March 2013 Reinsurance Newsletter
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March 2013 Reinsurance Newsletter

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March 2013 Reinsurance Newsletter March 2013 Reinsurance Newsletter Document Transcript

  • REINSURANCE NEWSLETTER March 2013RECENT CASE SUMMARIESNew York Court of Appeals Reverses Summary Judgment on Follow-the-Settlements CaseU.S. Fid. & Guar. Co. v. Am. Re-Ins. Co., 2013 WL 451666 (N.Y. Feb. 7, 2013).In a closely watched asbestos settlement allocation case, the New York Court of Appeals has modified the order of theintermediate appellate court to deny summary judgment to the cedent based on two issues of fact raised to challengethe reasonableness of the cedent’s settlement allocation. The court affirmed the judgment rejecting the other defenses topayment raised by the reinsurers.This case involved asbestos claims arising out of policies issued in the 1950s and 1960s to a distributor of asbestosproducts. The underlying policies were also not “occurrence” based policies, but were the old form of “per accident”policies with no aggregate limits. The case is further complicated by corporate acquisitions in the 1960s, which led toquestions about whether the cedent’s policies covered the successor company. Those and other issues were litigated inCalifornia, including whether the successor corporation succeeded to the insurance issued by the cedent to the originalinsured.Meanwhile, claims came pouring in, resulting in default judgments after the cedent and other insurers refused to defendand the insured agreed not to oppose the entry of default judgments. In the coverage litigation, the insured had allegedthat the cedent’s refusal to defend breached the implied covenant of good faith and fair dealing. The coverage suit settledwhile trial was in progress and resulted in the insured’s filing for bankruptcy and the creation of an asbestos trust.After the settlement, the cedent billed the excess-of-loss reinsurers who refused to pay. The motion court granted summaryjudgment to the cedent and the appellate division affirmed with one judge dissenting. This appeal ensued.In modifying the appellate division’s order, the Court of Appeals presented a detailed analysis of the rules governingreinsurance allocation in the context of follow-the-settlements under New York law. It is important to note that thereinsurance contracts here had a following clause binding the reinsurer to pay claims allowed by the cedent. The court’sanalysis was premised on the follow-the-settlements clause.The court articulated the well-established rule that a follow-the-settlements clause (like the one here) ordinarily barschallenge by a reinsurer to the ceding company’s decision to settle a case. That rule, said the court, makes sense becausethere is little risk of unfairness as the parties are typically aligned to pay as low a settlement amount as possible. In thiscase, the few exceptions to that rule did not apply because the reinsurers did not challenge the cedent’s decision to settleor the amount of the settlement. Here, the dispute was about the settlement allocation to the reinsurers.In discussing the reinsurance allocation, the court accepted that the follow-the-settlements rule raises problemsbecause the interest of the cedent and the reinsurer may often conflict. The court concluded that was the case here,
  • where an allocation of the settlement to losses less than $100,000 would result in no reinsurance recovery, but allocation to lossesof $200,000 would result in the reinsurers paying half the cost. Because of this, the reinsurers argued that the cedent’s allocationdecision should not bind reinsurers under a follow-the-settlements clause.While finding logic to the reinsurers’ argument, the Court of Appeals nevertheless agreed with the majority of courts and held thata follow-the-settlements clause requires a level of deference to a cedent’s allocation decision. The rationale for this deference wasdescribed by the court as providing for a more orderly and predictable resolution of claims. But the court made it clear that deferencedid not mean that the cedent’s allocation decisions were immune from scrutiny.The decision still had to be in good faith and reasonable. The court stated that “[i]n our view, objective reasonableness shouldordinarily determine the validity of an allocation. Reasonableness does not imply disregard of the cedent’s own interests. Cedentsare not the fiduciaries of reinsurers, and are not required to put the interests of reinsurers ahead of their own.” The court held that acedent’s allocation “must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrivedat in arm’s length negotiations if the reinsurance did not exist.”The court concluded that the cedent’s motive “should generally be unimportant. When several reasonable allocations are possible, thelaw, as several courts have recognized, permits a cedent to choose the one most favorable to itself.” But, said the court, “the choicemust be a reasonable one, and we also conclude that reasonableness cannot be established merely by showing that the cedent’sallocation for reinsurance purposes is the same as the allocation that the cedent and the insurance claimants actually adopted insettling the underlying insurance claims.” The court rejected the cedent’s argument that if the allocation is the same as the underlyingsettlement it establishes the validity of the allocation. Instead, the court held that under a follow-the-settlements clause (like the onehere), a cedent’s reinsurance allocation of a settlement will be binding on a reinsurer if, “but only if, it is a reasonable allocation, andconsistency with the allocation used in settling the underlying claim does not by itself establish reasonableness.”In reversing the summary judgment decision, the Court of Appeals concluded that the reasonableness of the assumptions used inthe allocation, that (1) all of the settlement amount was attributable to claims within the limits of the cedent’s policies and nonewas attributable to the claims against the cedent for bad faith in refusing to defend the insured; and (2) all claims for lung cancerhad a $200,000 value, while certain other claims had values of $50,000 or less, presented issues of fact that required a trial. Thecourt pointed to evidence in the record to show that a fact finder could conclude that an allocation giving no value to the bad faithclaims was unreasonable and that assigning high values to lung cancer claims instead of allocating some of that value to bad faithor other claims was unreasonable. The court pointed to an underlying settlement demand that included a significant amount for badfaith presented just shortly before settlement and the parties’ arguments to the bankruptcy court to approve the plan partly on thebasis that the bad faith claims had significant value. The court concluded that it was impossible to find as a matter of law that partiesbargaining at arm’s length, in a situation where reinsurance was absent, could reasonably have given no value to bad faith claims.The Court of Appeals did find that there was no evidence from which a fact finder could infer that allocating all the losses to a singleinsurance policy was unreasonable. The court discussed California law and the continuous trigger and related rules to support itsholding. It also rejected the reinsurers’ argument that the Other Insurance clause precluded allocation to one policy year. Finally, thecourt rejected the argument concerning an alleged amendment to the retention per loss for the reinsurance contracts.This case provides the latest and certainly one of the more detailed roadmaps for addressing reinsurance allocation determinationsunder a follow-the-settlements clause. Reasonableness is the catchword, but reasonableness based on the objective standard ofwhat the underlying parties’ to a settlement would consider reasonable if there were no reinsurance. Allocating all of the settlementto claims covered by the cedent’s policies and nothing to the bad faith claims may or may not be reasonable – only a trial and adecision by a fact finder will decide that issue.The ultimate take away here is that the specific facts matter, that a reinsurer will still be bound to a cedent’s good faith andreasonable claims determination, and that a follow-the-settlements clause like the one in this case will bind the reinsurer to an Page 2 of 25
  • objectively reasonable reinsurance allocation decision without regard to the cedent’s motive, as long as it could have been derivedfrom an arm’s length negotiation by the underlying parties as if no reinsurance existed.Second Circuit Holds That Federal Common Law Governs the Interpretation of the Term “Arbitration”M.D. Imad John Bakoss v. Certain Underwriters at Lloyd’s of London, __F3d __, 2013 WL 238708 (2d Cir. Jan. 23, 2013).In an insurance coverage dispute over disability insurance, the Second Circuit has joined the majority of federal circuit courts inholding that the question of whether a clause in a contract provides for arbitration is governed by federal common law in a case thatfalls under the Federal Arbitration Act (“FAA”) through its application of the Convention on the Recognition and Enforcement of ForeignArbitral Awards (the “New York Convention”). The case was removed from state court to federal court by the insurer and the insurerobtained summary judgment. On appeal, the insured challenged the basis for federal jurisdiction and summary judgment.In affirming the district court, the Second Circuit examined the contractual provision that the insurer claimed was an arbitration clauseand agreed with the motion court. The clause provided that the insured and insurer may each examine the insured by a physician ofits choice to determine if the insured was permanently disabled and, in the event of a disagreement between each party’s physician,the two party-appointed physicians “shall [jointly] name a third Physician to make a decision on the matter which shall be final andbinding.” The district court applied federal common law to hold that the third-physician clause was an agreement to arbitrate and thatthe court had subject matter jurisdiction under the FAA via the New York Convention.In holding that federal common law provides the definition of arbitration under the FAA (not state law), the circuit court recognizedthat unless there is a plain indication to the contrary, a federal act is not dependent on state law and will be interpreted under federalcommon law. This allows for the creation of a uniform national arbitration policy, as intended by Congress. To apply state law wouldresult in a patchwork of varying interpretations of the FAA, said the court.This case is important because now the Second Circuit has clearly held that questions about whether a clause is an arbitration clauseand how it should be interpreted require the application of federal common law, not state law, when the case is governed by the FAA.Minnesota Federal Court Stays Litigation Pending ArbitrationSecurity Life Ins. Co. of Am. v. Southwest Reinsure, Inc., No. 11-1358 (MJD/JJK), 2013 WL 500362 (D. Minn. Feb. 11, 2013).A Minnesota federal court granted motions by the successor to a group of off-shore producer-owned reinsurance companies and theirowners to stay an action brought by a cedent pending arbitration of the cedent’s claims against the reinsurers and their owners. Thiscase involves a complex interwoven reinsurance relationship between the cedent and its reinsurers and whether a dispute about whathappened to trust funds deposited as security for reinsurance should be heard in arbitration or by the court.The cedent reinsured a portion of its life insurance policies with off-shore producer-owned reinsurers through three reinsuranceagreements, each of which had an arbitration clause. The 1994 reinsurance contract provided for arbitration of any disputes arisingout of the reinsurance agreement. The 1997 agreements provided for arbitration for any disputes or differences arising under, outof, or in connection with, or in any manner relating to the reinsurance agreements. The cedent also entered into an administrationagreement with a subsidiary of the owner of the reinsurers. The cedent considered all of these relationships part of one unifiedprogram.Under the reinsurance agreements and for credit for reinsurance purposes, the reinsurers were required to provide security. Originallyletters of credit were provided, but in 2005, a trust agreement was entered into. The defendant trustee held the funds for cedent asthe beneficiary. The cedent contends that the trust funds were transferred out to another trustee without its knowledge under a new Page 3 of 25
