The Insurance and Reinsurance Report

No Early Exit for Ex-AIG Executives

People v. Greenberg (N.Y. App. Div. 1st Dep’t May 8, 2012)

On March 8, 2012 New York’s Appellate Division, First Department, denied summary judgment motions filed by two former executives of American International Group, Inc. (“AIG”), ex-CEO Maurice “Hank” Greenberg and ex-CFO Howard Smith, and New York’s Attorney General (“AG”), clearing the way for the now seven-year-old case to go to trial.

The case against the two former executives alleges violations of Executive Law § 63(12) and the Martin Act, General Business Law § 352 et seq.  The case alleges statutory violations against the former executives based upon their role in fraudulent transactions designed to portray an unduly positive picture of the insurer’s loss reserves and underwriting performance.  The insurer, formerly the largest insurance company in the world, entered into a settlement agreement with the AG.  The AG and both the former executives filed summary judgment motions.  In its motion, the AG argued that the executives knew of, and participated in, two unlawful reinsurance schemes.  For their part, the executives argued that the AG’s enforcement powers under the Martin Act and Executive Law are preempted by federal law.

The trial court denied summary judgment to the executives, finding that there was no evidence that Congress intended to preempt the claims, and granted partial summary judgment to the AG based on a finding that the executives had knowledge of, and participated in, one of two challenged transactions, and that this behavior constituted violations of the Executive Law § 63(12) and General Business Law § 352-c(1)(a) and (c).  

On appeal, the First Department found that the record evidence presented triable issues of fact as to whether the executives knew of, or participated in, the fraudulent aspects of both schemes given the nature and degree of their personal involvement in both of the challenged transactions. The appeals court ruled that summary resolution of the executives’ knowledge and participation in the two challenged schemes was not determinable as a matter of law.  Therefore, partial summary judgment in favor of the AG was inappropriate.

With regard to federal preemption issue, the appeals court agreed that there was no evidence that Congress intended to preempt the claims: “[N]othing in the language or legislative history of the cited legislation indicates Congress intended to preempt this civil enforcement action under the Martin Act and the Executive Law.”  In their motions, the executives had sought dismissal of the entire suit, arguing that the AG’s case was “expressly” barred by the Securities Litigation Uniform Standards Act of 1998.  They also claimed that the suit conflicted with Congress’s intent to create a uniform federal standard for securities litigation, pointing to the Private Securities Litigation Reform Act of 1995 and the National Securities Markets Improvement Act of 1996.  However, the First Department came to the opposite conclusion, writing: “In fact, the cited statutes, their legislative histories and the case law presuppose an important role for state attorneys general in investigating fraud and bringing civil actions to enjoin wrongful conduct, vindicate the rights of those injured thereby, deter future fraud and maintain the public trust.”

 On May 14, 2012 the executives sought permission on to appeal the Third Department decision to the Court of Appeals, New York’s highest court. 

For a copy of the decision click here

Matthew Cabral and Jeffrey Kingsley

Federal Judge Dismisses Breach of Contract Suit Against Reinsurance Brokers

Olympus Insurance Co. v. Aon Benfield Inc. and Benfield Inc. (D. Minn. March 30, 2012)

On March 20, 2012 a federal judge in Minnesota dismissed a breach of contract action brought by Olympus Insurance Co. (“the insurer”) against its reinsurance brokers, Aon Benfield Inc. and Benfield Inc. (collectively “the reinsurance broker”), by which the insurer sought money allegedly owed to the insurer, finding that the reinsurance broker did not owe the insurer an annual fee.  The insurer alleged that it hired the reinsurance broker to obtain reinsurance policies for the insurer and that the reinsurance broker had agreed to pay the insurer an annual fee based on a percentage of the commissions that the reinsurance broker received during the contract year from the insurer’s reinsurance providers.

The insurer alleged that in early 2009, Peter Chandler, the specific reinsurance broker who handled the insurer’s reinsurance business, left the employment of the reinsurance broker and went to work for Guy Carpenter & Co. LLC.  Subsequently, the insurer appointed Guy Carpenter as its new reinsurance broker effective June 1, 2009.  The insurer argued that it was owed the annual fee that was due at the end of the 2008-2009 fiscal year.  The reinsurance broker responded that it did not owe the annual fee because the insurer terminated it as its reinsurance broker no later than March 25, 2009, and, under the forfeiture provision of the contract between the parties, no annual fee was thereafter due.  The reinsurance brokers moved to dismiss and, on March 30, 2012, U.S. District Court Judge Patrick J. Schiltz granted their motion.

The judge ruled that no annual fee was due before March 25, 2009 because the insurer ended its relationship with the reinsurance broker prior to that date.  According to the court, pursuant to the forfeiture provision, no annual fee was payable subsequent to such a decision.  Because the annual fee was not payable before the insurer’s decision to terminate the reinsurance broker, and because the annual fee was not payable after that decision, the annual fee was not payable at all, the court concluded.

The court rejected the insurer’s contention that the term “Subject Business” contained in the contract was limited to a time period beginning on June 1, 2008 and ending on May 31, 2009.  The court decided that to interpret the “Subject Business” of the contract as referring only to the placement and servicing of reinsurance contracts during the initial term was inconsistent with the unambiguous language of the contract.  According to the court, the terms “terminate” and “replace” contained in the contract include non-renewal.  Therefore, the insurer’s decision to terminate its relationship with the reinsurance broker, and to replace the reinsurance broker with Guy Carpenter, was clearly a decision by the insurer to terminate or replace the reinsurance broker as its reinsurance broker for any portion of the “Subject Business” of the contract.

Finally, the court held that the insurer, as a party to an express contract, could not recover on claims for quasi contract, unjust enrichment, and quantum meruit.  In the opinion of the court, the insurer received exactly what it bargained for in the written contract: the placement and servicing of reinsurance contracts as well as the conditional entitlement to an annual fee.  Both of these benefits were legally sufficient consideration in the eyes of the court regardless of whether the insurer subjectively believed these benefits to be adequate consideration.

