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IN THIS ISSUE
Recent Case Summaries
Recent UK Cases
Recent Speeches and
Larry P. Schiffer
PattonBoggs.com Reinsurance Newsletter – September 2013
RECENT CASE SUMMARIES
GOOD NEWS FOR ARBITRATORS FROM THE SUPREME COURT?
Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013).
In a non-reinsurance case, the United States Supreme Court recently defined the
scope of the limited judicial review provided for under Section 10(a)(4) of the
Federal Arbitration Act (“FAA”). Section 10(a)(4) permits a court to vacate an
arbitration award where the arbitrator has exceeded his or her powers (“Where
the arbitrators exceeded their powers, or so imperfectly executed them that a
mutual, final, and definite award upon the subject matter submitted was not
made”). Because this ground is one of the few grounds that parties to a
reinsurance dispute may use to challenge an arbitration award, a Supreme Court
decision on this ground is relevant to reinsurance disputes and to reinsurance
In this case, which involved class action arbitration procedures that typically are
not an issue in reinsurance disputes, the Court clearly defined the limited judicial
review provided for under Section 10(a)(4). In essence, the Court held that as
long as an arbitrator construes the contract, it doesn't matter whether the
arbitrator's construction is wrong. An arbitrator cannot be said to have exceeded
Congratulations to John Nonna for being named an “Elite Lawyer” by
Intelligent Insurer magazine and New York City Insurance Law “Lawyer of the
Year” 2014 by The Best Lawyers in America.
Congratulations to John Nonna, Mark Sheridan, and Larry Schiffer for being
ranked in Chambers USA and to John Nonna and Larry Schiffer for being
named “Leading Lawyers” for Insurance: Advice to Insurers – Coverage in
The Legal 500 U.S. guide.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 2
his or her powers if all the arbitrator is doing is interpreting the contract. If the arbitrator renders an award that is not
based on interpreting the contract, but imposes the arbitrator’s view of sound policy, that will exceed the arbitrator’s
powers and would be subject to judicial review under Section 10(a)(4) said the Court. Notably, the Court in this case
implied that the arbitrator likely got it wrong, but performing the contract interpretation task poorly is not a basis to
vacate an arbitration award. “The arbitrator’s construction holds, however good, bad, or ugly” said the Court. Thus,
by choosing arbitration, the parties must now live with that choice, which includes the chance that the arbitrator may
perform the contract interpretation task poorly.
For arbitrators, the lesson is that when crafting an award it is essential to interpret the reinsurance contract and not
impose the panel’s view of what it considers sound policy. In other words, rough justice does not cut it if the contract
is abandoned and is not being interpreted when issuing an award. The potential good news for arbitrators is that if
they construe the contract, their decisions should not be subject to review under Section 10(a)(4) even if their
construction is off the mark. That good news for arbitrators may be bad news for the parties who rely on arbitrators
to interpret reinsurance contracts properly.
CALIFORNIA FEDERAL COURT ORDERS COMPLETION OF UMPIRE SELECTION PROCESS SO PANEL
CAN RESOLVE PROCEDURAL ISSUES
Granite State Ins. Co. v. Clearwater Ins. Co., No. C 13-2924 SI, 2013 U.S. Dist. LEXIS 118413 (N.D. Ca. Aug.
In a very recent case, 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. Instead, the court ordered the
parties to complete the existing selection process for the one arbitration demanded and allow that panel to resolve
issues concerning consolidation and application of the honorable engagement clause.
The dispute arises over asbestos losses and the cession of a settlement to three reinsurance contracts. The reinsurer
paid some of the cessions, but then stopped paying, which resulted in a demand for arbitration. Party-appointed
arbitrators were named and after a very long delay, umpire candidates were proposed. The selection process stalled,
however, when issues arose over whether there should be one or three arbitrations (over three reinsurance contracts
in dispute) and over which honorable engagement clause should apply among the reinsurance contracts. The cedents
wanted an umpire appointed in a single arbitration and the reinsurer wanted three umpires in three arbitrations or a
single arbitration using its preferred honorable engagement clause.
