Goldgerg Segalla’s Reinsurance Review – January, 2011

Goldgerg Segalla’s Reinsurance Review – January, 2011

IN THIS MONTH'S EDITION:

Court Concludes that Arbitration Clause is Broad Enough to Cover Dispute

District Court Concludes that Insurer Has Right To Intervene In Suit by Policyholder To Obtain Proceeds Of Judgment From Reinsurer

District Court Granted Summary Judgment to Insurer on Rescission and Exclusion Contained in Policy

Pennsylvania District Court Grants Defendants' Demand For Claim And Underwriting Materials But Denies Request For Reinsurance Agreements

Appellate Court Reverses Lower Court and Allows Claims Involving Reinsurance Reserves Against J.P. Morgan

Amendment to New York's Credit for Reinsurance from Unauthorized Insurers Regulation Issued

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 DISTRICT COURT DECISIONS

SOUTHERN DISTRICT OF MISSISSIPPI

JOINER  V. PERFORMANCE INSURANCE SERVICES, INC.
(CIVIL ACTION NO. 10-CV-235  DECEMBER 16, 2010)
2010 U.S. Dist. LEXIS 133358
[lexis.com]

Court Concludes that Arbitration Clause is Broad Enough to Cover Dispute

In a dispute over whether to compel arbitration, an insurance agent in Mississippi entered into a producer agreement with an Indiana company pursuant to which it solicited and submitted 80 insurance policies.  After a complaint was made by the agent to the Mississippi Department of Insurance regarding the Indiana company's practice of charging an inspection fee on each policy regardless of whether or not an inspection was being performed, the Indiana company sent a letter stating that it was terminating the agreement.  The agent subsequently filed a suit in federal court in Mississippi for tortious interference with contractual relations and breach of duty of good faith and fair dealing, alleging that the Indiana company improperly terminated the agreement to punish the agent for filing the complaint.

The Indiana company sought to dismiss the action without prejudice and an order that the agent must submit the claims to arbitration pursuant to the agreement's mandatory arbitration clause which provides:

In the event of any dispute, claim or controversy concerning, arising out of or relating to this agreement, its effect, the breach thereof, or the transactions contemplated by it, the same shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.

The arbitration clause stated that the arbitration proceedings must take place in Indiana and that the results of the arbitration shall be final and binding.  There were no exceptions or limitations to the arbitration clause.  The agent contended that the arbitration clause did not apply to its claims because it did not bring a breach of contract action.

Citing the acceptance and enforceability of such arbitration clauses under 9 U.S.C.§ 2, the court noted that the agreement was valid and was not limited to breach of contract claims.  The court held that broad arbitration provisions such as the one in this action are deemed to cover all possible claims that might arise.  Determining that it would not be unconscionable to compel arbitration, the court further held that there were no legal constraints to prevent it from enforcing the arbitration.

IMPACT (ARBITRATION):   As discussed previously, courts in similar contexts will view an arbitration clause as broad as possible provided the clause is clear, concise as to scope, and is not prohibited by any state or federal law.

 

EASTERN DISTRICT OF NEW YORK

CALLON PETROLEUM CO. V. NATIONAL INDEMNITY
(CIVIL ACTION NO. 06-CV-0573  DECEMBER 23, 2010)
2010 U.S. Dist. LEXIS 136056 [
lexis.com]

District Court Concludes that Insurer Has Right to Intervene in Suit by Policyholder to Obtain Proceeds of Judgment from Reinsurer

In 2000, plaintiff policyholder obtained a judgment against defendant insurer intervener out of a surety bond issued by insurer.  The insurer failed to satisfy the judgment and the policyholder then sought a direct action against the reinsurer to collect the judgment out of the reinsurance proceeds.  Despite failing to satisfy the bond, the insurer made a motion to intervene in the insured's action against the reinsurer.

