Reinsurance Newsletter - March 2014

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Reinsurance Newsletter - March 2014

  1. 1. MARCH 2014 This newsletter provides only general information and should not be relied upon as legal advice. This newsletter may be considered attorney advertising under court and bar rules in certain jurisdictions. IN THIS ISSUE NEWSLETTER REINSURANCE NEWSLETTER RECENT CASE SUMMARIES NEW YORK FEDERAL COURT CONFIRMS “CONCEPTUAL” ARBITRATION AWARD AS A FINAL JUDGMENT R&Q Reinsurance Co. v. Utica Mut. Ins. Co., No. 13 Civ. 8013 (PAE), 2014 U.S. Dist. LEXIS 19040 (S.D.N.Y. Feb. 14, 2014). Recent Case Summaries Recent Regulatory Developments A Brief Review of Reinsurance Trends in 2013 Recent Speeches and Publications EDITOR Larry P. Schiffer ABU DHABI ANCHORAGE DALLAS DENVER DOHA DUBAI NEW JERSEY NEW YORK RIYADH WASHINGTON DC PattonBoggs.com A New York federal court confirmed an arbitration award as a final judgment and rejected the cedent’ argument that the award was an interim award in an arbitration that never reached completion. The case arises out of asbestos losses ceded to nine facultative certificates covering the cedent’s umbrella policies issued to an asbestos-defendant insured. The arbitration proceeded under an arbitration protocol that specifically indicated that a reasoned award was not required. After hearing, the panel issued a “Final Order” that set out the panel’s findings, including a holding that the facultative certificates did not cover defense costs, orphan shares, or declaratory judgment expenses, and that future billings should conform to the Final Order and the certificates. The Final Order did not calculate the specific amounts that were owed by the reinsurer. The cedent sought reconsideration twice, which the panel essentially rejected other than to say that all other requests for further relief were denied. In confirming the award, the court found that there was no material issue of fact that would preclude confirmation. It rejected the cedent’s argument that the award was not final because it failed to specify the exact amount the reinsurer owed to the cedent. The court found that there was more than the required barely colorable justification for the outcome reached. The court noted that for better or worse, the parties asked the arbitrators to resolve the dispute on a conceptual basis, not on an exact mathematical level. Neither side in their proposed awards supplied the panel with data to determine Reinsurance Newsletter – March 2014
  2. 2. the precise amount the reinsurer would owe under the various award scenarios. Essentially, the parties had to take the panel’s findings and apply them to the billings now and in the future based on the framework provided. The court stated that the parties pursued the arbitration in a manner that made it impossible for the panel to calculate the exact amount owed and the cedent did not either stipulate to facts or present evidence necessary for the panel to make such a calculation. That did not make the award any less final, held the court. TENNESSEE FEDERAL COURT HALTS ARBITRATION OF PROTECTED CELL REINSURANCE AGREEMENT Milan Express Co. v. Applied Underwriters Captive Risk Assur. Co., No. 13-1069, 2014 U.S. Dist. LEXIS 8317 (W.D. Tenn. Jan. 23, 2014). In one of the first cases involving a protected cell company in a reinsurance agreement, a Tennessee federal court upheld a magistrate judge’s order stopping arbitration because governing state law barred arbitration of contracts “concerning or relating to an insurance policy.” The case involved an insured’s attempts to contest fees demanded by its reinsurer, who maintained a segregated “protected cell” from which a portion of the insured’s worker’s compensation benefits would be paid. The insured and the reinsurer had entered into a three-year “Reinsurance Participation Agreement,” which allowed the insured to capitalize the segregated cell account and “share in the benefit of good loss experience at the risk of bearing the cost of unfavorable loss experience.” The Reinsurance Participation Agreement was an adjunct to a reinsurance treaty between the insured’s direct insurers and the reinsurers. When fees charged to the insured to capitalize the protected cell sharply increased, the insured stopped paying premiums, and the reinsurer demanded arbitration. After more than a year of informal negotiations, the reinsurer’s efforts to open arbitration in Chicago, and the insured’s request to stay arbitration and mediate, the insured sued in federal court. In the Reinsurance Participation Agreement, the parties agreed to “resolve any disputes arising under [the agreement] without resort to litigation.” As such, the parties were compelled to initiate informal dispute resolution prior to demanding binding arbitration under American Arbitration Association rules. Any litigation that did arise under the agreement was to be resolved under Nebraska law and in the state and federal courts of Nebraska. When the insured sued in federal court, the reinsurer moved to compel arbitration and/or transfer the action to Nebraska. The court denied both motions, concluding that the arbitration clause in the Reinsurance Participation Agreement was void and unenforceable. The court found that Nebraska law renders any arbitration agreement “‘valid [and] enforceable,’ Neb. Rev. Stat. § 25-2602.01(b), except when that written contract is ‘an agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract,’ Neb. Rev. Stat. § 252602.01(f)(4).” Although the reinsurer argued that the Reinsurance Participation Agreement was clearly, by its own terms, a “reinsurance contract” and thus subject to arbitration, the court found that the reinsurance exception applied only to contracts “between insurance companies.” Because the insured was not an insurance company, the litigation amounted to a basic insurance dispute that could not be arbitrated. Moreover, because the reinsurance contract was PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 2
  3. 3. part of a network of agreements that provided the insured with direct worker’s compensation insurance, the dispute “‘relate[d] to’ an insurance policy” under the Nebraska statute, and thus the arbitration provision was unenforceable. The court further concluded that the insured’s early efforts at dispute resolution and mediation did not constitute a waiver of its rights to later challenge arbitration. In considering whether to transfer the case, the court rejected arguments that the contract’s forum selection clause— which mandated litigation in Nebraska—should govern the analysis. The court instead considered the federal transfer statute, 28 U.S.C. § 1404(a), and concluded the convenience to the parties, including to witnesses overwhelmingly located in Tennessee, warranted resolution of the case there. NEW YORK FEDERAL COURT HOLDS PRECLUSIVE EFFECT, IF ANY, OF PRIOR ARBITRATION AWARD FOR ARBITRATORS TO DECIDE Citigroup, Inc. v. Abu Dhabi Investment Auth., No. 13 Civ. 6073 (PKC), 2013 U.S. Dist. LEXIS 167310 (S.D.N.Y. Nov. 25, 2013). In a recent non-reinsurance case, a New York federal court held that whether a prior arbitration award has a preclusive effect on a subsequent arbitration is for the arbitrators to decide and not the courts. The dispute arises out of a multi-billion investment agreement. The investment agreement contained an arbitration clause. The clause was found by the court to be broad (“any dispute that arises out of or relates to the Transaction Documents, or the breach thereof”). The first award rejected the claims under the investment agreement and the award was confirmed. A second arbitration demand was served, which allegedly raised claims that were raised in the first arbitration. This action was brought to preclude the second arbitration. In dismissing the complaint, the court held that the arbitrators had to determine the preclusive effect, if any, of the prior award. Citing Nat’l Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir. 1996), the court held that preclusion is a merits-based defense to be decided by the arbitrators. The court also rejected the plaintiff’s attempt to use the All Writs Act to enjoin the arbitration. FEDERAL COURT FINDS FOR REINSURER IN CASCADING EXCESS TAX DISPUTE Validus Reinsurance, Ltd. v. U.S., No. 13-0109(ABJ), 2014 U.S. Dist. LEXIS 13981 (D.C. Feb. 5, 2014). We normally don’t report on tax-related matters in the Newsletter, however, this case is significant.. A Washington, D.C. federal court addressed an issue of growing importance to off-shore reinsurers that assume risks from the United States, but then seek retrocessional coverage from non-U.S. reinsurers. In this case, the off-shore reinsurer of U.S. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 3