  • trust agreement to which the cedent was not a party. Eventually, the owner of the reinsurers and the administrator withdrew the trustfunds for other purposes.The cedent sued the reinsurers, the administrator, the principal and the original trustee. One of the defendants, the administrator,filed a motion to dismiss, which was denied, but did not assert any arbitration rights. After an amended complaint was filed and somediscovery was taken, the successor reinsurer, after it was finally served, asked whether the cedent would arbitrate. When the cedentrefused to arbitrate, the reinsurer filed a motion to dismiss or in the alternative a motion to stay pending arbitration.In granting the motion to stay pending arbitration, the court discussed the standards for determining arbitrability and the principlethat nonsignatories can compel arbitration under certain circumstances. Here, the successor reinsurer was being asked to respond toclaims under the reinsurance agreements that contained arbitration clauses. The court agreed that at minimum, equitable estoppelapplied to allow the successor reinsurer to enforce the arbitration clause in the agreements. The court found that the arbitrationclauses were broad and covered the cedent’s claims against the successor reinsurer. The court rejected the claim that the successorreinsurer waived its right to arbitration and that the cedent was prejudiced by the successor reinsurer’s actions.As to the administrator, there was no arbitration clause in the administration agreement, but because the claims were interrelatedand intertwined, and the core of the dispute concerned compliance with the provisions of the reinsurance agreements, the courtconcluded that the claims against the administrator were subject to arbitration as well. The court also concluded that even thoughthe administrator participated in discovery and did not move to stay pending arbitration until the successor reinsurer was served andmade the motion, the administrator had not waived its right to seek arbitration.Finally, the court stayed the action against the trustee because the result of the arbitration had the potential to resolve or narrow theclaims against the trustee. The stay was granted to all parties, but the case was not dismissed because of the various non-arbitrableclaims alleged in the amended complaint.New York Federal Court Denies Preliminary Injunction on Alleged Use of Confidential InformationUtica Mut. Ins. Co. v. INA Reinsurance Co., No. 6:12-CV-00194 (DNH/TWD) (N.D.N.Y. Dec. 14, 2012).In a case arising out of alleged breaches of confidentiality agreements and orders, a New York federal court has accepted therecommendations of a magistrate judge and has denied a cedent’s motion for a preliminary injunction to prevent the furtherdisclosure of confidential information in a pending arbitration. The cedent and the reinsurer entered into a confidentiality agreementfor an audit. Subsequent to the audit an arbitration was commenced and the parties entered into further confidentiality agreementsas part of the arbitration process. A dispute arose about the completeness of the earlier audit responses and the cedent producedadditional documents, including e-mails relevant to the underlying claims. Counsel for the reinsurer printed out the e-mails andreviewed them.Another reinsurer also reinsured the cedent for the same underlying risks. A dispute arose between the cedent and the other reinsurerand a lawsuit alleging breach of the reinsurance certificates was commenced. The same law firm that represented the reinsurer in thiscase also represented the other reinsurer. The same lawyer was involved in both cases for both reinsurers. Shortly after receiving thecomplaint in the other reinsurer’s action, the lawyer discussed certain e-mails obtained in the audit and arbitration on behalf of thereinsurer with those working on the other reinsurer’s case.The cedent claimed that disclosure of those e-mails to the other attorneys in the same firm violated the various confidentialityagreements in the arbitration and audit. In denying the preliminary injunction, the court focused on the requirements for a preliminaryinjunction and found that there was no irreparable harm. Although it was not required, the court did provide its views on the merits ofthe claim and found that the cedent had shown a likelihood of success on the merits that the disclosures breached the confidentiality Page 4 of 25
  • agreements.Wisconsin Federal Court Remands Arbitration Counsel Disqualification Action to State CourtNat’l Cas. Co. v. Utica Mut. Ins. Co., No. 12-cv-657-bbc, 2012 WL 6190084 (W.D. Wisc. Dec. 12, 2012).The popularity of attorney disqualification applications in reinsurance disputes continues with this dispute venued in Wisconsin.Several reinsurance contracts were entered into, all of which had arbitration provisions. The ceding company and the insured litigatedover certain claims presented by the insured and ultimately settled. The cedent billed the reinsurer and the reinsurer questioned itsobligation to pay.This dispute arose when the cedent’s counsel demanded arbitration. It turned out that the cedent’s counsel had served as defensecounsel in the underlying coverage dispute. The reinsurer claimed that this caused a conflict of interest, because counsel representedboth the reinsurer’s and the cedent’s interests in the coverage litigation. When the cedent refused to replace its counsel, the reinsurerfiled this action to disqualify counsel in state court, which the cedent removed to federal court.The Wisconsin federal court remanded the action back to state court after finding that the cedent had not shown that federal subjectmatter jurisdiction was present. The court originally was concerned whether there was diversity of citizenship, but once that wasresolved, the court could not get past the amount in dispute. The reinsurer focused on the amount in dispute in the arbitration. Butas the court found, the cedent did not identify the amount in dispute in the arbitration or the cost of replacing arbitration counsel.Although the amount in controversy was eventually identified and exceeded $75,000, the court had an issue concerning whether theamount in controversy in the arbitration was the proper measure for the disqualification action as the object of the disqualificationlitigation was not compelling arbitration or confirming an arbitration award. The court remanded essentially because it would notadopt the stakes in arbitration as the measure for subject matter jurisdictional purposes.Supreme Court of Washington State Holds That State Statute Prohibits Binding ArbitrationAgreements in Insurance ContractsState of Washington, Dep’t of Transp. v. James River Ins. Co., 87644-4, 2013 WL 174111 (Wash. Jan. 17, 2013).The Supreme Court of the State of Washington, sitting en banc, unanimously affirmed a trial court’s denial of an insurer’s motionto compel arbitration, reasoning that a Washington State statute rendered an arbitration clause present in an insurance agreementunenforceable. The relevant statute, RCW 48.18.200(1)(b), provides that no insurance contract issued in Washington, and coveringrisks in that state, may contain a condition “depriving the courts of [Washington] of the jurisdiction of the action against the insurer.”The insurer argued that the statute only prohibited forum selection clauses within insurance contracts that required an action tobe brought outside of Washington, and did not disturb an insurer’s ability to compel arbitration. The Supreme Court rejected thisargument, stating that the statute was intended to preserve an insured’s right to bring an “original action” in a Washington court,where the court would have jurisdiction over the “substance” of the dispute between the parties. Accordingly, the Supreme Courtconcluded that the statute “prohibits binding arbitration agreements in insurance contracts.”New York Court Grants Cedent’s Request to Appoint UmpireIn re American Home Assurance Co. and Clearwater Ins. Co., No. 653079/12, 2013 N.Y. Misc. LEXIS 103 (N.Y. Sup. Ct. Jan. 15,2013).A New York state motion court granted a cedent’s petition to appoint an umpire to preside over a series of reinsurance disputesthrough a combination of the ranking and “strike and draw” methods. The disputes arise out of three reinsurance treaties, one of Page 5 of 25
  • which provided for the appointment of an umpire should the party-appointed arbitrators disagree on resolving the dispute. The cedentsought the appointment of a single umpire from among the three individuals that its party-appointed arbitrator previously proposed.The reinsurer opposed the petition, and requested that an umpire be selected for each arbitration from among its list of threeindividuals. Each party had appointed its arbitrator, but the party-appointed arbitrators failed to select an umpire as provided in thetreaties.In granting the petition in part to appoint an umpire, the court noted that while it was undisputed that the two arbitrators failed toselect an umpire, the reinsurer objected to the appointment of a court appointed arbitrator on two grounds. First, the court rejectedthe argument that the court was not permitted to appoint an arbitrator under New York law, CPLR 7504, because the CPLR wasnot referenced in the treaties. The court held there was no need for the treaties to refer to the CPLR because a contract generallyincorporates the state of law in existence at the time of its formation. The CPLR mechanism for appointment of an arbitrator existedwell before the formation of the treaties.Second, the court rejected the argument that CPLR 7504 should not apply because the cedent was to blame for a breakdown in theselection of the umpire. The court rejected this argument because CPLR 7504 provides for the court appointment of an arbitrator “ifthe agreed method fails or for any reason is not followed...” The court noted that the cedent demonstrated that the parties’ agreedmethod of appointing the umpire had failed.The court next focused on the selection method for the umpire as neither the reinsurance treaties nor CPLR 7504 set forth anysubstantive criteria for the appointment of the umpire. The cedent urged the court to appoint the umpire from among the threeindividuals that its arbitrator proposed, or alternatively, that the court use the ARIAS-US ranking method. The reinsurer urged the courtto use the strike and draw method or, alternatively that the court appoint the umpire from among the three individuals it proposed.The court instead adopted Justice Feinman’s approach in Lexington Ins. Co. v. Clearwater Ins. Co., No. 651280/2011 (N.Y. Sup Ct.,Jan. 6, 2012), which used the ranking method, but modified it to incorporate aspects of the strike and draw method. But to avoid thepossibility of a tie, the court added that the umpire must be drawn by random lot in the event of a tie in the rankings of the umpire orthird arbitrator.The arbitration clause in one of the treaties raised the issue of whether the selection of an umpire, before a disagreement among thearbitrators arises at the hearing, is premature because, as the reinsurer contended, the umpire can only be appointed after a disputearises among the party appointed arbitrators during the hearing. In holding that appointment of the umpire did not have to await adispute between the arbitrators at the hearing, the court went with the practical approach of choosing the umpire at the outset of thearbitration to avoid the added expense of conducting additional arbitrations should the party-appointed arbitrators disagree.In conclusion, the court ruled that an umpire was to be chosen within 60 days as follows: Each side shall nominate five candidates,and each side may then strike three of the five candidates on the other’s list. Each side shall next rank the remaining candidates inorder of preference, and the candidate with the highest cumulative ranking shall be appointed the umpire. In the event of a tie for thehighest cumulative ranking, the umpire will be drawn by random lot.Finally, the court cautioned that its order should not be read as consolidating the arbitrations under the three separate treaties simplybecause the method of appointing the umpire and third arbitrator are the same for all arbitrations.Court intervention in the appointment process can be avoided if arbitration clauses are drafted to address stalemates in theappointment process. In this case, the court adopted a hybrid approach that joined a ranking method with the traditional strike anddraw method, including a tie-breaker.Second Circuit Refuses to Extend Reinsurance Late Notice Prejudice Rule to P&I Club Certificate Page 6 of 25