In deciding whether the insured could continue directly against the reinsurer for the proceeds from the judgment against the insurer, the District Court held that insurer was a proper intervening party because it satisfied the four elements for intervening, namely the insurer: (1) filed a timely motion; (2) showed an interest in the litigation; (3) showed that its interest may be impaired by the disposition of the action; and (4) showed that its interest is not adequately protected by the parties to the action.  Specifically, the insurer demonstrated an interest in the litigation because the policyholder was seeking to recover reinsurance proceeds that the reinsurance agreement assigned to insurer.  In addition, the insurer met the minimal burden of showing that its interest may not be adequately protected in the litigation because the reinsurer is potentially indifferent to whom it must pay.

The District Court did not rule whether the insurer waived its rights to intervene due to its prior inability to satisfy the insured's judgment.  It is clear that the District Court focused solely on the procedural issue of whether the insurer can properly intervene in a direct action by the insured against the reinsurer. 

IMPACT (REINSURANCE):  This is an interesting case.  Here, we have an insurer who did not satisfy a judgment but proceeded to intervene when the insured commenced a direct action against the reinsurer.  Unless outlined in the reinsurance agreement, there are limited circumstances in which the underlying insured can seek proceeds directly from the reinsurer.  We will continue to monitor this case when a full and final determination is rendered. 

 

SOUTHERN DISTRICT OF FLORIDA

GREAT LAKES REINSURANCE (UK) PLC V. MORALES
(CIVIL ACTION NO. 09-CV-20184  DECEMBER 9, 2010)
2010 U.S. Dist. LEXIS 130000
[lexis.com]

District Court Granted Summary Judgment to Insurer on Rescission and Exclusion Contained in Policy

Plaintiff is a marine insurance company which issued a policy affording Hull & Machinery coverage on a 2005 33-foot Avanti power vessel owned by Romilio Morales.  On October 29, 2008, Jorge Barreiro was the operator of the vessel.   Mr. Barreiro put the vessel on its trailer, parked the trailer in the driveway of his residence and went to work the next morning.  Barreiro's residence did not have a fence or gate.  Barreiro's wife noticed the vessel was missing the next afternoon.  Morales filed a claim and demanded payment of an amount equal to the insured value of the vessel, claiming a total loss of the vessel as a result of the theft.

The insurer moved for summary judgment, arguing that it was entitled to rescind the insurance policy on the ground that it was void because the application contained material misrepresentations of Morales' experience, or lack thereof, in operating and owning vessels.  The application for the policy covering the vessel represented that Morales was the owner of the boat and had over twelve years experience in both the ownership and operation of boats.  During his deposition, however, Morales testified that he had never owned a vessel and that the information about his experience was incorrect.  Furthermore, Morales' application for coverage represented that he had prior boat ownership experience.  Mr. Morales testified that he never owned a boat and that the information on the application was also incorrect.

The court held that defendant's misrepresentations concerned essential facts that were material to plaintiff's decision to issue an insurance quote and a policy of marine insurance thereafter.  The application forms specifically inquired as to defendant's prior boating and ownership experience.  Accordingly, the court held that plaintiff was entitled to rescind the policy, and summary judgment was appropriate.

Additionally, the court granted summary judgment on the basis of an exclusion precluding coverage for theft of the scheduled vessel while on a trailer unless the vessel is situated in a locked and fenced enclosure or marina and there is visible evidence of forcible entry and or removal made by tools, explosives, electricity or chemicals.  The court held that the exclusion in the policy was unambiguous and provided no coverage.

IMPACT (REINSURANCE):  This case exemplifies the standard that a clear and concise policy with applicable exclusions will be applied to the broadest extent possible as an insurance contract is a contract to which the terms and conditions speak for themselves.  Based upon the facts in this case, the District Court's decision was expected.  

 

MIDDLE DISTRICT OF PENNSLYVANIA

TIG INSURANCE CO. TYCO INTERNATIONAL LTD
(CIVIL ACTION NO.  08-CV-1583  NOVEMBER 12, 2010)
2010 U.S. Dist. LEXIS 120342 [
lexis.com]

Pennsylvania District Court Grants Defendants' Demand For Claim And Underwriting Materials But Denies Request For Reinsurance Agreements

This case involved the interpretation of an excess insurance policy issued by TIG and whether the policy covered Grinnell's payment in settlement of the underlying lawsuit arising out of a warehouse fire in May, 1997 due to a faulty sprinkler system.  An endorsement to the policy extended coverage to "prior acts" that occurred before the policy's inception but the same endorsement also excluded "any claims of which the Named Insured had actual or constructive notice prior to the commencement of coverage under this policy."   The fire took place during the "prior acts" period.

