The Insurance and Reinsurance Report

Court Clarifies the Discoverability of Loss Reserves and Reinsurance Information

Isilon Systems, Inc. V. Twin City Fire Ins. Co. (W. D. Wash. February 15, 2012)

Plaintiff, Isilon Systems, Inc. (“Isilon”) brought a motion to compel arguing that Defendant, Twin City Fire Ins. Co. (“Twin City”) wrongfully withheld and redacted numerous documents based on meritless claims of privilege and attorney work product.  Isilon also alleged that Twin City’s privilege logs were inadequate, and took exception to Twin City’s position that information about loss reserves and reinsurance was not discoverable.

In response, Twin City argued that information about loss reserves is not relevant to bad faith claims because a reserve does not equate to an admission of liability or the value of a particular claim.  Furthermore, Twin City argued that reinsurance information is generally not discoverable and that the redacted portions of its Claim Summary Report were protected by attorney-client privilege and attorney work product doctrine.

The court determined that Twin City’s privilege and redaction logs did not meet the standards of Federal Rule 26(b)(5)(A)(iii).  According to the court, the logs included very brief descriptions that failed to provide any factual or legal explanation for why privilege was asserted, and were therefore insufficient to enable the opposing party, or the court, to assess the validity of the claimed privilege.

On the issue of loss reserves, the court noted that insurance reserves are generally relevant in a bad faith case against insurance companies.  Notwithstanding this precedent, Twin City argued that in a diversity case governed by the Federal Rules of Evidence, loss reserves information is not relevant because the reserves represent nothing more than an accounting decision made by persons without actual knowledge of the policies involved.

The court determined that in the present case, loss reserves decisions were in fact made by members of Twin City’s upper management with knowledge of the actual policies involved. Thus, the general rule establishing the relevancy of insurance reserves was applicable, and the court ordered Twin City to turn over all materials withheld or redacted relating to loss reserves.  The court noted, however, that while aggregate reserve information is not protected as attorney work product, individual case reserves calculated by defendant’s attorney may be.

Finally, with respect to reinsurance, the court noted that reinsurance polices themselves are discoverable under Federal Rule 26(a)(1)(D).  However, this rule does not extend to communications between the insured and the reinsurer regarding the reinsurance policies.  Thus, in the present case, the court held that while Twin City must produce all reinsurance policies themselves pursuant to Federal Rule 26(a)(1)(D), Twin City does not have to produce other reinsurance documents unless Isilon presents a basis for the relevance of such documents.

A copy of the decision can be found here

Jeffrey Kingsley and Matt Cabral

Professional Liability Monthly - February Edition is Now Available

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Cases for Professional Liability Monthly – February 2012 Edition

Cases provided courtesy of LexisNexis.

Willson v. Vanderlick

Corky McMillin Constr. v. US Speciality Ins. Co.

Assured Guaranty (UK) Ltd. v J. P. Morgan Investment

Darwin Select Ins. Co. v. Laminack, Pirtle & Martines

Afrim Frangu v. Eugene Axelrod et al.

Robert Grimm v. John Wayne Fox

LaBar v. McDonald

Wilcox v. Schwartz

Assouline Ritz1 LLC, et al., v. Mills & Assoc.

Farrell v. Whiteman

Charlotte Hungerford Hospital v. Kevin Creed

Sixth Circuit Vacates Class Certification for Cancer Patients Suing Life Investors Insurance Company

Gooch v. Life Investors Ins. Co. of Am. Et al., (United States Court of Appeals for the Sixth Circuit February 10, 2012)

The Sixth Circuit vacated an order of class certification for cancer patients because there was an overlap between class members of this class and a class that had settled on the same issue in another case. Despite this, the Court upheld a preliminary injunction forcing the defendant to pay for the plaintiff’s lymphoma treatment bills in full.

