate the prior arbitration decision.  However, the district court ruled that the statute of limitations had passed.  The reinsurer then reconsidered whether or not the insurance company's arbitrator could serve on the current panel.  It argued that since the arbitrator participated in the prior arbitration, it was not a disinterested party.  The Circuit Court agreed and ordered an injunction preventing the arbitration and the insurance company appealed.

In order to grant equitable relief the petitioner must demonstrate irreparable injury.  The Circuit Court reversed the district court's injunction finding no irreparable injury.  Specifically, the reinsurer agreed to the second arbitration.  In addition, forcing the parties to wait until the arbitration is completed will not unalterably deprive the party of any rights.  The only potential injury in waiting for the arbitrators to make an award is delay and the out-of-pocket costs of paying the arbitrators and legal counsel, none of which are irreparable injuries.  In addition, the insurance company's arbitrator is not an interested party because interested party means someone with a stake in the outcome.  Having failed to show that the arbitrator had a financial stake in the outcome, mere knowledge does not make him an interested party that would disqualify him from serving.

IMPACT (ARBITRATION):   This is an important decision in that the Circuit Court upheld the scope and substance of private arbitration disputes.  In the district court decision, the court seemed to attack the scope and substance of the arbitration panel's decision.  By upholding the arbitration process and decision, this decision may assist in reducing collateral attacks on arbitration panel's decision.



(CIVIL ACTION NO. CV 10-3736 PSG, JANUARY 11, 2011)
2011 U.S. Dist. LEXIS 4272

District Court Dismisses Case against British American Sua Sponte For Lack of Subject Matter Jurisdiction

This reinsurance dispute arises from claims involving the return of excess deposits and premiums from certain reinsurance contracts entered into by plaintiff, Health Facilities of California (HFC), an incorporated risk retention group.  Defendants, British American Insurance Group (BAIG) and Peter Myrtle, domiciled in Louisiana, are acting as reinsurance intermediaries transmitting premiums payments, payments of return premium and collecting payments.

HFC entered into a reinsurance contract with the defendants.  However, before BAIG calculated the precise premiums, HFC provided a deposit upon execution of the contract with the understanding that any excess deposit would be returned.  After the premiums on the reinsurance contract were calculated, HFC was allegedly owed $2.1 million in excess deposits.  When HFC demanded a return of same, BAIC instructed plaintiff to apply the money to further insurance premiums, against HFC's wishes, who then brought suit.

Previously, the court issued an Order to Show Cause regarding the court's subject matter jurisdiction and its concerns that HFC was not diverse from defendants BAIG and Peter Myrtle.  The complaint alleged that HFC is a Nevada domiciled mutual insurance company organized and operated under the federal Liability Risk Retention Act of 1986.  However, the complaint was silent as to HFC's principal place of business, stating only that HFC issued professional and general liability insurance policies to California health facilities and that all of HFC's insurance transactions and risks are in California.  The court noted that while it was undisputed that HFC's Board of Directors, President, Secretary and Treasurer controlled the management of the corporation, the issue was from where did they primarily operate.

Upon a detailed inquiry into the facts of the case, the court found a lack of diversity, dismissing the case for lack of subject matter jurisdiction.  Specifically, the court determined that the plaintiff failed to carry its burden in establishing a complete lack of diversity among the parties.  The Board makes decisions, at least in part, during conference calls, where four of the seven Board members are physically located in California and three are not.  Based on Hertz v. Friend, 130 S. Ct. 1181 (2010) [ / lexisONE], the court noted that "'a corporation shall be a citizen of any state by which it has been incorporated and of the state where it has its principal place of business'" thus providing dual citizenship to any corporation meeting this criteria.

Here the court was not persuaded that because the majority of the Board of Directors were located in California and some board meetings took place in California via telephone conferences that the principal place of business was, indeed, California.  On the contrary, defendants showed that HFC's President, Secretary, and one Director were located in Louisiana, which was also the only place identified as having an office and was listed on the firm's website.  The court further determined that plaintiff's allegations as to the location of several board members and that the concentration of their risks were in California were unavailing and spoke to the corporation's "'center of gravity' a diversity consideration dispensed with in Hertz."