  • Weeks Marine, Inc. v. American Steamship Owners Mut. Protection & Indemn. Ass’n, Inc., No. 11-3774-cv, 2013 WL 377979 (SummaryOrder) (2d Cir. Feb. 1, 2013).In a summary order involving marine insurance, the Second Circuit Court of Appeals has affirmed a district court’s summary judgmentin favor of the insurer and specifically addressed the argument by the insurer on late notice. The insured did not give notice to theinsurer until two days after a judgment was obtained in favor of the underlying claimant. The insurer disclaimed based on late notice.The district court found that New York’s “no prejudice” rule applied and granted summary judgment to the insurer.In affirming the district court, the circuit court noted the exception to New York’s “no prejudice” rule in the context of a reinsurancecontract. The court declined to extend the reinsurance exception to marine insurance contracts based on the facts of this case.New York Federal Court Denies Motion to Reconsider on Reinsurer Summary Judgment on Most Claims Made by Terminated ManagingAgent, But Certifies Order as Final for AppealAcumen Re Management Corp. v. Gen. Sec. Nat’l Ins. Co., No. 09 Civ. 796 (GBD), 2012 WL 3890128 (S.D.N.Y. Dec. 4, 2012).We reported on this case in our December 2012 Reinsurance Newsletter. The managing agent moved to have the court reconsiderits grant of summary judgment. The court denied the motion holding that the managing agent did not raise any controlling decisionsor factual matters overlooked by the court. But the court did certify the order granting summary judgment as final to allow for animmediate appeal because summary judgment was granted on four of five grounds supporting the claim and it would be judiciallyinefficient not to avoid a costly, duplicative trial if the appeal is successful.Ohio Federal Court Transfers Reinsurance Dispute to FloridaCertain Underwriters at Lloyd’s, London v. Stonebridge Cas. Ins. Co., No. 2:12-cv-160 (S.D. Ohio Dec. 17, 2012).An Ohio federal court has transferred a reinsurance dispute to Florida, where another related action was pending. The cedent,commencing with its predecessor, underwrote an automobile dealership awards program. Reinsurance for the awards programwas obtained via a broker allegedly from a Lloyd’s coverholder in 2004. This process was repeated in 2006 with another Lloyd’scoverholder. The cedent sought to recover under both reinsurance programs.The reinsurers and their agent for the 2006 program commenced an action in Florida for a declaration that they had no liability tothe cedent for failure to comply with certain conditions and requirements. The cedent moved to compel arbitration under the 2004agreement, which was granted by the Florida court.Subsequently, the 2004 reinsurers filed suit in Ohio claiming that they never entered into and had no knowledge of the 2004agreement. The cedent moved to transfer the Ohio action to Florida where the 2006 action was pending.In granting the motion to transfer, the court found Florida federal court to be convenient because it could have been brought inFlorida, neither party had yet requested arbitration as the reinsurers were contesting the contract’s validity, that a substantial partof the events leading up to the litigation took place in Florida, the main witness resided in Florida, and that in the interest of justicetransfer to Florida was appropriate.Illinois Federal Court Refuses to Strike a Motion to Dismiss on Foreign Sovereign Immunities ActGroundsPine Top Receivables of Ill., Inc. v. Banco de Seguros Del Estado, No. 12 C 6357, 2012 WL 6216759 (N.D. Ill. Dec. 13, 2012). Page 7 of 25
  • Doing reinsurance business with non-U.S. reinsurers owned by foreign governments often raises interesting issues of enforcement andcollection. In this case, a receiver of an insolvent reinsurer sold and assigned its receivables from a retrocessionaire, an instrumentalityof the Republic of Uruguay. The assignee sought to collect payments allegedly due or to compel arbitration. The retrocessionaire filed amotion to dismiss the cause of action to compel arbitration. The assignee moved to strike the motion to dismiss. The court denied theassignee’s motion to strike.In denying the motion to strike the retrocessionaire’s motion to dismiss, the court addressed the assignee’s claim that the motionto dismiss was improper because the retrocessionaire had not paid pre-judgment security as required by state law. The Illinoisstatute (215 ILCS 5/123) is one of the many pre-answer or pre-judgment security provisions in state insurance laws that require anunauthorized foreign or alien company to post security before it can take any action in court or arbitration. The retrocessionaire arguedthat the security statute did not apply because the retrocessionaire was an instrumentality of a foreign state and is immune from pre-judgment security under the Foreign Sovereign Immunities Act (“FSIA”) (28 U.S.C. § 1602) and that the assignee lacked standing tomake the motion.The court found that the assignee had standing to make the motion. More importantly, however, the court held that theretrocessionaire was immune from pre-judgment security under FSIA. The court rejected the assignee’s argument that the pre-judgment security requirement was not an “attachment” within the definitions of FSIA by looking to the practical effect of the security.The court also found that neither the arbitration clause nor the collateral clause in the relevant contracts resulted in an affirmativewaiver of the retrocessionaire’s immunity.Utah Federal Court Denies Reinsurers’ Recovery of Attorney FeesNational Indem. Co. v. Nelson, Chipman & Burt, No. 2:07-CV-996 TS, 2013 WL 226881 (D. Utah Jan. 18, 2013).A Utah federal court granted underlying defense counsel’s motion for partial summary judgment against reinsurers, as subrogees ofcedent and its insured, denying their right to recover attorney fees, as consequential damages. The cedent incurred attorneys’ feeswhen it sought reimbursement from its insured for the settlement monies it paid over the policy limits on its behalf in the underlyingaction.The dispute arose from an underlying litigation brought on behalf of a minor, injured during an adult softball tournament, whichresulted in a verdict in excess of $6 million against the insured and other parties. Even after the cedent settled with the minor for areduction in the award, the settlement was still in excess of the $2 million policy limit, and the insured refused to pay the amount inexcess of the limits. The reinsurers, through its cedent, however, paid the full settlement amount.The cedent subsequently sued its insured for reimbursement of the amounts it paid beyond the policy limits. The reimbursementquestion was certified to the Utah Supreme Court as an issue of first impression. The Supreme Court ruled that there was no extra-contractual right to restitution between an insurer and its insured, and denied reimbursement.The reinsurers, as subrogees of the cedent and the cedent’s insured, next brought malpractice claims against counsel retained bycedent in the underlying action to recover attorney fees as damages under the third-party litigation exception. The third-party litigationexception allows recovery of fees only in the limited situation where defendant’s wrongful conduct foreseeably causes the plaintiff toincur attorney fees through litigation with a third party. Defense counsel subsequently moved for partial summary judgment to denyreinsurers recovery of their attorney fees.In granting defense counsel’s motion, the court held that defense counsel’s actions did not fall within the third-party litigationexception to Utah’s long-standing rule allowing recovery of attorney fees as consequential damages where provided by statute orcontract. The court focused on the issue of foreseeability to answer the question of whether the reinsurers could recover as damages Page 8 of 25
  • the attorney fees incurred by the cedent and its insured in determining cedent’s reimbursement rights for the settlement monies paidto the minor.The malpractice claims were based upon tort and contract causes of action. Under the tort allegations, the court held that thethird-party litigation exception applies when the foreseeable and natural consequence of one’s negligence is another’s involvementin a dispute with a third party. For the reinsurers to recover attorney fees in tort under the third-party litigation exception, the courtstated that it must be reasonably foreseeable that a contemplated loss resulting from counsel’s allegedly negligent acts would be theattorney fees expended in a reimbursement action between cedent and its insured.Moreover, if the loss of attorney fees was foreseeable, the court noted it would also have to infer that some of the other actions wereforeseeable, including whether the cedent would settle with the minor for an amount in excess of policy limits, and subsequently bringa coverage action against its insured.Similarly, under the breach of contract allegations, the court noted that in order for the reinsurers to recover attorney fees under thethird-party litigation exception, it would have to infer that attorney fees expended in a reimbursement suit were reasonably foreseeableas the natural and usual course of events resulting from a breach of representation contract between an insurer and its retainedcounsel. The test for reasonable foreseeability was whether it could “. . . fairly and reasonably be said that if the minds of the partieshad adverted to breach when the contract was made. . . .” loss of attorney fees would have been within their contemplation.After careful analysis, the court held that no reasonable jury could return a verdict for the reinsurers’ recovery of attorney fees underthe third-party litigation exception in either tort or contract causes of action. The court reasoned that the coverage dispute, with itsresultant attorney fees, was not the foreseeable natural consequence of counsel’s alleged malpractice.Connecticut Federal Court Grants Cedent’s Motion to Amend Complaint Adding Account Stated andCUPTA ClaimsThe Travelers Indem. Co. v. Excalibur Reinsurance Corp., No. 3:11-CV-1209 (CDH), 2012 WL 424535 (D. Conn. Feb. 1, 2013).A Connecticut federal court granted a cedent’s motion to amend its complaint in a dispute with its reinsurer. The underlying disputeinvolves insurance brokers’ errors and omissions policies and the settlement of an underlying E&O claim. The reinsurer refused to payand this action commenced.The cedent’s motion for an amended complaint adds two additional claims beyond breach of contract: account stated and violationof Connecticut’s Unfair Trade Practices Act (“CUTPA”). The reinsurer opposed the motion based on its untimeliness and the legalsufficiency of the additional causes of action. The court, in granting the motion, found no substance to the timeliness objection basedon the case being in its early stages. On the sufficiency issue, the court found that the cedent adequately pled a plausible claim foran implied account stated and for violations of CUTPA.The reinsurer also raised the issue of the cedent’s strategy in seeking to amend its complaint to force the reinsurer to post pre-answersecurity as a basis to deny the motion on bad faith grounds. The court rejected this argument, finding that the pending motion forsecurity did not bear on the cedent’s right to add plausible claims to its complaint as a “proper and professional exercise” to furtherits legitimate purpose of seeking “to transfer money from a defendant’s pocket into its own.”Texas Appellate Court Concludes that Foreign Country Judgments Assessing Costs against anInsurer Are Enforceable Under Foreign Country Money-Judgments StatuteNew Hampshire Ins. Co. v. Magellan Reins. Co. Ltd., 02-00334-cv, 2013 WL 105654 (Tex. App. Jan. 10, 2013). Page 9 of 25
  • A Texas intermediary appellate court affirmed a trial court’s denial of an cedent’s motion for nonrecognition of certain foreign countryjudgments. Following the dismissal of a suit brought by the cedent against a reinsurer in the Turks and Caicos Islands (“TCI”), thereinsurer obtained two “judgments” assessing costs against the cedent. The reinsurer then sought to enforce the judgments in Texas,and the cedent moved for nonrecognition.The cedent contended that the “judgments” were not “judgments on the merits” arising from a cause of action asserted by thereinsurer, because they provided for taxation of costs only. Rejecting this argument, the Texas appellate court held that the UniformForeign Country Money-Judgment Act, as implemented in Texas, does not restrict a defendant’s ability to enforce a foreign judgment toonly those cases where the defendant has prevailed on its own cause of action. The cedent also asserted that the cost assessmentswere not “judgments” because they were entered by TCI court personnel other than the TCI justices who ruled on the substantiveissues of the cedent’s action. In response, the Texas court observed that under the law of the United Kingdom (relevant because TCI isa British overseas territory), the term “judgment” includes cost assessments, and further cited a number of U.S. cases where “later-determined cost assessments” were recognized as “judgments” under the Uniform Foreign Country Money-Judgment Act. The court,however, cautioned that its ruling was driven by the facts of the case, and its opinion “should not be construed as holding that in everycase, a cost assessment from a foreign country court will be enforceable as a judgment.”Finally, the cedent contended that the “loser pays” principle (the “English rule”) is intended to punish unsuccessful litigants, andtherefore cost assessments are properly regarded as “penalties,” which are expressly excluded from the definition of “foreign countryjudgment” under the Act. Rejecting this argument, the court cited authority reasoning that the English rule is designed to compensatea defendant that is forced to defend the suit, rather than penalize the losing plaintiff. Further, the court observed that a judgment isconsidered “penal” when “its purpose is to punish an offense against the state,” but not when it simply affords a “private remedy” to awronged party. Accordingly, the court affirmed the trial court’s order denying the cedent’s motion for nonrecognition.RECENT ENGLISH CASE SUMMARIESEnglish High Court Affirms Arbitration Award Finding That World Trade Center Attack Constituted TwoSeparate OccurrencesAioi Nissay Dowa Ins. Co. Ltd. v. Heraldglen Ltd. and Advent Capital (No. 3) Lts. [2013] EWHC 165 (Comm).The English High Court of Justice, Queen’s Bench Division (Commercial Court) has handed down a decision affirming an arbitral awardholding that the September 11, 2001 attack on the World Trade Center arose out of two occurrences rather than one for purposes ofapplying policy limits and deductibles.The reinsurer issued four excess-of-loss reinsurance agreements to the cedents for all business classified as aviation business. Thecontracts provided coverage in varying amounts for “each and every loss” in excess of $100,000, with the phrase “each and everyloss” defined to mean “each and every loss or accident or occurrence or series thereof arising out of one event.” In the underlyingarbitration, the parties disputed whether the two separate planes that crashed into the World Trade Center should be viewed as oneoccurrence or two. The cedents had settled their inward claims on the basis that the World Trade Center attack consisted of twoseparate occurrences, a position on which it then based its outward claim to the reinsurer.The arbitration panel based its conclusion that the World Trade Center attack constituted two separate occurrences on the “unities”doctrine, discussed in Kuwait Airways Corp. v. Kuwait Ins. Co. SAK [1996] 1 Lloyd’s Rep 664. Using this doctrine, the arbitratorsevaluated the unities as to (1) the circumstances and purposes of the persons responsible for the attack; (2) the cause of the event; Page 10 of 25