For a copy of the decision click here

Matthew Cabral and Daniel Gerber

Court of Appeals: New York’s Antitrust Statute does not reach London’s Reinsurance Marketplace

Global Reinsurance Corp. v. Equitas Ltd. (N.Y. March 27, 2012)

In a suit by a New York branch of a German reinsurance corporation against U.K.-based entities engaged in the business of providing retrocessionary reinsurance, asserting a claim under New York State’s antitrust statute, the Donnelly Act, the Appellate Division’s ruling in favor of the plaintiff on a CPLR 3211 motion to dismiss was reversed by the New York Court of Appeals.

The retrocessionaires, or retrocessionary reinsurers, wrote coverage for risks ceded to them by reinsurers.  The complaining German reinsurer, through its New York branch, purchased retrocessional coverage in a London marketplace and consequently sustained economic injury when retrocessional claims management services were by agreement within that London marketplace consolidated so as to eliminate competition over their delivery.  In the reinsurer’s second amended complaint, although a worldwide market was nominally alleged, there was no allegation of any anticompetitive effect attributable to the alleged conspiracy beyond the London marketplace. 

While there was no dispute as to the relevant market, the complaint failed to allege the requisite power within the relevant worldwide market on the part of the claimed conspirators.  The extraterritorial reach of the Donnelly Act did not reach a competitive restraint imposed by participants in a British marketplace that only incidentally affected commerce in the United States by the circumstance that the reinsurer’s purchasing branch happened to be situated in New York.  Accordingly, the Court of Appeal held that any injury was not redressable under the Donnelly Act.

For a copy of the decision click here 

Jeffrey Kingsley and Matthew Cabral 

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

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.

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

Reinsurers on the Hook for Settlement that Arguably Included Bad Faith Claims

United States Fidelity & Guar. Co. v. American Re-Insurance Co.
N.Y. App. Div. 1st Dep’t, Jan. 24, 2012

The case arose out of litigation concerning the underlying asbestos claims spanning several decades. The Appellate Court reviewed and affirmed the lower courts Order granting the reinsured summary judgment and denying the reinsurer’s motion for summary judgment.   The reinsurance treaty involved was an excess of loss treaty with a $100,000 retention and a maximum $4.9 million payable by the reinsurers for any one loss subject to a $3 million limit for personal injury or property damage liability. The reinsurer’s refused to pay the reinsured’s claim for several reasons including the basis that the settlement included an amount for the settlement of bad faith claims which were not covered by the treaty.

The reinsurers’ argued that the lower court erred in applying the “follow the fortunes” doctrine. After a brief statement setting forth the purpose of the doctrine, the Appellate Court affirmed its applicability finding that it precluded the court’s review of the reinsured’s allocation of the loss, including any alleged bad faith claims. The court stated that the parties involved in negotiating the settlement confirmed that the settlement amount did not include costs for bad faith. Additionally, the court stated that the issue of payment for the bad faith claims was never “actually litigated” despite statements in the bankruptcy court record that the insured had “colorable claims for bad faith” and that “some portion of the $2 billion contribution to the trust was attributable to those bad faith claims.”  

The opinion drew a one judge dissent with the view that a triable issue of fact existed with regard to whether a portion of the $987.3 million was attributable to the bad faith claims not covered under the reinsurance treaty. The dissenting opinion notes the reinsured’s reliance on Peerless Ins. v. Inland Mut. Ins. for the proposition that bad faith damages are covered under the reinsurance treaty but distinguishes the cases based on the fact that the reinsurers here did not participate or acquiesce in the reinsured’s defense of the underlying action. Regardless, the dissent cites the New York Court of Appeals case, Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s of London for the proposition that a follow the fortunes clause does not serve to alter the terms of the contract or create coverage where none exists. The dissent points to language in the bankruptcy court opinion that clearly suggests that the court would not have approved the bankruptcy plan if it had believed that there was no payment for bad faith claims included in the settlement.

For a copy of the decision click here

Jeffrey Kingsley and Patrick Omilian

Court Refuses to Allow Cumulative Evidence in Motion to Disqualify Counsel in Arbitration Dispute

NORTHWESTERN NAT’L INS. CO. V. INSCO, LTD. (No. 11 Civ. 1124 (SAS), November 9, 2011)

On October 3, 2011 the U.S. District Court for the Southern District of New York (“the court”) issued an Opinion and Order granting Northwestern National Insurance Company’s (“NNIC”) motion to disqualify the law firm of Freeborn and Peters, LLP (“Freeborn”) from continued representation of Insco, Ltd. (“Insco”) in an ongoing arbitration dispute between the parties.  In response, Insco sought leave of the court to file additional evidence in support of its motion for reconsideration.  On November 9, 2011 the court determined that Insco’s proposed additional evidence was merely cumulative of evidence already before the court and denied Insco’s motion for leave.

The dispute between NNIC and Insco arises out of a reinsur­ance agreement between the parties whereby NNIC agreed to reinsure a portion of the risks insured by Insco.  Pursuant to that agreement, Insco sought reimbursement from NNIC after it reimbursed an insured for thousands of claims relating to asbestos exposure.  NNIC denied reimbursement and the parties submit­ted the matter to arbitration as required by their reinsurance agreement.  Pursuant to the arbitration provision of that agreement, each party selected an arbitrator and a third impartial umpire was selected by a lottery. 

On February 11, 2011, with the arbitration ongoing, Insco’s arbitrator shared 182 pages of private email communications between the three arbitration panel members with Freeborn.  Insco’s arbitrator allegedly believed the emails demonstrated bias on the part of the umpire.  Freeborn reviewed the emails and thereafter sent a letter to the members of the arbitration panel and NNIC demanding the immediate resignation of the arbitrators, but only Insco’s arbitrator resigned.  NNIC complained to the arbitration panel about the emails in Insco’s possession and the umpire agreed that obtaining such communications was a “massive violation.” 