Consequently, plaintiff's failure to carry its burden in identifying the single principal place of business was fatal in establishing diversity and federal subject matter jurisdiction.  Moreover, as plaintiff appeared to share citizenship in Louisiana with BAIG and Myrtle, the court's basis for subject matter jurisdiction was destroyed.

IMPACT (REINSURANCE):   This case demonstrates the difficulty at times in establishing jurisdiction.  Practitioners should be mindful, as this case illustrates, of the forum in which to commence a lawsuit.


(CIVIL ACTION NO. 10-1241, JANUARY 6, 2011)
2011 U.S. Dist. LEXIS 1344

District Court Concludes that Insurer Cannot Avoid Stay of Litigation in Favor of Arbitration Where Arbitration Was Between the Insured-Contractor and Owner of Construction Project and Arbitration Was Demanded Immediately After Answers Were Filed

An insured contractor entered into a construction contract with a project owner.  The parties' contract included an arbitration agreement.  The insurer issued payment and performance bonds on the project but had no arbitration agreement with the project owner.  The owner filed suit in federal court against the contractor and its insurer, then sought a stay of the proceeding to compel arbitration with the contractor.  The insurer opposed the motion, arguing the Federal Arbitration Act ("FAA") did not apply because the dispute did not "involve commerce," it was not a party to the arbitration agreement, and the owner waived the right to arbitration by filing the lawsuit.

The District of Kansas flatly rejected the insurer's argument that the contract for construction services did not "involve commerce."  The FAA's "involving commerce" language is construed broadly to mean "affecting commerce" and signals the broadest permissive exercise of the Commerce Clause power of Congress.  The parties' construction contract fell within the ambit of the FAA.

The Court also held that the insurer was not entitled to a stay of the proceeding even though it was not a party to the arbitration agreement between its insured contractor and the project owner. Federal policy favoring arbitration is sufficiently strong and it may be invoked to stay a proceeding even where all participants to the proceeding are not party to the arbitration agreement.

Finally, the Court concluded the owner did not waive its right to arbitration by first filing the lawsuit.  The Court cited federal law which allows a party to initiate a legal proceeding in order to preserve a statute of limitations and then demand arbitration shortly thereafter.  In instances where a party files a lawsuit, litigates for a length of time, then attempts to invoke arbitration "on the eve of trial", it might be precluded from invoking an arbitration agreement.  But in this instance, the owner filed suit and immediately demanded arbitration.  The insurer's request to oppose arbitration was denied.

IMPACT (ARBITRATION):  This case highlights the significance and difficulties in enforcing an arbitration provision as to non-signatories.  While there is quite a bit of case law on the subject, the decision here should provide practitioners with some guidance regarding the arguments binding non-signatories to arbitration agreements.




2011 NY Slip Op 264  [ / lexisONE]

First Department of New York Reinstates Reinsurance Action

The above-mentioned reinsurance dispute arises from claims that the Equitas defendants were at the center of a conspiracy to violate New York's Anti-Trust law (General Business Law §340, the Donnelly Act) by eliminating claims service competition to pre-1993 non-life retrocessional reinsurance coverage (i.e., the reinsurers that provide coverage to the insurers or cedents, that provide coverage to the underlying policyholders).  The trial court granted defendants motion to dismiss and the retrocedent appealed.

Specifically, the complaint alleged that the conspiracy originated in 1996 when the Lloyds' syndicate was faced with financial ruin due to potentially crippling losses that stemmed from unexpectedly large claims on certain pre-1993 non-life lines of business (i.e., long-tail asbestos and environmental coverage).  Plaintiff alleged that cost savings from the elimination of claims service competition with respect to the pre-1993 business were realized over the ensuing years at its expense and that of retrocedents.  According to plaintiff, Equitas engaged in claims payment behavior that retrocessionaires, subject to competitive constraints, could not have engaged in (i.e., denying claims, and, when not denied, were paying less and later), resulting in plaintiff  suffering millions of dollars in damages.

The Appellate Court held that it was an error to dismiss the plaintiff's complaint since it properly alleged defendants' conduct in the handling of its claims service business and the competitive restraints it was subject to, as well as the resulting damages.  The court held that plaintiff sustained anti-trust injury because the quality of what it purchased, retrocessional coverage with the attendant claim-handling service, was adversely affected by an agreement eliminating competition over claims-handling.