  4. 4. risks purchased a retrocessional treaty for its own protection. The U.S. Internal Revenue Service (“IRS”) claimed that the off-shore reinsurer owed the government an excise tax on the retrocessional premium under 26 U.S.C. § 4371. Commentators have called this a cascading tax because the tax liability for U.S. risks cascades through the layers of insurance and reinsurance. In finding in favor of the reinsurer and against the IRS, the court held that § 4371 did not impose an excess tax on retrocessional transactions because the language of that section does not apply beyond the first level of reinsurance. The court found that the statute had a clear internal limitation on its application to reinsurance policies (i.e., application to premiums paid on reinsurance covering any of the contracts taxable (casualty insurance, indemnity bonds, life insurance, sickness and accident policies, and annuity contracts)). Because a retrocessional contract provides coverage against the risks of the assumed reinsurance contract, the court held it to be outside the scope of the statute and not subject to the excise tax on reinsurance contracts. It will be interesting to see if the IRS pursues an appeal considering the motivation by the Treasury Department to broaden the extra-territorial effect of the U.S. Tax Code on as many businesses as a possible with any connection to the United States. NEW YORK MOTION COURT DISMISSES TWO OF REINSURER’S AFFIRMATIVE DEFENSES Granite State. Ins. Co. v. Transatlantic Reinsurance Co., No. 652506/2012, 2013 N.Y. Misc. LEXIS 6142 (N.Y. Sup. Ct. Dec. 23, 2013). In a complicated reinsurance dispute, a New York motion court has dismissed two affirmative defenses to claims of breach of contract by the cedent. The cedent’s motion to dismiss the remaining defenses and for summary judgment was denied. This dispute arises from asbestos losses ceded to a series of facultative certificates. In reaching its decision, the court describes the distinction between facultative and treaty reinsurance. One of the affirmative defenses was that the cedent failed to settle the underlying action promptly. The court dismissed this affirmative defense based on follow-the-settlements principles, holding that a reinsurer is bound to accept the cedent’s good faith decisions on all things concerning the underlying insurance terms and claims against the underlying insured. The court also dismissed the affirmative defense of breach of the duty of utmost good faith. Because that defense was duplicative of its breach of contract defense and arises from the same set of facts, it was dismissed. Other defenses were sustained and summary judgment was denied because of issues of fact and proof that were required to be resolved. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 4
  5. 5. PENNSYLVANIA FEDERAL COURT DENIES STAY OF DISCOVERY IN MORTGAGE REINSURANCE DISPUTE Cunningham v. M&T Bank Corp., No. 1:12-vc-1238 (M.D. Pa. Jan. 14, 2014). A Pennsylvania federal court denied an application by bank-related defendants to stay all discovery and proceedings pending resolution of a parallel mortgage reinsurance case on appeal before the Third Circuit. There are quite a few cases being brought against mortgage banks and their affiliated reinsurers for various claims of Real Estate Settlement Procedures Act violations. This case is among those that assert the reinsurance contracts with the mortgage bank’s captive reinsurer did not create a bona fide reinsurance relationship as there was no risk transfer and that the transaction was merely a kick-back scheme. In the companion case, the district court granted summary judgment to the mortgage back defendants and affiliates and the defendants in this case wanted a stay until the Third Circuit ruled on the appeal of the grant to summary judgment. The court denied the stay, holding that the mortgage bank defendants’ arguments were purely speculative as discovery in this case could yield a different result. WISCONSIN APPELLATE COURT NOTES THAT ASSUMPTION REINSURANCE IS NOT REINSURANCE DeMarco v. Keefe Real Estate, Inc., No. 2012AP1933, 2013 Wisc. App. LEXIS 1062 (Wis. Ct. of App. Dec. 27, 2013). We include this case solely for the court’s recognition that assumption reinsurance is not reinsurance. The case was about whether certain carriers assumed the liability of the insured’s insolvent carrier. While one carrier had assumed the insolvent carrier’s liabilities, the other had not. The court noted that typically reinsurance contracts provide no direct liability of the reinsurer to the insured, but sometimes insurers do assume direct liability for policies issued by another carrier. These agreements, said the court, “are not truly reinsurance contracts but are sometimes labeled as such.” That was the case with the one carrier, which entered into an assumption reinsurance agreement. The other carrier, however, did not assume liability under the insolvent carrier’s policies. CALIFORNIA FEDERAL COURT UPHOLDS COMMON INTEREST DOCTRINE FOR PRIVILEGED COMMUNICATIONS WITH REINSURER Hawker v. BancInsurance, Inc, No. 1:12-cv-01261-SAB, 2013 U.S. Dist. LEXIS 180831 (E.D. Ca. Dec. 27, 2013). Policyholders brought a motion to compel seeking documents, including communications with reinsurers, which were being withheld or redacted on the ground of privilege. One of the main issues was whether common interest protection applied to the requested documents. The insureds argued that their insurer had “offered no evidence to PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 5
  6. 6. show any common interest between itself and any of its insurers; or an agreement to pursue a common legal defense and/or to share costs of the litigation with its reinsurers.” Citing California Evidence Code §§ 912 and 952, the carrier contended that the production of its reinsurance reports was barred based on privilege and therefore it had not waived the privilege. In denying the motion to compel, the court stated that, pursuant to California law, “where reinsurance documents include attorney-client or protected work product communications, they would be entitled to the same privilege protection as would similar communications between the ceding insurer and its attorneys handling the insured claim.” In addition, the court noted that California law requires an insurer who obtains reinsurance to communicate “all the representations of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk.” Therefore, court held that communications with a reinsurer, which include attorney-client information, are not discoverable and that the carrier had not waived its privilege by its communication with its reinsurers. CONNECTICUT FEDERAL COURT GRANTS REINSURER’S MOTION TO SEAL Travelers Indem. Co. v. Excalibur Reinsurance Corp., 3:11-cv-1209-CSH (D. Conn. Nov. 26, 2013). This case arose out of several errors and omissions policies. The reinsurer sought to seal certain documents, including two unredacted memoranda of law filed by the cedent and two exhibits. Previously, the court had provisionally allowed the reinsurer to designate a deposition as confidential information, but required the reinsurer to designate the specific portions of the transcript if the reinsurer was going to move to seal. The reinsurer filed a motion to seal, arguing that the designated portions of deposition testimony be limited to five pages of a transcript that spanned nearly two hundred pages. Specifically, the reinsurer contended that those pages allegedly contained confidential and sensitive business information and also its business practices and relationships. In granting the motion to seal, the court weighed the strong presumption of public access against the significant interest in protecting sensitive confidential business information from public dissemination. Further, the court recognized that, upon a particularized showing of potential harm to the movant, sensitive business information may provide a clear and compelling reason to warrant sealing. The court granted the reinsurer’s “narrowly tailored” request to maintain sealing of the unredacted versions of the insurer’s memoranda and the designated portions of the deposition transcript. As such, the court sealed, with permanency, the unredacted memoranda containing the reinsurer’s confidential and sensitive business information, disclosure of which could have materially affected the reinsurer’s ability to compete effectively as a business. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 6