On June 20, 2011 the arbitration panel issued an Order in which it described the release of the intra-panel communications as “highly inappropriate,” but nevertheless determined to “continue to decide the case on the facts and evidence presented.”  In response, NNIC moved the court to disqualify Freeborn.  The court determined that Freeborn’s actions did indeed warrant disqualification and granted NNIC’s motion.  Thereafter, Insco moved for leave to file the documents shared by its arbitrator as additional evidence in support of its motion for reconsideration of the court’s decision to disqualify Freeborn.

The court denied Insco’s motion for leave on November 9, 2011.  According to the court, “the major grounds justifying reconsideration are an intervening change in controlling law, the availability of new evidence, or the need to correct a clear error on prevent manifest injustice.”  Courts will only consider new evidence where the movant demonstrates that the evidence existed at the time of the court’s decision, that movant was justifiably ignorant of its existence, that the evidence is in admissible form and of such importance that it probably would have changed the outcome, and that the evidence is not merely cumulative or impeaching.

In this case the court determined that the new evidence presented by Insco, if admitted, would be merely cumulative of evidence already before the court and would not change the outcome of the case.  The court held that because the new evidence would not provide any information that was not previously before the court it cannot be filed in connection with Insco’s motion for reconsideration.

For a copy of the decision click here 

Matthew Cabral and Jonathan Kuller

 

 

Illinois Court Dismissed Captive Reinsurer’s 14-Count Complaint against AIG and Affiliates

Mount Mansfield Ins. Group, Inc. v. American Int’l Group, Inc. (App. Ct. Ill., Nov. 15, 2011)

Mount Mansfield, a captive insurance company, filed suit against numerous AIG entities and affiliates  alleging the defendants created Mount Mansfield to reduce their insurance risk, then mismanaged it to a point of near-insolvency. The complaint alleged further that AIG retaliated against Mount Mansfield by altering its records, reporting it to the Vermont Department of Insurance, and forcing it into a protracted rehabilitation, from which the court later released Mount Mansfield finding that it was not in fact insolvent, rather the reserves in the account were inaccurate. The reinsurer alleged that it lost millions of dollars in assets due to AIG’s mismanagement. Defendants moved to dismiss the complaint; their motion was granted and affirmed on appeal.

Among the comprehensive and complex allegations, Mount Mansfield alleged that the parties entered into two written agreements – a Management Agreement and a Reinsurance Agreement – but that additional contractual obligations were agreed upon orally but not consummated in writing. Plaintiff alleged that AIG agreed to create a written “All-Inclusive Insurance Agreement” where AIG would be responsible for “every aspect of the insurance program,” protecting Mount Mansfield,  and assuring that all written contracts for the insurance program were timely prepared; however, none of these “expansive” duties appeared anywhere in a writing.

Ultimately, a fourth amended complaint included 14 different counts including breach of fiduciary duty, breach of written and oral contracts, and negligent spoliation. The court summarized Mount Mansfield’s core allegations stating that in 1992 AIG’s agents made an oral agreement with plaintiff in which they agreed to become plaintiff’s fiduciaries and to manage the captive insurance program. Thereafter, AIG failed to reduce the agreement to writing, breached the oral and/or written agreements or their fiduciary duties by mismanaging the insurance program.

Among the allegations, Mount Mansfield alleged defendants breached an oral reinsurance agreement, yet it attached a written reinsurance agreement to the complaint, arguing the written agreement was merely a supplement to the more comprehensive oral agreement. The court reviewed the written agreement, finding that it comprehensively set out the rights and responsibilities of the parties. The court determined the parol evidence rule prohibits plaintiff from asserting that an oral agreement modifies the written agreement. The court also determined that the plaintiff failed to identify any specific provision of the written reinsurance agreement that defendants breached. Specifically, plaintiff alleged that AIG had improperly omitted or included unspecified terms and conditions, and the court noted that the duties AIG allegedly breached were not even included in the reinsurance agreement.

The crux of plaintiff’s arguments relied on the existence of an agency relationship between the defendant’s that allegedly entered the oral agreements with plaintiff and all the remaining defendants. The court found no factual allegations to even infer an agency agreement from stating for example that plaintiffs did not claim that the defendants called to set the meeting for AIG, that the meeting was held in AIG’s offices, or that the defendants presented AIG business cards. Because there was no evidence of an agency relationship, the defendants must have ratified the agreements to be bound. Here, the court found no evidence of any benefit defendants received from the alleged oral agreements. Additionally, the plaintiffs claimed a fiduciary duty existed because plaintiff was a new company, unsophisticated in insurance/reinsurance, and had completely entrusted its affairs to defendant. Again, the court also found no allegations to support this conclusion. Rather, it found that plaintiffs played in active role in the reinsurance program by marketing policies to its shareholders.  Accordingly, the court dismissed plaintiff’s fourth amended complaint in its entirety.

A copy of the decision can be found here

Chris Bopst and Verne Pedro

Dan Gerber and Jeff Kingsley Discuss Emerging Reinsurance Trends at 2011 Monte Carlo Rendez-Vous

As attendees and presenters at the 2011 Reinsurance Rendez-Vous in Monte Carlo, the premier annual conference for the global reinsurance industry, Goldberg Segalla partners and Insurance and Reinsurance Report editors Daniel W. Gerber and Jeffrey L. Kingsley were at the forefront of discussions among key decision makers in the reinsurance community.

Visit the Goldberg Segalla website for video interviews with Dan and Jeff on emerging reinsurance trends, recorded on the scene at the Monte Carlo Rendez-Vous.

The Inside Scoop From the 2011 Inside FAC Monte Carlo Roundtable

Goldberg Segalla partners Dan Gerber and Jeff Kingsley joined top-level reinsurance industry representatives and thought leaders as participants in the Inside FAC Roundtable, held during the September 2011 Reinsurance Rendez-Vous in Monte Carlo. The discussion addressed numerous critical issues affecting reinsurers, cedants, underwriters and others today and into the future.

Visit the Goldberg Segalla website for a full transcript of the Inside FAC Roundtable discussion.