In addition, the court held that it was improper to dismiss the complaint because the trial court did not discuss if the retrocedent adequately alleged a worldwide market.  Also, the Foreign Trade Antitrust Improvements Act, 15 USCS §6a, did not deprive New York courts of subject matter jurisdiction over the retrocedent's antitrust claims because the retrocedent did not claim the anticompetitive conduct affected competition over "new" retrocession business, and the retrocedent's allegations of injury in New York sufficiently supported the adverse competition effects.

Based on the foregoing, the trial court's decision was reversed and the complaint reinstated.

IMPACT (REINSURANCE):  This decision reinforces, at least in New York, that pleadings are to interpreted liberally to afford parties to maintain causes of actions despite not having all of the facts when the action is commenced.  The sum and substance of the Appellate Division's decision seems to reflect that.




(JANUARY 19, 2011)

Insurer Sue Three Reinsurers To Recover Amounts Paid in Loss Settlements For Asbestos-related Injuries on Behalf of ACandS

On January 19, 2011, Travelers Casualty and Surety Company ("Travelers") filed suit in the U.S. District Court for the District of Connecticut against three reinsurers who allegedly failed to pay valid claims.  Travelers is seeking a declaration of coverage and damages for breach of contract. The suit involves reinsurance treaties referred to as Travelers Blanket Excess of Loss Reinsurance Agreements, covering April 1976 through April 1979.

In its Complaint, Travelers alleges that the reinsurance treaties obligated the reinsurers to indemnify Travelers for all losses paid out by Travelers.  In addition, the treaties considered all losses that resulted from a series of accidents, occurrences and/or causative incidents having a common origin to be considered as having resulted from a single accident or occurrence.  The treaties further provided that the reinsurers would not second-guess settlements made by Travelers, would abide by the loss settlements of Travelers, and would pay amounts to Travelers immediately upon proof of loss settlement by Travelers.

At issue in the Complaint are loss settlements for asbestos-related injury claims made against Travelers' insured, Armstrong Contracting and Supply Company ("ACandS").  Travelers made indemnity and defense payments on behalf of ACandS for pre-1976 policies until such policies' limits were exhausted.  Then, in 2007, Travelers settled post-1976 liability by paying $449 million to the ACandS Asbestos Settlement Trust.  Travelers submitted the $449 million settlement as a single loss under the reinsurance treaties, but, Travelers alleges, the reinsurers wrongly refused to pay their respective shares of Travelers' loss settlements as they were obligated to do under the reinsurance treaties.  In its Complaint, Travelers alleges Nationwide is liable for $2.7 million, National Casualty is liable for $2.76 million, and Wausau is liable for $693,000 under the treaties.



(NOVEMBER 30, 2011)

Reinsurer Files Declaratory Judgment Action to Disqualify Law Firm's Representation of Insurer

Certain Underwriters at Lloyd's London ("Lloyd's") issued a reinsurance policy to Liberty Mutual Insurance Company ("Liberty").  After Lloyd's refused to pay reinsurance billings, Liberty commenced an arbitration against Lloyd's on April 6, 2010.  Liberty retained the law firm of Sidley Austin LLP to render advice in regard to its potential claims under the reinsurance agreements.  Resolute Management Inc. ("Resolute") manages the United States direct insurance claims for Lloyd's on insurance contracts entered into prior to 1993.  Thereafter, Resolute contacted Sidley Austin LLP concerning the possible representation on an appeal of an injunction entered in a coverage action between Lloyd's and Teck Metals Ltd.

Lloyd's commenced a declaratory judgment action seeking a preliminary and a permanent injunction disqualifying Sidley Austin LLP from acting as counsel for Liberty in the arbitration on the grounds that the firm has a concurrent conflict in violation of Rule 1.7(a) of the Massachusetts Rules of Professional Responsibility because no informed consent had been given by Lloyd's.  The complaint alleges that Sidley Austin must have been aware of the conflict but failed to disclose during various communications.