  7. 7. REVENUE SHARING AGREEMENT UPHELD IN FAVOR OF CEDENT AND AGAINST REINSURANCE BROKER Homeowners Choice, Inc. v. Aon Benfield, No. 13-1846, 2013 WL 6670981, 2013 U.S. App. LEXIS 25194 (7th Cir. 2013). In an unpublished decision, the Seventh Circuit Court of Appeal affirmed a district court ruling that a reinsurance intermediary remained liable to a cedent on a revenue sharing agreement (“RSA”) after the cedent terminated the insurance intermediary as its broker of record. The cedent issued a Broker Authorization Contract designating the reinsurance intermediary as its broker of record in 2007. Later, in 2008, the parties began to negotiate the terms of an RSA and in 2009 they entered into a written RSA for a one-year term that expired on May 31, 2010. In March 2013, the cedent notified the reinsurance intermediary that it had selected another reinsurance intermediary and designated it as the new broker of record for the following one-year term. The reinsurance intermediary argued that certain language in the RSA precluded the cedent from receiving a rebate on brokerage because of the cedent’s decision to appoint a new reinsurance intermediary (the “Termination Provision”). The appellate court concluded that the Termination Provision relied upon by the reinsurance intermediary was ambiguous, as the district court had also concluded. This ruling enabled the court to review evidence outside of the four-corners of the RSA to determine the parties’ intent concerning the Termination Provision. Furthermore, because the reinsurance intermediary had drafted the RSA, the court determined that it was proper to construe ambiguity in the RSA Termination Provision against the reinsurance intermediary. As a result, the court affirmed that the reinsurance intermediary was required to pay the cedent a rebate on brokerage related to placements made during a one-year term covered by the RSA. RECENT REGULATORY DEVELOPMENTS VERMONT PASSES LEGACY INSURANCE MANAGEMENT ACT Signed into law on February 19, 2014, the Legacy Insurance Management Act, H. 198, puts Vermont out front in the business of providing a safe harbor for runoff operations. What the Act does is allows for the transfer of closed blocks of non-admitted commercial property and casualty insurance and reinsurance to a Vermont-domiciled assuming company established for the sole purpose of acquiring closed blocks under the Act. It does not apply to personal lines, life, health, or workers’ compensation insurance. This Act is relevant to the reinsurance market because it provides for a statutory novation and allows the assumption of closed blocks of assumed reinsurance as well. Discontinued business, legacy and run-off units of insurance companies may find this Act useful in developing an exit strategy for some of their portfolios. That, of course, is what the State of Vermont hopes will happen. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 7
  8. 8. Here are some notable features that affect reinsurance. A closed block means a block, line or group of commercial non-admitted insurance policies or reinsurance agreements or both. The business cannot be admitted Vermont business. The transferring insurer has to have ceased offering, writing or selling this insurance or reinsurance to new policyholders and all policy periods have to be fully expired for not less than 60 months (no active premiums). As part of the transfer plan under the Act, the assuming company must file a list of all outward reinsurance agreements attaching to the policies or inward reinsurance agreements in the closed block. Also necessary, is a list of policies and inward reinsurance contracts to be transferred, which by their terms and conditions prohibit assignment and assumption of liabilities without prior written consent of the policyholder or inward reinsurance counterparty. A statement of the outward reinsurance agreement assets attaching to any policy or inward reinsurance agreement must be provided. A statement describing any pending disputes between the transferring insurer and any inward reinsurance counterparty must be provided. Information identifying policyholder and reinsurance counterparties is exempt from public inspection under the Vermont Public Records Act. Notice of the transfer must be given to any inward or outward reinsurance counterparty. Objections must be filed by these counterparties within the time permitted. Any objection must be express and in writing. If an objection is made, the assuming company may submit a revised list excluding the objecting inward reinsurance counterparty and the relevant reinsurance contract or file an express notice from that counterparty now accepting the plan and withdrawing the objection. Otherwise, the plan is deemed accepted. If the reinsurance contract requires the consent of the inward reinsurance counterparty to the transfer, that reinsurance contract shall not be transferred unless consent is obtained. In reviewing the plan, the Commissioner of the Department of Financial Regulation must make findings concerning whether any outward reinsurance agreement will be adversely affected by the transfer and whether the plan materially adversely affects the interests of any outward reinsurance company, including the interests of any inward reinsurance counterparty who has accepted the plan. The key features of the Act include the ability of policyholders and inward reinsurance counterparties to object to the plan and essentially opt out, and the requirement that if written consent is necessary to assign or transfer obligations, that written consent must be obtained for that policy or reinsurance contract to be on the transfer list. Thus, the cram-down features of a Part VII transfer do not appear in this Act. News articles suggest that industry objections caused amendments to the proposed legislation to allow for these key features. A BRIEF REVIEW OF REINSURANCE TRENDS IN 2013 The year 2013 brought us an important case from the New York Court of Appeals on follow-the-settlements in the context of allocation, which introduced an objective reasonableness standard. 2013 also brought us a series of late PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 8
  9. 9. notice defense cases. Courts also exhibited a continued willingness to stay litigation and compel arbitration where the dispute fell squarely within the scope of the relevant arbitration clause. On the other hand, at least one motion court also enjoined arbitration when there was evidence of misconduct. Arbitrator authority was another issue addressed by the courts this past year, along with arbitrator panel composition issues, issues surrounding arbitration awards and whether court filings involving reinsurance disputes should be sealed. ARBITRATION Compelling Arbitration As with previous years and consistent with federal public policy, courts continued enforcing arbitration clauses in 2013. For instance, in Trenwick Am. Reinsurance Corp. v. Unionamerica Ins. Co., No. 3:13cv94 (JBA), 2013 U.S. Dist. LEXIS 97518 (D. Conn. Jul. 12, 2013), a Connecticut federal court compelled arbitration against a reinsurer and denied the reinsurer’s application to enjoin arbitration. The dispute was between a signatory to a reinsurance assumption agreement, who claimed that the reinsurer under reinsurance agreements between that reinsurer and another cedent was required under the reinsurance assumption agreement to pay certain amounts because of the original cedent’s failure to pay obligations under the reinsurance agreements. In granting the motion to dismiss and to compel arbitration, the court rejected the argument that it was without jurisdiction to consider the issue or arbitrability. Nevertheless, it found the issues in dispute arbitrable. The court noted precedent that a signatory to an arbitration agreement is estopped from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement the party has signed. Because, held the court, the object of the arbitration was collection of reinsurance balances under the terms of the reinsurance contracts the dispute clearly fell within the scope of the arbitration clause. In another decision, a Minnesota federal court granted motions by the successor to a group of off-shore producerowned reinsurance companies and their owners to stay an action brought by a cedent pending arbitration of the cedent’s claims against the reinsurers and their owners. Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., No. 111358 (MJD/JJK), 2013 WL 500362 (D. Minn. Feb. 11, 2013). This case involved a complex interwoven reinsurance relationship between the cedent and its reinsurers and whether a dispute about what happened to trust funds deposited as security for reinsurance should be heard in arbitration or by the court. In granting the motion to stay the pending arbitration, the court discussed the standards for determining arbitrability and the principle that nonsignatories can compel arbitration under certain circumstances. Here, the successor reinsurer was being asked to respond to claims under reinsurance agreements that contained arbitration clauses. The court agreed that at minimum, equitable estoppel applied to allow the successor reinsurer to enforce the arbitration clause in the agreements. The court found that the arbitration clauses were broad and covered the cedent’s claims against the successor reinsurer. The court rejected the claim that the successor reinsurer waived its right to arbitration PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 9