Reinsurance Agreement Between Insurer And Reinsurer Did Not Provide A Direct Cause Of Action Against Reinsurer For Underlying Environmental Claims

Canal Ins. Co. v. Montello, Inc. et. al. (United States District Court, Northern District of Oklahoma, September 26, 2011)

This environmental reinsurance action stems from the use of asbestos containing materials in the drilling mud distributed by Montello.  Specifically, Montello was the distributor of products used in the drilling industry.  One of its products was a drilling mud that contained asbestos.  Defendant Montello was sued by numerous individuals who were allegedly exposed to asbestos through Montello’s products.  Thereafter, Montello sought coverage from the group of insurers alleged to have insured defendant during the time period it distributed the asbestos containing product.  In addition, Montello brought claims against the reinsurer National Indemnity Ins. Co. (NICO) alleging NICO is liable based on a recent reinsurance agreement the reinsurer made with CNA, who was a direct insurer of defendant Montello during the relevant time periods.

Specifically, Montello alleged that the reinsurance agreement required CNA’s asbestos and environmental pollution liabilities would be transferred to NICO, thus shifting responsibility for a portion of Montello’s asbestos litigation to NICO, and thereby making NICO directly liable to Montello for any covered loss.   Montello further alleged that CNA ceded or will cede approximately $1.6 billion of net asbestos and environmental liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. 

The issue before the court was whether the reinsurance agreement between NICO and CNA provided a direct cause of action to CNA’s insureds, and specifically to Montello.  In ruling against Montello, the court noted that a basic law of insurance is that the existence of a reinsurance contract does not allow an insured to proceed directly against the reinsurer absent two exceptions. 

The first exception argued by Montello was that the reinsurance contract between NICO and CNA contained a “cut through" clause.  However, in denying the applicability of this exception the court noted that while the existence of a cut through clause in the contract would provide a direct cause of action against NICO, the Agreement and other incorporated agreements did not contain such a clause, either express or implied.  Thus, while NICO agreed to undertake extensive administrative services under the reinsured polices issued by CNA, the agreement was insufficient to establish an implied cut through provision in favor of Montello for two reasons.  First, the agreements contained “express negation clauses” in which NICO disavowed undertaking any direct liability to a third party by virtue of the agreement.  The court held that under New York law, the existence of a “negating clause” is dispositive on the issue of whether the contract creates third-party beneficiaries.  Second, the court held that under the Second Circuit precedent in Jurupa Valley Spectrum v. National Indemnity Co. 555 F3d 87 (2d Cir 2009), the agreements that authorized NICO to administer claims for the benefit of the reinsured cannot be read to create a direct link to the original insured. 

Likewise, the court denied the second exception argued by Montello that the nature of the agreement created “assumption reinsurance” wherein the reinsurer steps into the shoes of the ceding company with respect to the reinsured policy, assuming all its liabilities.  Again under Jurupa, supra, the court held that because NICO has not assumed all of CNA’s liabilities under the agreement, the reinsurance contract did not create assumption reinsurance and NICO was not directly liable to Montello under that theory, as well. 

For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

NY Court Rejects Reinsurer’s Plea to Allow Lawsuit Against Bankrupt Insurer’s Liquidator

In re Liquidation of Midland Ins. Co.  (N.Y. App. Div. (1^st Dept.) Aug. 25, 2011)

A New York appellate court recently refused to modify an injunction against bankrupt insurer Midland Insurance Company to permit its reinsurer to assert a breach-of-contract claim against its liquidator.

A New York court placed Midland in liquidation in 1986 and permanently enjoined the commencement and prosecution of all actions against it. Everest Reinsurance Company had entered into excess of loss reinsurance treaties and facultative reinsurance certificates with Midland for policy periods in the 1970s and 1980s. Everest moved the court for an order modifying the injunction to allow an action for a declaration that the liquidator breached the reinsurance contracts by failing to provide Everest with (1) proper information regarding claims, (2) an opportunity to participate in settlement negotiations with Midland policyholders, and (3) an opportunity to participate in the claim allowance process. The relief Everest would have sought in its action was a declaration that it was not required to provide reinsurance for claims affected by the alleged breaches and a further declaration that Everest has the right to interpose defenses in the liquidator’s settlement negotiations and claims allowance processes.

The lower court denied Everest’s motion to modify the injunction. On appeal, the court affirmed the lower court’s ruling, finding that Everest did not establish a likelihood of success in proving its case. The court noted that Everest will suffer no injury until it is called upon to make payment on claims that the liquidator allows and the court has approved. Moreover, the court noted that Everest’s claim of a right to interpose defenses at the commencement of a liquidation proceeding is at odds with the very nature of reinsurance. To this end, the court observed that the reinsurance contracts involved contain the typical “follow the settlements” or “follow the fortunes” provisions that leave reinsurers with “little room to dispute the primary insurers’ claims handling.” Thus, the reinsured’s liability determinations are insulated from the reinsurer’s challenge unless they are fraudulent, in bad faith, or the payments are clearly beyond the scope of the original policy or in excess of the reinsurer’s agreed-to exposure.

For a copy of the decision, click here

Carrie Appler and Jeffrey Kingsley

Second Circuit Vacates Federal Convictions of Gen Re and AIG Executives Stemming from a Finite Reinsurance Agreement

U.S. v. Ferguson, et al

(2nd Circuit August 1, 2011)

 

The Second Circuit federal appellate court vacated the 2008 and 2009 convictions of four executives of General Reinsurance and an executive of American International Group and the matter was remitted to the district court for retrial. The convictions stemmed from a finite reinsurance transaction designed to reallocate risk in a way that shored up AIG’s loss reserves which were believed to be depressing AIG’s stock price. The defendants were convicted of conspiracy, mail fraud, securities fraud, and false statements made to the Securities and Exchange Commission and were sentenced to prison terms ranging from one to four years.

While an ordinary reinsurance transaction an insurer purchases coverage from a reinsurer for all potential losses on policies it has issued, in finite reinsurance an insurer cedes a finite amount of risk to a reinsurer. Traditional reinsurance is generally used to lay off risk while finite reinsurance is used to accomplish specific accounting goals because it can be strategically designed.

