Reinsurance Focus

Following are selected bills in the captive insurance and reinsurance areas that have been recently introduced in the state legislatures:

• H.B. 314 proposes to amend Delaware’s captive insurance company laws by adding two new forms of captive insurance companies, “agency captive insurance companies” and “branch captive insurance companies,” to those that can currently be licensed in Delaware. In an agency captive structure, the insurance risk on policies is reinsured to the agency captive, thereby allowing the agents or brokers that placed the policies to share in the profits or losses attributable to these policies. Branch captive insurance companies are divisions of offshore captives that establish a business unit onshore. These new forms of captive insurance companies are intended to enhance the economic development potential of Delaware’s captive insurance laws. The bill also makes a technical change to the delinquency provisions applicable to sponsored captive insurance companies. The bill was introduced in the Delaware House of Representatives on January 26, 2010, and it was assigned on the same day to the Economic Development/Banking/Insurance/Commerce Committee. The following day the bill was reported out of committee favorably in the Delaware House of Representatives.

• H.B. 305 proposes to amend Maryland’s domestic reinsurance law requirements for various purposes, including: (i) specifying an assessment fee payable by specified domestic reinsures to the Maryland Insurance Commissioner; (ii) exempting domestic reinsurers from a requirement to have an office in the State; (iii) requiring domestic reinsurers to keep specified assets in the State; and (iv) authorizing domestic reinsurers to keep their general ledger account records outside the State under specified circumstances. The bill was introduced in the Maryland House of Representatives on January 27, 2010.

This post written by Karen Benson.

Along with an insurance policy, the parties previously entered into an administration agreement that obligated the defendant to reimburse the plaintiff for claims made under extended warranty contracts. The plaintiff brought suit in state court over the alleged failure to pay reimbursement requests. The defendant removed and then sought to compel arbitration and stay proceedings pursuant to the arbitration provision in the administration agreement. However, this agreement was to be interpreted in accordance with Nebraska law, and the Nebraska Uniform Arbitration Act (“NUAA”) exempts from arbitration any agreement that concerns or relates to an insurance policy. In denying the defendant’s motion to compel arbitration and stay proceedings, the court ruled that the NUAA reverse-preempted the Federal Arbitration Act (“FAA”) pursuant to the McCarran-Ferguson Act, finding that the NUAA was enacted for the purpose of regulating the business of insurance and would be invalidated, impaired or superseded by the FAA. The Court therefore denied the motion to compel arbitration, finding that the Nebraska statute prevailed over the FAA. Datacor, Inc. v. Heritage Warranty Ins. Risk Retention Group, Inc., Case No. 09-1123 (USDC E.D. Mo. Dec. 16, 2009).

This post written by Dan Crisp.

The Texas Insurance Department (“Department”) determined that American National Ins. Co. and other insurance companies were incorrect when they reported stop-loss insurance policies that they sold to self-funded employee benefit plans as reinsurance instead of direct insurance. The Companies disagreed, and brought the matter to court. The trial court granted the Department’s motion for summary judgment, agreeing with the Department that self-funded plans are not insurers under Texas law. The Companies appealed, and the Appellate Court reversed. It found that by selling the stop-loss policies at issue in this case to self-funded benefits plans and reporting their sale to the Department as a sale of assumed reinsurance, the Companies did not violate those provisions of the Texas Insurance Code cited by the Department. The Court filed an Order with instructions to enter judgment in favor of Companies on the issue. American National Ins. Co. v. Texas Dept. of Insurance, No. 03-08-00535-CV (Tex. App. Ct. Dec. 16, 2009).

This post written by John Pitblado.

Royal Surplus Lines Insurance Company, the plaintiff’s predecessor, assumed the liabilities and acquired the related assets of an insurer that provided a one-year general liability policy to Equity Residential (“Equity”). Employers Reinsurance Company, the defendant’s predecessor, reinsured this policy until it terminated the reinsurance agreement on August 18, 2000. In this action, the plaintiff, Arrowood Surplus Lines Insurance Company (“Arrowood”), sought reimbursement for a settlement payment to Equity and claim expense in connection with losses occurring between December 15, 2000 and December 15, 2002, and the defendant, Westport Insurance Corporation (“Westport”), moved for judgment on the pleadings, arguing that Westport has no liability for losses after December 15, 2000. Arrowood argued that the Equity settlement was covered under the reinsurance agreement under the “follow the fortunes” clause.