In partially denying the cedents’ petition and denying the reinsurer’s cross-petition, 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
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 3
address the procedural issues of multiple v. 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 FAA. The court pointed out
that procedural issues like consolidation and application of a particular contractual provision were for the arbitration
panel to decide and not for the courts. Under the FAA, sections 4 and 5 grant the courts limited power to either
require the parties to arbitrate as agreed under section 5 or to appoint an arbitrator when there is an impasse under
section 4. Neither section, said the court, authorizes the court to decide “the two scope-of-the-arbitration agreement”
questions posed by the reinsurer. Because compliance with the parties’ chosen method of appointing the umpire was
not impossible, the court ordered compliance under section 4. The court rejected the notion that it could order three
appointments because there had only been one arbitration demand and under section 4, the court can only order
parties to proceed on disputes where a demand for arbitration has been made.
Thus, 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.
CONNECTICUT FEDERAL COURT COMPELS ARBITRATION IN FRONTING DISPUTE
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 claims 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. Essentially, the fronting carrier defaulted and the real party in interest demanded arbitration
for outstanding reinsurance recoverables.
Notably, while each of the underlying reinsurance agreements has an arbitration clause, the reinsurance assumption
agreement does not; but the reinsurance assumption agreement was appended as a scheduled agreement to reach
reinsurance contract. After the signatory to the assumption agreement demanded arbitration against the reinsurer, the
reinsurer brought this action to enjoin the arbitration. A temporary restraint of the arbitration was granted pending a
full hearing on the motion for an injunction. This decision was on the motion to dismiss the complaint and compel
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
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 4
found that the reinsurer agreed to arbitrate with the signatory of the reinsurance assumption agreement based on
Article I of the reinsurance agreement, which expressly references the schedule containing the assumption agreement.
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, collection of reinsurance balances under the terms of the reinsurance
contracts was the object of the arbitration the dispute clearly fell within the scope of the arbitration clause.
The court also left a statute of limitations issue for arbitrators to decide as it was not expressly carved out of the
MASSACHUSETTS FEDERAL COURT HOLDS THAT ARBITRATOR SHOULD DETERMINE THE
PRECLUSIVE EFFECT OF A COURT’S CONFIRMATION OF A PRIOR ARBITRATION IN A PENDING
Nat’l Cas. Co. v. OneBeacon Am. Ins. Co., No. 12-cv-11874-DJC, 2013 U.S. Dist. LEXIS 92840 (D. Mass. Jul. 1,
A Massachusetts federal court held that the issue of whether a court judgment confirming an arbitration award had a
preclusive effect in a pending arbitration was for an arbitrator to decide, not a court. On a motion to compel
arbitration, the court also rejected the cedents’ request to disqualify an umpire candidate from consideration.
Cedents sought recovery for losses arising out of asbestos and silica claims brought against the cedents by several
policyholders from reinsurers who were parties to a treaty reinsurance program. The cedents demanded arbitration
against one reinsurer and the arbitration panel ruled that the reinsurer was not obligated to pay for aggregated
asbestos and silica losses as ceded. The court confirmed the panel’s decision.
After the cedents brought a similar arbitration demand against the treaty reinsurers that were not parties to the first
arbitration, the reinsurers sought declaratory relief regarding the preclusive effect of the court’s confirmation of the
first panel’s decision on the second arbitration.
In reaching its decision, the court noted that, generally, if the underlying action is arbitrable, the preclusive effect of a
prior arbitration on a subsequent arbitration is for the arbitrator to decide. A court would have to decide whether the
issues were “identical,” which would in turn require the court to interpret the language of the reinsurance contracts
and the underlying claims. The court found such an inquisition into the merits inappropriate.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 5
The court noted that while the First Circuit had not yet addressed the issue, the Ninth Circuit has rejected the
argument that a confirmation of an earlier arbitration award invests a federal court with the authority to consider a res
judicata defense in a subsequent suit. While judgment entered upon a confirmed arbitration award has the same force
and effect under the FAA as a court judgment, it is not wholly parallel to a court judgment for all purposes. A res
judicata defense, as with other affirmative defenses such as laches and statute of limitations, is a component of the
merits of the dispute and is thus an arbitrable issue. Accordingly, the court held that the final judgment in the prior
arbitration did not automatically have preclusive effect; that question was for the arbitrators in the second arbitration
On the issue of the cedents’ challenge to the umpire candidate, the court pointed out that the FAA frowns upon a
court removing an arbitrator for any reason prior to the issuance of an arbitral award. In this case, not only had there
not yet been an arbitral award, but the challenged candidate had not even been selected to serve as umpire and the
arbitration panel had yet to be determined.
