Recent Case Summaries
New York Appeals Court Holds Motion Court’s Ruling on Whether Treaty Reinsurance Is Prospective Was Premature
Granite State Ins. Co. v. Transatlantic Reins. Co., No. 652506/12, 2015 N.Y. App. Div. LEXIS 7591 (App. Div. 1st Dep’t, Oct. 15, 2015).
At the end of 2013, a New York state court denied a motion to dismiss certain affirmative defenses but while doing so also ruled that the reinsurance agreement – a Loss Portfolio Transfer Agreement (LPT) – was not treaty reinsurance because it was not prospective in nature. While affirming the denial of the motion to dismiss, a New York intermediate appellate court held that the motion court’s ruling on whether the LPT was treaty reinsurance was premature.
The underlying dispute involved facultative certificates of reinsurance for a series of excess liability policies written by the cedent for a number of corporate insureds. The facultative certificates provided for a retention warranty that the cedent would retain for its own account, “subject to treaty reinsurance only,” the amount specified on the face of the certificate. The facultative certificates also had a clause that precluded assignment of the certificates without written consent of the reinsurer.
Many years later, the cedent entered into a loss portfolio transfer reinsurance agreement (LPT) with a third-party reinsurer transferring all its asbestos liabilities including those arising under the excess liability policies reinsured by the reinsurer’s facultative certificates (the LPT was a little more complex, so please read the opinion for moredetails).
After the LPT was entered into, the reinsurer stopped making claim payments. When the cedent brought this action for breach of contract, the reinsurer counterclaimed and asserted affirmative defenses, including that the cedent had breached the retention warranty and assignment clauses by entering into the LPT. The cedent moved to dismiss the affirmative defenses and for partial summary judgment.
The motion court denied both motions. In declining to dismiss the retention warranty defenses, the motion court concluded that, because the LPT was retroactive, it was not treaty reinsurance.
On appeal, the appellate court affirmed the motion court’s denial of the motions, but addressed the treaty reinsurance finding of the motion court. The appeals court held that the question of whether the LPT was treaty reinsurance could not be resolved as a matter of law at the current stage of the proceedings. The court noted that the motion court relied on dicta to reach its finding and pointed out that the cases relied upon by the motion court did not explicitly hold that treaty reinsurance could never be retroactive. The appellate court pointed out that the term “treaty reinsurance” was not defined and that it was not clear from the four corners of the certificates whether treaty reinsurance was exclusively prospective. The court also indicated that there was nothing in the record that established a universally accepted definition of “treaty reinsurance” “in the specialized reinsurance industry.”
While not resolving the issue, the appellate court provided some guidance on the issue and some brief case law analysis. Arbitrators likely would have little difficulty with this issue.
New York Appellate Court Affirms Order Severing Claims Against Reinsurers
Utica Mut. Ins. Co. v. Am. Re-ins. Co., No. 1078 CA 15-00408, 2015 N.Y. App. Div. LEXIS 7474 (N.Y. App. Div. 4th Dep’t Oct. 9, 2015).
A New York appellate court affirmed a motion court’s decision to sever claims brought by the cedent against two reinsurers. Although the claims against the reinsurers related to insurance payments made by the cedent to the same policyholder for asbestos-related losses, the court found that severance was proper because there was a lack of commonality.
In granting the severance, the court noted the differences in the parties, claims and defenses. First, the court pointed out that the reinsurers had no relationship to one another. Second, the court found that the claims involved arose from different reinsurance contracts, were triggered by different underlying umbrella policies and involved different time periods. Finally, the court noted that the reinsurers asserted different affirmative defenses and a finding of liability against one defendant would not impact the liability of the other. Because of the lack of commonality, the court held that the motion court did not abuse its discretion in granting the severance motion.
Commission Adjustments Held to Carry Over Between Consecutive Reinsurance Agreements
Odyssey Reins. Co. v. Cal-Regent Ins. Servs. Corp., No. 3:14-cv-00458- VAB, 2015 U.S. Dist. LEXIS 139595 (D. Conn. Oct. 14, 2015).
A Connecticut federal court recently considered a declaratory judgment claim by a reinsurer seeking a judgment that the managing agent had breached reinsurance agreement and for damages. The case was decided under Texas law pursuant to a contractual choice-of-law provision. (See the Squire Patton Boggs Reinsurance Newsletter, September 2015, for the earlier decisions in this case.)