Under accepted accounting standards, some risk of loss must be involved in a finite reinsurance transaction. The government contended that the deal made between AIG and General Reinsurance was an unlawful agreement intending to deceive AIG stockholders by booking a no-risk transaction as reinsurance.

The convictions were vacated based upon a finding by the Second Circuit that the district court (1) abused its discretion by admitting certain stock-price data into evidence and (2) improperly issued a jury instruction as to causation. The stock-price data and charts, showing a 12% decline in the relevant period when information detailing the transaction was published, were admitted to demonstrate that there was a substantial likelihood that the transaction and alleged accounting misstatements would be important to a reasonable investor. The appellate court held that the material was improperly admitted and prejudicial to the defendants because this transaction was only one of several problems besetting AIG at that time. There were also unrelated allegations of bid-rigging, improper self-dealing and earnings-manipulations that were publicized at that time.

For a copy of the decision click here

Bryan Richmond and Jeff Kingsley

Federal District Court Confirms Arbitration Award in Favor of Service Provider in Dispute Over Financial Service Contract with AARP

Affinity Financial Corp. v. AARP Financial, Inc. (U.S. District Court, .D.C.)

In a dispute over a contract in which Affinity Financial agreed to provide financial services to AARP members, both parties entered into binding arbitration proceedings pursuant to the terms of the contract.  The arbitration Panel held that it was difficult to pinpoint the moment when any one party “crossed the line and breached the Agreement when the other party was not in breach” and found that “one could readily conclude that both parties were in default during various points during the life of the contract.”  The arbitration panel concluded that, in calculating the total amount of damages, the fair result would be for Affinity to recover “some portion of the money expended by Affinity in getting its planned program up and running” in reliance on the contract.  The arbitrators ultimately awarded a total of $2.75 million in damages to the petitioners.  Both Parties then filed respective motions in federal district court to confirm and to vacate the arbitration award.  Both parties also sought an award of reasonable attorneys’ fees.

AARP contended that the award should be vacated because the arbitration panel exceeded its powers and manifestly disregarded the law.  The district court disagreed.  In confirming the award, the court held that since the service agreement granted the arbitrators the wide discretion to “fashion appropriate relief when the circumstances warrant doing so,” the arbitration panel was empowered to make the award. 

In regard to the contention that the arbitration panel manifestly disregarded of the law, AARP argued that the arbitrators did so by (1) ignoring the governing rule that a breaching party may generally not recover against a non-breaching party, (2) by awarding damages that were excessive in light of the contract’s prohibitions on certain types of damages and (3) by failing to explain its award of damages.  The court found that the first argument ignores the arbitration panel’s finding that AARP is not a non-breaching party.  In regard to the second contention, the court held that AARP’s dissatisfaction with the arbitration panel’s imposition of damages is insufficient to require vacatur of the award.  Lastly, the court held that the final argument fails because the arbitration panel is under no obligation to provide an explanation of its award and the failure to do so cannot constitute a manifest disregard of the law.  The court also granted Affinity leave to file a motion for an award of reasonable attorneys’ fees.

For a copy of the decision click here

Bryan Richmond and Jeffrey Kingsley

Court Denies Motion to Strike Cross-Petition Seeking the Same Relief as a Petition to Confirm an Arbitration Award

Century Indemnity Company v. Certain Underwriters at Lloyd’s, London, et al. (S.D.N.Y. May 22, 2011)

Petitioner commenced an action to confirm an arbitration award against respondents.  Respondents cross-petitioned, but did not argue that the award should not be confirmed.  Instead, respondents set forth their account of the arbitration and urged that the award should be confirmed.  Petitioners requested that the court strike the cross-petition, arguing that respondents were merely trying to use the action as a public relations device to present their side of the confidential arbitration proceedings.

The court denied the motion to strike the cross-petition.  While the court agreed that a court proceeding should not be used as a device to air allegations that may have been otherwise precluded by the confidentiality agreement in the arbitration proceeding, courts nevertheless do not lightly strike materials from the public record.  The court noted that when parties seek court assistance, they are seeking the assistance of a public institution and the public has a right to understand the bases for actions by the court.

The court granted the petition to confirm the arbitration award, and denied the cross-petition as moot.

For a copy of the decision click here

Toni Frain and Jefffrey Kingsley

Reinsurer Must Prove Prejudice to Avoid Coverage Based on Late Notice

Pacific Employers Ins. Co. v. Global Reins. Corp. of Am. (E.D. Pa. May 23, 2011)

In a matter of first impression in Pennsylvania, a federal court in Pennsylvania held that a reinsurer must demonstrate prejudice in order to avoid its coverage obligation based on the cedant’s failure to comply with the reinsurance certificate’s notice provisions. In so holding, the court noted that Pennsylvania law does not favor forfeiture of coverage for a technical breach of the insurance contract, a maxim that also applies in the reinsurance context.

Pacific Employers entered into a facultative reinsurance contract with Global through which Global, as the reinsurer, agreed to reinsure an umbrella commercial liability policy issued by Pacific Employers to Buffalo Forge Company. After the certificate was executed, Buffalo Forge was named in numerous asbestos personal injury lawsuits. Buffalo Forge began to notify Pacific Employers of the personal injury claims and lawsuits in April 2001. Pacific Employers did not notify Global of the claims until September 2009, allegedly when Global’s layer of reinsurance was first implicated. Global denied coverage based on Pacific Employers’ failure to comply with the certificate’s notice provision.

Global moved for summary judgment on the ground that Pacific Employers did not promptly provide a Definitive Statement of Loss (“DSOL”), which Global claimed was a condition precedent to coverage. Pacific Employers opposed the motion, arguing that the policy provision requiring a DSOL referred to Global’s obligation to remit payment, not its obligation to provide coverage. Pacific Employers also argued that the provision was ambiguous and, therefore, that the court should consider Pacific Employers’ extrinsic evidence, including evidence of trade usage and custom as well as expert and lay testimony.