ILLINOIS FEDERAL COURT BARS ASSIGNEE OF CLAIMS UNDER A REINSURANCE TREATY FROM
INVOKING ARBITRATION CLAUSE
Pine Top Receivables of Ill., Inc. v. Banco de Seguros Del Estado, No. 12 C 6357, 2013 U.S. Dist. LEXIS 81516, 2013
WL 2574596 (N. D. Ill. June 11, 2013).
An Illinois federal court granted a reinsurer’s motion to dismiss claims to compel arbitration asserted by a cedent’s
assignee in liquidation. The cedent, which was ordered by an Illinois state court to liquidate, sold and assigned all of
its rights to payment from the reinsurer. The assignee filed suit after the reinsurer refused a demand for payment
under the treaties. The assignee argued that an arbitration clause in the treaties dictated that the dispute be arbitrated.
The reinsurer filed a motion to dismiss the claim to compel arbitration, arguing 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
In granting the reinsurer’s motion to dismiss and denying the assignee’s motion to compel arbitration, the court
agreed with the reinsurer. The court found that, while certain portions of the assignment agreement broadly
transferred all of the cedent’s rights to obtain information, the provisions transferring the insurer’s rights to obtain
payment under the treaties were limited to specifically defined powers, including the right to sue for, compromise, and
recover amounts due. 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.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 6
NEW YORK STATE COURT DENIES APPLICATION TO APPOINT ARBITRATOR
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 our June 2013
Reinsurance Newsletter we discussed the ruling on the statute of limitations. No new ground is broken on the denial
of the motion to reargue.
In denying the cross-motion to appoint an arbitrator, 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 the pending motion. Now
that the motion has been resolved, stated the court, the reinsurer was to proceed with the selection process provided
by the reinsurance agreement.
PENNSYLVANIA FEDERAL COURT CONFIRMS ARBITRATION AWARD ON SECOND TRY
Platinum Underwriters Bermuda Ltd. v. Excalibur Reinsurance Corp., No. 12-70, 2013 U.S. Dist. LEXIS 98671
(E.D. Pa. Jul. 15, 2013).
A Pennsylvania federal court has had a second chance to review an arbitration award arising out of a dispute between
a cedent and reinsurer over the calculation of the experience account after commutation. Unlike the prior arbitration
award, which was vacated when the panel removed the deficit carry forward clause and ordered relief not requested by
the parties (PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 400 F. App’x 654 (3d Cir. 2010), the new
award, the court found, drew its essence from the reinsurance contract and was confirmed.
In its decision, the court provides a nice lesson on the role of a court in reviewing an arbitration award. Here are some
good quotes: “I may vacate the Final Award only for irrationality, not for over or under ‘literality’.” “I may not vacate
an arbitration award simply because I disagree with it.” The court distinguished its two decisions, stating that the
current arbitration panel did not eviscerate the reinsurance contract, but grounded its decision on the language of that
agreement. And that is the job of the arbitration panel: to render an award that draws its essence from the agreement.
The prior arbitration award engendered a fair amount of controversy. This award, as confirmed by the court, likely
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 7
NEW YORK FEDERAL COURT APPLYING CALIFORNIA LAW ALLOWS TRIAL ON PREJUDICE BECAUSE
OF ALLEGED LATE NOTICE
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,
A New York federal court applying California law 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, Kaiser Cement & Gypsum (“Kaiser”). The cedent had issued
excess umbrella coverage to Kaiser 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.
The cedent first received notice of a possible loss under the Kaiser policy in 1988 and notice from Kaiser that its
primary limits had been exhausted was not received by the cedent until 2001. The reinsurer did not receive notice of a
possible claim either in 1988 or 2001. From 2001 to 2009, extensive litigation occurred between Kaiser and its excess
insurers, including the cedent here, but notice was still not provided to the reinsurer. During this period, the reinsurer
commuted its own retrocession agreements that would have covered part of the Kaiser liability, but was unaware of
the Kaiser claim as it negotiated those commutations. Notice was provided to the reinsurer in 2009 when the
underlying dispute between the cedent and Kaiser was settled.
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. The court rejected the cedent’s claim that the reinsurer
was constructively on notice of the claim because notice of Kaiser-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.