  • (3) the timing of the event; and, (4) the location of the event. The arbitrators considered the various aspects of the coordinated attackand concluded that despite the nexus in the origins of the planning of the hijackings, the separate sequence of events that led to theseparate loss and damage caused by each hijacked plane constituted two separate occurrences rather than one. The panel viewedthis as a “common sense result,” concluding that “an independent objective observer watching each of the hijackings and then deathand personal injury on board would have concluded that there were two separate hijackings.”Despite the reinsurer’s attempt to overturn the arbitration award, the court rejected the reinsurer’s challenge to the panel’s findings,concluding that the arbitrators had properly considered the various factors in the unities doctrine. It noted that the arbitrators hadconsidered the fact that the World Trade Center attack originated from one overall terrorism plan, but that this fact alone was notdeterminative of the outcome of the unities analysis. While acknowledging the common planning and execution of each hijacking,the court did not find fault in the arbitrators’ conclusion that this common plan did not override the conclusion that the two separatehijackings caused separate loss and damage. The arbitration award was therefor left to stand and the appeal dismissed.A Brief Review of Reinsurance Trends in 2012ARBITRATIONArbitration AwardsFederal courts almost uniformly confirmed reinsurance arbitration awards in 2012, continuing the trend of deference to arbitraldecisions. Where the motion courts granted motions to vacate, the appellate courts often reversed and confirmed the award. Forexample, in Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 688 F.3d 60 (2d Cir. 2012), the Second Circuit Court ofAppeals reversed the vacatur of an arbitration award on the basis of evident partiality, holding that the arbitrators’ failure to discloseconcurrent participation in another arbitration with related subjects and witnesses was not sufficient evidence of partiality within themeaning of § 10(a)(2) of the Federal Arbitration Act (“FAA”). In so holding, the Second Circuit confirmed the arbitration award andset down a clear test for evident partiality.The Second Circuit ruled that the failure to disclose concurrent service in a similar arbitration is not indicative of evident partiality.Concurrent service, the court said, does not, in itself, suggest a predisposition to rule in any particular way. Because the FAA’sevident-partiality standard is directed to the question of bias, if an undisclosed matter is not suggestive of bias, vacatur based onthat nondisclosure cannot be warranted under an evident-partiality theory. The court outlined the factors, while not dispositive, indetermining the applicability of the evident-partiality test, which in summary form may be outlined as follows: (1) extent and characterof the personal interest; (2) directness of the relationship between the arbitrator and party; (3) the connection of that relationshipto the arbitrator; and (4) the proximity in time between the relationship and the arbitration. The court ruled that to determine if arelationship is material, the district court must look to how strongly the relationship tends to indicate the possibility of bias, not howclosely the relationship relates to the facts of the arbitration. It is not appropriate, said the court, to vacate an award solely becausean arbitrator fails to consistently live up to the arbitrator’s announced standards for disclosure or conform in every instance to theparties’ disclosure expectations. The court found no indication that either arbitrator was predisposed to rule in any particular way inthe present arbitration because of the other arbitration and that the nondisclosure by itself did not constitute evident partiality. Thekey takeaway from this case is that in assessing evident partiality, the relationship (or lack of a relationship) of the nondisclosure toevidence of bias or partiality must exist. It is not a conflict of interest that requires vacatur under the evident partiality standard, butdemonstrable evidence of bias against a party. Here, the court found there was none.More typical examples of award confirmations include Century Indem. Co. v. Certain Underwriters at Lloyd’s London, No. 11 Civ. 1040(RJS), 2012 WL 104773 (S.D.N.Y. Jan. 10, 2012), in which a reinsurance arbitration falling under the Convention on the Recognitionand Enforcement of Foreign Arbitral Awards (the “New York Convention”), a New York federal court confirmed both the final arbitration Page 11 of 25
  • award and an interim arbitration award on the posting of letters of credit as security. During the course of the arbitration, the panelordered certain of the reinsurers to post letters of credit as required under the treaties and later clarified that the letters of credit werenot required to be posted for incurred, but not reported, losses. A final award issued setting forth the documentation requirementsnecessary for asbestos claims and guidelines for reconciling outstanding balances. Both parties sought to confirm the final award andthe reinsurer sought to confirm the interim award on the letters of credit requirements within the three-year period allowed by the NewYork Convention. The court granted both applications, finding no basis to vacate either the final or interim awards under the criteriaset forth in the New York Convention. The court noted that an interim ruling from an arbitration panel is sufficiently final if it finally anddefinitely disposes of a separate and independent claim even though it does not dispose of the entire arbitration.Similarly, in Ace Am. Ins. Co. v. Christiana Ins. LLC, No. 11 Civ. 8862(ALC), 2012 WL 1232972 (S.D.N.Y. Apr. 12, 2012), a New Yorkfederal court granted a reinsurer’s petition to confirm an arbitration award. The underlying arbitration concerned property damage andsubsequent delay of operations of a commercial facility resulting from a hurricane. The parties were unable to come to an agreementas to the valuation of the losses incurred at the commercial facility for property damage and lost production. As a result, a demand forarbitration and an arbitration agreement were filed. The reinsurer provided $50 million in a claim advance to the cedent assuming thatthe total claim value would exceed $250 million—with the $50 million payment representing the difference between the purportedtotal claim value and the $200 million deductible. The arbitration panel found that the cedent failed to meet its burden of proof toshow that the commercial facility sustained a loss that exceeded $250 million and that the reinsurer failed to meet its burden ofproof to show that the loss was less than $250 million. In denying the cedent’s cross petition to vacate the award, the court ruledthat the arbitration panel’s refusal to hear “prior course of dealings” evidence did not “provide a basis to vacate the Arbitration Awardunder § 10(a)(3) of the FAA.” The court also found that a vacatur under § 10(a)(4) was limited in scope to circumstances wherea panel exceeds its authority to determine a certain issue and that the cedent had failed to demonstrate that the panel had in factexceeded its authority. Because the cedent also failed to show that the panel was obligated to apply either a governing law or abinding provision that it subsequently failed to apply, the cedent’s assertions that the panel issued its ruling in “manifest disregard ofthe law” and “manifest disregard of the terms of the parties’ relevant agreement” were also rejected.In Am. Centennial Ins. Co. v. Global Int’l Reinsurance Co. Ltd., No. 12 CV 1400, 2012 WL 2821936 (S.D.N.Y. Jul. 9, 2012), a NewYork federal court denied the cedent’s petition to vacate the arbitral award and granted reinsurer’s cross-petition to confirm. Thepetition and cross-petition concerned the third arbitration conducted between the parties. The issues before the panel were several,and included whether certain relief awarded to the reinsurer in the first two arbitrations barred further relief. The panel found in favorof the reinsurer, but granted a lower rate of reimbursement than was sought. The cedent moved to vacate the award arguing that thearbitrators (1) exceeded their powers; (2) showed manifest disregard of the law; and (3) showed manifest disregard of the reinsuranceagreement. The court refused to vacate based on the arbitrators acting in excess of their powers, holding that the panel was “arguably”acting within the scope of its authority. In refusing to vacate for manifest disregard of the law, the court held that the panel provided a“barely colorable justification” for its rulings, sufficient to withstand scrutiny under the manifest disregard standard. Finally, on manifestdisregard of the reinsurance agreement, the court held that the cedent had “not directed the Court to an ‘egregious impropriety’ bythe panel or shown that the panel ‘intentionally defied’ a clear and unambiguous term in the [reinsurance agreement].”In confirming awards, courts in 2012 also took the opportunity to deny motions to seal. For example, in Aioi Nissay Dowa Ins. Co. Ltd.v. Prosight Specialty Mgmt. Co. Inc., No. 12 CV 3274, 2012 WL 3583176 (S.D.N.Y. Aug. 21, 2012), a New York federal court granteda reinsurer’s petition to confirm an arbitration award under the New York Convention, awarded the reinsurer costs under Fed. R. Civ. P.54(d), and denied the cedent’s motion to seal. The petition to confirm was unopposed, and the court granted the petition finding nobasis on which to vacate or modify the arbitration award. The cedent’s motion to seal was based upon a confidentiality agreemententered into by the parties in which each side agreed to make good faith efforts to limit disclosure of information related to thearbitration. The cedent argued that the petition to confirm and filing on the court’s docket was inconsistent with the confidentialityagreement. Though noting that a breach of contract action may lie, the court held that “absent evidence or argument that wouldenable the Court to make ‘specific, on the record findings demonstrating that closure is essential to preserve higher values [thatwould outweigh the presumption of public access to judicial documents] and is narrowly tailored to preserve that interest,’” the motionmust be denied. Page 12 of 25