There was no dispute that the parties had entered into valid reinsurance agreements, or that the reinsurer had performed all of its obligations under the reinsurance agreement. In the earlier decision, the court denied summary judgment and gave the managing agent leave to amend its answer to assert allegations concerning the failure of the reinsurer to fulfill its obligations. The managing agent failed to amend its answer, thereby, leaving the record clear that the reinsurer had fulfilled all of its obligations. In considering the reinsurer’s summary judgment evidence, the court found that there also was no material dispute that the managing agent had failed to pay required commission adjustments, and that the reinsurer had suffered damages as a result. The trial court, therefore, awarded summary judgment to the reinsurer on liability.
Considering damages, the court quickly disposed of straightforward commission adjustments for Underwriting Years 2003, 2004, 2005 and 2007. For 2006, the issue was more complicated. The 2006 commission adjustment depended in part on whether a debit carry- forward from Underwriting Year 2005 could be applied to losses incurred in Underwriting Year 2006. Approximately US$1 million in damages rested on that distinction.
To determine the question, the court considered a provision in the 2004 reinsurance agreement, which provided that, for purposes of calculating an adjusted commission, “if the loss ratio for an Underwriting Year exceeded 66.5%, then the difference in percentage points between the loss ratio and 66.5% must be multiplied by premiums earned for the period, and the product must be carried forward to the “next adjustment period as a debit (additional) to the losses incurred.”” Id. at *8 (emphasis added). Because “adjustment period” was undefined, the court determined that it meant an underwriting year.
The dispute between the parties centered on whether the carry-forward provision survived termination of the 2004 Reinsurance Agreement, which ended on the day Underwriting Year 2006 began. The managing agent argued that there is no “next adjustment period” when an agreement is terminated. The court agreed with the reinsurer, however, that such an interpretation would render meaningless the survival provision of the 2004 Reinsurance Agreement.
The court also considered the definition of “Losses Incurred,” which included “[a]s respects second and each subsequent Underwriting Year hereunder, plus (minus) the debit (credit) from the preceding Underwriting Year.” The managing agent argued that “hereunder” meant only during the term of the 2004 Reinsurance Agreement, which the court noted “essentially defines ‘Underwriting Year hereunder’ as a twelve-month period encompassed within the effective period of the relevant agreement.” Id. at *12.
The court rejected that argument, finding that the definition of “Underwriting Year” in the 2004 Reinsurance Agreement included “each twelve-month period commencing after April 1, 2004 . . . to the extent that policies covered by the 2004 [Reinsurance] Agreement have inception, renewal, or anniversary dates during that period.” Id. at *13. Thus, the court found that the 2006 Policy Year was an “Underwriting Year” under the 2004 Reinsurance Agreement and, after applying the debit carry-forward, awarded the reinsurer the entire amount of its claimed commission adjustment for 2006, as well as prejudgment interest on the entire judgment.
New York Federal Court Grants Claims Administrator’s Motion to Dismiss, But Declines to Invoke Follow-the-Fortunes Doctrine
AmTrust NA v. Safebuilt, No. 14 Civ. 09494 (CM), 2015 U.S. Dist. LEXIS 147628 (S.D.N.Y. Oct. 28, 2015).
Though it declined a third-party claims administrator’s request to dismiss a case under the “follow-the-fortunes” doctrine, a New York federal court ultimately granted the motion on other grounds in a case alleging that a pair of reinsurers was fraudulently induced to become parties to a reinsurance program. The case consisted of a complex reinsurance arrangement that sought to insulate the reinsurers from risk, but ultimately – in the court’s words – left them “holding the proverbial bag.”
Under the arrangement, a managing underwriter controlled by the creators of the scheme was to underwrite primary policies that would be issued by a third-party and reinsured by the reinsurers. In turn, the reinsurers would have their risk retroceded 100% to a “protected cell,” which consisted of an entity that was wholly owned by the scheme creators. As the court explained, the “idea behind [this] scheme” was to allow the reinsurers to provide reinsurance without actually having anything at risk.
When the scheme creators undercapitalized the entities that were ultimately tasked with absorbing the reinsurers’ risk, the latter sued, claiming that the undercapitalization violated the trust, agency and reinsurance agreements that formed the basis of the arrangement. In turn, the scheme creators brought a claim against the third-party claims administrator, who moved to dismiss the third-party complaint.
