The plaintiff, a joint powers self-insured retention pool consisting of numerous California public agencies, sued the defendant, a reinsurer that reinsured plaintiff pursuant to two agreements, after the defendant declined to provide reinsurance coverage. The lawsuit alleged breach of contract and tortious breach of the implied covenant of good faith and fair dealing, and sought declaratory relief. The defendant moved to dismiss the implied covenant claim, arguing that, under California law, reinsureds may not recover tort damages for a breach of the implied covenant of good faith and fair dealing. That motion was granted. The court held that the availability of tort remedies in the context of a contractual dispute depends on whether social policy supports their imposition. While tort remedies for breach of the implied covenant of good faith and fair dealing in insurance policies had previously been recognized by California courts, they were only considered appropriate because the policies were characterized by elements of adhesion and unequal bargaining power, public interest and fiduciary responsibility. The relationship between reinsurer and reinsured does not implicate the same concerns since reinsureds are sophisticated business entities and, in obtaining reinsurance coverage, are merely seeking the commercial advantage of writing more policies than their reserves would otherwise sustain. The court ruled that more was needed before it could justify the imposition of tort damages in a straightforward contractual dispute. California Joint Powers Insurance Authority v. Munich Reinsurance America, Inc., Case No. CV 08-956 (USDC C.D. Cal. Apr. 21, 2008).

This post written by Brian Perryman.

WellPoint Health Networks and John Hancock Life Insurance Company became involved in a dispute over the interpretation of three documents relating to WellPoint’s purchase from John Hancock of what were termed Hancock’s Group Business Operations. The Purchase and Sale Agreement, Coinsurance Agreement and Administration Agreement all contained arbitration provisions. The issue was whether three loss-producing books of insurance business, the most important of which were heavily loss producing personal accident risks originated by JEH Re Underwriting Management in Bermuda, were included in the transaction. WellPoint demanded arbitration, seeking additional information about these businesses and a declaration of its responsibilities. Hancock counter-demanded for arbitration seeking $42.4 million from WellPoint, which it later “revised” to $464.4 million. Both parties appointed an arbitrator, and when the party-appointed arbitrators could not agree on an umpire, under the terms of the contract the Denver office of the American Arbitration Association appointed the umpire. Shortly after Hancock increased its claim by ten-fold, Hancock replaced its counsel and sought to replace its party-appointed arbitrator. Conceding that it could not “fire” its appointed arbitrator, WellPoint apparently convinced the arbitrator to withdraw, and a dispute arose as to how to appoint a replacement.

Neither the agreements nor applicable law expressly covered the issue. WellPoint contended that it could appoint a replacement, while Hancock contended that it could appoint the replacement under a provision allowing it to do so if WellPoint defaulted in timely appointing an arbitrator. The remaining arbitrator and umpire allowed WellPoint to appoint a successor, who Hancock conceded was qualified under the arbitrator qualification provisions of the agreements. The arbitration proceeded in two phases, with an interim award entered after the initial phase, and a final award entered after the second phase. The panel's conclusion was that the JEH Re business was not included in the purchase transaction, and that WellPoint owed Hancock $26.4 million instead of the $464 million it had requested.

Hancock moved to vacate the awards, while WellPoint moved to confirm. The first issue was whether the award after the initial phase was subject to immediate confirmation. If it were, Hancock’s motion to vacate was untimely. The court determined that the “initial award” was not a final award, and that Hancock had acted timely in seeking to vacate the final award.

With respect to the replacement of the arbitrator, the court held that Hancock had not waived its right to challenge the appointment by failing to seek relief immediately under section 5 of the FAA. The court upheld the appointment of the replacement arbitrator by WellPoint based upon its interpretation of the agreements and the evident intention of the parties that each would appoint one of the arbitrators. The fact that neither the agreements nor the FAA clearly addressed the situation provided the court with discretion, which it interpreted to require it to attempt to implement the intention of the parties.

This is a very interesting, 33 page opinion, which addresses a number of issues of great importance in many reinsurance arbitrations. The Seventh Circuit has addressed some interesting arbitration process issues, and we will watch to see if this decision is appealed. WellPoint Health Networks, Inc. v. John Hancock Life Ins. Co., Case No. 07-943 (USDC N.D. Ill. Apr. 24, 2008).

This post written by Rollie Goss.

In a March 5, 2008 post, we reported on a jury verdict against AIG subsidiaries for $28 million plus punitive damages in a case seeking the rescission of two reinsurance facilities. AIG filed a motion for judgment as a matter of law, or in the alternative for a new trial, and to amend the judgment. Finding no legal error and sufficient facts to support the jury's verdict, the court has denied AIG's motion. AXA Versicherung AG v. New Hampshire Insur. Co., Case No. 05-10180 (USDC S.D.N.Y. Apr. 22, 2008).

