FIRST CIRCUIT RECOGNIZES UBERRIMAE FIDEI IN ADMIRALTY CONTEXT

The First Circuit recently examined, in the admiralty context, the doctrine of uberrimae fidei, a legal doctrine requiring that all parties to an insurance contract deal in good faith and fully disclose all material facts. The case involved a maritime insurance policy in which the insured failed to disclose that its dry dock had substantial, preexisting damage and failed to disclose the dry dock’s actual value. When the insured later made a claim and the facts were revealed, the insurer denied the claim. In subsequent coverage litigation, the district court decided in favor of the insurer, finding that the insurance policy was void ab initio because the insured failed to disclose the true value of the dry dock, its level of deterioration, and other material facts. The First Circuit affirmed, holding that uberrimae fidei is an established admiralty rule within the first circuit. The First Circuit, however, modified the district court’s ruling to reflect that the contract was merely voidable, not void ab initio.

Catlin at Lloyd’s v. San Juan Towing & Marine, No. 13-2491, 2015 WL 500744 (1st Cir. Feb. 6, 2015).

This post written by Catherine Acree.

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FEDERAL OFFICE OF INSURANCE REQUESTS COMMENTS FOR TRIA CERTIFICATION STUDY

Section 107 of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “Reauthorization Act”) requires the Secretary of the Treasury (“Secretary”) to conduct a study of the certification process required under in the Terrorism Risk Insurance Act of 2002, as amended (“TRIA”) and submit a report of the study results to Congress. To assist the Secretary in conducting the study and formulating the report, the Federal Insurance Office (“FIO”) issued a request for public comment, on the following items:

  • The establishment of a reasonable timeline by which the Secretary must make an accurate determination on whether to certify an act as an act of terrorism;
  • The impact that the length of any timeline proposed to be established may have on the insurance industry, policyholders, consumers, and taxpayers as a whole;
  • The factors the Secretary would evaluate and monitor during the certification process, including the ability of the Secretary to obtain the required information regarding the amount of projected and incurred losses resulting from an act which the Secretary would need in determining whether to certify the act as an act of terrorism;
  • The appropriateness, efficiency, and effectiveness of the consultation process required under section 102(1)(A) of TRIA and any recommendations on changes to the consultation process;
  • The ability of the Secretary to provide guidance and updates to the public regarding any act that may reasonably be certified as an act of terrorism;
  • The manner and extent to which the certification timeline and the Secretary’s ability to make an accurate determination on whether to certify an act as an act of terrorism may be influenced by domestic or international law enforcement processes; and,
  • The implications for insurers or policyholders if one or more events are certified as acts of terrorism but the aggregate, calendar-year insured losses do not exceed the amount required for Treasury to make payments for insured losses.

The written comments should also include: 1) the data or rationale, including examples, supporting any opinions or conclusions; 2) approaches and options respecting improvement of the certification process, if any; and, 3) any specific legislative, administrative, or regulatory proposals for carrying out such approaches or options.
Comments are due on or before March 6, 2015 and may be submitted electronically through the Federal eRulemaking Portal at http://www.regulations.gov.

This post written by Kelly A. Cruz-Brown.

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THIRD CIRCUIT EVALUATES THE DEFINITION OF “MATERIALITY” IN RESCISSION CLAIMS

In a case on which we previously reported, the Third Circuit recently evaluated the legal standard for determining materiality in a claim for rescission of an insurance contract.  The case involved a dispute between two reinsurers in which a federal court awarded the plaintiff $5.6 million based on breaches of the parties’ retrocession agreements.  The district court also entered summary judgment in the plaintiff’s favor on the rescission counterclaim.  The Third Circuit affirmed, ruling that the information plaintiff withheld was not material so as to amount to a breach of the duty of utmost good faith, approving the following definition of materiality under New York law: “A fact is material . . . if, had it been revealed, the insurer or reinsurer would either have not issued the policy or would have only at a higher premium.”  The Third Circuit rejected the other party’s broader definition of materiality – that information is material if it “likely” would have influenced the decision.