Among other things, the claims administrator argued that the scheme creators’ claim was barred by the follow-the-fortunes doctrine, insisting it – at bottom – constituted “second-guessing good faith determinations” made by the reinsurers (in their capacity as retrocedents). Essentially, the claims administrator argued that because the scheme creators “owned and/or controlled” the “reinsurers who matter to [the] case” (i.e., the non-party entities that were tasked with reinsuring the reinsurer’s risk), the follow-the- fortunes doctrine barred the scheme creators from recovery. While the court conceded that the “wall separating [the scheme creators] from [their wholly-owned entities] may ultimately fall,” the wall – at least in this stage in the litigation – remained intact, thus, preventing resort to the follow-the-fortunes doctrine.
Georgia Appeals Court Affirms Motion to Compel Arbitration Against Claims Administrator
McLarens Young Int’l, Inc. v. Am. Safety Cas. Ins. Co., No. A15A0932, 2015 Ga. App. LEXIS 730 (Ga. App. 4th Div. Nov. 20, 2015).
A Georgia intermediate appeals court denied a claims administrator’s motion to stay arbitration and granted a cedent’s motion to compel arbitration in a dispute over responsibility for a significant claim payment made under a lawyers’ professional liability program.
The claims administration contract between the cedent and the claims administrator had an arbitration provision. After the loss was paid, the cedent and the reinsurer sent a joint letter demanding arbitration and seeking reimbursement for the claim payment. The claims dispute arose because the claim could have been settled for a very small amount, but allegedly because of the manner in which the claim was defended a policy limits settlement was required. Ultimately, an arbitration notice was filed with the American Arbitration Association on the same basis, while at the same time, the claims administrator rejected the demands claiming that the reinsurer had no basis to seek arbitration. The claims administrator went to court to stay the arbitration and the cedent and reinsurer moved to compel arbitration. The motion court denied the claims administrator’s motion to stay and granted the motion to compel arbitration.
On appeal, the intermediate appellate court affirmed. It noted that the reinsurer’s participation in the dispute did not raise claims by the reinsurer against the claims administrator, but was in the nature of subrogation as the claims were the same claims brought by the cedent for breach of the claims administration agreement and negligent claims handling. In other words, the sole dispute is whether the claims administrator had to reimburse the cedent for the claim and expenses under the terms of the claims handling agreement. Essentially, the court found that the dispute fit within the scope arbitration provision of the claims handling agreement even though the reinsurer was involved.
Louisiana Federal Court Finds For Workers’ Compensation Self-Insured Fund
La. Comm. & Trade Ass’n Self Insurers Funds v. Nat’l Union Fire Ins. Co., No. 13-773-JJB-RLB, 2015 U.S. Dist. LEXIS 148725 (M.D. La. Nov. 3, 2015).
A Louisiana federal court granted summary judgment to a self-insured fund against what is either an excess insurer or a reinsurer for payment of a covered loss under employers’ liability coverage. This case is interesting because the court decided not to decide whether the insurer was an excess insurer or a reinsurer. Notably, the court found that the policy was called an excess workers’ compensation and employers’ liability indemnity policy. Yet the policy required the insurer to indemnify the self-insured fund for payments made by the self-insured fund under its policy written to employers.
Each state handles self-insured workers’ compensation funds with its own statutory and regulatory structure. Most self-insured funds have either reinsurance or some other excess coverage to cover losses over retentions. Here, the self-insured fund had a US$250,000 retention and a US$500,000 policy limit for employers’ liability. The underlying loss was settled for US$1.3 million and, according to the court, was done so after both the self-insured fund and the insurer considered the potential excess liability.
The self-insured fund billed the reinsurer for US$1 million, which was the policy limit for the employers’ liability coverage under the excess policy. The insurer paid only US$800,000 and sought US$300,000 back as an overpayment.
In granting summary judgment in favor of the self-insured fund, the court considered the US$1 million policy limit as unambiguous and rejected the insurer’s argument that it only had to indemnify the self-insured fund for up to the self-insured fund’s US$500,000 policy limit less its retention. The court found nothing in the insurer’s policy issued to the self-insured fund that tied its obligation to indemnify the self-insured fund to the self-insured fund’s limit of liability in its policy issued to the employer.