This post written by Rollie Goss.

A Virginia district court dismissed a Complaint alleging breach of contract after the defendant sought to enforce the arbitration clause in the contract governing the parties’ relationship. The plaintiff argued that the arbitration clause was too vague and indefinite to be enforced, in that it failed to prescribe a location, a number of arbitrators, procedural rules, or any enforcement mechanism for an arbitration award. However, because the parties agreed that the FAA was the appropriate federal law regarding arbitration, the court concluded that the absent terms were supplied by the FAA. Wolverine Fire Protection v. Atlantic Marine Construction Co., Case No. 2:08cv75 (USDC E.D. Va. April 24, 2008).

This post written by Lynn Hawkins.

Argonaut Insurance reinsured Global Reinsurance under excess of loss, quota share and facultative reinsurance agreements. A dispute arose as to whether certain commutation payments made by Global and ceded to the reinsurance agreements came within the scope of the reinsurance agreements, and arbitration was demanded. Background is found in the Petition to Confirm the arbitration award (which is redacted). An arbitration panel decided in favor of Argonaut, finding that the commutation payments were not "claims, losses or settlements within the terms, limits and conditions of the Retrocessional Contracts at issue ...." Copies of the reinsurance contracts and the arbitration award are found in a declaration filed in support of confirmation of the award. The award was confirmed with the agreement of all parties. The court denied a request to keep filings in the confirmation proceeding under seal, finding that there had not been a sufficient showing to overcome the presumption that filings in US District Courts are public. Global Reinsur. Corp. v. Argonaut Insur. Co., Case No. 07-8350 (USDC S.D.N.Y. 2008).

This post written by Rollie Goss.

An underlying insured lacks standing to maintain an action against a reinsurer under a contract to which it is not a party, according to a Louisiana district court. Plaintiff, LaSalle Parish School Board, was the insured on a policy of insurance issued by Property Casualty Alliance of Louisiana (“PCAL”). PCAL in turn entered into a contract of reinsurance with Allianz Global Risks. LaSalle Parish School Board filed a complaint against Allianz (and Eagle Adjustment Services) after Allianz failed to pay LaSalle more than $800,000 for tornado damage to LaSalle High School. The complaint alleged claims for breach of contract, detrimental reliance, and negligent misrepresentation. Allianz and Eagle moved to dismiss all claims.

The court granted Allianz's motion to dismiss the breach of contract claim, finding that “LaSalle has no standing to sue Allianz under the reinsurance contract, absent an intent to stipulate an advantage for LaSalle.” The Court also concluded that none of the state statutory exceptions allowing an insured to proceed directly against a reinsurer of its own insurer applied. The court denied the defendants’ motion to dismiss the detrimental reliance and negligent misrepresentation claims due to Allianz’s direct involvement in working with the insurance adjuster who dealt directly with the school system in adjusting the claim. LaSalle Parish School Board v. Allianz Global Risks U.S. Ins. Co., Case No. 1:07-cv-00399 (USDC W.D. La. April 24, 2008).

This post written by Lynn Hawkins.

There have been a number of decisions recently addressing different issues with respect to the confirmation or vacation of arbitration awards:

• Modifying a final award: There have been two decisions under the functus officio doctrine, which addresses whether an arbitrator exceeds his/her powers by making substantive changes to the merits of an award. In Transtech Industries, Inc,. v. A & Z Septic Clean, No. 05-5246, the Third Circuit held that modifications to an award were permissible since they "clarified" ambiguity resulting from the initial award stating "relatively little" with respect to an issue. In Eastern Seaboard Concrete Constr. Co. v. Gray Constr. Inc., Case No. 08-37 (USDC D. Me. Apr. 18, 2008), a magistrate judge held that an arbitrator exceeded his authority when he modified the substantive portion of an earlier award to address an "additional" issue. The line between clarifying an award that does not address an issue and changing an award to initially address an issue may be a fine line.


• Scope of arbitration issues: The Third Circuit held in Greenwich Services, Inc. v. District 1199C, No. 06-4951 (3d Cir. Apr. 11, 2008) that an arbitrator has the authority to interpret and determine the scope of the issues in the arbitration, based upon the submissions of the parties and the applicable contract. Finding that the arbitrator's determination drew its essence from the contract, the court affirmed the confirmation of the award.


• Timing of seeking vacation of award: In Employers Ins. Co. of Wausau v. Paladin Reinsurance Corp., Case No. 08-42 (USDC S.D.N.Y. Feb. 21, 2008), the court confirmed an arbitration award finding that the claims asserted with respect to 19 facultative reinsurance certificates were time barred, when the party seeking to vacate did not make the request within the time allowed by the Federal Arbitration Act. The Petition to Confirm the award sets forth pertinent background facts.