The court found the policy provision that required notice pertained to Global’s obligation to provide coverage, not its obligation to remit payment. The court also held that Pacific Employers’ eight-year delay in providing a DSOL with respect to the asbestos claims breached the provision, which required prompt notice of a DSOL of any claim where Pacific Employers created a loss reserve equal to 50% of its loss retention.

The court was then asked to decide whether New York law or Pennsylvania law applied. The court found that Pennsylvania law applied and, in a matter of first impression, ruled that the Pennsylvania Supreme Court would hold that a reinsurer must prove prejudice to avoid coverage where the cedant breached a notice condition that is a condition precedent to coverage. Inasmuch as Global had earlier represented to the court that it intended to withdraw its prejudice argument, the court ruled that Global was not entitled to summary judgment.

For a copy of the decision, click here

Carrie Appler and Jeffrey Kingsley

Second Circuit Determines Reinsurer Did Not Breach Broker Services Agreement

Royal Palm Ins. Co. v. Guy Carpenter & Co. Inc.  (2^nd Cir., May 27, 2011)

This reinsurance litigation arose from the alleged breach of Broker Services Agreement (“BSA”) executed by the parties.  Defendant-appellant, Guy Carpenter, appealed from the district court's judgment in favor of plaintiff-appellee Royal Palm Insurance Company ("Royal Palm") in the amount of $4,243,581. Specifically, in April 2006, Royal Palm started its insurance business in Florida, and engaged Guy Carpenter to act as its broker pursuant to a "Reinsurance Intermediary Authorization" (the "RIA"). 

Thereafter, in November 2006, Royal Palm and Guy Carpenter entered into a Broker Services Agreement retroactive to June 1, 2006, whereby Royal Palm recognized Guy Carpenter as its primary intermediary in the treaty reinsurance market. The BSA provided for a three-year term commencing "as of June 1, 2006.  The BSA further provided:

We will provide services outlined in Appendix B attached hereto for as long as we continue as your reinsurance intermediary. Should you choose to discontinue our relationship, Guy Carpenter's obligation to provide such services shall terminate. . . . If you request additional services outside the scope of services set forth in Appendix B . . ., such additional services may result in extra charges.

Attached as Appendix A to the BSA was a retention schedule that provided for Guy Carpenter to retain 50% of the brokerage commissions for the first year and 60% for the second and third years with the balance to be remitted to Royal Palm. On February 15, 2008, Royal Palm advised Guy Carpenter that it had elected to award its reinsurance business to another broker, and that it was discontinuing its relationship with Guy Carpenter.

Thereafter, Royal Palm commenced the subject diversity action for breach of contract and related claims.  The district court issued a decision relying principally on a Florida statute that provided:

A transaction between a reinsurance intermediary broker and the insurer it represents . . . may be entered into only pursuant to a written authorization . . . [that] must provide, at a minimum, that . . . [t]he insurer may terminate the reinsurance intermediary broker's authority at any time.

The district court concluded that this provision permitted Royal Palm to terminate its relationship with Guy Carpenter at any time. The district court rejected Guy Carpenter's argument that, even though the Florida statute gave Royal Palm the statutory right to terminate, Royal Palm could still be liable contractually for terminating the BSA before the expiration of its three-year term.

On appeal the parties disputed whether the Florida statute barred a party from seeking contractual damages where an agreement does not provide, as Florida law requires, a right to terminate the agreement at will. The Second Circuit, however, noted that the underpinning of Guy Carpenter's claim was premised on the assertion that Royal Palm breached the BSA by terminating the relationship before the expiration of the three-year term. Thus, the applicability of the Florida statute need not be decided.

In holding that Royal Palm did not breach the BSA, the court highlighted the fact that under §3 of the BSA Royal Palm had the right — contractually — to discontinue the relationship at any time.  Secondly, although § 1 of the BSA provided for a three-year term, the two provisions were not inconsistent. Together, they provided for an outside limit of three years, subject to Royal Palm's right to terminate early, before the end of the three-year term. The Second Circuit noted that Guy Carpenter's construction of these provisions would render the language in §3 meaningless, which is disfavored by the courts.

Third, the court noted that the BSA made no provision for any modification of the retention schedule in the event of early termination. Given this silence, the court determined that the plain reading of the BSA was that the retention schedule in Appendix A continued to apply for the duration of the relationship. In contrast, §3 specifically addresses the scope of Guy Carpenter's obligations, as set forth in Appendix B, and how those obligations would change in the event of termination.

Lastly, Guy Carpenter argued that it had already earned $7 million in commissions for the first year by June 1, 2006, and that it agreed to remit 50% only because it was bargaining for a three-year agreement. The court noted that while that may be so, the fact is that the BSA, as executed, made no provision for modification of Appendix A in the event of early termination.

Accordingly, based on the plain wording of the BSA and lack of ambiguity therein, the court held, as a matter of law, that Royal Palm did not breach its contractual obligations.

For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

Court Addresses Primary Insurer’s and Reinsurer’s Summary Judgment Motions Following Settlement of Underlying Action

Executive Risk Indemnity, Inc. v. Charleston Area Medical Center, Inc. (S.D. W.Va. May 12, 2011)

Defendant revoked a doctor’s clinical privileges when it determined that the doctor’s proposed plan for self-funding his medical professional liability was inadequate and not actuarially sound.  The doctor filed a lawsuit seeking the injunctive relief of reinstatement of his clinical privileges in addition to punitive damages.  The state court ordered that the doctor’s clinical privileges be restored and the claim for damages proceeded.  The doctor moved to amend the complaint seeking to add claims for defamation and claim for invasion of privacy.  These claims were tried and a jury returned a sizable verdict against defendant, $5,000,000 in compensatory damages and $20,000,000 in punitive damages.  The verdict was reduced and the parties eventually settled for $11,500,000. 

After settlement, this dispute arose over which of defendant’s insurers, if any, must provide coverage to defendant for the settlement, with all parties filing motions for summary judgment.  Plaintiff provided Directors, Officers and Trustees Liability insurance to defendant.  The policy contained an exclusion providing that plaintiff will not pay for claims resulting from any dishonest or fraudulent act or omission or any willful violation of any statute, rule or law by the insured.  Additionally, the policy contained an endorsement explicitly adding punitive damages to the definition of loss subject to a maximum aggregate limit.  Defendant also had a reinsurance policy.