  • Similarly, in Century Indem. Co. v. AXA Belgium, No. 11 Civ. 7263, 2012 WL 4354816 (S.D.N.Y. Sept. 24, 2012), a New York federalcourt also granted a cedent’s petition under the New York Convention to confirm multiple arbitration awards in its favor, denied cross-petition to vacate the awards, and denied motions to seal. Although the parties were at odds as to the propriety of the awards, theyboth moved to file certain documents under seal under a confidentiality agreement. The court held that the documents were judicialdocuments to which a presumption of access attaches, and although the confidentiality agreement was binding on the parties, it didnot preclude the court from making those documents available to the public. The court noted that although parties to arbitration aregenerally able to keep documents confidential, the “circumstance changes when a party seeks to enforce in federal court the fruits oftheir private agreement to arbitrate, i.e., the arbitration award.”The trend here shows that the benefits of confidentiality of a private commercial arbitration may fall away if one of the parties goes tocourt to confirm or vacate the arbitration award.Arbitration Panel CompositionIn Arrowood Indem. Co. v. Harper Ins. Co., Nos. 3:12-cv-2-RJC-DSC, 3:12-cv-3-GCM, 2012 WL 161667 (W.D.N.C. Jan. 19, 2012),there arose a series of disputes over arbitrator selection. In three related arbitration proceedings, the arbitration clause provided fora three-member panel, “one chosen by each party and the third by the two so chosen....” The parties had made their choices in allthree matters. But, the third neutral had only been chosen in one matter because a dispute arose over whether to consolidate thethree cases. The cedent asked the court to choose a third neutral in each of the remaining matters. The reinsurer countered that allthree matters should be consolidated before the single panel already in place. The court held that whether to consolidate ongoingarbitration matters is presumptively a question for the arbitrators, not a court. But the issue remained whether the consolidation issueshould be resolved by three panels or one. Determining how many panels would require interpreting a contractual provision that thecourt found ambiguous. Because the parties had already chosen one panel under the contract, and contractual interpretation “issolely for an arbitrator to decide,” the court held that the ambiguity should be resolved by the panel already in place.CONTRACTUAL INTERPRETATIONFrom ambiguities in contractual provisions to waivers of rights, 2012 was a year rich with court decisions interpreting reinsurancecontract provisions. At least four courts relied, in part, upon extrinsic evidence in construing contractual provisions, and each decisionheld the parties to the terms of the contract.In the first extrinsic evidence case, OneBeacon Am. Ins. Co. v. Commercial Union Assurance Co. of Can., 684 F.3d 237 (1st Cir. 2012),the First Circuit affirmed a district court’s denial of summary judgment to the cedent and award of summary judgment to the reinsurer.The dispute concerned the alleged obligation of the reinsurer to reinsure the cedent for certain policies issued by the cedent in theearly 1980s. The cedent provided coverage to the insured for three years during three consecutive policy periods. The 1980 policyincluded an endorsement stating that the policy was reinsured by the reinsurer. A facultative certificate, expiring at the conclusionof the 1980 policy, confirmed the reinsurer’s obligation to reinsure the cedent for the risk. The cedent did not issue the reinsuranceendorsement on either the 1981 or the 1982 policy periods, nor was a facultative certificate issued for this time period. In findingfor the reinsurer, the district court held that the facultative certificate was the only contract between the parties and because it statedthat the reinsurance term ended at the expiration of the 1980 policy, the reinsurer did not reinsure the later policies. In affirming, theFirst Circuit held that the cedent, as the party seeking coverage, was unable to prove that the reinsurer agreed to reinsure the 1981and 1982 policies, finding there was no evidence that the reinsurer agreed to provide reinsurance beyond the term of the 1980policy. In making its decision, the court also examined evidence regarding the flow of premium payments during the three-year periodin question and found support for the argument that the reinsurer terminated the relationship at the conclusion of the 1980 policyperiod. Page 13 of 25
  • The second case addressing extrinsic evidence in contract interpretation, Munich Reinsurance Am., Inc. v. Am. Nat’l Ins. Co., No.09:6435, 2012 WL 4475589 (D.N.J. Sept. 28, 2012), was a complicated retrocessional dispute. The district court granted in part anddenied in part the retrocedent’s motion for summary judgment and preserved the retrocessionaire’s rescission counterclaim for trial.The dispute centered on the alleged failure of the retrocessionaire to pay under two retrocessional agreements. The retrocessionairealleged various counterclaims and sought rescission based on misrepresentations it uncovered during discovery. One issue the courtruled on was construction of the retention provision of the retrocessional contract. The retrocedent claimed that the retention provisiontriggered the retrocedent’s obligation when both the retrocedent and the underlying ceded paid a cumulative total of $500,000 oneach loss occurrence. The retrocessionaire claimed that the underlying cedent’ payments did not count toward ultimate net loss. Thecourt found that the contract language was only susceptible to one reasonable interpretation and that extrinsic evidence supportedthat same conclusion.In the third case, a Florida state appellate court reversed a trial court’s ruling on interpretation of a reinsurance contract and criticizedthe lower court for failing to consider extrinsic evidence in making its determination. In Kiln PLC v. Advantage Gen Ins. Co., 80 So. 3d429 (Fla. Dist. Ct. App. 2012), a Florida state appellate court continued the trend of not construing a reinsurance contract againstthe drafting party. The appellate court reversed summary judgment issued in favor of the cedent and remanded the case to examineextrinsic evidence of whether coverage was available under an ambiguous provision of a reinsurance contract. The dispute waswhether the reinsurance contract covered claims arising from non-employee airline passengers. The clause at issue stated that thereinsurance coverage was for claims paid by the cedent for the death or injury of an airline passenger up to $300,000 for any oneperson not exceeding 10 times their annual salary. In reversing the trial court, the appellate court held that the reinsurance contractwas ambiguous as to whether non-employees were covered and that the trial court should have considered extrinsic evidence insteadof construing the contract against the reinsurers as the drafter. Because of the unique and highly specialized nature of the reinsurance(the court actually said insurance), extrinsic evidence should be used to help resolve the ambiguity.In a fourth case, Trenwick Am. Reinsurance Corp. v. W.R. Berkley Corp., 54 A.3d 209 (Conn. App. Ct. 2012), the Connecticut Courtof Appeals affirmed a trial court judgment holding that an agreement between the reinsurer and the cedent commuted their priorreinsurance contract. The commutation agreement terminated all prior “reinsurance agreements” between the parties. Despite thecommutation agreement, the parties continued exchanging reinsurance payments for premiums under the commuted reinsurancecontract for four years. Then, the reinsurer terminated payments and filed suit seeking restitution for the amounts unnecessarily paidto the cedent. The cedent argued that the commutation agreement should be reformed because the parties were mistaken as towhether the original reinsurance contract was commuted. The court refused to reform the contract because the parties agreed to anunambiguous commutation agreement terminating the original reinsurance contract. The court bound the cedent to the commutationagreement because the cedent’s experienced officer drafted the commutation agreement with the help of counsel, and the clearlanguage of the agreement terminated all prior reinsurance contracts. Moreover, the commutation agreement was not ambiguouswhen, by its terms, it terminated all “reinsurance agreements. The court, however, also affirmed the denial of restitution because bothparties for four years performed their respective obligations under the contract notwithstanding the commutation agreement. Becausethere was no evidentiary foundation for a court to have determined that one party had been unjustly enriched at the expense of theother, restitution was not appropriate.Courts in 2012 also addressed issues of contractual interpretation apart from extrinsic evidence. For example, in Women’s Hosp.Found. v. Nat’l Pub. Fin. Guar. Corp., No. 11-cv-00014, 2012 WL 956622 (M. D. La. Mar. 20, 2012), a Louisiana federal courtupheld the right of a reinsurer to approve a new issuance of debt by the insured. In Women’s Hospital, the cedent bond insurer wroteinsurance for a public hospital’s issuance of bonds to facilitate building renovations. The reinsurer stepped into the shoes of thecedent for purposes of enforcing the insurance contract with the insured hospital under a reinsurance contract. Thereafter, the insuredsought to obtain additional financing in order to build a new facility. Because the new debt issuance would require an amendment tothe insurance agreement, the insured was required to obtain written consent from the reinsurer prior to issuing the debt. After somenegotiation, the reinsurer withheld its consent to the new issue, and the insured then sued both the cedent and the reinsurer allegingbreach of the insurance agreement. The insured pointed to a “debt test” provision in the insurance agreement whereby the insuredcould incur additional debt liabilities without violating certain covenants and without modification to the agreement. The insured Page 14 of 25
  • argued that, so long as the additional liabilities did not violate these covenants, the reinsurer was obliged to provide its consent. Inessence, the insured argued that the “debt test” provision of the agreement qualified the separate provision requiring the insurer’sconsent to any modification of the agreement. In granting the cedent and the reinsurer’s motion to dismiss the insured’s lawsuit, thecourt found the consent provisions plain and unqualified: the insurer was free to withhold its consent to any modifications to theinsurance agreement even though the proposed debt issuance would not violate the “debt test,” which concerned certain transactionsthat would not require modification to the insurance agreement, and which was not the case for the new debt at issue. Importantly,the court observed that consent provisions of this kind are designed to provide the insurer with some degree of control over therelationship between the parties, and the reinsurer rightfully exercised that control in this case. This control provides some mechanismby which the insurer can limit the ability of the insured to take on additional debt, thereby increasing the risk of default on the priorinsured bonds.Finally, one court held that terms that were not defined in the reinsurance contract would take their meaning from the underlyinginsurance policies. In Ace Prop. & Cas. Ins. Co. v. R&Q Reinsurance Co., No. 02290, 2012 Phila. Ct. Com. Pl. LEXIS 128 (May 15,2012), a Pennsylvania state court granted a cedent’s motion for summary judgment against its reinsurer and predecessor companies,and decided the contract interpretation issue in the cedent’s favor. The dispute focused on the meaning of the terms “loss” and“expense” in multiple facultative reinsurance certificates issued by the reinsurer. The court accepted the cedent’s position that thedefinitions should be taken from the definition of “ultimate net loss” in the underlying insurance policies. The facultative certificatesprovided that the liability of the reinsurer followed that of the cedent, being subject in all respects to the terms and conditions of thecedent’s policies, except as otherwise provided. The cedent purchased facultative reinsurance on four underlying insurance policies inwhich the insured was sued by claimants alleging asbestos bodily injuries. When the claims settled, the cedent submitted proofs ofloss, but the reinsurer did not pay them, claiming instead that the cedent miscalculated its attachment point by combining indemnityand expenses. The court noted that the parties checked the “excess of loss” box on the facultative certificates, and not “contributingexcess” or “non-concurrent,” and ruled that, because loss was not defined in the facultative certificates, the definition carried overfrom the underlying policies. The court agreed with the reinsurer’s position, however, that the terms “loss,” “expense,” and “damage”would be determined by the facultative certificates and not the underlying policies if the facultative certificates were “non-concurrent”instead of “excess of loss.” Accordingly, the court ruled that the broad “ultimate net loss” definition in the underlying insurance policiesshould prevail, and that the term “loss” included defense and expenses in addition to indemnity. The court held the cedent was correctin combining indemnity and defense costs to reach its attachment point.FOLLOW-THE-FORTUNES AND FOLLOW-THE-SETTLEMENTS CLAUSESIn 2012, courts continued to recognize the viability of follow-the-fortunes and follow-the-settlements clauses. In United States Fid.& Guar. Co. v. Am. Re-Ins. Co., 939 N.Y.S.2d 307 (1st Dep’t 2012), aff’d as modified, 2013 WL 451666 (N.Y. Feb. 7, 2013), a NewYork appellate court affirmed summary judgment in favor of the cedent and against the reinsurers upholding the cedent’s allocationof asbestos losses to its reinsurance contract on follow-the-fortunes grounds. In 2013, the New York Court of Appeals modified theAppellate Division’s judgment, reversed the finding of summary judgment for the cedent on two grounds, and remanded the case fortrial. This analysis focuses on the since modified Appellate Division determination.Following a settlement of underlying asbestos losses, the cedent billed its reinsurers for a share of the settlement. The billingsallocated the settlement to the 1959 policy year and all the reinsurance claims to the 1959 treaty year. The reinsurers resistedbased on a different understanding of the cedent’s retention under the reinsurance agreements and that the cedent’s bad faithclaim exposure was being ceded when that exposure was not covered. Litigation commenced, and the cedent’s motion for summaryjudgment was granted, while the reinsurers’ was denied. On appeal, the reinsurers contended that the cedent acted in bad faithfrom its initial denial of its duty to defend and indemnify to its reinsurance presentation, breaching its duty of utmost good faith. Theappellate court affirmed, with one justice dissenting, distilling the dispute down to a question of fact concerning the increase of thecedent’s retention in the excess-of-loss reinsurance agreements, and a question of law concerning the application of the follow-the-fortunes doctrine. On the follow-the-fortunes point, the majority agreed that the follow-the-fortunes doctrine required the reinsurers to Page 15 of 25