The plaintiff brought a claim against the defendant insurance company for wrongfully denying policyholders payment on cancer treatment claims. The plaintiff brought the case because the defendant changed its previous policy from paying the higher list price of treatments that appeared on hospital bills to paying the actual charges incurred by patients covered under its cancer policies.

The Sixth Circuit Court noted that there was an identical class action case in Arkansas that took on this same issue and settled in 2009. The Arkansas case is known as the Runyan Case. The case involved the same defendant and the same claims that covered cancer patients during the years 2004-2009. The Court found that this class action was precluded by the Runyan Case. The Court found that there was overlap between the settling plaintiffs in the Runyan case. The class members in this case attempted to represent the class members who were covered by cancer policies issued by the defendant from 2001 to present. Moreover, the current plaintiff had opted out of the Runyan Case, and that impacted his status as a class representative.

The Court did not dismiss the defendant’s appeal of the order in which the District Court denied the defendant’s motion to dissolve the preliminary injunction because it could not “review a district court order denying a request for reconsideration of a previously granted preliminary injunction.” Therefore the Court held that the preliminary injunction remained in place forcing the defendant to pay for the plaintiff’s lymphoma treatment bills in full.

The decision can be found here

Sarah Delaney and Joanna Roberto

Washington Court Rules That Diminished Value Auto Loss Covered

In a controversial decision, the Supreme Court of Washington recently determined that an automobile policy obligated an insurer to compensate an insured for the diminished value of a repaired car, post-accident. The court also approved class certification for the lawsuit against the auto insurer. The case is Moeller v. Farmers Ins. Co. of Wash., No. 84500-0, 2011 Wash. LEXIS 957 (Dec. 22, 2011).

David Moeller's 1996 Honda Civic CRX was damaged in a collision. His insurer, Farmers Insurance Co. of Washington ("Farmers"), elected to repair the car and then paid for the cost of repairs less Moeller's $500 deductible. Moeller then sued Farmers alleging breach of contract for failure to reimburse him for diminished value of the vehicle after repairs were complete. Moeller sought to certify his suit as a class action against Farmers, which was approved by the court below.

The Farmers policy covered "loss to your Insured car caused by collision," with loss defined as "direct and accidental loss of or damage to your Insured car, including its equipment." The policy also stated that the limits of liability for loss "shall not exceed ... the amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality, or with new property less an adjustment for physical deterioration and/or depreciation." Finally, the policy also stipulated that "we may pay the loss in money or repair or replace damaged or stolen property."

Moeller argued that the policy was ambiguous with respect to whether diminished value was covered. Farmers argued that the policy clearly obligated it to either repair a vehicle or pay the insured money for the loss, but not both.

The court agreed with Moeller, finding that the policy language was ambiguous and, therefore, that the policy had to be interpreted strictly in favor of coverage. The court followed Georgia (State Farm v. Mabry) and West Virginia (Ellis v. King), which have addressed the issue and determined that a post-accident and post-repair diminution in value loss is covered by similar auto policy language because a reasonable insured would expect such coverage in order to be made whole after an accident. The court explained that an insurer is required not merely to restore a vehicle to usable condition but also to pay for any lost value after repairs are complete. A strong, lengthy dissent countered the majority, saying that the decision created a new contractual obligation not embodied in the Farmers policy.

The decision should have wide-ranging impact in the insurance industry due to the frequency of covered auto losses.

This article was first published on IRMI.com and is reproduced with permission. Copyright 2012, International Risk Management Institute, Inc.

Former New York State Superintendent of Insurance, James J. Wrynn, joins Goldberg Segalla LLP as Partner

Goldberg Segalla LLP is pleased to announce James J. Wrynn will join the law firm March 5. He will run the firm’s New York office and will be a senior partner in its Global Insurance Services Practice Group.

Mr. Wrynn served as the 40th and last Superintendent of Insurance in the State of New York until it merged with the New York State Department of Banking to form the new Department of Financial Services. He then served as the first Deputy Superintendent of the new department. Prior to serving as Superintendent, Mr. Wrynn served as the Executive Director of the New York State Insurance Fund, New York's Largest workers' compensation and disability benefits carrier.