Defendant argued that by virtue of the jury’s findings, as illustrated on the jury verdict form, at least some portion of the settlement fell under the dishonest/fraudulent acts exclusion and was not covered.  The court disagreed, holding that the claims presented to the underlying jury were for defamation and invasion of privacy, not fraud.  Defendant was alleged to have wronged the doctor by communicating to others his lack of insurance coverage, the actuarial deficiencies of his self-insurance program and his revoked clinical privileges.  Because the doctor never presented a cause of action that was predicated on fraudulent or dishonest conduct, the jury could not have found for him on such a claim, excluding the settlement from coverage.  Additionally, plaintiff could not identify any particular dishonest or fraudulent act or omission on defendant’s part.  The mere fact that the jury made predicate findings with regard to punitive damages and attorney’s fees did not alter the nature of the conduct giving rise to the claim. 

Defendant also argued that it was entitled to concurrent coverage from its reinsurer.  That policy provided coverage for Directors and Officers Liability, Employment Practices Liability and Fiduciary Liability in excess of the underlying insurance policies providing coverage for the same categories of losses.  The court determined that defendant’s policy with plaintiff covered defendant’s claim and as such, defendant’s losses fall under the reinsurance policy.  However, the reinsurer argued that it was only obligated loss in excess of the aggregate policy limits, or in excess of $20,000,000.  Because the underlying claim only totaled $11,500,000, the reinsurer contended that defendant was not entitled to coverage.  The court agreed, holding that because defendant did not show that the policy limits were exhausted, it had not made out a prima facie case of coverage under this provision of the reinsurance policy.

The reinsurance policy also contained a “catch-all” provision covering all coverages provided under the policy which were not listed in other coverage groups.  The “catch-all” did not apply to any liability for which coverage is provided, or would be provided except for limits or exclusions.  The court held that in this case, all of defendant’s claims are explicitly covered in under other provisions of the policy.  The court noted that if defendant could obtain coverage under the “catch-all” for any loss exceeding its self-insured retention amount, such an outcome would completely obliterate the function of the two underlying insurance policies and ignore the policy language.

 For a copy of the decision click here

Toni Frain and Jeff Kingsley

Disqualification of Reinsured’s Attorney Matter for Judiciary, Not Arbitrator

Employers Ins. Co. of Wausau v. Munich Reins. Am., Inc. (S.D.N.Y. May 16, 2011)

The district court for the Southern District of New York recently held that the issue of whether a law firm should be disqualified from representing a reinsured where the same law firm represented the reinsurer in a prior matter is one for the judiciary, not the arbitrators. The court found that the law firm was not disqualified from representing the reinsured in a subsequent arbitration because the two matters where not the same or substantially similar.

Allianz Insurance Company wrote several insurance policies for the Roman Catholic Archdiocese of Los Angeles from June 1979 to June 1986. During that period, Munich Re issued seven facultative reinsurance certificates that reinsured six policies written by Allianz. In 2003, California adopted a statute that revived certain previously-stale claims of childhood sexual abuse. Thereafter, the Archdiocese agreed to resolve all 508 claims for a payment of $660 million, with Allianz agreeing to pay $62 million. Munich Re agreed to pay Allianz $17.5 million pursuant to its reinsurance agreement. Munich Re then submitted billings to its reinsurer, Employers Insurance Company of Wausau, pursuant to a reinsurance contract between Wausau and Munich Re’s predecessor.

Wausau objected to Munich Re’s representation by the law firm of Rubin Fiorella & Friedman LLP on the ground that the firm had represented Wausau in a reinsurance arbitration against Paladin Reinsurance Corporation in 2007.  It commenced an action in which it sought a declaration that it was not permissible for Rubin Fiorella to represent Munich Re against Wausau in the reinsurance arbitration demanded by Munich Re because the representation violated Rule 1.9 of New York’s Rules of Professional Conduct.

The court noted that scant authority had been found on the issue of whether the disqualification of an attorney from an arbitration is a matter left to the arbitrators or the court. The court concluded that the dispute over whether Wausau’s former lawyer may represent a party who is adverse to it did not arise from the reinsurance treaties and was not within the customary expertise of insurance industry arbitrators. The court went on to find that Munich Re’s law firm was not disqualified insofar as the past and present matters lacked a substantial relationship from which the law firm could have benefited in the present arbitration. Moreover, the court stated that “[p]redilections and prejudices on the selection of an arbitrator or umpire gained from a small number of prior representations, is an insufficient ground for disqualification.”

For a copy of the decision, click here

Carrie Appler and Anthony Golowski

Whether arbitration must be stayed in absence of necessary party is a matter to be decided by arbitrators

Munich Reinsurance America, Inc. v. National Casualty Co., 10 Civ. 5782 (SHS) (April 26, 2011)

Munich Reinsurance America, Inc. (“Munich Re”) and National Casualty Corporation (“National”) were involved in a dispute over payments due under a multiparty reinsurance treaty. Both agreed that the treaty required the dispute to be decided in arbitration. Munich Re contended the dispute could be resolved by a two-party arbitration that should commence immediately. National contended the arbitration could not go forward without the active participation of a third party, Employers Insurance Company of Wausau (“Wausau”) because Wausau was a party to the treaty and the arbitration provision of the treaty required the reinsuers to “act as one party” in connection with arbitration. At the time, Wausau and Munich Re were engaged in a separate litigation in which Wausau had moved to disqualify Munich Re’s counsel in the arbitration proceeding. In the present action, National sought to enjoin arbitration pending resolution of the dispute between Wausau and Munich Re.

 The court granted Munich Re’s motion to compel arbitration, determining that whether arbitration should be enjoined so as to await a determination of the disqualification action and participation by Wausau was a matter for the arbitration panel to decide. In so deciding, the court first reviewed the language of the parties’ arbitration agreement. The provision provided that any dispute arising from the treaty was to be submitted to an arbitration panel and that, “if more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this clause”. Wausau began participating in the arbitration but stopped before selection of a neutral umpire, choosing instead to await a determination in the separate action as to whether Munich Re’s counsel should be disqualified. 