  • accept the cedent’s reinsurance presentation. The court stated that all of the reinsurers’ arguments on bad faith, allocation, valuation,changes to the loss presentation, were all efforts to second guess the cedent’s decisions and barred by the follow-the-fortunesdoctrine. Even if considered on the merits, the reinsurers’ complaints would not excuse the reinsurers from their obligations. Thisfinding, as discussed above, was reversed by the New York Court of Appeals in February 2013.Similarly, in Arrowood Indemn. Co. v. Assurecare Corp., No. 11 CV 5206, 2012 WL 4340699 (N.D. Ill. Sept. 19, 2012), an Illinoisfederal court granted summary judgment to a cedent against its reinsurer in a dispute over settlement of a coverage declaratoryjudgment action following settlement of an underlying wrongful death action. The reinsurer provided a 100 percent quota share treatycovering the first $250,000 of net liability, plus a proportion of loss adjustment expenses. After settlement, the reinsurer paid theunderlying loss, but the insured brought a coverage action against the cedent claiming that more of the underlying settlement shouldhave been covered. The cedent settled the coverage action and billed the reinsurer for its share of the settlement plus expenses. Ingranting summary judgment to the cedent, the court, under Connecticut law, construed the loss settlements, follow-the-settlements,and follow-the-fortunes clauses and found for the cedent. The treaty required that all loss settlements by the cedent by way ofcompromise confer liability on the reinsurer. Because there was no evidence of bad faith by the cedent, the court held that thesettlement was covered under the treaty. The reinsurer argued that a portion of the settlement that was allocated to the insured’s badfaith claim was not covered, but the court found that it was arguably covered, pointing to the treaty’s ECO clause.LATE NOTICEAlthough late notice cases are infrequent, 2012 featured some notable decisions, highlighting the implications of choice-of-law andstate-law differences on the requirement of a show of prejudice. For instance, in Pacific Employers Ins. Co. v. Global Reinsurance Corp.of Am., 693 F.3d 417 (3d Cir. 2012), the Third Circuit reversed a lower court decision and ruled that a reinsurer had no obligation toindemnify its cedent for certain asbestos-related losses due to late-notice of loss given by the reinsured.The reinsurance certificate required that “[a]s a condition precedent, [the cedent] shall promptly provide the Reinsurer with adefinitive statement of loss on any loss or occurrence.” The cedent had received initial notice of the claim in April 2001 and theunderlying loss reached the excess layer by 2004. The broker, however, failed to keep the reinsurer advised about the claim despiterepeated requests by the reinsurer, and ultimately the reinsurer denied coverage and asserted a late notice defense. The district courtfound that the reinsurance certificate unambiguously required the cedent to provide a definitive statement of loss promptly after theinitial claim from the underlying insured and that the definitive statement of loss was a condition precedent to recovery. The certificate,however, failed to include an explicit choice of law provision. This issue was critical because although New York law on late noticegenerally requires a showing of prejudice, there is an exception where the reinsurance contract has an explicit condition precedentnotice requirement, as was the case here. Under Pennsylvania law, however, prejudice was arguably a requirement for succeeding on alate notice defense. The district court applied Pennsylvania law and concluded that the reinsurer had failed to allege facts supportinga finding of prejudice.On appeal, the Third Circuit reversed. The Third Circuit determined that, contrary to the district court’s conclusion, New York law applied.At the time the agreement was signed in 1980, the reinsurer was located in New York and the cedent was located in California. Theonly connection to Pennsylvania was that the cedent had become a Pennsylvania company in 1999. Although not easily ascertainablebecause the minimal negotiations of the certificate occurred via telex, the court ultimately determined that the place of contractformation was New York. Based on the totality of the circumstances at the time of contracting, where a New York reinsurer accepted,in New York, the terms and conditions of an agreement with a California company, there was no reason to believe the parties had anyexpectation that Pennsylvania law would apply. The Third Circuit thus ruled that New York law applied and that the reinsurer was notrequired to show prejudice in order to deny coverage.A federal magistrate judge in a New York federal court also ruled on the issue of late notice in AIU Ins. Co. v. TIG Ins. Co., No. 07 Civ.7052 (S.D.N.Y. Aug. 16, 2012). In a long-standing dispute over whether facultative certificates are required to respond to asbestos Page 16 of 25
  • loss notices claimed to be late by the reinsurer, the magistrate judge recommended that the reinsurer’s renewed motion for summaryjudgment be granted. The dispute involved a series of umbrella policies issued by the cedent to cover the insured’s excess liabilities.The cedent reinsured its exposure through a series of facultative certificates. Each of the facultative certificates stated that “promptnotice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance.”In 2001, a series of declaratory judgment actions and third-party actions were commenced over various insurers’ obligations onasbestos bodily-injury claims brought against the insured. In 2006, the cedent settled with the insured and began making paymentsunder the settlement agreement. In 2007, the cedent sought recovery under the facultative certificates for the settlement payments.The reinsurer rejected the cession based on the prompt notice provision of the certificates.In finding for the reinsurer, the magistrate judge first found that Illinois law, not New York law, applied to the certificates, which meantthat the reinsurer was not required to show prejudice from the late notice. After determining that Illinois law governed, the magistratejudge addressed the prejudice issue and found that, under Illinois law, prompt notice is a prerequisite to coverage under thecertificates. The magistrate judge also found that there were no questions of fact as to whether the reinsurer had actual notice of theunderlying claim and recommended summary judgment be granted to the reinsurer.JURISDICTION AND VENUEIn 2012, several courts faced the challenge of whether a foreign reinsurer is subject to the personal jurisdiction of U.S. courts andconsistently held that contracting with a cedent who conducts business in a particular forum is insufficient for an insured to hale areinsurer into a court in that jurisdiction. In Schultz v. Ability Ins. Co., No. C11-1020, 2012 WL 4794365 (N.D. Iowa Oct. 9, 2012), apolicyholder brought claims in Iowa federal court against Bermuda-based reinsurance companies affiliated with the insurer relatingto long term care benefits. The Bermuda companies (and others) filed a motion for judgment on the pleadings. In addressing whetherthe court had personal jurisdiction over the Bermuda companies, the court found that there were no direct contacts with Iowa, nooffices or employees in Iowa, and the companies did not conduct business in Iowa. Although the policyholder pointed out that nearly75 percent of the insurer’s risk was reinsured in Bermuda, the court held that the policyholder failed to show that the insurer was thealter ego of the Bermuda companies or acted as their agent. The court stated that “[w]hile one can question the wisdom of regulatorspermitting [the insurer] to purchase reinsurance from a member of the same corporate family, it does not render the contractualrelationship a ‘sham’ or otherwise make [the Bermuda companies] susceptible to suit in Iowa.” Piercing the corporate veil andproving an alter ego corporate theory is very difficult as this case shows. Further, this case also points out to Bermuda and otheroff-shore affiliates of U.S. companies that keeping corporate separateness and observing all the appropriate regulatory and corporategovernance compliance rules is crucial to avoid being haled into court.A similar case in California also dealt with a Bermuda-based reinsurer, with similar results. In Hollander v. XL Ins. (Bermuda) Ltd.,No. B230807, 2012 WL 4748956 (Cal. Ct. App. Oct. 5, 2012), a California appeals court affirmed a trial court’s order quashingservice of a summons and complaint for lack of personal jurisdiction against a Bermuda insurer. The Bermuda insurer made a specialappearance and moved to quash because it did not issue the policies in issue, did not do business in California, and its smallnumber of insureds in California did not subject it to jurisdiction. The policyholder argued that the Bermuda insurer did substantialbusiness in California and was party to a quota share reinsurance agreement that resulted in the Bermuda company’s sharing inCalifornia risks. In affirming the trial court, the appellate court held that the minimal California policyholders the insurer had, and itsparticipation in the reinsurance agreement, were too de minimis to confer jurisdiction. The court also rejected any alter ego theory.The climate is a bit different for foreign reinsurers who choose to bring suit in the U.S. In ABA Capital Mkts. Corp. v. Provincial DeReaseguros C.A., 101 So. 3d 385 (Fla. Dist. Ct. App. 2012), a Florida state appellate court affirmed the lower court’s order permittinga Venezuelan reinsurer to avail itself of the forum of its choice. The foreign reinsurer entered into a transaction with an entityincorporated in the British Virgin Islands (“BVI Entity”). The transaction involved a bond swap and off-shore investments in U.S. dollars.When the BVI Entity refused to return the bonds or transfer them to a designated custodian, the reinsurer filed suit in Florida state Page 17 of 25
  • court. The BVI Entity moved to dismiss the complaint for forum non conveniens, arguing that Venezuela was the more appropriateforum. On appeal, the court applied a four-part analysis, reviewing 1) whether an adequate alternative forum exists; 2) relevantfactors of private interest; 3) factors of public interest, where private interests are in balance or near equipoise; and 4) if the plaintiffcould reinstate its suit in the alternative forum without undue inconvenience or prejudice. After noting that Venezuela was a suitablealternative forum, the appellate court turned to private interests. Although acknowledging that a plaintiff’s choice of forum is generallyrespected, the court stated that a plaintiff’s choice “is given less deference when the plaintiff is not a resident of the forum state, orhas little bona fide connection to that state.” The court found, however, that the main witness and president of the BVI Entity residedin Miami, the BVI Entity held the bonds in Miami and maintained bank accounts there, other witnesses had traveled from Venezuelato Miami and were able to continue to do so, and all key documents had been translated from Spanish to English. Ultimately, thecourt held that although the Venezuelan reinsurer was “entitled to less deference” than a plaintiff who resided in Florida, the lowercourt correctly denied the BVI Entity’s motion to dismiss. Finding that the second factor of its analysis was not met, the court did notaddress the remaining factors.Courts typically uphold contractual forum selection clauses, and forum selection for an arbitration arising out of a reinsurance disputeis no exception. In Employers Ins. Co. of Wausau v. Arrowood Indemn. Co., Nos. 12-cv-283-bbc, 12-cv-284-bbc, 12-cv-285-bbc, 2012WL 5306152 (W.D. Wis. Oct. 26, 2012), the parties could not agree on the method for selecting arbitration panels in disputes arisingfrom a series of reinsurance contracts. The cedent argued that venue was not proper in Wisconsin because the contracts all had NewYork forum selection clauses in their arbitration provisions. In transferring the cases to New York, the court agreed with the cedent andfound that the forum selection clause was mandatory and must be enforced under Section 4 of the FAA. The court rejected argumentsthat FAA Section 5’s appointment of the arbitrator or umpire provisions, which are not affected by venue, would require the case tostay in Wisconsin.CHOICE OF LAWAn Illinois state court held that a contractual provision for choice of law in arbitration has no bearing on a choice of law determinationoutside of the arbitration context. In Amerisure Mut. Ins. Co. v. Global Reinsurance