TIG contended that coverage was barred because Grinnell had notice of the fire before the commencement of the policy.  Grinnell refutes the allegation and claims that the exclusion must be construed to apply only if the insured (Grinnell) had notice of a loss in excess of the policy's attachment point, i.e. $60 million, prior to the commencement of the policy.

Grinnell sought TIG's claims and underwriting manuals, information regarding reinsurance agreements and reserve information arguing that these documents would provide insight into the meaning of the policy's prior acts endorsement which bars from coverage "claims resulting from an occurrence of which the Named Insured had actual or constructive notice prior to the commencement of the policy."

The court granted Grinnell's requests for production of the claims and underwriting manuals, holding that whether an exclusion applies was relevant to Grinnell's counterclaim, and these materials were relevant to determining whether an ambiguity existed, therefore aiding in its resolution.

However, the court denied the remaining requests for information regarding reinsurance agreements holding that this information is more remote than the underwriting manuals in its efficacy at resolving the policy language.  Also, the court noted that TIG and its reinsurers may agree to a term that is not ipso facto probative of how the term is applied in the policy.  Likewise the court denied the Grinnell's request for reserve information as too speculative to provide good cause for discovery.  The Court also denied TIG's request for Grinnell's litigation file because there was no common interest in the facts of this case and the underlying action.

IMPACT (REINSURANCE):  The case demonstrates a common issue involving whether reinsurance agreements are discoverable. In this case, as the court demonstrated, the reinsurance agreements are typically separate and distinct from the main coverage action and to request that specific information may not be relevant to the issues in the main action.  Another argument typically raised by a reinsurer is that the information is privileged.  Case law is mixed as to whether such reinsurance information is discoverable and required to be produced.  

 

STATE COURT DECISIONS

NEW YORK

ASSURED GUARANTY V. J.P. MORGAN INVESTMENT MANAGEMENT
(NEW YORK APPELLATE DIVISION, FIRST DEPARMENT, NOVEMBER 23, 2010)

2010 NY Slip Op 8644 [lexis.com / lexisONE]

Appellate Court Reverses Lower Court and Allows Claims Involving Reinsurance Reserves Against J.P. Morgan

A U.S. based life reinsurance company which had reinsured more than 370,000 policies with an aggregate insured amount of $36.7 billion formed a new company and turned over to the company its 2004 term life reinsurance liability.  The company paid for its reinsurance reserves by issuing preference shares and bonds.  Assured Guaranty guaranteed the company's payments to note holders with one of the bond series issued.  The company then entered into an investment management agreement with J.P. Morgan, to which Assured Guaranty was a third-party beneficiary entitled to enforce the agreement.  Although the agreement was governed by New York law, it provided that "with respect to the assets held in the Reinsurance Trust Account, investment must be made in compliance with . . . Chapter 13 of the Delaware Insurance Code."

A monthly statement showed "precipitous declines" in the value of the assets in the company's portfolio.  Subsequently, in correspondence dated September 24, 2007 the reinsurance company exercised its contractual right to amend the investment guidelines and directed J.P. Morgan to make all future investments "in cash, cash equivalents, money market securities or AAA-rated obligations" of government agencies.  The guarantor later sued the investment manager alleging breach of fiduciary duty, negligence, and breach of contract.  Specifically, the guarantor alleged that the investment manager improperly invested all of the account at issue in risky subprime real estate mortgage investments.  The Supreme Court, in New York County, found that the fiduciary and negligence claims were preempted by the Martin Act, New York General Business Law §§ 352-359, and dismissed the contract for gross negligence, and willful misconduct claims.  The guarantor appealed.