  10. 10. and that the cedent was prejudiced by the successor reinsurer’s actions. The stay was granted to all parties, including the trust administrator and trustee, but the case was not dismissed because of the various non-arbitrable claims alleged in the amended complaint. Although not cases compelling arbitration, the following two decisions involved denials of motions to compel arbitration in unique circumstances. In the first, Pine Top Receivables of Ill., Inc. v. Banco de Seguros Del Estado, No. 12 C 6357, 2013 U.S. Dist. LEXIS 81516 (N. D. Ill. June 11, 2013), the issue before the Illinois federal court was whether an assignee that received a right to obtain payment from a reinsurer from its cedent—after the cedent’s liquidation— also received the cedent’s right to arbitrate all claims against the reinsurer. Here, the court granted a reinsurer’s motion to dismiss claims to compel arbitration asserted by a cedent’s assignee in liquidation. The reinsurer argued that the agreement assigning the right to payment from the cedent to the assignee did not indicate that the right to invoke arbitration was included in the assignment. In granting the reinsurer’s motion to dismiss and denying the assignee’s motion to compel arbitration, the court agreed with the reinsurer. Because the assignment agreement specifically stated that it did not include a novation or full assignment, the court held that the deliberate use of limiting language in the transfer of rights to obtain payment evidenced an intent to convey only the rights expressly granted, of which the right to arbitrate was not one. The same Illinois federal court in two earlier decisions addressed the insolvent cedent’s assignee’s attempt to collect payments allegedly due from the assignor’s reinsurer. Pine Top Receivables of Illinois, LLC v. Banco De Seguros Del Estado, No. 12 6357, 2013 U.S. Dist. LEXIS 15246; 2013 U.S. Dist. LEXIS 28040 (N. D. Ill. Feb. 5 & 25, 2013). In one of those two decisions, the court granted the reinsurer’s motion to dismiss an assignee’s attempt to compel arbitration. The court found that although the underlying reinsurance treaties contained binding arbitration clauses, the plain language of the assignment agreement only granted the assignee limited rights to collect specific debts. Thus, rights under the arbitration clause were not assigned. Indeed, the assignment plainly stated that it “shall not be construed to be a novation or assignment” of the reinsurance treaties themselves. As such, the assignee did not have the power to enforce the treaties’ arbitration clauses. In New Jersey Physicians United Reciprocal Exchange v. ACE Underwriting Agencies, Ltd., No. 12-04397 (FLW/LHG), 2013 U.S. Dist. LEXIS 52035 (D.N.J. Apr. 11, 2013), a New Jersey federal court stayed litigation brought by a cedent pending the outcome of arbitration over an alleged breach of a reinsurance contract. In finding for the reinsurers, the court held that the arbitration clause was extremely broad and applied to all disputes and all differences arising out of or connected with the second reinsurance contract. Because the dispute was based on the interpretation of contractual terms and because the arbitration clause was so broad, the court found that the dispute fell within the scope of the arbitration clause. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 10
  11. 11. Enjoining Arbitration Two cases in 2013 dealt with the converse of compelling arbitration: staying/enjoining arbitration. In the first case, Star Ins. Co. v. Nat’l Union Fire Ins. Co., No. 13-13807, 2013 U.S. Dist. LEXIS 130379 (E.D. Mich. Sept. 12, 2013), a federal court in Michigan found that the facts in this case fell into the exception to the rule that courts generally lack jurisdiction to review arbitration proceedings until a final award is issued. Counsel for the reinsurer had an ex parte telephone conference with the reinsurer’s party-appointed arbitrator about the interim final award (as apparently shown in his time entries produced to obtain an award of attorney fees) granted after a reinsurance arbitration proceeding. The question the court had was whether the arbitration clause was breached and whether a stay was appropriate to allow for that question to be researched and resolved. Essentially, the cedents argued that instead of submitting the matter to a three-person panel, decisions were made by a two-person panel in violation of the contract (and the ARIAS• U.S. Code of Conduct). In granting the injunction, the court found that under Michigan law (which was the choice of law in the contract) all the cedents had to do was prove the fact of ex parte communications to prevail on a request to remove a panel member. Thus, the court found that the cedents would prevail on the merits and granted the preliminary injunction. The court finished off with the following: “Although there is a strong federal policy favoring arbitration, the public interest lies in the integrity of the arbitration process and in upholding arm’s length, negotiated contracts.” This is an unusual, fact-specific case and the order has been appealed to the Sixth Circuit Court of Appeals. A decision is expected in 2014, which may clarify the import, if any, of this case. In the second case, in Allstate Ins. Co. v. OneBeacon Am. Ins. Co., No. 13-12368-NMG, 2013 U.S. Dist. LEXIS 146826 (D. Mass. Oct. 8, 2013), a Massachusetts federal court denied a reinsurer’s motion to enjoin arbitration. The reinsurer sought a preliminary injunction to enjoin arbitration because the designated umpire received notification that the cedent had proposed that he be appointed umpire. In denying the motion, the court articulated four standard criteria that a movant needed to demonstrate in order for a preliminary injunction to be granted: that the movant was likely to succeed on the merits; that the movant was likely to suffer irreparable harm in the absence of preliminary relief; that the balance of equities tipped in the movant’s favor; and that an injunction was in the public’s interest. Because the reinsurer failed to meet any of its burdens as a movant, the court denied the reinsurer’s preliminary injunction. The court also ruled that, as the same four-factor test applied to permanent injunctions, the reinsurer’s motion for a permanent injunction should be denied as well. This result is the typical result when parties attempt to enjoin an arbitration in the face of a strong federal policy of deferring to arbitration. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 11