The court concluded that the reinsurer was entitled to a trial on whether it had suffered prejudice as a result of the late
notice. The court acknowledged that the reinsurer had identified several plausible grounds for finding prejudice,
including that it had entered into commutations of its own reinsurance program without the benefit of knowing about
its Kaiser-related exposure. The court also noted that the cedent’s counsel in the underlying litigation had refrained
from taking a particular litigation position because that position would not have been helpful to other excess carriers
litigating against Kaiser. This “best interests of the group” approach could have been avoided had the reinsurer been
permitted to associate in the defense of the Kaiser claim to ensure that its interests were protected.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 8
Finally, the court addressed the question of whether the reinsurer could avoid having to prove prejudice if it instead
could show that the cedent’s late notice was a result of bad faith. Although the California Supreme Court has not
ruled on whether a bad faith exception exists to the prejudice requirement, the court predicted that the California
Supreme Court would in fact adopt such an exception. The court permitted the reinsurer to take discovery on
whether the cedent’s late notice was in bad faith and directed that the case then move to trial.
NEW YORK FEDERAL COURT DENIES REINSURER AND GUARANTOR MOTIONS TO DISMISS BREACH
OF CONTRACT CLAIMS
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 has denied several motions to dismiss claims filed by a cedent against reinsurers and the
reinsurers’ guarantors. The dispute was over the interoperation of 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 breach of contract, and right for accounting. The reinsurers and their guarantors
moved to dismiss on the grounds of ripeness and under Federal Rule of Civil Procedure 12(b)(6) for failure to state a
The reinsurers and their guarantors argued that cedent’s claims were not ripe for litigation because the amounts due
under the reinsurance and retrocession agreements—which were claims subject to arbitration—had yet to be
determined and that the cedent was essentially asking the court to rule on a purely hypothetical dispute that may never
arise. They also argued that the cedent’s claims were properly subject to arbitration. The court, however, disagreed
and construed the guarantees as a guaranty of payment (collectable immediately upon default) rather than a guaranty
of collection (collectible only after exercising due diligence in attempting to collect the debt). Because the guaranty
was a guaranty of payment, the court determined that the cedent’s claims were ripe for consideration. Furthermore,
because the guarantee agreements lacked a governing arbitration provision, the court ruled that the cedent’s claims as
against the guarantors were not subject to arbitration even though the guarantee, reinsurance, and retrocession
agreements were related agreements.
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
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 9
NEW YORK FEDERAL COURT TRANSFERS CASE UPSTATE
Munich Reinsurance Am., Inc. v. Utica Mut. Ins. Co., No. 13 Civ. 238 (KBF) (S.D.N.Y. Jun. 18, 2013).
A New York federal court granted a cedent’s motion to transfer a reinsurance dispute over a 1977 reinsurance
contract from the Southern District of New York to the Northern District of New York. The cedent had already
commenced an action against the reinsurer in the Northern District of New York on a 1973 reinsurance contract and
claimed that the cases were related and would include overlapping discovery. In granting the transfer motion, the
court found that the factors considered on this type of motion weighed in favor of transfer because the cedent has its
place of business in the Northern District, the reinsurer did not have its principal place of business in the Southern
District, none of the witnesses were in the Southern District, and the operative conduct took place at the parties’ head
offices, which no longer include the Southern District.
NEW YORK FEDERAL COURT LIMITS CEDENT’S RIGHT TO REINSTATEMENT PREMIUM PAYMENT
Aioi Nissay Dowa Ins. Co. v. Prosight Specialty Mgmt. Co., 11 Civ. 1330 (JPO), 2013 U.S. Dist. LEXIS 87050,