The court, however, found that the losses under the Equity policy were outside of the reinsurance agreement, which stated that a policy issued for a period of more than one year shall be considered as “becoming effective” on the policy’s anniversary date while the policy is in force. Even if the runoff option was exercised, the policy would only be in effect until the anniversary date. Therefore, the reinsurance coverage period was limited to one year at a time, regardless of the length of the underlying insurance contract. Losses after the anniversary date would not be covered because the Equity policy could not “become effective” under a terminated reinsurance agreement. Moreover, the “follow the fortunes” clause only applies to a reinsurance contract in force. The court thus granted Westport’s motion for judgment on the pleadings. Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., Case No. 08-1393 (USDC D. Conn. Jan. 5, 2010).

This post written by Dan Crisp.

AXA Belgium S.A. (“AXA”) reinsured Century Indemnity Co. (“Century”) under certain treaties dating back to the 1970’s. In 2005, Century disputed AXA’s fulfillment of certain payment obligations, and the parties arbitrated the matter. The award, rendered in 2007, was in Century’s favor on a number of issues, and ordered AXA to make payments to Century. After AXA refused to make the ordered payments, Century filed an action in Pennsylvania in 2009 to confirm the award, and the award was confirmed. Thereafter, Century claims AXA still did not make required payments, and moved for contempt in the Pennsylvania action.

For its part, AXA claims that correlated issues involving the parties that were not subject to the arbitration impact AXA’s payment obligations because they entitle AXA to offsets or credits against its payment obligations ordered in the arbitration and confirmed in court. AXA thus filed its own action in New York federal court, seeking to compel arbitration of the offset issues it claims impact its payment obligations. The New York court deferred and transferred the action, suggesting that AXA was engaged in forum shopping, and finding that the Pennsylvania court was already familiar with the issues and was the appropriate forum for AXA to raise its claims pertaining to the offset. However, in an Order ironically issued the same day as the New York Order, the Pennsylvania court – plainly displeased by the bitter tone of the parties’ dispute – refused to enjoin the New York litigation, but did not grant Century’s motion for contempt, based on its review of the arbitration award, finding that the award did not command the payment of a sum certain by AXA. It also held that the arbitrability of the offset issue should be determined in the New York action. Both courts have now deferred the resolution of this issue to the other court. AXA Belgium, S.A. v. Century Indemnity Co., 09-9703 (USDC S.D.N.Y. Jan. 11, 2010); Century Indemnity Co. v. Certain Underwriters at Lloyd’s, No. 09-94 (USDC E.D.Pa. Jan 11, 2010).

This post written by John Pitblado.

Parties to a contract for the sale of steel pipe brought cross-motions to vacate, modify and correct an arbitration award conducted according the International Dispute Resolution Procedures of the AAA’s International Centre for Dispute Resolution. The arbitrator issued an amended award, which was challenged in District Court by both parties. The District Court vacated the amended award and confirmed the original award. Appellant T.Co. Metals appealed the judgment to the Second Circuit arguing that the arbitrator acted in manifest disregard of the law and exceeded his powers. Appellee Dempsey Pipe & Supply filed a motion for fees.

The Second Circuit agreed with the district court’s refusal to vacate the damage award to Dempsey finding that the arbitrator did not manifestly disregard the law in interpreting the Supreme Court’s recent decision in Hall Street Assoc. LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008). The Court determined, however, that the district court erred in applying the functus officio doctrine to the arbitrator as he was acting on the parties’ petitions for reconsideration and revised the award pursuant to his interpretation of the arbitral rules the parties had agreed upon. Accordingly, the Second Circuit vacated the order confirming the arbitrator’s original award and remanded the case so that the amended award may be confirmed. Dempsey’s motion for fees was denied. T.Co. Metals, LLC v. Dempsey Pipe & Supply, Inc., Case No. 08-3894 (2d Cir. Jan. 14, 2010).