In addition to overseeing the state’s supervision of all insurance companies that do business in New York, Mr. Wrynn played a key role in developing national and international regulations and policies governing the insurance industry. In 2010 he was elected Chair of the Northeast Zone of the National Association of Insurance Commissioners (NAIC), the organization of the chief insurance regulatory officials of the 50 states, the District of Columbia, and five U.S. territories. He also served as a member of the NAIC’s Executive Committee, as Vice Chair of its International Insurance Relations “G” Committee, as Co-Chair of its Credit Rating Task Force, and as Vice Chair of the task force involved in a review of international developments regarding insurance supervision, banking supervision, and international accounting standards and their potential use in United States insurance regulation as part of a critical self-examination of the United States Insurance Solvency Regulation framework known as the “Solvency Modernization Initiative.”

Mr. Wrynn also represented the United States as a member of the International Association of Insurance Supervisors (IAIS), an organization of insurance supervisory authorities from nearly 140 countries that sets international standards for insurance regulators. He participated heavily in international issues such as Solvency II (an economic risk-based solvency regulatory framework to be utilized by all European Union member states); systemic risk (and the development of a methodology for the identification of globally systemically important financial institutions and the measures to be taken once identified); the development of a common framework for the supervision of internationally active insurance groups (known as “COMFRAME”); group supervision; and numerous other issues and initiatives.

“The addition of Jim Wrynn to our team marks a significant milestone in our firm’s growth and a reinforcement of our position as a premier law firm for the global insurance and reinsurance markets,” said Richard J. Cohen, Managing Partner of Goldberg Segalla. “He knows the industry and insurance law inside and out, and he is tremendously respected in the business community. His experience will bring a unique perspective and a distinct advantage to Goldberg Segalla’s insurance and reinsurance clients across the globe. We are thrilled to have him on board.”

Mr. Wrynn said: “In my career I’ve had the opportunity to develop great relationships with a number of the partners at Goldberg Segalla, and I felt this firm would be the perfect fit for my return to private practice because of its high regard in the insurance industry and its refreshing service ethic that truly does put clients first. I’ve always admired the breadth and depth of the firm’s capabilities, as well as its bold vision to become the go-to law firm for insurers and reinsurers everywhere. I’m excited to join this talented team, and I look forward to serving the needs of our clients.”

Mr. Wrynn has more than 25 years of experience as an attorney focusing in the areas of life, accident, and health insurance; property and casualty insurance; general liability insurance; insurance coverage disputes; professional malpractice; and product liability. His extensive legal background includes counseling agents, brokers, risk-retention groups, and insurance companies in most lines of insurance and excess insurance, reinsurance, self-insurance, and captive insurance.

Mr. Wrynn began his legal career in 1982 and later was a founding partner in the law firm of MacKay Wrynn & Brady, LLP. He received his B.A. in Accounting from St. John’s University College of Business Administration and his J.D. from St. John’s University School of Law.

Insurer has a Duty to Defend Policyholder for Clean Air Act Violations

Louisiana Generating LLC et al v. Illinois Union Insurance Company, U.S. Dist. Ct. Louisiana, January 30, 2012

In this case, both parties made motions for summary judgment seeking a declaration on the insurer’s duty to defend the policyholder in the underlying suit. The suit was brought by the Federal Government against the policyholder for Clean Air Act violations. The underlying suit alleged that the policyholder, a subsidiary of NRG Energy Inc., made major modifications to a coal plant within notifying the government or obtaining the necessary permits. The federal government sought a mitigation plan and civil penalties for the harm done by the excess emissions caused by the illegal modifications to the plant.

The underlying action alleged that the major modifications to the plant resulted in increased emissions. The court first ruled that the underlying action fell under the policy’s coverage period and then ruled that the insurer had a duty to defend the policyholder as the allegations, on their face, were covered by the policy.