2013 WL 3111349 (S.D.N.Y. Jun. 20, 2013).
A New York federal court sided with a reinsurer in a dispute with a cedent over a series of excess-of-loss loss and
reinstatement premium payment reinsurance agreements. This case arose out of the infamous Fortress Re aviation
pool. The cedent participated on property and liability insurance policies to airlines, which unfortunately were
involved in the September 11, 2001 attacks. The reinsurer participated in four excess-of-loss reinsurance contracts
through the Fortress Re pool. The excess-of-loss contracts had reinstatement of premium provisions should the limit
of liability be exhausted by the payment of loss. The cedent also entered into a series of premium protection contracts
with the Fortress Re pool, which protected the cedent from its obligation to pay reinstatement premium under the
Following the massive aviation losses from September 11, 2001 and other aviation losses during the relevant period,
the cedent commuted its liabilities with certain members of the Fortress Re pool, which had become insolvent. The
reinsurer here declined to enter into a commutation agreement. Apparently, the reinsurer did not know about the
cedent’s commutation with the other Fortress Re pool members. The cedent billed the reinsurer under the premium
protection contracts as if it had not commuted with the other members of the Fortress Re pool.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 10
The reinsurer filed suit against the cedent, arguing that it was only obligated to reimburse for its percentage of
reinstatement premiums actually paid. After a bench trial, the court rejected the cedent’s counter-argument that the
parties intended that the reinsurer’s payments under the premium protection contracts would match dollar-for-dollar
the excess of loss reinstatement premiums that the cedent owed to the reinsurer. Under New York law, the court
held that the parties likely had no intent regarding what would result if commutations were made with the other
Fortress Re pool members at the time the contracts were executed, the language of the premium protection contracts
was controlling and, while ambiguous, the language was clear that the reinsurer was only liable for a percentage of
reinstatement premiums actually paid.
The court found that the reinsurer’s liability was limited to its assumed percentage of the percentage of reinstatement
premium the cedent actually paid to the reinsurer under the excess-of-loss contracts following the commutations.
The court ruled that to hold the reinsurer liable for more would violate the ultimate net loss clauses in the contracts
and was consistent with the several liability clauses limiting the reinsurer’s liability to its share of the total cost of
reinstatement regardless of whether the other pool members could pay.
The cedent argued that both types of contracts had to be read together as a package. The court rejected this
argument, finding that the contracts, while purchased from the same reinsurers, had no textual connection and were
purposely kept separate for competitive reasons. The court held that extrinsic evidence failed to show that the parties
had any particular intent as to what should happen if members of the Fortress Re pool disappeared. The court also
rejected the cedent’s statute of limitations defense based on an open account theory, along with other defenses.
ILLINOIS FEDERAL COURT RESOLVES LONG-STANDING RETROCESSIONAL DISPUTE
Republic Ins. Co. v. Banco De Seguros Del Estado, No. 10 C. 5039, 2013 U.S. Dist. LEXIS 110842 (N.D. Ill. Jul.
An Illinois federal court addressed competing summary judgment motions in a long-standing retrocessional dispute
arising out of the old Pan Atlantic syndicate. The retrocedent was seeking long overdue reinsurance recoverables.
The retrocessionaires were seeking rescission for breach of a retention warranty.
In dismissing the counterclaims based on the retention warranty, the court analyzed the parties’ relationships and the
relevant contract wording. It found that the warranty language applied to the syndicate as a whole and not to the
retrocedent, which acted as the fronting company for the syndicate in addition to its own syndicate participation.
The court also rejected the retrocedent’s open account theory to avoid the retrocessionaire’s statute of limitations
argument. The parties disagreed over what law applied and after performing an analysis using Illinois choice-of-law
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 11
principles, the court held that English law applied. Based on English law, the court rejected the account stated theory
and found that claims made on billings before a certain date were barred by the applicable six-year limitations period.
DELAWARE COURT APPROVES OF DISCOVERY ORDER GRANTING AND DENYING IN PART MOTION
TO COMPEL DISCOVERY FROM REINSURER
Mine Safety Appliances Co. v. AIU Ins. Co., C.A. No. 10C-07-241 MMJ, 2013 Del. Super. LEXIS 229 (Del. Super.
Ct. Jun. 6, 2013).
A Delaware state trial court approved a Special Discovery Master’s memorandum opinion and clarifying letter
granting in part and denying in part an insured’s motion to compel various insurance-related discovery from certain
defendant insurance carriers. The case involved insurance coverage for thousands of toxic tort claims brought against
The insured had previously requested discovery of information on coal-dust-related claims submitted to the insurers
by other policyholders, and information on the insurers’ agreements and communications with their reinsurers about
policies issued to the insured. On the insured’s motion to compel, the Special Master (1) denied the insured’s request
to compel production of other policyholder information, (2) granted the insured’s request to compel production of
reinsurance agreements only as to those insurers against whom the insured was seeking monetary damages, and (3)
denied the insured’s request to compel the insurers to produce all communications between them and their reinsurers
relating to policies issued to the insured, with a narrow exception for those insurers that had raised and maintained an
untimely notice defense.