Munich Reinsurance Am., Inc. v. Am. Nat’l Ins. Co., No. 14-2045 (3rd Cir. Feb. 3, 2015)

This post written by Catherine Acree.

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INTERIM TRIA GUIDANCE ISSUED BY DEPARTMENT OF TREASURY

As previously reported, the Terrorism Risk Insurance Act (“TRIA” or the “Program”) was re-authorized and signed into law on January 12, 2015 (the “Reauthorization Act”).

On February 4, 2015, the Department of Treasury (“Treasury”) issued Interim Guidance Concerning the Terrorism Risk Insurance Act Reauthorization of 2015 (the “Interim Guidance”), which may be relied upon until superseded by amended regulations or additional guidance, to address implementation of the TRIA Reauthorization. The Interim Guidance addresses documentation of TRIA coverage, disclosures, and new offers of coverage.

Documentation

Recognizing that insurers may require additional time to provide disclosures and offers of coverage that comply to with state insurance rate and form laws, the Interim Guidance establishes an April 13, 2015 deadline for insurers to provide required disclosures and coverage offers.

Disclosures

The Interim Guidance provides the following advice concerning insurer disclosures:

  • National Association of Insurance Commissioner (NAIC) Model Disclosure Forms Nos. 1 and 2, as amended in 2015, are consistent with the disclosure requirements required under current TRIA regulations and the Reauthorization Act. Insurers may use these forms pursuant to Interim Section 50.17(c) of the Program regulations.
  • Insurers are no longer required to provide to a policyholder certain disclosures at the time of a policy’s purchase; however, insurers must provide such disclosures at the time of offer and renewal The timing of an insurer’s disclosures may conform with either subpart B of the Program’s regulations or Section 103(b)(2) of TRIA, as amended by the Reauthorization Act.
  • Insurers that offered coverage for insured losses prior to January 12, 2015, using the then-current NAIC Model Disclosure Form No. 1, NAIC Model Disclosure Form No. 2, or other disclosures consistent with Program regulations, are not required to provide a revised disclosure to the policyholder.
  • Disclosures on or after January 12, 2015 provided in connection with a new or mid-term offer of coverage for insured losses should be based on Program regulations and the Reauthorization Act.

New Offers of Coverage

The Interim Guidance expects an insurer to make a new offer of coverage for insured losses with respect to any in-force policy that does not provide coverage for insured losses, except where:

  • The policy incorporates a conditional exclusion or change of terms and conditions relating to coverage for insured losses and, because the Program is in effect, the insurer forbears effective January 1, 2015 (or as of the effective date of the policy, if later) on the exercise of the conditional exclusion or change in terms and conditions. The insurer should provide the policyholder written notice no later than April 13, 2015, of the insurer’s forbearance or written notice of the insurer’s withdrawal of any previous exercise of the conditional exclusion or change in terms and conditions. In the written notice, the insurer should state that the insurer’s forbearance or withdrawal, as applicable, is effective January 1, 2015 (or as of the effective date of the policy, if later); or
  • The policyholder declined coverage for insured losses, so long as the insurer’s offer did not materially differ in price from that which the insurer would have offered following enactment of the Reauthorization Act.

The Interim Guidance further advises that if a policyholder declined coverage for insured losses but the insurer’s offer materially differed in price from that which the insurer would have offered following enactment of the Reauthorization Act, then the insurer should consider making a new offer to that policyholder.

In response to the Reauthorization Act and the Interim Guidance, the NAIC developed a Model Bulletin to expedite communication of implementation issues concerning the Reauthorization Act. Several states, such as Alabama, Kentucky, Louisiana, Maryland, North Carolina, Oklahoma, Rhode Island, and Wyoming have issued the Model Bulletin tailored to existing state regulatory requirements for each jurisdiction. It is anticipated that additional jurisdictions will issue similar bulletins or memoranda concerning compliance with the Reauthorization Act.

This post written by Kelly A. Cruz-Brown.