On appeal, the Appellate Division, First Department found initially that the Martin Act did not preempt otherwise validly pleaded common-law causes of action.  The Martin Act "authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State."  The Appellate Court held that while a private action cannot be maintained based upon the provisions of the Martin Act, common law causes of action that are properly pleaded are not preempted by the Act.  Accordingly, the court held that the guarantor's fiduciary and negligence claims were not preempted.

The Appellate Division also reinstated the guarantor's cause of action for breach of contract. These claims were based upon an alleged violation of Delaware Insurance Code ch. 13.  Contrary to the investment manager's argument, the court found that Delaware Code §1323 was not limited to individual mortgages and included references to bonds, notes, or other evidences of trust representing first or second liens on real estate.  The court further noted that a 90-day limit to objections set forth in the parties' agreement was reasonable and operated as a statute of limitations.  Finding that the September 24, 2007 amendment to the investment guidelines constituted a written objection to the investment manager's acts and transactions, the court held that only those claims that accrued before June 26, 2007 (90 days prior to September 24) were barred.  Accordingly, the Supreme Court's order was modified to reinstate the contract claims that accrued on or after June 26, 2007, as well as claims for breach of fiduciary duty and gross negligence that accrued on or after that date.

IMPACT (ARBITRATION):  This decision and the ramifications of allowing this dispute to continue against J.P. Morgan may be significant.  The court here allowed common law New York claims to continue and determined that the federal act did not apply and did not preempt state claims.  We will continue to monitor this action and see if J.P. Morgan files a dispositive motion shortly. 

 

OTHER NEWS AND NOTES

Amendment to New York's Credit for Reinsurance from Unauthorized Insurers Regulation issued.

On January 1, 2011, amendments to New York's Regulation No. 20 (11 NYCRR 125), Credit for Reinsurance, took effect.  The amended regulation contains numerous changes, including repeal and renumbering of sections as well as major modification to credits that insurers may take as to recoverable reinsurance available from unauthorized reinsurers.  

Section 125.1 was repealed and a new Section 125.1 was promulgated which permits ceding insurers "act with financial prudence" when entering into reinsurance arrangements.  The new Section 125.1 provides 8 risk criteria that ceding insurers should consider.  Section 125.1 also requires a ceding insurer to manage its reinsurance recoverable proportionate to its own book of business and to diversify its reinsurance program.

The most notable amendment to Regulation 20 was the amendment of Section 125.4 which was renumbered as the new Section 125.2 and was modified significantly. The amended regulation allows a ceding insurer to take a credit, as an asset or deduction from reserves for reinsurance recoverable by unauthorized insurers that maintain financial strength ratings from at least two rating agencies, such as S&P, Moody's, Fitch, or A.M. Best.  The amount of credit the ceding insurer is allowed to take is based upon the rating of the reinsurer, and can be no greater than the credit allowed for the lowest rating as provided in the table below:

Credit

Allowed

Best

S&P

Moody's

Fitch

100%

A++

AAA

Aaa

AAA

90%

A+

AA+, AA, AA-

Aa1, Aa2, Aa3

AA+, AA, AA-

80%

A, A-

A+, A, A-

A1, A2, A3

A+, A, A-

25%

B++, B+

BBB+, BBB, BBB-

Baa1, Baa2, Baa3

BBB+, BBB, BBB-

0%

B, B-, C++,

C+, C, C-,

D, E, F

BB+, BB, BB-, B+,

B, B-, CCC, CC, C,

D, R, NR

Ba1, Ba2, Ba3,

B1, B2, B3, Caa,

Ca, C

BB+, BB, BB-, B+,

B, B-, CCC+, CCC,

CCC-, DD

The collateral reduction credits are consistent with Florida's regulatory scheme and NAIC recommendations.  New York's new credit provisions should not have a lasting impact, however, because federal law will supersede the state regulation, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will be effective July 21, 2011.

 

AIG agrees to pay $146.5 million in fines for misreporting workers comp premiums

AIG has agreed to pay $146.5 million in fines, taxes and assessments to settle claims by insurance regulators in all 50 states concerning allegations that AIG misreported more than $2 billion in workers compensations premiums. The alleged violations occurred largely prior to 1996.