The insurer argued that the government allegations did not relate to covered claims as there was no property damage and no remediation demanded in the complaint. The court found that, although the insurer may ultimately prove otherwise, the air injury alleged in the action and the retrofitting sought in the action constituted remediation.

The court also found that the fines and penalties exclusion in the policy, which excluded coverage for criminal fines, did not apply because the penalties sought by the federal government were civil and not criminal penalties. The court thus found that the insurer owed a duty to defend.

The decision can be found here

Joanna Roberto and Paul Steck

Second Circuit Reverses Vacatur of Arbitration Award; Find Arbitrators Impartial

Scandinavian Reins. Co. Ltd. v. St. Paul Fire & Marine Ins. Co. (2^nd Cir. (N.Y.) Feb. 3, 2012)

The Second Circuit recently reversed a district court’s vacatur of an arbitration award, holding that there was insufficient evidence to support a finding of “evident partiality” of two of the arbitrators.

 Plaintiff Scandinavian and defendant St. Paul entered into a specialized type of reinsurance contract  known as a stop-loss retrocessional agreement. Pursuant to the agreement, St. Paul ceded to Scandinavian some of the reinsurance liabilities that St. Paul had assumed from other insurance companies. In exchange for Scandinavian’s assuming these liabilities, St. Paul became obligated to pay premiums to Scandinavian, by retaining those funds within an “experience account” from which any liabilities would first be paid out. Only if the experience account became fully depleted would Scandinavian have to pay St. Paul out of its own funds.

In January 2002, Scandinavian entered into “run off,” thereby ceasing to underwrite new business. St. Paul also entered into run-off later the same year. After St. Paul requested that Scandinavian indemnify it for much of its loss, two disputes emerged concerning the agreement’s interpretation. First, the parties disputed whether the agreement limited the volume of liability assumed by Scandinavian. Second, the parties could not agree on whether the agreement provided for a single experience account or three separate experience accounts.

Per the agreement, the parties submitted their disputes to arbitration. Each of the arbitrators made initial disclosures to the parties. The arbitral panel, consisting of two party-selected arbitrators and an umpire, concluded that the agreement was valid and should be enforced according to its terms, thereby exposing Scandinavian to an aggregate limit of approximately $290 million in liability. The panel also ruled in favor of St. Paul on the number of experience accounts.

Scandinavian filed an action to vacate the arbitration panel’s award based on two of the arbitrator’s “evident partiality.” Specifically, Scandinavian argued that the fact that two of the three arbitrators on the panel had failed to disclose their concurrent service in an arbitration involving “a common witness, similar disputed issues and contract terms, and the company that succeeded to the business of St. Paul” reflected bias by those arbitrators in St. Paul’s favor. The district court agreed and vacated the arbitration award.

The Second Circuit reversed, noting that “evident partiality” did not exist simply because two arbitrators served together in a separate arbitration. The Second Circuit also rejected Scandinavian’s argument that the Court should infer partiality by virtue of the arbitration panel ruling in St. Paul’s favor. Rather, the Court stated that “the fact that one party loses at arbitration does not, without more, tend to prove that an arbitrator’s failure to disclose some perhaps disclosable information should be interpreted as showing bias against the losing party.”

The Second Circuit's Decision can be found here

Carrie Appler and Jeffrey Kingsley

February Edition of Reinsurance Review is Now Available

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Cases for Reinsurance Review - February 2012 Edition

Cases provided courtesy of LexisNexis

United States of America v. Leif D. Rozin

Alabama Municipal Insurance Corporation v. Alliant Insurance Services

Transport Insurance Company v. Tig Insurance Company

Evangelical Presbyterian Church v. American Fidelity Assurance

George Campbell Painting, v. National Union Fire Insurance Company of Pittsburgh, PA,

United States Fidelity & Guaranty Company v. American Re-Insurance Company