The complaint contends that Rule 1.7 of the Massachusetts Rules of Professional Conduct prohibits a lawyer from representing a client against another client unless each client consents after consultation.  Rule 9.1(c) of the Massachusetts Rules of Professional Conduct specifies that "consultation" denotes communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.  The complaint asserts that Sidley Austin did not obtain Lloyd's consent after consultation in regard to its concurrent conflict of interest. Sidley Austin did not inform Lloyd's that it had been retained in the Teck matter and that the firm was also representing and advising Liberty in regard to a potentially large reinsurance claim against Lloyd's that included a possible claim of willful and intentional unfair or deceptive practices.  Additionally, the firm sought Resolute's signature on the engagement letter without advising Resolute of the filing of the arbitration demand.  Moreover, the engagement letter excludes from the scope of the conflict consent any conflicting representation that is "substantially related" to the scope of the firm's representation set forth in the letter.  The complaint alleges that a question of law involved in the Teck matter is also at issue in the arbitration, the two matters are substantially related.  Accordingly, even if the engagement letter did constitute a valid consent after consultation, that consent would not apply to Sidley Austin's representation of Liberty against Lloyd's. The complaint alleges that since the firm did not receive consent to represent Liberty against Lloyd's it deprives Lloyd's of the loyalty which is an essential element of the lawyer's relationship to a client.

The complaint alleges that allowing Sidley Austin to continue to represent Liberty inflicts immediate and irreparable injury to Lloyd's.  Therefore Lloyd's is seeking a preliminary and permanent injunction requiring Sidley Austin to withdraw from representing Liberty in the arbitration.


Bankrupt Lehman sued by Pulsar Re alleging $450 million looting of Lehman Re's assets

Bermuda-based Pulsar Re filed suit against bankrupt Lehman Brothers Holdings Inc. alleging that Lehman improperly took $450 million in assets from now defunct Lehman Re in exchange for liquid assets.  Pulsar Re joins numerous other creditors seeking recovery in Lehman's Chapter 11 bankruptcy action.

Lexington sues Tokio Marine seeking $7.4 million related to 9/11 property damage payments

Lexington Insurance Co., seeking to recovery $7.4 million in reinsurance coverage for 9/11 property damage claims by the Port Authority of New York and New Jersey, has sued Tokio Marine & Nichido Fire Insurance Company, Ltd. in the Southern District of New York.  The Port Authority sustained more than $1 billion in property damage of which Lexington and American Home Insurance Company paid $11 million and now seek reinsurance from Tokio Marine.

TIG and Arrowood agree to arbitrate reinsurance dispute involving $2 million in settlement payouts for landfill operations

TIG Insurance Company (TIG) has agreed to dismiss its lawsuit against its reinsurer, Arrowood Indemnity Co.  TIG was seeking more than $2 million paid by TIG to settle a dispute over coverage for losses from the operation of a landfill in California.  TIG alleged Arrowood breached its obligations under a facultative reinsurance contract between the parties.

Aviva unveils plans to bolster share performance, generate more cash

Aviva PLC, Britain's second largest insurer, announced that it is paying down nearly £750 million of its debt, reducing the deficit of its defined-benefit pension scheme to £400 million from £1.7 billion, and is moving to disclosure of a more conventional measure of embedded value, in efforts to bolster its share price and generate cash.  The announcement follows the removal of Aviva's head of European business as well as the announcement of the acquisition of River Road Asset Management of Louisville, Kentucky, a firm with $3.6 billion of assets under management.

Lloyd's of London prepares to spend £300 million to comply with New European solvency rules

Lloyd's chairman, Lord Levene, projects Lloyd's will spend nearly £300 million in order to comply with new Solvency II rules that will be in force in 2013.  The new rules are designed to ensure that insurers hold capital in proportion to the risks they underwrite.

Former insurance broker sentenced to four years in $20 million insurance scheme

A former partner of a New Jersey-based insurance broker was sentenced to four years in prison and ordered to pay $22 million in restitution following his conviction in a loan fraud scheme. The former broker admitted to preparing applications for premium financing for companies that did not need the coverage, submitting the fake applications, then sending the loans back to his firm on behalf of its customers.

Washington State fines Chubb subsidiaries $534,000 for repeated violations

Six subsidiaries of Chubb & Son, Inc. have been fined $1,000 for each of the 534 violations of state law for failing to report reasons for changes in insurance policy rates.  The companies agreed to pay the fines in order to be able to continue writing new policies in the State.

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.

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

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