 

Citi Insurance affiliates pay $2 million for violating NY insurance laws

Three affiliates of Citigroup, Inc. paid New York $2 million in fines for violations of New York insurance laws and regulations from 2003 to 2007.  The fines related to the Citi Insurance companies' life insurance and annuity contracts practices and involved alleged failure to disclose information comparing policies and other incomplete or inaccurate information.

 

Life settlement company LTAP files for Chapter 11 bankruptcy protection

LTAP US LLLP, a life settlement company filed for bankruptcy protection due to insurance policies failing to mature, lenders' refusing to provide funds, and an inability to see policies. LTAP, based in Atlanta and managed by Berlin Atlantic Holding GmbH & Co., sought protection of the value of its portfolio above the $222.5 million owed to secured lender, Wells Fargo Bank NA.

 

Travelers sues R&Q to recover $8.5 million in reinsurance proceeds from asbestos claims

Travelers Casualty and Surety Co. filed a complaint against R&Q Reinsurance Co. in federal court in Connecticut seeking $8.5 million paid out for asbestos claims.  At issue are a series of reinsurance treaties subscribed to by a number of companies, including R&Q which covered four primary policies issued by Travelers to Armstrong Contracting and Supply Co.  In 2007, Travelers paid $449 million to the Asbestos Settlement Trust and submitted bills to its reinsurers.  Travelers allege R&Q refused to pay the $10.7 million billed to R&Q.

 

Proposed Disclosure Requirements for Credit Insurance Criticized by Insurers

A Federal Reserve Board initiative to make credit insurance subject to strong disclosures under the Truth In Lending Act has met strong resistance from representatives of life, property and casualty insurers.  The proposed disclosures would relate to the sale of credit insurance when selling a financial product.  Among other things, the insurance representatives assert that the Board's proposed requirements directly conflict with state law disclosure requirements and therefore, violate the McCarran-Ferguson Act which directs that state regulators are the primary regulators of insurers.

 

The Hartford to sell third-party claims administrator for $278 million.

The Hartford Financial Services announced it is selling its third-party claims administrator, Specialty Risk Services, LLC, to Sedgwick Claims Management Services for $278 million, in a deal expected to close in early 2011.  The move is said to be consistent with The Hartford's new growth strategy announced after the company repaid the $3.4 billion to the U.S. Treasury it had borrowed under the Troubled Asset Relief Program.

 

FEMA announces new flood insurance program

The Federal Emergency Management Agency will make available starting January 1, 2011 new Preferred Risk Policies available for properties that have been newly added in high-risk areas due to recent flood map revisions.  The new policies will ease financial burdens on landowners whose buildings are newly mapped from low-risk to high-risk zones.

 

Lloyd's launches new coverholder to underwrite insurance in Israel

Kesh International Underwriters has established a new Lloyd's coverholder to underwrite bus, truck and heavy equipment policies in Israel.  Beginning January 1, 2011, Kesh will begin writing the new business for Lloyd's which is expected to bring an estimated £18 m to the market in premiums.  Lloyd's, which has been in the Israeli insurance market since before the creation of the modern state in 1948, is the only foreign insurer licensed to underwrite direct insurance in Israel.

 

Lloyd's announces new chief of Asia Pacific

Kent Chaplin will begin managing Lloyd's Asia Pacific operations, based in Singapore, beginning January 1, 2011.  Chaplin, who replaces Keith Stern, has been Lloyd's head of claims since 2004 and was previously an insurance litigator in the U.K. and New Zealand.  Stern will now be Lloyd's regional manager for Ireland and the U.K.

 

Allied Re launches new special unit

Allied World Assurance Co. Holdings Ltd. announced that Allied World Re U.S. has launched a global marine specialty division, to be headed by Kevin Marine. The new division will offer global reinsurance for marine, aviation, satellite and crop reinsurance.

 

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, and Jeffrey L. Kingsley appreciate your interest and welcome your feedback.

Comments

Anonymous
Anonymous
  • 11-16-2011

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