The insured argued that reinsurance information should encompass all fact-based affirmative defenses, and should not
be limited to the late notice defenses. The insurers presented various arguments in response: that the Special Master
correctly concluded that only non-privileged communications with reinsurers regarding the late notice defense were
sufficiently relevant to require production; that all communications between the insurers and their reinsurers are
protected as work product or subject to the attorney-client privilege; that Delaware Superior Court discovery rules
relating to insurance agreements do not apply to reinsurance contracts.
The reinsurers argued that because the insured was not a party to any reinsurance agreement, the reinsurers could not
be liable for any risk beyond the terms of the reinsurance agreement and that any communications the reinsurers had
with the insurer were protected by the work product privilege. Those arguments notwithstanding, the court approved
of the Special Discovery Master’s memorandum opinion, finding that the opinion properly applied Delaware law and
was crafted to balance the need for relevant discovery, the burden on the parties in identifying and producing
discovery, and applicable privileges.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 12
INDIANA COURT OF APPEALS AFFIRMS GRANT OF SUMMARY JUDGMENT ON ERRORS AND
OMISSIONS COVERAGE IN FAVOR OF REINSURERS
Wellpoint, Inc. v. Nat’l Union Fire Ins. Co., 989 N.E.2d 845 (Ind. App.Ct. Jun. 19, 2013)(Memorandum Decision –
Not For Publication).
An Indiana state court of appeals affirmed a trial court grant of summary judgment against a cedent that secured
several reinsurance contracts to cover errors and omissions liability. The cedent had issued to itself policies for errors
and omissions coverage and then entered into several reinsurance agreements for those policies. The cedent was later
sued in several unrelated state and federal actions that alleged improper denial of reimbursement and claims arising
under federal and state racketeering laws. As a result of the settlement of some of these state and federal actions, the
cedent sought reimbursement under its reinsurance contracts. The reinsurers denied coverage and litigation ensued.
The Indiana trial court held that the alleged wrongful acts of the cedent in the state and federal actions were not acts
connected with “professional services in the form of claims handling or adjusting” and therefore the cedent was not
entitled to coverage under its polices and therefore the reinsurance contracts did not have to respond. In affirming
the trial court, the court of appeals examined the policy language and determined that the underlying claims were not
covered under the definition of “Professional Service” as the term was used in the policies. One of the three appellate
judges dissented, however, stating that the policies provided coverage for the rendering or failure to render
professional services. The dissent’s opinion stated that it was unclear whether the claims against the cedent would
qualify as a normal “failure to render” coverage, which would be within the scope of coverage rather than malicious
and intentional acts which would be excluded from coverage.
MORE CASES ON CAPTIVE REINSURANCE MORTGAGE INSURANCE
White v. The PNC Fin. Servs. Grp., Inc., No. 11-7928, 2013 U.S. Dist. LEXIS 86650 (E.D. Pa. Jun. 20, 2013).
In this case, plaintiffs accused one of the defendant banks and its affiliated reinsurer of carrying out an illegal captive
reinsurance scheme. The defendants moved to dismiss the RESPA allegations and the court granted the motion
based on untimeliness and a failure of the plaintiffs to justify a tolling of the limitations period based on concealment.
Leave to replead was granted.
A similar result occurred in Menichino v. Citibank, N.A., No. 12-0058, 2013 U.S. Dist. LEXIS 101102 (W.D. Pa. Jul.
19, 2013) and Manners v. Fifth Third Bank, No. 12-0442, 2013 U.S. Dist. LEXIS 101100 (W.D. Pa. Jul. 19, 2013).
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RECENT REGULATORY DEVELOPMENTS:
NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES’ IRAN SANCTIONS PROBE
The New York State Department of Financial Services (“DFS”) started an “investigation” of whether certain non-
U.S. reinsurers that do business in New York may be violating the Iran sanctions by insuring companies involved in
trading with Iran and Iran-related companies on the sanctions list. In late June, the DFS sent out an inquiry letter to
around 20 non-U.S. reinsurers off the DFS’ Certified Reinsurer list, requiring a response by July 15, which was
apparently extended to July 30. On July 24, the DFS issued Circular Letter No. 6 (2013), which requests similar
responses from a group of around 20 non-US reinsurers on the DFS’ Accredited Reinsurer list. The due date for
responding was August 16.