Without seeing the policies, it is difficult to understand what is going on here, but what can be gleaned is that it is important to consider the nature of the insurance contract being written in a self- insured workers’ compensation context so that the true intent of the parties as to whether coverage is mean to be reinsurance or excess insurance is clear.
New York Federal Court Dismisses “Shadow Insurance” Putative Class Action
Robainas v. Metro. Life Ins. Co., No. 14cv9926 (DLC), 2015 U.S. Dist. LEXIS 138354 (S.D.N.Y. Oct. 9, 2015).
A New York federal court recently dismissed a putative class action complaint against a life insurance company for lack of standing. In recent years, there have been regulatory and legal challenges brought against certain practices of life insurance companies for using reinsurance with captive off-shore companies. Some have taken to calling this practice “shadow insurance.”
In this case, putative class plaintiffs brought an action against a life insurer claiming that the life insurer’s use of captive and other offshore reinsurance violated New York law concerning life insurance reserves and resulted in misleading representations being made about the life insurance company’s financial strength. Essentially, the argument is that because of this “shadow insurance,” the life insurer may not be able to pay its claims because it really does not have the reserves it claims it has.
The life insurance company moved to dismiss the complaint for various grounds, including that the plaintiffs did not have standing to bring the case in federal court. In granting the motion to dismiss, the court held that there was no injury-in-fact and because of that, the court lacked subject matter jurisdiction over the action.
In reaching that conclusion, the court described reinsurance and the nature of the reserve relief reinsurance provides to the ceding insurer in general terms and in the context of offshore reinsurance. The court also described the theory of “shadow reinsurance.” While this case is more about standing in federal court than reinsurance, it provides support for the basic underlying issues and has a good succinct discussion of life reinsurance reserves.
New York Federal Court Issues Rulings on Discoverable Information From Insurance Companies
Great Am. Ins. Co. v. Castleton Commodities Int’l LLC, No. 15 Civ. 3976 (JSR), 2015 U.S. Dist. LEXIS 144338 (S.D.N.Y. Oct. 15, 2015).
In this insurance coverage dispute, a New York federal court made multiple rulings regarding information that is discoverable from insurance companies. The court first considered when an insurance company can withhold information based on the assertion of the attorney-client privilege. The court held that discussions between the insurance company and its attorneys prior to the denial of coverage are not protected by the attorney-client privilege unless the discussions are “primarily or predominately a communication of a legal character.” The court ruled that communications that are routine business activities such as discussions involving insurance policy interpretation or investigation into the circumstances from which the claim arose are not protected by the attorney-client privilege.
The court next announced a general rule regarding an insurance company’s assertion of the work-product privilege. The court held that “if a declination decision has been made, documents subsequently drafted are presumed to have been created in anticipation of litigation; if the claim has not yet been rejected the documents are part of the claim investigation process and are not work product.” The court further explained that this presumption can be overcome if the document at issue contains a discussion of strategic aspects of litigation.
The court also considered instances in which primary and excess insurers may validly assert the joint defense or “common interest” privilege. After noting that primary and excess insurers’ legal interests actually conflict, the court assumed that insurers’ discussions among themselves are entitled to the benefits of the common interest privilege for the sole purpose of not waving other forms of privilege. The court, however, held that the common interest privilege is not an “independent source of privilege or confidentiality.” The court ruled that “[i]f a communication is not protected by the attorney-client privilege or the attorney work- product doctrine, the common interest doctrine does not apply.”
Finally, the court addressed the issue of whether information related to an insurance company’s reserves and reinsurance is discoverable. In ordering the reinsurer to produce this information, the court held that this type of information should not be excluded from discovery as “palpably irrelevant.” As a result of the court’s rulings, the reinsurer was ordered to produce many documents that it previously withheld from discovery.lacked standing because the proposed class includes a reinsurance arrangement where there is no named plaintiff and the proposed class includes borrowers who obtained loans from lenders other than the defendants. The plaintiffs objected to the dismissal of the plaintiffs who relied upon equitable tolling or equitable estoppel to excuse late filings, which had become moot by the decision discussed above. The court held that the Findings and Recommendations regarding the tolling subclass had been rendered moot and otherwise adopted the Findings and Recommendations in full.