  12. 12. Arbitration Panel Composition Five cases in 2013 provided reasons to consider adding language to arbitration clauses to avoid problems associated with arbitration panel composition. In the first case, a New York state motion court granted a cedent’s petition to appoint an umpire to preside over a series of reinsurance disputes through a combination of the ranking and “strike and draw” methods. In 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). In granting the petition in part to appoint an umpire, the court noted that while it was undisputed that the two arbitrators failed to select an umpire, the reinsurer objected to the appointment of a court appointed arbitrator on two grounds. First, the court rejected the argument that the court was not permitted to appoint an arbitrator under New York law, CPLR 7504, because the CPLR was not referenced in the treaties. The court held there was no need for the treaties to refer to the procedural statute because a contract generally incorporates the state of law in existence at the time of its formation. The statutory mechanism for appointment of an arbitrator existed well 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 the selection of the umpire. The court rejected this argument because CPLR 7504 provides for the court appointment of an arbitrator “if the agreed method fails or for any reason is not followed. . . .” The court noted that the cedent demonstrated that the parties’ agreed method of appointing the umpire had failed. Because the reinsurance treaties and CPLR 7504 did not set forth any substantive criteria for the appointment of the umpire, the court 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. The court added that the umpire must be drawn by random lot in the event of a tie in the rankings of the umpire or third arbitrator. Typically, courts do not get involved in the details of panel selection, leaving it instead to the parties’ contract. But where the contract does not provide the requisite procedures, or where there are multiple contracts involved with competing clauses, courts now seem willing to step in and craft the panel selection mechanism. Second, a California federal court partially denied the petition and denied the cross-petition of the cedents and reinsurer, respectively, to appoint an umpire and compel arbitration. Granite State Ins. Co. v. Clearwater Ins. Co., No. C 13-2924 SI, 2013 U.S. Dist. LEXIS 118413 (N.D. Ca. Aug. 19, 2013). Here, the court ordered the parties to finish the selection process they started on the only arbitration that was demanded and then have the selected panel address the procedural issues of multiple or consolidated arbitrations and the application of the honorable engagement clause. To do otherwise, said the court, was to overstep the court’s authority under the Federal Arbitration Act (the “FAA”). The court pointed out that procedural issues like consolidation and application of a particular contractual provision were PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 12
  13. 13. for the arbitration panel to decide and not for the courts. Therefore, rather than completely stand down and let the parties fend for themselves (which some courts have done in these situations), this court at least made the parties finish the selection process they started to allow the selected panel to address the procedural issues that were beyond the power of the court to address under the FAA. Third, in ROM Reinsurance Management Co. v. Continental Ins. Co., No. 654480/12 (N.Y. Sup. Ct., N.Y. Co. Jul. 29, 2013), a New York State motion court denied a reinsurer’s motion to reargue an earlier denial of a petition to stay arbitration because of a time bar and also denied the cedent’s cross-motion to appoint an arbitrator. In denying the cross-motion, the court found that there was no basis to intervene in the appointment process because the reinsurer only refused to appoint an arbitrator because of its pending motion. Because the motion had been resolved, stated the court, the reinsurer was to proceed with the selection process provided by the reinsurance agreement. In the final two cases, the courts addressed an unfortunately growing trend of motions to disqualify counsel in reinsurance disputes. In Utica Mut. Ins. Co. v. Emp’rs Ins. Co., No. 6: 12-CV-1293 (N.D.N.Y. Sept. 26, 2013), which is on appeal, a New York federal court denied a reinsurer’s motion to dismiss the cedent’s complaint in a case where the cedent sought a declaration that its counsel should not be disqualified and that arbitration should proceed without the obstruction by the reinsurers. In an action against the underlying insured, the cedent and the reinsurers shared a common interest and were all represented by a certain law firm. A dispute between the cedent and the reinsurers developed regarding the appropriateness of the defense billings for the underlying claim. To resolve this dispute, the cedent used that same law firm to demand arbitration against the reinsurers. The reinsurers requested that the law firm withdraw from its representation of the cedent because the dispute being arbitrated was substantially related to the underlying matter in which the law firm represented the reinsurers. The law firm declined to step down. One of the reinsurers filed a complaint in Wisconsin seeking disqualification of the law firm. In response, the cedent filed this action in New York. The reinsurers moved to dismiss on grounds that the New York federal court did not have subject matter jurisdiction and that the cedent failed to state a claim upon which relief could be granted. In denying the motion to dismiss, the court noted that there was a lapse in the naming of an arbitrator. Accordingly, Section 5 of the FAA afforded the parties the opportunity to seek relief from district courts to designate and appoint an arbitrator. The cedent thus had the authority to seek the relief it sought in the New York federal court. Therefore, the court found the reinsurer’s motion to dismiss for failure to state a claim unpersuasive. Finally, 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 court remanded the action back to state court after finding that the cedent had not shown that federal subject matter jurisdiction was present. The dispute arose when the cedent’s counsel demanded arbitration on several reinsurance contracts, all of which had arbitration provisions, after the reinsurer questioned its obligation to PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 13
  14. 14. pay a settlement reached after litigating certain claims. It turned out that the cedent’s counsel had served as defense counsel in the underlying coverage dispute. The reinsurer claimed that this caused 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 cedent removed to federal court. The court was originally concerned with whether there was diversity of citizenship, but once that was resolved, the court could not get past the amount in dispute. 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 threshold limit required in diversity of citizenship actions—the court had an issue concerning whether the amount in controversy in the arbitration was the proper measure for the disqualification action as the object of the disqualification litigation was not compelling arbitration or confirming an arbitration award. The court remanded the case to state court essentially because it would not adopt the stakes in arbitration as the measure for subject matter jurisdictional purposes. Sealing Arbitration Panel Awards The trend of courts rejecting the parties’ confidentiality stipulations and orders in arbitration continued in 2013. A New York federal court granted an application by putative intervenors to unseal reinsurance arbitration information originally filed under seal in a proceeding that was settled without court order. Eagle Star Ins. Co. v. Arrowood Indemnity Co., No. 13 Civ. 3410 (HB), 2013 U.S. Dist. LEXIS 135869 (S.D.N.Y. Sept. 23, 2013). The “confidential” arbitration information was filed in conjunction with a petition to confirm an arbitration award and a related motion to dismiss. Before the petition and motion were fully briefed, the parties settled and agreed to discontinue the case. Nevertheless, the putative intervenors, which apparently had an arbitration with the same respondent, moved and objected to the arbitration information remaining under seal. After analyzing the court’s ability to address a sealing motion after the parties had settled and the recent law on sealing motions, the court granted the motion to unseal the petition and motion to dismiss (containing the arbitration information), but denied the motion to intervene as moot. What makes this case particularly unusual is that parties to a different arbitration apparently wanted to get access to the arbitration information from the first arbitration for use in their separate arbitration against the same respondent. The court allowed this to happen. This case and others that reject sealing requests have ramifications for confidentiality stipulations and their viability once a party goes to court to vacate or confirm an arbitration award. Arbitration Awards Ordinarily, courts have afforded great deference to arbitral decisions and displayed a reluctance to vacate arbitration awards. In Arrowood Indem. Co. v. Trustmark Ins. Co., No. 3:03cv1000 (JBA), 2013 U.S. Dist. LEXIS 46566 (D. Conn. Mar. 29, 2013), however, a Connecticut federal court denied a cedent’s motion for judgment and contempt against a reinsurer where the motion sought to enforce an arbitration award that had been improperly revisited by the PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 14