Violations of the Iran Freedom and Counter-Proliferation Act of 2012 and other sanctions regimes are under the
jurisdiction of the U.S. Treasury Department's Office of Foreign Assets Control (“OFAC”). OFAC has investigated
and sanctioned some reinsurers for reinsuring cedents who issued property insurance and other coverages to Iranian
shipping companies. Sanctions against reinsurers are still fairly unique, but all reinsurers that do business in the United
States via affiliates or otherwise, need to be mindful that international sanctions, especially U.S. sanctions on Iran, are
being strictly enforced and investigated by OFAC. While it is possible to get a “license” to enter into a transaction in
advance (essentially pre-clearance), it is not an easy process. Still, OFAC is willing to work with insurers and reinsurers
to avoid sanctions where possible.
What the DFS is doing is another example of a state regulator/prosecutor, addressing an issue that is presumptively
under federal jurisdiction. But the DFS has broad powers to investigate and obtain information from insurers and
reinsurers doing business in New York so this probe will continue.
It may be that this is just the second round of information requests, which may be followed up by requests to U.S.
domiciled reinsurers who do international business and who are either accredited or licensed in New York. Even if
your company has not gotten a DFS letter yet, it does not mean that you are off the hook. And in any event, if you do
any overseas business, through affiliates or otherwise, having a sanctions compliance program in place is necessary.
FOREIGN ACCOUNT TAX COMPLIANCE ACT AND REINSURANCE
On July 12, 2013, insurance companies, banks and other financial institutions, received a reprieve from the Internal
Revenue Service (“IRS”). The agency delayed, by six months, withholding and other requirements mandated by the
Foreign Account Tax Compliance Act (“FATCA”). The IRS announced the delay in Notice 2013-43. FATCA places
onerous reporting and withholding obligations on foreign financial institutions (“FFIs”) and nonfinancial foreign
entities (“NFFEs”) to promote the disclosure of financial information of their account holders or owners. The delay
will allow foreign governments and financial institutions more time to put in place the information technology
structures necessary to comply with the reporting requirements of FATCA.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 14
Life insurance companies which issue, or are obligated to make payments for a cash value insurance or annuity
contract, are considered financial institutions for FATCA purposes. Foreign reinsurance entities must determine
whether they are FFIs or NFFEs and comply with the requisite obligations. FFIs must either (1) enter into an
agreement with the United States (becoming participating FFIs), subjecting them to comprehensive reporting, due
diligence, withholding, record-keeping, and other obligations with respect to their U.S. account holders; or (2) be in a
country which has entered into an inter-governmental agreement (“IGAs”) with the United States. Otherwise, they
will be subject to a 30 percent withholding tax to be applied to certain U.S. source payments. NFFEs must disclose
their substantial U.S. owners to their payors, who then must pass this information onto U.S. authorities.
Subject to certain exceptions, covered payments include any payment of U.S. source FDAP income. FATCA
regulations specifically include as a withholdable payment, premiums for life insurance contracts or annuity contracts
and amounts paid under cash value insurance or annuity contracts. In addition, reinsurance premiums paid by U.S.
insurance companies to foreign reinsurers are treated as U.S. source FDAP and thus a withholdable payment that may
have to be withheld upon.
The 6-month delay will allow withholding agents (reinsurance intermediaries and other insurance brokers may be
classified as withholding agents), U.S. or otherwise, to begin withholding 30 percent on payments made to
noncompliant FFIs for payments made after June 30, 2014, rather than the previously scheduled January 1, 2014, start
date. The delay does not affect the timing provided in the final regulations for withholding on gross proceeds, pass-
through payments, and payments of U.S. source FDAP on offshore obligations by persons not acting in an
intermediary capacity. For the first FFI reports due March 31, 2015, FFIs will now only be required to report
information for the 2014 calendar year (for U.S. accounts identified by December 31, 2014) rather than including
information for 2013 as well. This will also apply to companies in countries which sign IGAs. Transition rules may
apply to certain offshore obligations.
Initially targeted for July 15, 2013, the FATCA registration portal website was made accessible to financial institutions
on August 19, 2013. Prior to January 1, 2014, any information entered into the system will not be regarded as a final
submission. The IRS will not issue any global intermediary identification numbers (“GIINs”) in 2013. Instead, it will
begin issuing GIINs as registrations are finalized in 2014. The IRS will now electronically post the first IRS FFI list by
June 2, 2014, and will update the list on a monthly basis thereafter. To ensure inclusion in the June 2014 IRS FFI List,
FFIs would need to finalize their registration by April 25, 2014.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 15
RECENT UK CASE SUMMARIES
UK SUPREME COURT AFFIRMS THAT INSURED CANNOT ALLOCATE ITS CLAIMS TO TAKE
ADVANTAGE OF EXCLUSIONS ON CAPTIVE UPPER LAYERS
Teal Assurance Co. Ltd. v. W R Berkley Ins. (Europe) Ltd. and Aspen,  UKSC 57 (31 July 2013).