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REINSURER FOUND PREJUDICED BY DISADVANTAGEOUS COMMUTATIONS RESULTING FROM CEDING INSURER’S LATE NOTICE

A legal dispute stemmed from Utica Mutual Insurance Company’s late notice of claim to Fireman’s Fund Insurance Company, Utica’s reinsurer. Although the parties’ facultative reinsurance certificate required Utica to provide prompt notice “of any occurrence or accident which appears likely to involve reinsurance,” Utica did not provide notice of its claim until 2008 after it entered into a settlement agreement with its own insured surrounding litigation which commenced in 1997. Fireman’s Fund argued that it was prejudiced by Utica’s late notice of its $35 million claim because Fireman’s Fund did not take the claim into account when it negotiated thirteen commutation agreements with retrocessionaires. According to Fireman’s Fund, the retrocessionaires would have been responsible for almost $20 million of the $35 million claim had Fireman’s Fund known of the claim because those claims would have been part of their negotiations. Utica maintained that the commutations were collateral matters which did not constitute prejudice and sought partial summary judgment on the issue of late notice. The court concluded that a reinsurer may be prejudiced by its ceding insurer’s late notice which caused it to make disadvantageous commutations. However, the reinsurer must prove that it suffered tangible loss. If it can do so, then the reinsurer is entitled to complete relief from its duty to indemnify and not merely for those damages caused by the prejudice. The court also denied Utica’s motion for partial summary judgment on Fireman’s Funds bad faith defense. Genuine issues of material fact existed as to whether Utica was grossly negligent or reckless in failing to provide prompt notice to Fireman’s Fund. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 6:09-CV-853 (USDC N.D.N.Y. Feb. 9, 2015).

This post written by Leonor Lagomasino.

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DELAWARE COURT ORDERS BANK TO TURN OVER $156 MILLION OF REINSURER’S ASSETS TO STATE INSURANCE COMMISSIONER

The Delaware Court of Chancery has denied U.S. Bank, N.A.’s request for an order establishing its right to retain cash and securities valued at $156 million and maintained by Freestone Insurance Company, a reinsurer now in receivership, in a custodial account at the Bank. When Freestone’s delinquency proceedings began, it maintained assets valued at $175 million with the Bank, which held the assets in trust to secure the insurer’s right to payment from Freestone (and others) as reinsurer. The Bank turned over only $19 million of the assets and moved for an order establishing its right to retain the rest, arguing it was entitled to keep the assets as security for potential indemnification claims and present and future expenses. The court denied the Bank’s motion, finding the Bank was not entitled to retain indefinitely assets valued at $156 million nor was it entitled to a security interest in those assets. Instead, the court ordered the Bank to turn over the $156 million to the Insurance Commissioner of the State of Delaware, allowing the Bank to keep only its current administrative fees to the extent incurred as of a date thirty days after the date the commissioner demanded the assets’ return. In the Matter of the Liquidation of Freestone Insurance Co., C.A. No. 9574-VCL (Del. Ch. Dec. 24, 2014).

This post written by Renee Schimkat.

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REINSURANCE-RELATED DISPUTE STAYED PENDING ARBITRATION DESPITE LATER EXECUTED SETTLEMENT AGREEMENT

Steadfast Insurance Company entered into a settlement agreement with its insured, Barton Malow Enterprises after agreeing to pay $15 million on Barton’s claim. The settlement included a complete release of all claims by Steadfast against Barton and its affiliates and subsidiaries. Thereafter, Steadfast discovered that it had purchased reinsurance covering a portion of the settlement proceeds under a reinsurance agreement with United Integrity. United denied the claim, arguing that Steadfast released United because United was in fact a wholly-owned subsidiary of Barton’s. Steadfast then served an arbitration demand on United pursuant to the arbitration clause in their reinsurance agreement. Barton and United responded by filing suit against Steadfast, which moved to stay the action pending arbitration. Barton and United opposed the motion for stay, arguing that the later-executed settlement agreement overrode the arbitration provision. The court disagreed and stayed the case pending arbitration. The arbitration provision was not superseded by the settlement agreement because the settlement agreement did not specifically preclude arbitration. Moreover, United’s claims fell within the scope of the arbitration provision; the claims implicated both sides’ rights and obligations under the reinsurance agreement. Finally, although Barton was not a party to the reinsurance agreement, the court found that judicial economy warranted staying Barton’s claims against Steadfast pending conclusion of the arbitration. Barton Malow Enterprises, Inc. v. Steadfast Insurance Co., No. 14-cv-7347 (USDC S.D.N.Y. Dec. 31, 2014).