  15. 15. underlying arbitration panel. The court determined that the arbitration panel was functus officio, or without authority, to determine the reinsurer’s ultimate responsibility to the cedent after a final award had been issued and the panel had been disbanded. The court further held that whatever dispute the parties had about how the reinsurer carried out its duties must be litigated in a separate proceeding. FOLLOW-THE-SETTLEMENTS CLAUSE Two cases in 2013 recognized the persistent viability of the follow-the-settlements doctrine. In a closely watched asbestos settlement allocation case, the New York Court of Appeals modified the order of the intermediate appellate court to deny summary judgment to the cedent based on two issues of fact raised to challenge the reasonableness of the cedent’s settlement allocation. United States Fid. & Guar. Co. v. American Re-Ins. Co., 20 N.Y.3d 407 (N.Y. 2013). The court affirmed the judgment rejecting the other defenses to payment raised by the reinsurers. In modifying the appellate division’s order, the Court of Appeals presented a detailed analysis of the rules governing reinsurance allocation in the context of follow-the-settlements under New York law. It is important to note that the reinsurance contracts here had a following clause binding the reinsurer to pay claims allowed by the cedent. The court’s analysis was premised on the existence of a specific follow-the-settlements clause. The court articulated the well-established rule that a follow-the-settlements clause (like the one here) ordinarily bars challenge by a reinsurer to the ceding company’s decision to settle a case. That rule, said the court, makes sense because there is little risk of unfairness as the parties are typically aligned to pay as low a settlement amount as possible. In this case, the few exceptions to that rule did not apply because the reinsurers did not challenge the cedent’s decision to settle or the amount of the settlement. Here, the dispute was about the allocation of the settlement to the reinsurers; an issue that has been raised at the Second Circuit Court of Appeals numerous times. In discussing the reinsurance allocation, the court accepted that the follow-the-settlements rule raises problems because the interests of the cedent and the reinsurer may often conflict. The Court of Appeals agreed with the majority of courts and held that a follow-the-settlements clause requires a level of deference to a cedent’s allocation decision. The rationale for this deference was described by the court as providing for a more orderly and predictable resolution of claims. But the court made it clear that deference did not mean that the cedent’s allocation decisions were immune from scrutiny. The decision still had to be in good faith and reasonable. This case provides the latest and certainly one of the more detailed roadmaps for addressing reinsurance allocation determinations under a follow-the-settlements clause. Reasonableness is the catchword, but reasonableness based on the objective standard of what the underlying parties’ to a settlement would consider reasonable if there were no reinsurance. Allocating all of the settlement to claims covered by the cedent’s policies and nothing to the bad faith claims may or may not be reasonable, but only a trial and a decision by a fact finder will decide that issue. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 15
  16. 16. The ultimate takeaway here is that the specific facts matter, that a reinsurer will still be bound to a cedent’s good faith and reasonable claims determination, and that a follow-the-settlements clause like the one in this case will bind the reinsurer to an objectively reasonable reinsurance allocation decision without regard to the cedent’s motive, as long as it could have been derived from an arm’s length negotiation by the underlying parties as if no reinsurance existed. In the second decision, a Connecticut federal court took pains to use the decision in U.S. Fidelity & Guaranty Co. v. Am. Re-Insurance Co., 20 N.Y.3d 407 (N.Y. 2013), as its touchstone for deciding the scope of discovery needed by the reinsurer where a follow-the-settlements argument was being made by the cedent. Here, the reinsurance contract was governed by New York law. The court made it clear that the decisions of the New York Court of Appeals bound the court in construing the contract and not the decisions of the Second Circuit. The reinsurance contracts had a following clause that obligated the reinsurer to pay losses paid on the underlying policies and “will follow the settlements of the Company, subject always to the terms and the conditions of this Agreement.” Like U.S. F&G, this case was a dispute about the post-settlement reinsurance allocation. In interpreting New York law on follow-the-settlements, the court enumerated four rules: (1) a follow-the-settlements clause requires deference to the cedent’s post-settlement allocation; but (2) a cedent’s allocation decisions are not immune from scrutiny, which includes; (3) whether the allocation is reasonable as one that the parties to the settlement might reasonably arrive at without consideration of reinsurance; and in any event (4) an allocation that violates or disregards reinsurance contract provisions is void. After reviewing the competing arguments of counsel, the court found that the reinsurer was entitled to challenge the reasonableness of the post-settlement allocation and to argue that the allocation violated the reinsurance contract. Based on this finding, the court allowed the reinsurer’s motion to compel discovery. What these cases show is that the trend toward allowing reinsurers to challenge a cedent’s post-settlement allocation decision is expanding ever so slightly. The hurdles are high, but the door is not closed to a legitimate defense if the specific facts demonstrate a lack of objective reasonableness. LATE NOTICE 2013 was a year that saw an unusual amount of cases involving late notice, which has not been a serious reinsurance issue for some time. Interestingly, all four of the late notice decisions were handed down by New York courts. In the first case—a non-reinsurance case—the Second Circuit Court of Appeals affirmed a district court’s summary judgment in favor of the insurer and specifically addressed the argument by the insurer on late notice. Weeks Marine, Inc. v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n, 510 Fed. Appx. 52 (Summary Order) (2d Cir. 2013). The insured did not give notice to the insurer 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 PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 16
  17. 17. 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 reinsurance contract. The court declined to extend the reinsurance exception to marine insurance contracts based on the facts of this case. Second, in a case that arose out of asbestos losses incurred by Foster Wheeler, a New York federal court examined whether the cedent’s notice under nine facultative certificates was late (more than three years) entitling the reinsurer to avoid coverage. AIU Ins. Co. v. TIG Ins. Co., 934 F. Supp. 2d 594 (S.D.N.Y. 2013). The cedent, which issued a series of umbrella policies, purchased the facultative certificates of reinsurance from the reinsurer. The facultative certificates all had a notice provision that stated “[p]rompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance.” None of the certificates had a choice-of-law clause. The case came down to whether Illinois or New York law applied. The Magistrate Judge concluded that Illinois law should apply and recommended granting the reinsurer’s summary judgment motion. The court agreed and determined that the Seventh Circuit’s ruling on late notice—that the reinsurer need not prove prejudice to avoid coverage—was the rule of law that applied in this case. The court found that the cedent, a sophisticated insurance company, waited more than three years before giving notice to the reinsurer even though the cedent was aware that coverage under the certificates was available and that the notice provision was triggered. Under Illinois law, held the court, the reinsurer could refuse coverage under the certificates because of the late notice without showing prejudice. Third, in Ins. Co. of PA. v. Argonaut Ins. Co., No. 12 