Corp. of Am., No. 10 L 012665 (Ill. Cir. Ct. Nov.7, 2012), the court dismissed a cedent’s complaint seeking attorney fees for a reinsurer’s alleged unreasonable failure to settle aclaim. The cedent submitted a claim to the reinsurer, which the reinsurer refused to pay. Under an arbitration clause in the reinsurancecontract, the parties commenced arbitration in Illinois and applied Illinois law. Following the arbitration, the cedent filed suit seekingattorney fees under state law after an appeals court ruled that the arbitration panel exceeded its authority in awarding attorneyfees, and the lower court erred in confirming that award. The court dismissed the cedent’s complaint because under a choice of lawanalysis, New York law, not Illinois law, applied, and New York law does not provide for attorney fees when an insurer fails to settlea claim. The reinsurance contract did not have a choice-of-law clause applicable to litigation. The only choice-of-law clause in thereinsurance contract governed the applicable law in arbitration. As a result, the court applied a two-step choice of law analysis. First,the outcomes would differ if New York or Illinois law applied because only the Illinois Insurance Code, and not New York law, providesfor attorney fees when a reinsurer unreasonably fails to settle a claim. Second, New York had more significant contacts because thereinsurer was a New York company, and the place of performance and last act under the reinsurance contract was either in New Yorkor Michigan. The court found that the Illinois contacts were that the cedent had an Illinois attorney and the arbitration took place inIllinois. Despite Illinois’ interest in discouraging alleged unreasonable conduct by insurers, the court held that New York had the mostsignificant contacts and that New York law applied. As such, under New York law, the cedent could not recover attorney fees from thereinsurer.ANTITRUSTIn 2012, New York’s highest court dismissed a state law antitrust claim against Equitas. In its decision in Global Reinsurance Corp. - U.S. Branch v. Equitas Ltd., 969 N. E. 2d 187 (N. Y. 2012), the New York Court of Appeals held that New York’s antitrust law, known as theDonnelly Act, Gen. Bus. Law § 340, could not be used to assert claims by a New York branch of a German reinsurer against Equitas. Page 18 of 25
  • The underlying dispute involved retrocessional claims issues and the requirements that Equitas put in place to document and examineclaims prior to paying retrocessional claims. The retrocedent commenced arbitration against Equitas under various reinsuranceagreements, but also brought this action under the Donnelly Act claiming that Equitas’ claims handling practices amounted to asuppression of competition in the marketplace.In reversing the intermediate appellate court’s reinstatement of the complaint, the Court of Appeals reinstated the motion court’s orderdismissing the complaint. Although the substance of the case is not a reinsurance issue, for reinsurers interested in state law antitrustissues, this is an opinion worth noting.DISQUALIFICATION OF COUNSELAs we observed in last year’s reinsurance review, 2011 was marked by a notable amount of litigation over the disqualification ofcounsel. At that time, it appeared that disqualification of counsel was one of the few areas of authority courts were not willing to cedeto arbitration panels. Litigation in this area continued in 2012.In Certain Underwriters at Lloyd’s, London v. Sidley Austin, LLP, No. 10-4663-BLS2 (Sup. Ct. Mass. Mar. 5, 2012), a Massachusettsstate court dismissed an action to disqualify counsel. There, the cedent in a reinsurance dispute with Lloyd’s over asbestos losseshired a law firm that had allegedly contemporaneously represented Lloyd’s in an appeal of an injunction proceeding in another matterin which Lloyd’s underwrote a direct insurance policy. Complicating things further was the potential involvement of Equitas and itsclaims management service company in the U.S. Essentially, the claims management service hired the law firm on the direct matteron appeal, while the cedent had hired the law firm on the reinsurance dispute arising out of a reinsurance contract. In denying theapplication to disqualify counsel, the court found that there was a conflict caused by the concurrent representation of the cedent ina reinsurance claim against Equitas and Lloyd’s and Equitas in the appeal. The court also found that the conflict was disclosed tothe cedent and obtained the cedent’s waiver of the conflict. In addition, the court found that the conflict was adequately disclosed toLloyd’s/Equitas and that a binding valid waiver was obtained.Not all courts, however, accepted the opportunity to substantively rule upon the issue of disqualification of counsel. In Utica Mut.Ins. Co. v. INA Reinsurance Co., 468 Fed. Appx. 37 (2d Cir. 2012) (Summary Order Without Precedential Effect), the Second Circuitaffirmed the appeal of a denial to disqualify. There, the cedent appealed the denial of its motion to disqualify a firm as counsel forthe reinsurer, along with various related discovery issues. The Second Circuit held that the district court had not abused its discretionin denying cedent’s motion to disqualify the reinsurer’s counsel, but because they had not been raised at the trial court level, thecourt took no substantive position on the two bases for disqualification raised on appeal: first, whether the district court should haveapplied New York law due to the matter having been removed from New York state court; and second, whether an ethical wall could besufficient to rebut the presumption of disqualification of a law firm where the conflicted attorney possesses material information abouta former client. Because the reinsurer voluntarily accepted the district court’s discovery prophylaxis, the Second Circuit determinedthat this issue was irrelevant to the disqualification motion.In Nat’l Cas. Co. v. Utica Mut. Ins. Co., No. 12-cv-657-bbc, 2012 WL 6190084 (W.D. Wisc. Dec. 12, 2012), a Wisconsin federal courtalso declined to substantively rule on the question of counsel disqualification. It had found that no basis for federal subject matterjurisdiction existed, and instead remanded the issue to state court.In this case, the cedent’s counsel had served as defense counsel in the underlying coverage dispute. The reinsurer claimed that thiscaused a conflict of interest, because counsel represented both the reinsurer’s and the cedent’s interests in the coverage litigation.When the cedent refused to replace its counsel, the reinsurer filed this action to disqualify counsel in state court, which the cedentremoved to federal court. The Wisconsin federal court ultimately remanded the action back to state court after finding that the cedenthad not shown that federal subject matter jurisdiction was present. Although the amount in controversy was eventually identified andexceeded $75,000, the court had an issue concerning whether the amount in controversy in the arbitration was the proper measure Page 19 of 25
  • for the disqualification action as the object of the disqualification litigation was not compelling arbitration or confirming an arbitrationaward. The court remanded essentially because it would not adopt the stakes in arbitration as the measure for subject matterjurisdictional purposes.DISCOVERYIn three cases in 2012, federal courts required the disclosure of reinsurance materials in discovery, emphasizing the broad scopeof discovery and the need to produce relevant materials. First, in Granite State Ins. Co. v. Clearwater Ins. Co., No. 09 Civ. 10607(RKE), 2012 WL 1520851 (S.D.N.Y. Apr. 30, 2012), a reinsurance dispute over the cession of asbestos losses, the reinsurersought production of reserve information as evidence that the cedent failed to implement reasonable and adequate practices andprocedures in reporting claims information to the reinsurer. A New York federal court affirmed the magistrate judge’s order requiringthe cedent to produce the requested information. In affirming the order, the district court rejected the cedent’s contention that the lawin the Second Circuit on late notice and bad faith precluded this discovery once it was undisputed that the cedent had a practice orpolicy in place. The court noted the broad scope of discovery permitted under the Federal Rules of Civil Procedure and determinedthat the reserve information was directly relevant to the reinsurer’s defense. The court also stated that the evidence was not onlyrelevant to whether the cedent acted in good faith, but whether notice was actually sent to the reinsurer. The court, however, did allowfor a protective order to secure proprietary information.Similarly, in Isilon Sys. Inc. v. Twin City Fire Ins. Co., No. C10-1392MJP, 2012 WL 503852 (W. D. Wash. Feb. 15, 2012), a Washingtonfederal court partially granted an insured’s motion to compel discovery of reinsurance information withheld by its insurer. In thisinsurance coverage action, the insured sought, among other things, the insurer’s reinsurance contracts and its communicationsconcerning the reinsurance contract. The insurer argued that reinsurance information was not discoverable because there is no badfaith claim being made. The court found that while reinsurance contracts are discoverable and do not require a showing of relevancy,the insurer does not have to produce other reinsurance information unless the insured established its relevancy. The court furtherordered the insurer to provide a more complete description of redacted information and documents withheld related to reinsurance.The court held that the justifications for withholding information were insufficient to “address the validity of the claimed privilege,” andordered the insurer to provide a more complete description of redactions and withholdings related to reinsurance.Finally, in Fireman’s Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 284 F.R.D. 132 (S.D.N.Y. 2012), an insurance coverage suit involvinga dispute over the production of reinsurance documents arising out of the sinking and salvage of a dry dock, the court granted theinsured’s motion to compel the cedent to produce the file of its reinsurer, as well as other communications or documents maintainedon the reinsurance contracts, including communications related to the cedent’s procurement of, and claims made on, its reinsurancecontract for the dry dock loss. The insured initially subpoenaed the reinsurer directly, but after the cedent objected on the ground thatthe information was protected by the common-interest doctrine, the reinsurer turned the file over to the cedent to handle the dispute.The cedent objected to the insured’s reinsurance information requests on the grounds of relevance and the common-interest doctrine.As to relevancy, the court noted the federal rules provide that a party is entitled to discovery on “any non-privileged matter that isrelevant to any party’s claim or defense.” In finding that the information was relevant, the court noted that although “case law issparse within the Second Circuit” concerning the discoverability of reinsurance information, “the few cases to consider the issue havedetermined that reinsurance information is indeed discoverable.” Based upon these cases, the broad scope of the federal discoveryrule, and that the cedent’s cross-claim asserting fraud put what the cedent told its reinsurer about the age and condition of the drydock in issue, the court held that the cedent’s position that reinsurance documents are generally irrelevant was insufficient to withholdthe documents, including information on loss reserves. Moreover, the court held that more recent cases on reserve information haveheld that document requests seeking reserve information should be evaluated on a case-by-case basis because both, the reserveamounts and changes to reserves, could possibly lead to admissible evidence relating to the insurer’s own beliefs about coverage,liability, and the good faith handling of the claim. Page 20 of 25