• Merits of awards: In Delgado v. A. Korenegay Senior House HDFC, Case No. 07-7761 (USDC S.D.N.Y. Mar. 21, 2008), the court affirmed an award over a number of complaints relating to procedure and evidence, finding that the arbitrator had found that the party seeking to vacate the award was not a credible witness, which is not a basis for vacating an award.

This post written by Rollie Goss.

The defendant municipality requested an order compelling further responses to requests for production of documents relating to reserves set by the plaintiff insurer on the defendant’s claims, and documents relating to reinsurance of the plaintiff’s policies. The court granted the request, finding that while setting reserves does not constitute an admission of liability, it may be relevant as to plaintiff’s state of mind for the potential for coverage and, therefore, duty to defend. Similarly, non-privileged communications with reinsurers may be relevant for the same reason. The court denied as irrelevant, however, a request for an order compelling further responses to requests for admission concerning hourly rates paid to a law firm in connection with matters not related to the litigation. Insurance Co. of the State of Pennsylvania v. City of San Diego, Case No. 02-CV-693 (USDC S.D. Cal. Apr. 4, 2008).

This post written by Brian Perryman.

The plaintiff, Birmingham, along with a group of investors, entered into a funding agreement with defendant’s subsidiary, ALVE, which served as a holding company for intellectual property of the defendant, Abbott. The funding agreement related to the development of a stent product and contemplated successor stent product, and contained a broad arbitration provision. Pursuant to the funding agreement, ALVE and Abbott were to use commercially reasonable efforts to obtain regulatory approval of these products. Concurrent with the funding agreement, Abbott entered into a “keep well” agreement with ALVE obligating Abbott to guarantee ALVE’s performance under the funding agreement. The keep well agreement identifies Birmingham and the investors as its intended beneficiaries, and incorporated by reference provisions of the funding agreement. The keep well agreement did not contain an arbitration provision. Subsequently, Abbott decided not to pursue development of the stent product. Birmingham believed that the termination of the development was improper, and that the stent had significant commercial potential. It filed a lawsuit alleging that Abbott abandoned the stent because it wished to focus on a different stent, thereby breaching the keep well agreement. Abbott moved to compel arbitration pursuant to the funding agreement’s arbitration provision.

The court granted the motion to compel arbitration, citing the strong federal policy favoring arbitration and the estoppel doctrine, under which a non-signatory may compel arbitration where: (1) there is a close relationship between the parties and controversies and (2) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration provision. The court initially found that there was a close relationship between Abbott and ALVE and the controversy at issue because of those parties’ parent-subsidiary relationship. The second prong was also satisfied because the dispute between Birmingham and Abbott in the lawsuit was directly related to the terms of the funding agreement. Birmingham Associates Ltd. v. Abbott Laboratories, Case No. 07 Civ. 11332 (USDC S.D.N.Y. Apr. 14, 2008).

This post written by Brian Perryman.

With this post we are expanding the content of Reinsurance Focus to include an occasional article of greater length containing a more detailed analysis of a reinsurance or arbitration-related topic of interest. These posts will be placed in the Special Focus category of our blog, and will consist of a short executive summary of the article linked to the article. We hope that this somewhat more detailed exploration of selected topics adds to our readers’ enjoyment of our blog. Our current intention is to have one such Special Focus post about every other month. Following is the executive summary of our first such article.

The manifest disregard of law doctrine has been referred to as a “judicially created” basis for vacating arbitration awards, which arguably is not expressly provided for in the Federal Arbitration Act (“FAA”). In the recent Hall Street Associates opinion (see the March 28, 2008 post), the United States Supreme Court stated that the grounds for vacating arbitration awards set forth in the FAA are the exclusive grounds for vacating an arbitration award, which may imply that what some courts have described as judicially created bases for vacation, such as the manifest disregard of law doctrine, are not viable. In the accompanying article, we briefly explore the current status of the manifest disregard of law doctrine and whether it has a future after Hall Street Associates. Read the article.

This post written by Rollie Goss.