This post written by Leonor Lagomasino.

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COURT DENIES MOTIONS TO COMPEL PRODUCTION OF DOCUMENTS UNRELATED TO REINSURANCE POLICIES AT ISSUE IN ACTION

The dispute continues between Utica Mutual and Clearwater Insurance in the Northern District of New York where the court recently denied, in large part, the parties’ respective motions to compel discovery of insurance and reinsurance documents unrelated to the specific facultative reinsurance policies at issue in the action. In this case, on which we have previously reported, the issue is whether reinsurance is due under contracts between Utica Mutual and Clearwater for a reinsurance claim relating to a settlement with one of Utica Mutual’s insureds. Utica Mutual sought to compel Clearwater to produce unrelated reinsurance contracts, claim notices, claim files, claim billing information, and other documents concerning contractual relationships with non-parties, arguing these documents were relevant to Clearwater’s defenses and counterclaim that it was misled into paying amounts toward that settlement. Clearwater, in turn, sought to compel Utica Mutual to produce information about primary commercial insurance policies issued by Utica Mutual to a number of its commercial insureds, claiming the information was needed, in part, to determine damages relating to the underlying settlement.

The court denied the parties’ motions, finding the documents sought were not relevant and noting that any issues as to the underlying settlement were already litigated and resolved. Discovery of entirely different contracts and documents that are “not germane or are only faintly relevant” would create confusion and diversion. The court did grant that part of Utica Mutual’s motion seeking to compel Clearwater to respond to an interrogatory requesting the factual and legal bases for Clearwater’s assertions that the amounts it paid to Utica Mutual were not due and payable. That single interrogatory, the court found, sought relevant information. Utica Mutual Insurance Co. v. Clearwater Insurance Co., No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2015).

This post written by Renee Schimkat.

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SPECIAL FOCUS: ALTERNATIVE CAPITAL AND REINSURERS

One hot topic in the reinsurance industry over the last year or two has been the influx and role of alternative capital.  In a Special Focus article titled Alternative Capital Proving That For Reinsurers, Size Does Not Matter, Bob Shapiro and Scott Shine explore some of the issues in this area.

This post written by Rollie Goss.

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SEVENTH CIRCUIT FINDS ATTORNEY FEE DISPUTE ARBITRABLE

The Seventh Circuit recently held that a cost-sharing agreement (“CSA”) between Hennessy Industries Inc. (“Hennessy”) and National Union Fire Insurance Co. (“National Union”) required the parties to arbitrate a dispute over attorneys’ fees stemming from asbestos-related personal injury claims. Hennessy and National Union entered into a CSA that set forth a framework to govern asbestos claims handling and payment in 2008. The CSA was governed by Illinois law and contained an agreement that the parties would submit disputes to arbitration, though arbitrators would not have jurisdiction to award punitive damages, fines, or penalties.

Despite the language of the CSA, Hennessy sued National Union in federal court, seeking penalties, attorneys’ fees, and costs as provided by Section 155 of Illinois’s insurance law. National Union moved to compel arbitration of that claim, but the district court denied the motion, finding that the Section 155 claim was not within the scope of the parties’ arbitration agreement. National Union appealed to the Seventh Circuit, which reversed the district court’s ruling. Judge Posner, writing for the court, held: (1) Section 155 “regulate[s] the business of insurance” and thus could not be preempted by the Federal Arbitration Act; and (2) Section 155 was within the scope of the arbitration agreement, and so it was arbitrable by its terms. Hennessy Industries, Inc. v. National Union Fire Ins. Co. of Pittsburgh, No. 14-1277 (7th Cir. Oct. 28, 2014)

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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