Civ. 6494 (DLC), 2013 U.S. Dist. LEXIS 110597 (S.D.N.Y. Aug 6, 2013), a New York federal court applied California law and granted partial summary judgment to a reinsurer on the question of whether a seven-year delay in providing notice under a facultative certificate constituted late notice, permitting the reinsurer’s claim of prejudice from the delayed notice to proceed to trial. The dispute arose from a series of underlying litigation involving the original insured. The cedent had issued excess umbrella coverage above the insured’s primary limit, and then facultatively reinsured some of that excess liability with the reinsurer. The facultative certificate required the cedent to “promptly” notify the reinsurer of any occurrence that may implicate the reinsurer’s liability. It also permitted the reinsurer the right to associate in the defense of any claim involving the certificate. In finding that the cedent had breached the notice requirements in the reinsurance certificate, the court concluded that, at the very latest, notice should have been given to the reinsurer in 2002, when the insured filed a cross-claim against the cedent asserting a claim under the excess policy, as opposed to 2009 when notice was actually provided. The court rejected the cedent’s claim that the reinsurer was constructively on notice of the claim because notice of insured-related claims had been provided to the reinsurer’s broker under different reinsurance agreements. In light of the seven-year delay in providing notice, the court found the cedent in breach of its contractual notice obligations. Finally, a New York State motion court granted part of a cedent’s motion for summary judgment in a case involving the cession of asbestos losses after a substantial group settlement of an asbestos coverage action and denied the PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 17
  18. 18. reinsurer’s defense that the cedent failed to give timely notice of the loss. New Hampshire Ins. Co. v. Clearwater Ins. Co., No. 653547/2011, 2013 N.Y. Misc. LEXIS 5117 (N.Y. Sup. Ct. Oct. 31, 2013). The facultative certificate here provided that the cedent will promptly notify the reinsurer of any event or development that it “reasonably believes might result in a claim against” the reinsurer. The reinsurer claimed that although the cedent knew about the loss in 1991, the cedent did not provide notice until 1997 and then, later in 1997, advised the reinsurer that it did not think its policy would be impacted. Thus, the reinsurer claimed, it did not receive actual notice until 2010. In rejecting the reinsurer’s late notice defense and granting partial summary judgment to the cedent, the court noted that the reinsurer must show economic injury to sustain a claim of prejudice because of late notice. The reinsurer claimed that it had commuted with its retrocessionaires. The court rejected the reinsurer’s claim because of a lack of any detailed facts to support its claim of prejudice. The court also rejected the reinsurer’s claim that it did not need to show prejudice when the cedent had failed to implement routine practices and controls to ensure prompt and timely notice. The court held that New York law did not support that proposition. STATUTE OF LIMITATIONS As always, some actions failed in 2013 on statute of limitations grounds. In OneBeacon Ins. Co. v. Aviva Ins. Ltd., No. 107498, 2013 U.S. Dist. LEXIS 70212 (E.D. Pa. May 17, 2013), a Pennsylvania federal court granted partial summary judgment to a reinsurer on statute of limitations grounds, but denied summary judgment based on genuine issues of material fact on a number of issues. This case involved successor entities dealing with delays in claims cessions under a contract that was never finalized between a U.S. cedent and a U.K. reinsurer. Although all of the parties agreed that the limitations period was four years, they could not agree on when the limitations period commenced. Because the court found, based on the parties’ stipulation, that the reinsurance agreement (which was never formalized in writing) conditioned the reinsurer’s payment of reinsurance billings, the court held that the statute of limitations ran from the performance of that condition (here, the submission of a claims bordereau). Thus, bordereaux submitted more than four years before the cedent commenced the lawsuit and not subject to the tolling agreement were barred by the statute of limitations. DISCOVERY At least one court in 2013 treated reinsurance contracts as discoverable. In two separate rulings, a California federal court granted plaintiffs’ motion for production of reinsurance documents in a putative RESPA class action and struck eight of the reinsurer’s affirmative defenses. Munoz v. PHH Corp., No. 1:08-cv-0759-AWI-BAM, 2013 WL 684388 (E.D. Cal. Feb. 22, 2013) and Munoz v. PHH Corp., No. 1:08-cv-0759-AWI-BAM, 2013 WL 1278509 (E.D. Cal. Mar. 26, 2013). Plaintiffs alleged that a mortgage lender received illegal referral fees from mortgage insurance companies who agreed to reinsure with the lender’s captive reinsurance company. Ceded premiums allegedly funded reinsurance PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 18
  19. 19. trusts, rather than funds from reinsurer, and, therefore, reinsurer allegedly assumed no real or commensurate risk. The court’s order compelling production of reinsurance documents required reinsurer to produce documents given to the federal Consumer Financial Protection Bureau (“CFPB”) pursuant to a Civil Investigatory Demand into the mortgage lender’s captive reinsurance agreements. CONTRACT INTERPRETATION Three cases in 2013 dealt with issues relating to contract interpretation. The first case was an interesting decision concerning when an excess facultative certificate is required to respond to a particular loss. In Seneca Ins. Co. v. Everest Reinsurance Co., No. 11 Civ. 7846 (BF), 2013 U.S. Dist. LEXIS 151594 (S.D.N.Y. Oct. 17, 2013), a New York federal court granted summary judgment to a reinsurer and dismissed the cedent’s case for breach of contract. The cedent filed an action for breach of contract against a reinsurer after the reinsurer denied coverage to the cedent. The facultative certificate specified a $5 million threshold that would trigger the reinsurer’s obligations to pay for loss and other expenses. The case boiled down to the question of whether interest amounts ($2.43 million) were properly considered “loss” or “interest on a judgment” under the reinsurance certificate. Finding the latter, the court concluded that the judgment “loss” was $4.91 million, which fell just short of the $5 million loss threshold that would have triggered the reinsurer’s obligation to pay. Therefore, the court granted summary judgment in favor of the reinsurer, holding that the reinsurer did not breach the reinsurance contract when it denied coverage. Second, a Florida federal court granted a reinsurer’s motion to dismiss a cedent’s complaint finding that there was no coverage under the cedent’s policy and, therefore, no claim for reimbursement under the reinsurance contract. Public Risk Management of Fl. v. One Beacon Ins. Co., No. 6:13-cv-1067-Orl-31 TBS, 2013 U.S. Dist. LEXIS 150091 (M.D. Fl. Oct. 18, 2013). The case arose out of the reinsurance of a public official’s errors and omissions claim for a construction project dispute between a municipality and a contractor. The reinsurance dispute concerned whether the reinsurer was required to reimburse the cedent for expenses defending the underlying action between the contractor and the municipality (indemnity was not an issue as the settlement payment was not ceded). In dismissing the complaint, the court determined that the underlying complaint was not based on negligence and, therefore, no “wrongful act” was alleged to bring the matter within the coverage grants of the policy. Additionally, the policy excluded intentional breaches of contract. . Both these bases were sufficient to sustain the motion to dismiss and to avoid any obligation on the part of the reinsurer. . In a case that harkens back to the Second Circuit’s seminal decision in Bellefonte Reinsurance Co. v. Aetna Casualty & Sur. Co., 903 F.2d 910 (2d Cir. 1990), a New York federal court granted summary judgment to a reinsurer in a dispute over whether the liability limits of a facultative certificate were cost-inclusive. Utica Mut. Ins. v. Munich Reinsurance Am., Inc., No. 6:12-CV-0196 (LEK/ATB), 2013 U.S. Dist. LEXIS 141212 (S.D.N.Y. Sept. 30, 2013). The reinsurer issued a certificate indemnifying the cedent for a percentage of an umbrella liability policy up to a set dollar limit, which was PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 19