  • The court also addressed the common-interest privilege, stating that the doctrine is an exception to the general rule that voluntarydisclosure of confidential privileged material to a third-party waives any applicable privilege. While the doctrine protects the free flowof information from client to attorney whenever multiple clients share a common interest about a legal matter, the court cautionedthat the doctrine was not an independent source of privilege or confidentiality and will not apply if a communication is not protectedby the attorney-client privilege or the attorney work-product doctrine.The court emphasized that the parties must establish a “common legal, rather than commercial interest,” and it is key that the natureof the interest be identical, not similar. Here, the court noted, the evidence showed that the cedent and its reinsurer did not sharean identical legal interest that would entitle the cedent to withhold documents that it produced to its reinsurer. Moreover, the courtfound that the cedent had not proven or even argued that it disclosed otherwise privileged materials to its reinsurer in the course offormulating a common legal strategy, or for the purpose of obtaining legal advice from the reinsurer. Nor had it presented evidenceabout the legal necessity of exchanging otherwise protected information. Therefore, to the extent that the cedent shared otherwiseprivileged information with its reinsurer, the court ruled any privilege applying to the documents has been waived because the cedentfailed to establish that it shared a common legal interest with its reinsurer.MCCARRAN-FERGUSON ACTThough the McCarran-Ferguson Act did not receive significant treatment from the courts in 2011, the United States Court of Appealsfor the Fourth Circuit weighed in on the Act in the past year. In ESAB Group, Inc. v. Zurich Ins. PLC, 685 F.3d 376 (4th Cir. 2012), theFourth Circuit affirmed an order compelling arbitration, as it held that the McCarran-Ferguson Act did not apply.In this non-reinsurance case, the Fourth Circuit affirmed the district court’s exercise of subject-matter jurisdiction and order to compelarbitration. The appeal presented the question of whether the McCarran-Ferguson Act applies such that state law can reverse preemptfederal law and invalidate a foreign arbitration agreement. The dispute stemmed from a state court action brought by the insuredchallenging the insurer’s refusal to defend and indemnify the insured in products liability actions. The policies issued to the insuredcontained arbitration clauses requiring any disputes to take place in Sweden. The district court, adopting the reasoning of the FifthCircuit, held that because the McCarran-Ferguson Act limits its scope to federal statutes, and the New York Convention, not Chapter 2of the FAA, directs courts to enforce international arbitration agreements, the McCarran-Ferguson Act could not disrupt the applicationof traditional preemption rules.In affirming the district court’s order, the Fourth Circuit held that the scope of the McCarran-Ferguson Act is limited to domesticlegislation and therefore does not encompass Chapter 2 of the FAA because Chapter 2 implements the legislation of a treaty. Thecourt stated that Congress did not intend the McCarran-Ferguson Act to “delegate to states the authority to abrogate internationalagreements that this country has entered into and rendered judicially enforceable.” In so finding, the Fourth Circuit upheld the districtcourt’s order to compel arbitration in Sweden on the basis that state law invalidating arbitration agreements in insurance policies didnot apply.INTERMEDIARIESIn Olympus Ins. Co. v. AON Benfield, Inc., No. 11-cv-2607(PJS/AJB), 2012 WL 1072334 (D. Minn. Mar. 30, 2012), a Minnesotafederal court granted a motion to dismiss in favor of a reinsurance intermediary against a cedent. The dispute centered on theintermediary’s alleged failure to pay the cedent an annual fee, which was defined in the reinsurance brokerage agreement as a typeof rebate due at the end of the fiscal year calculated as a percentage of the commissions that the intermediary received during theyear from the cedent’s reinsurers. The brokerage agreement also provided a “forfeiture provision,” which eliminated the need of theintermediary to pay the annual fee “subsequent to any decision by [cedent] to terminate or replace [intermediary] as its reinsuranceintermediary-broker . . . .” The cedent appointed a new intermediary on February 17, 2009, to take effect on June 1, 2009, which was Page 21 of 25
  • the beginning of the new fiscal year. On March 25, 2009, the new intermediary advised the old intermediary that the cedent wouldnot be renewing its contract with the old intermediary.The cedent argued that it was owed the annual fee that was due at the end of the fiscal year. The intermediary asserted that noannual fee was owed because it was not payable before the cedent’s decision to change intermediaries and because, under the termsof the forfeiture provision, it was not payable after the cedent’s decision to change intermediaries.In granting the intermediary’s motion to dismiss, the court determined that the intermediary was not required to pay the annual fee.The terms of the agreement provided that if the cedent chose to discontinue the relationship between the cedent and the intermediaryno subsequent annual fee would be due or owing. The court found that terms set forth in a contract, as delineated by quotationsand parentheses, were not defined by the words that followed the terms, but by the words that preceded them. For those words orphrases not delineated by quotations and parentheses or otherwise explicitly defined, the words’ “plain and ordinary meaning” mustbe applied. The court, in applying these principles, determined that because the cedent ended the relationship between itself and theintermediary prior to the date the annual fee would have become due and owing, no annual fee was due and payable to the cedent.MANAGING AGENTSIn 2012, courts again took up the relationship between reinsurers and managing agents and not always to the reinsurer’s benefit. InLincoln Gen. Ins. Co. v. U.S. Auto Ins. Servs., Inc., No. 3:10-cv-2307-B, 2012 WL 3777408 (N.D. Tex. Aug. 30, 2012), a Texas federalcourt granted an underwriting agent’s motion for summary judgment in part in a complicated dispute arising out of the reinsuranceof automobile insurance policies written by the underwriting agent and the manner in which losses and commissions were paid andcalculated. The complaint alleged that the underwriting agent improperly used funds and withheld and misappropriated nearly $18million by manipulating the calculation of the contingent commission.The court found that the reinsurer did not demonstrate that the underwriting agent owed it a fiduciary duty. The agreements, consistentwith Texas insurance law, required the underwriting agent to hold the premiums as a fiduciary on behalf of the insured or insurer, andmust deposit the funds in an escrow account. Essentially, while the underwriting agent acted as an agent for the reinsurer for certainactivities, the provisions of the agreement cannot transfer fiduciary duties owed to the cedent directly to the reinsurer. The courtmade the same findings concerning the interpretation of the relevant insurance code provisions. Accordingly, the court granted theunderwriting agent’s motion for summary judgment on the reinsurer’s claim for breach fiduciary duty.The court also rejected the reinsurer’s claims for conversion because the claims fell within the terms of the contracts, and theeconomic loss rule limited the claim to breach of contract and not the tort of conversion. The court found that nothing in theagreements preserved common law remedies and the reinsurer did not show how there could be damages other than economic loss.The court denied the reinsurer’s summary judgment motion for breach of contract because the contracts did not unambiguouslyestablish each party’s obligations in case of termination.The reinsurer fared better in New York federal court later that year. In Acumen Re Mgmt. Corp. v. Gen. Sec. Nat’l Ins. Co., No. 09CV 01796(GBD), 2012 WL 3890128 (S.D.N.Y. Sept. 7, 2012), the court was faced with cross-motions for summary judgmenton a dispute over commissions based on the profitability of reinsurance contracts written by a managing agent. The underwritingagency agreement provided for the calculation of underwriting commissions and contingency commissions based on the reinsurer’sannual net profits. The parties agreed to terminate the relationship, but certain reporting requirements and contingent commissioncalculations were required as part of the termination agreement.Subsequent to the termination of the underwriting agreement, the reinsurer commuted a series of underlying reinsurance contracts onprograms that were performing poorly. The business written by the managing agent represented a fraction of the business commuted,but a substantial portion of the managing agent’s income-deriving business with the reinsurer. The reinsurer did not consult with the Page 22 of 25
  • managing agent on the commutations.In calculating the contingency commission, it turned out that no commissions were due. The managing agent claimed that thereinsurer breached its contract by not providing certain reports, failing to properly calculate the commissions, failing to consult whenestablishing incurred but not reported losses (“IBNR”), and using commuted losses in the commission calculations and other defects.The question for the court was whether any of the reinsurer’s actions resulted in a breach of either the termination agreement or theoriginal underwriting agreement.The court found that the failure to provide quarterly reports after the commutations was a breach, but that the breach was waivedby the underwriting agent because it never inquired about the reports and accepted the periodic reporting it had been receiving.The court also found no contractual requirement that the reinsurer consult with the managing agent on establishing IBNR forthe contingent commission calculation. The court also found no breach because the reinsurer included commuted losses in thecalculations or in the way the calculations were performed.Summary judgment was denied on the issue of data quality because enough of a factual issue was raised on whether the reinsurerproperly maintained its records on the managing agent’s business. The court ordered that the managing agent may proceed to trial onits data quality breach claim even though the claim may be limited to nominal damages.RECENT SPEECHES AND PUBLICATIONSJohn Nonna will be chairing program entitled “Difficult Issues in Arbitration - Even for Experienced Arbitrators,” as part of the ARIAS-USEducational Seminar on March 14, 2013, in New York. Larry Schiffer will be participating as a speaker in this program on technologyissues in arbitrations.Larry Schiffer will be making a presentation to the Lloyd’s Market Association on The Effect of Ambiguous Reinsurance ContractLanguage on April 17, 2013, in London.Eridania Perez will be presenting on disclosure of potentially privileged information between cedents and reinsurers at the Brokers andReinsurance Markets Association’s Annual Committee Rendezvous on April 22, 2013, in Clearwater, Florida.John Nonna and Eridania Perez spoke at the NYU Law International Arbitration Association on arbitration in the insurance andreinsurance industry and comparing domestic and international arbitration and ad hoc vs. institutionally administered arbitrations, onFebruary 13, 2013, in New York.Larry Schiffer spoke at webinar on “The Public Policy Ramifications of Superstorm Sandy on the Insurance Industry” for ThomsonReuters’ West LegalEdcenter on January 31, 2013.Larry Schiffer moderated a webinar on “U.S. Sanctions Compliance for the Insurance Industry” for Thomson Reuters’ WestLegalEdcenter on December 19, 2012. Daniel Waltz was a speaker on that webinar.Larry Schiffer moderated a webinar on “The Growing Expansion of Insurance Coverage Demands for Financial Fraud Claims” forThomson Reuters’ West LegalEdcenter on October 22, 2012.Larry Schiffer’s Commentary, “What’s Natural About the Expiration of In-Force Policies When a Reinsurance Contract Terminates?” waspublished on the website of the International Risk Management Institute, Inc., IRMI.com, in December 2012. Page 23 of 25
  • Larry Schiffer’s article, “Terrorism and the Pollution Exclusion,” was published in the Insurance Coverage Law Bulletin (Law JournalNewsletters), Vol. II, No. 9, in October 2012.Authors contributing to this newsletter are: Editor, Larry P. Schiffer, Suman Chakraborty, Devon A. Corneal, Aaron A. Boschee, AndrewMcNally, Alison Wyllie MacLaren, Anthony T. Nguyen, and Linda Sikora. Page 24 of 25
  • For more information, please contact your Patton Boggs attorney or a member of the Insurance and ReinsuranceDispute Resolution Practice Group: JOHN M. NONNA MARK D. SHERIDAN LARRY P. SCHIFFER Partner Partner Partner [T] 646.557.5172 [T] 973.848.5681 [T] 646.557.5194 jnonna@pattonboggs.com msheridan@pattonboggs.com lschiffer@pattonboggs.com ERIDANIA PEREZ MARK C. ERRICO SUMAN CHAKRABORTY Partner Partner Partner [T] 646.557.5137 [T] 973.848.5668 [T] 646.557.5142 eperez@pattonboggs.com merrico@pattonboggs.com schakraborty@pattonboggs.com JASON F. KING SHANNON W. CONWAY DAVID J. FARBER Of Counsel Partner Partner [T] 973.848.5687 214.758.6609 202.457.6516 jking@pattonboggs.com sconway@pattonboggs.com dfarber@pattonboggs.com EDWARD D. GEHRES T. MICHAEL GUIFFRE STEPHEN J. KOTT Partner Partner Partner 202.457.6016 202.457.6441 202.457.5224 egehres@pattonboggs.com mguiffre@pattonboggs.com skott@pattonboggs.com EDWARD S. WISNESKI J. THOMAS GILBERT Partner Of Counsel 202.457.6065 214.758.6686 ewisneski@pattonboggs.com tgilbert@pattonboggs.comThis newsletter may be considered attorney advertising under court and bar rules in certain jurisdictions. Thisinformation is not intended to constitute, and is not a substitute for, legal or other advice. You should consultappropriate counsel or other advisers, taking into account your relevant circumstances and issues. While notintended, this update may in part be construed as an advertisement under developing laws and rules.You may receive this newsletter from other people, which often occurs. To SUBSCRIBE or change your address, e-mailjstetkevych@pattonboggs.com. To UNSUBSCRIBE or OPT-OUT, simply e-mail jstetkevych@pattonboggs.com with“UNSUBSCRIBE” in the subject line.This newsletter can be accessed at:http://www.pattonboggs.com/newsletters/reinsurance/issue/feb2013.html Page 25 of 25