The Supreme Court of England and Wales has affirmed a lower court’s ruling that an insured cannot choose the order
in which it presents claims to its insurers in order to avoid exclusions in certain layers and maximize its own recovery.
In this dispute, the insured had arranged a tower of insurance for worldwide claims, with the primary layer written by
an unaffiliated insurer and the excess layers written by the insured’s captive. A final “top and drop” layer, which
became the primary lawyer upon exhaustion of all lower layers, sat above the captive’s intermediate layers. That
uppermost layer was also written by the insured’s captive, but then reinsured with unaffiliated reinsurers.
The dispute arose because of exclusions in the “top and drop” layer. While the primary and intermediary excess layers
covered claims arising from all jurisdictions, the “top and drop” layer excluded claims arising from the United States
and Canada. The insured found itself faced with significant U.S. and non-U.S. claims. If the non-U.S. claims were
settled first, the U.S. claims would be excluded from coverage under the “top and drop layer.” Conversely, if the
insured could allocate its U.S. claims to the primary and intermediate excess layers, the non-U.S. claims would be fully
covered by the “top and drop” layer.
In upholding the Court of Appeals’ decision against the insured, the Supreme Court reaffirmed the principle that an
insured’s claims exhaust the primary and successive excess layers in the chronological order in which the losses are
ascertained, not based on the insured’s decision to change the order in which it pays claims in order to maximize
available insurance. The Court noted that the insured’s captive, which wrote the “top and drop” layer in the first
instance before ceding those liabilities to third party reinsurers, was only arguing that in favor of a maximization of its
own insurance liabilities because it was affiliated with the insured and was then ceding liabilities to reinsurers. It would
not have been commercially reasonable for an independent insurer to take such a position.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 16
RECENT SPEECHES AND PUBLICATIONS:
Larry Schiffer is speaking on the NFL Concussion Injury Cases at the Claims Committee meeting of the Brokers and
Reinsurance Markets Association on September 10, 2013, in New York City.
Eridania Perez will be speaking on “Access to Records - Is Sharing Information on Claims With Reinsurers a Thing of
the Past?”, at the Contract Wording Discussion Group on September 24, 2013, in New York City.
John Nonna is chairing and Larry Schiffer is speaking on technology in reinsurance arbitrations at the ARIAS•U.S.
Fall Educational program on October 30, 2013, in New York City.
Eridania Perez is speaking on International Arbitration Issues in Latin America as part of the ARIAS•U.S. Fall
Conference and Annual Meeting on October 31, 2013, in New York City. Larry Schiffer is speaking at the same
conference on Changes to the ARIAS•US Arbitrator Ethical Guidelines on November 1, 2013.
Eridania Perez presented a “Practical Session on Cross-Examination,” including a mock cross-examination, at the
International Commercial Arbitration Summer Seminar presented by the University of Florence and the ICC
International Court of Arbitration on July 25, 2013, in Florence, Italy.
Eridania Perez appeared in Law360’s Q&A Series in May 2013.
Suman Chakraborty appeared in Law360’s Q&A Series in June 2013.
Larry Schiffer’s Commentary, “Reinsurance and Emerging Risks,” was published on the website of the International
Risk Management Institute, Inc., IRMI.com, in June 2013.
Larry Schiffer’s article, “A Primer on Technology in Arbitrations,” was published in the ARIAS•U.S. Quarterly, Vol.
20, No. 2, 2d Quarter 2013.
PattonBoggs.com Newsletter: Reinsurance Newsletter – September 2013 17
Authors contributing to this newsletter are: Editor, Larry P. Schiffer, Suman Chakraborty, Joseph Urso, Aaron A.
Boschee, Maxine Martin, and Erika Lopes-McLeman. 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
MARK C. ERRICO
JASON F. KING
SHANNON W. CONWAY
EDWARD D. GEHRES
T. MICHAEL GUIFFRE
STEPHEN J. KOTT
EDWARD S. WISNESKI
J. THOMAS GILBERT