A reinsurance broker unsuccessfully sought an interlocutory appeal from a federal district court’s denial of its motion for summary judgment. The cause of action in the case was the Pennsylvania tort of negligent misrepresentation. It was alleged that the broker presented material misinformation to an Italian reinsurer that induced the reinsurer to reinsure various property and casualty risks in the United States. The broker argued on summary judgment that, under Pennsylvania law, this tort could not apply to it, since it was not a “professional information provider.” The court denied the summary judgment motion, and the broker subsequently moved to certify the question for immediate appeal to the United States Court of Appeals for the Third Circuit pursuant to 28 U.S.C. § 1292(b). The district court denied this motion, too. After noting that interlocutory appeals are generally disfavored, the district court found that there was no controlling question of law as to which there was a substantial ground for difference of opinion (a requisite of a § 1292(b) certification). Although the broker contended that Pennsylvania law does not impose liability for negligent misrepresentation on a reinsurance broker who negligently provides information to a potential reinsurer, the district court essentially determined that this was not a per se rule, especially given that part of the service of acting as a reinsurance broker is to provide information about the risk on which a reinsurer expects to be able to rely. The court found, therefore, that it was not clear that the broker’s proposed question was “controlling.” The district court also determined that an immediate appeal would not materially advance the ultimate termination of the litigation (another requisite of certification), observing that the case was already “on the eve of trial.” For these reasons, the motion for leave to appeal was denied. United National Insurance Co. v. Aon, Ltd., Case No. 04-539 (USDC E.D. Pa. Apr. 7, 2008).

This post written by Brian Perryman.

A California court of appeals has held that the corporate attorney-client privilege extends to confidential communications between an insurer’s employees regarding legal advice and strategy if reasonably necessary for the transmission of that information or to further the purpose of the legal consultation, even when the corporation’s attorneys are not directly involved or when the communications do not include excerpts of direct communications from the attorneys. The trial court, relying on the recommendations of a discovery referee, had determined that only documents created by counsel or involving direct communications between the insurer and its counsel were protected under this privilege. Accordingly, it ordered the production of a number of documents from the insurer’s claim files, which contained reserve and reinsurance information. The insurer sought a writ of mandate from the court of appeals to compel the trial court to vacate this production order. The appellate court concluded that corporations could only act through agents, and that the discussion of legal advice by agents for the purpose of implementing that advice came within the attorney-client privilege, whether or not counsel were directly involved in such discussions. Zurich American Insurance Co. v. Superior Court, No. B194793 (Cal. Ct. App. Oct. 11, 2007).

This post written by Brian Perryman.

The Workers’ Compensation Reinsurance Association and the Minnesota Workers’ Compensation insurance Association sued nine insurers, alleging violation of the federal RICO statute and unjust enrichment due to the intentional underreporting of the amount of workers’ compensation insurance they had written in order to minimize assessments and reinsurance premiums. Disagreeing with a Magistrate Judge, a District Judge granted a motion to dismiss, dismissing the RICO claims with prejudice and the unjust enrichment claims for lack of jurisdiction. The court found that allegations focusing on the participation of the defendants in their own business, rather than the business of an enterprise, failed to allege a RICO violation. The unjust enrichment claim failed due to the failure properly to allege diversity jurisdiction. The RICO claims were dismissed with prejudice, and the unjust enrichment claims were dismissed without prejudice. Workers’ Compensation Reinsurance Association v. American International Group, Inc., Case No. 07-3371 (USDC D. Minn. Mar. 28, 2008).

This post written by Rollie Goss.

Those interested in alternative risk transfer mechanisms, including captives, cat reinsurance, and weather risks may be interested in a web site dealing with such issues, Artemis. Artemis has been updated to include new headlines and other information. The home page features news headlines, and the site also includes sections with background information on covered topics, a deal directory listing alternative risk transfer transactions and an events calendar. The site also sponsors a blog relating to alternative risk transfer topics, which we are adding to the links section of Reinsurance Focus.

This post written by Rollie Goss.

The English Commercial Court has ruled that Standard Life Assurance Ltd can not recover damages from its underwriters arising out of the improper sales of mortgage endowment policies, but could claim against its insurance broker, Aon. Standard Life subscribed to a policy with a liability cover of £75 million in excess of £25 million. The policy contained a provision permitting the aggregation of claims arising from an originating cause or source. The insured aggregated 97,000 small claims and sought to recover the full £75 million excess of £25 million. The underwriters claimed that even if the claims did arise from a single originating cause, the claims could not be aggregated because the policy schedule and slip contained the wording “excess: £25million each and every claim and/or claimant.”

The court agreed with the underwriters, finding that the policy did not allow for the claims to be aggregated together, meaning the excess limit could not be reached. Specifically, the court found no “plausible purpose for the inclusion of the words ‘and/or claimant’ in the excess provision in the slip other than the attempted achievement of a per claimant excess.”

Prior to the court’s ruling, Aon brought its own negligence claim against Reynolds Porter Chamberlain (“RPC”) as a third party to the proceedings. Aon’s claim against RPC argues that the firm did not recognize that the wording of the policy meant the claims could not be grouped together. Standard Life Assurance Ltd. – and – Oak Dedicated Ltd. – and – Aon Ltd., Reynolds Porter Chamberlain, [2008] EWHC 222 (Comm. Feb. 13, 2008).

This post written by Lynn Hawkins.