This post written by John Black.

After granting defendant Lloyd’s motion to compel arbitration, plaintiff B.D. Cooke and Partners filed a motion for reconsideration of the order.  Soon thereafter, B.D. Cooke contacted Lloyd’s to begin arbitration.  Lloyd’s subsequently filed a motion to stay arbitration pending the result of B.D. Cooke’s motion for reconsideration.  The District Court for the Southern District of New York likened the analysis to a stay of arbitration requested pending appeal of a court’s order compelling arbitration.  In such situations, the court explained, motions to stay are generally denied unless the equities tip decisively in the direction of a stay, such as when irreparable harm or clear hardship would otherwise result.  The Court denied the motion to stay, reasoning that incurring unnecessary expenses did not constitute sufficient harm to the defendant.  The court, however, denied plaintiff’s motion for fees finding that the motion to stay was not brought in bad faith.  B.D. Cooke & Partners Ltd. v. Certain Underwriters at Lloyd’s London, Case No. 08-3435 (USDC S.D.N.Y. Nov. 19, 2009).

This post written by John Black.

In this Special Focus article, John Pitblado provides an in-depth analysis of Century Indemnity Co. v. Certain Underwriters at Lloyd’s, London. In this decision, the Third Circuit addresses whether an agreement to arbitrate existed, and explores the tension between the presumption favoring arbitration and a party’s right to his/her day in court.

Haiti is one of sixteen members of the Carribean Catastrophe Risk Insurance Facility (CCRIC), which is a regional parametric trigger cat risk insurance pool that is intended to provide member governments with short term cash payments to bridge the gap between hurricanes or earthquakes and the receipt of contributions from other governments, organizations and individuals. The facility makes payments to member governments after a 14 day waiting period after a qualifying event. The CCRIF is scheduled to make a payment to the Government of Haiti of $8 million on January 26, which is more than 20 times the premium of $385,000 paid by Haiti for this coverage. The World Bank sponsored a donor conference when the CCRIF was founded in 2007, seeking international support for this facility, but pledges of support at that time from countries around the world, the World Bank and other organizations totaled only $47 million. This level of support may have been due in part to the fact that this was the first regional cat risk insurance pool of its kind, and there was uncertainty as to how effective it would be in accomplishing its goal. The CCRIF claims that it provides coverage to its members at approximately 40% less than commercially available coverage, when such coverage is available. While the amount of the CCRIF’s payment to Haiti is not impressive in light of the magnitude of this disaster, perhaps this event will prompt a re-evaluation of the level of international support for the CCRIF as a means of providing short term liquidity for immediate relief efforts for such disasters.

News reports have indicated that a large portion of the losses in Haiti are not insured, making the impact of this disaster for one of the historically poorest nations in the Western Hemisphere even more catastrophic. For sobering details about the impact of this disaster, including post-earthquake population movements in Haiti, details on the humanitarian response, and details about relief contributions from many sources around the world, go to the Relief Web, which is administered by the United Nations’ Office for the Coordination of Humanitarian Affairs.

This post written by Rollie Goss.

In October 2008, the New York Insurance Department issued Circular Letter No. 20 to address the topic of contract certainty in reinsurance contracts (as noted in our November 11, 2008 post). In its first draft supplement to the circular letter, the Department proposes further guidance on the subject in response to inquiries by interested persons. Initially, the definition of “promptly” in the context of delivering policy documentation would be construed to mean “within 30 business days.” Next, the draft supplement suggests the Department will ensure compliance with the Circular Letter on a case-by-case basis, depending on the “unique nature or size of the risk.” It also clarifies that the Department will employ principles of contract certainty in effect in the United Kingdom and Bermuda as standards for what constitutes adequate “policy documentation.” Finally, the 30-day period for achieving contract certainty would be allocated as follows: where a producer intermediates a transaction, the insurer should deliver policy terms and conditions within 18 business days post-inception. The broker then would have 12 business days to deliver the contract to the policyholder. The deadline for submitting public comments on this draft supplement is January 22, 2010.

This post written by Brian Perryman.