  20. 20. issued to a policyholder who incurred significant covered claims relating to asbestos exposure. The reinsurer reimbursed the insurer for the entire limit under the certificate. The umbrella policy, however, was cost-exclusive. The cedent filed suit against the reinsurer claiming that the limitation under the certificate was also cost-exclusive, and therefore, the reinsurer was liable for a percentage of the additional costs that the insurer incurred above the limits stated in the certificate. In granting the motion for summary judgment, the court first pointed out that the certificate was silent as to inclusion or exclusion of costs on the liability limit, and that under several prior New York cases, limit-of-liability provisions that were silent on whether they were cost-inclusive or exclusive were deemed to be unambiguously expense-inclusive. The court reasoned that, unless costexclusion is expressly stated, reinsurers are entitled to rely on the liability limit as setting the maximum risk exposure. Second, the court found that the absence of a follow-the-form clause was indicative that there was no basis to conclude that, just because the insurance policy was cost-exclusive, the facultative certificate should be deemed costexclusive. Accordingly, the court held that the cedent failed to raise an issue of material fact. This case is on appeal. In another case on the liability limit in facultative certificates, an Illinois state court granted a reinsurer’s motion for judgment on the pleadings in a case where the cedent sought a declaration that none of its facultative certificates contained limits on expenses and that the reinsurer therefore breached its certificates with the cedent by refusing to pay expenses in excess of the stated certificate limits. Cont’l Cas. Co. v. MidStates Reinsurance Co., No. 12 CH 42911 (Ill. Cir. Ct. Sept. 10, 2013). The certificates contained a provision titled “reinsurance assumed” that described the amount of coverage that the reinsurer agreed to provide. Although both parties agreed that this provision limited the reinsurer’s liability to compensate for losses, they disagreed on whether the provision applied to expenses as well. The court noted that while the “reinsurance assumed” provision did not distinguish between “losses” and “expenses” when discussing the reinsurer’s liability, a different provision in the reinsurance certificate did. The fact that the “reinsurance provision” only discussed the reinsurer’s liability in general terms indicated that the contracting parties had no intention of separating losses from expenses when calculating the amount for which the reinsurer should be liable. The court also pointed out that the majority of cases that had dealt with this issue found that “reinsurance assumed” provisions limited all liability and not just losses and expenses. Therefore, the court found that, as a matter of law, there was a limit on the reinsurer’s liability and that limit covered both losses and expenses. Because there was no genuine issue of material fact and the reinsurer was entitled to judgment as a matter of law, the court granted the reinsurer’s motion for judgment on the pleadings. Finally, in Greenlight Reinsurance, Ltd. v. Appalachian Underwriters, Inc., No. 12 Civ. 8544 (JPO), 2013 U.S. Dist. LEXIS 104605, 2013 WL 3835341 (S.D.N.Y. Jul. 25, 2013), a New York federal court denied several motions to dismiss claims filed by a cedent against reinsurers and the reinsurers’ guarantors. The dispute was over the interoperation of PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 20
  21. 21. several key provisions contained in reinsurance contracts, retrocession contracts, and two guarantees of the retrocession contracts. While the reinsurance and retrocession contracts contained arbitration provisions, the guarantees did not. The cedent brought a declaratory judgment action under the guarantees for breach of contract associated with various covenants in the guarantees and for an accounting. The reinsurers and their guarantors moved to dismiss on the grounds of ripeness and for failure to state a claim. In denying the motion to dismiss, the court found that the cedent pled sufficient facts to state most of its claims, except for its claim for an accounting. The court dismissed the cedent’s accounting claim with permission for cedent to replead. COMMERCIAL STATUES IN REINSURANCE CLAIMS In 2013, the courts continued to allow consumer claims statutes to be used in reinsurance disputes as long as the state recognized bad faith claims. For instance, in The 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 dispute involved insurance brokers’ errors and omissions policies and the settlement of an underlying E&O claim. The reinsurer refused to pay and this action commenced. Although the reinsurer objected to the cedent’s motion to amend the complaint in order to add two additional claims beyond breach of contract—for account stated and violation of Connecticut’s Unfair Trade Practices Act (“CUTPA”)—the court nevertheless found that the cedent adequately pled a plausible claim for an implied account stated and for violations of CUTPA. FOREIGN SOVEREIGN IMMUNITIES ACT AND PRE-JUDGMENT SECURITY The Pine Top Receivables of Illinois, LLC v. Banco De Seguros Del Estado, 2013 U.S. Dist. LEXIS 15246 (N.D. Ill. Feb. 5, 2013) case, discussed above, also provides interesting commentary on the Foreign Sovereign Immunities Act (“FSIA”). In that decision, the court interpreted the FSIA to preclude pre-answer security against sovereign-owned reinsurers. The FSIA prohibits courts from imposing prejudgment attachments on the assets of foreign instrumentalities. Here, the cedent sought pre-judgment security from a sovereign-owned reinsurer. The court held that the cedent was not entitled to prejudgment security where it was functionally equivalent to an attachment under FSIA and thus could not be imposed upon the sovereign-owned reinsurer. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 21
  22. 22. RECENT SPEECHES AND PUBLICATIONS: Larry Schiffer and Norma Krayem presented a talk on Cybersecurity to the Reinsurance Association of America’s Claims, Underwriting, and Emerging Issues Committees on December 12, 2013, in Washington, D.C. Larry Schiffer will be speaking on Facultative Certificates as part of the Lloyd’s Market Association’s LMA Masterclass Series on April 9, 2014, in London. Larry Schiffer will be speaking on Negotiating and Drafting Secure and Comprehensive Commutation Agreements at the American Conference Institute’s 9th National Run-Off and Commutations Summit, on April 23, 2014, in New York City. Suman Chakraborty will be speaking on Cyberrisks at the Brokers and Reinsurance Markets Association Committee Rendezvous on April 28-29, 2014, in Clearwater, Florida. Larry Schiffer will be speaking on a panel on Social Media and Decision-making in the Arbitration Process at the ARIAS-U.S. Spring Conference, on May 9, 2014, in Key Biscayne, Florida. Larry Schiffer’s Commentary, “Find the Right Reinsurer Years After Contract Termination,” was published on the website of the International Risk Management Institute, Inc., IRMI.com, in December 2013. Congratulations to Suman Chakraborty on his appointment to the ARIAS-U.S. Membership Committee. PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 22
  23. 23. Authors contributing to this newsletter are: Editor, Larry P. Schiffer, Suman Chakraborty, Christina Rock, Maxine Martin, Caroline Billet, Christopher Fontenelli and Zachary Novetsky. For more information, please contact your Patton Boggs LLP attorney or a member of the Insurance and Reinsurance Dispute Resolution Practice Group: JOHN M. NONNA MARK D. SHERIDAN LARRY P. SCHIFFER Partner 646-557-5172 jnonna@pattonboggs.com Partner 973-848-5681 msheridan@pattonboggs.com Partner 646-557-5194 lschiffer@pattonboggs.com ERIDANIA PEREZ MARK C. ERRICO SUMAN CHAKRABORTY Partner 646-557-5137 eperez@pattonboggs.com Partner 973-848-5668 merrico@pattonboggs.com Partner 646-557-5142 schakraborty@pattonboggs.com JASON F. KING SHANNON W. CONWAY EDWARD D. GEHRES Of Counsel 973-848-5687 jking@pattonboggs.com Partner 214-758-6609 sconway@pattonboggs.com Partner 202-457-6016 egehres@pattonboggs.com T. MICHAEL GUIFFRE Partner 202-457-6441 mguiffre@pattonboggs.com PattonBoggs.com Newsletter: Reinsurance Newsletter – March 2014 23

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