The court determined, applying precedent under the Federal Arbitration Act that interpretation and application of the “act as one” provision was a matter for the arbitrators to decide because, “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Questions about the validity of an arbitration agreement are for the court to decide, but questions about procedural issues in an otherwise valid arbitration agreement are for the arbitrator to decide. Because all parties agreed that the arbitration provision was valid and that their dispute fell within the scope of the provision, the issue before the court was procedural in nature and not within the court’s limited jurisdiction over arbitrability questions.

The court also denied Munich Re’s request for the court to appoint a neutral umpire. The court explained that the parties’ treaty contained a provision addressing the appointment of an umpire in situations where the parties, though each appointing one arbitrator, could not agree on the final neutral umpire to serve on the arbitration panel. The court declined to step in and appoint an umpire, instead ordering the parties to comply with the provision of the arbitration agreement regarding umpire selection.

For a copy of the decision click here

Patrick Omilian and Jeffrey Kingsley

Court Grants Motion to Dismiss Breach of Reinsurance Contract Action

Pacific Employers Ins. Co. v. AXA Belgium S.A. (E.D. Pa. April 27, 2011)

In 1978, plaintiff and defendant entered into a reinsurance agreement.  Pursuant to the agreement, defendant was obligated to reimburse plaintiff for 5% of a portion of loss and/or loss expense payments made with respect to insurance policies written on plaintiff’s behalf.  At the time the agreement was negotiated and entered into, plaintiff was (and still is) a California domiciled insurance company with its principal place of business in California.  Defendant was (and still is) an insurer and reinsurer organized under the laws of the Kingdom of Belgium with headquarters in Belgium.

Defendant terminated its participation under the agreement effective January 31, 1985.  Plaintiff alleged that defendant’s rights and obligations did not end at that time, and alleges that defendant remains liable to reimburse it for a portion of its loss and loss expense payments with respect to the policies reinsured under the agreement.  Defendant moved to dismiss plaintiff’s complaint for lack of personal jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(2).

The court granted defendant’s motion.  The court noted that a plaintiff can obtain personal jurisdiction over a defendant through either general or specific jurisdiction.  General jurisdiction is proper where a defendant’s contacts with the forum state are continuous and systematic and exists whether or not the cause of action is related to a defendant’s activities in the forum state.  Specific jurisdiction arises from a defendant’s activities in the forum state that relate to the particular cause of action being litigated.

The court held that general jurisdiction was not proper because defendant was a foreign corporation, not authorized to do business in Pennsylvania and did not consent to jurisdiction in Pennsylvania.  Additionally, plaintiff did not present sufficient evidence of defendant’s continuous and systematic contacts in Pennsylvania to establish a prima facie case of general jurisdiction.  Defendant does not own, rent, use or possess any property in Pennsylvania, does not have an office, place of business, postal address or telephone listing in Pennsylvania, is not licensed to do business in Pennsylvania, does not advertise, sell, solicit business or contract to supply any goods or services in Pennsylvania, does not have any employees in Pennsylvania and does not maintain a bank account or own other property in Pennsylvania.  Because the facts required to show general jurisdiction must be extensive and persuasive, and a plaintiff must show significantly more than mere minimum contacts to establish general jurisdiction, the court found general jurisdiction lacking in this case.

The court also held that specific jurisdiction was not proper.  The court held that the contract negotiations and the consummation of the agreement did not take place in Pennsylvania.  Also, there is no evidence was defendant would have had any expectation that in entering into the agreement with a California company it would later be haled into court in Pennsylvania.  Additionally, there were no grounds for jurisdiction in Pennsylvania by way of a forum selection clause or choice of law provision.  The court held that the location and character of the contract negotiations and the terms of the contract did not support the court exercising jurisdiction in Pennsylvania.  Any minimum contact defendant had with Pennsylvania stemmed from plaintiff’s unilateral move and was insufficient to confer jurisdiction.

For a copy of the decision click here

Toni Frain and Michael Glascott

 

case provided courtesy of Lexis

Excess Insurer Files Claim Against Reinsurer in Dispute Over Obligations Under Facultative Reinsurance Contract

ACE Property & Casualty Insurance Co. v. Global Reinsurance Corp. of America (U.S. District Court, E.D. PA)

In a case removed to federal court from a Pennsylvania state court, a Pennsylvania excess insurer recently filed a claim against a New York reinsurer in a dispute over its obligations under a facultative reinsurance contract.  Unlike a typical treaty reinsurance contract, which reinsures multiple insurance policies written under certain circumstances, a facultative reinsurance contract reinsures a specific insurance policy.  The parties entered into such an agreement to reinsure on an excess of loss basis an excess umbrella policy issued to Marley Wylain, Inc.  The agreement was issued for the 1977 calendar year, and was extended to August 1, 1978.  The agreement provided that the reinsurer’s liability shall follow that of the excess insurer’s and shall be subject to the terms and conditions of the excess insurance policy.  The excess insurer also contends that all of its loss settlements under the policy would also be binding upon the reinsurer pursuant to the terms of the facultative contract.

In the complaint, the Pennsylvania insurer sets forth the following allegations against the New York reinsurer:

After the facultative contract was executed, Marley Wylain was named as a defendant in a number of asbestos products personal injury claims and lawsuits.  These claims were tendered to Wylain’s primary insurers for defense and indemnity.  Eventually, the insurance coverage below the excess insurer’s policy exhausted, and the Pennsylvania insurer agreed to participate in defense and indemnity of Wylain’s claims.  By December of 2010, the excess insurer’s loss payments on behalf of Marley exceeded the $10 million retention noted in the facultative reinsurance contract.  The excess insurer then began to bill the reinsurer for its loss payments.  To date, those billings exceed $101,000.  The excess insurer noted that it expects substantial additional billings in the years to come over these asbestos loss payments.

The New York excess insurer alleged that the reinsurer breached the facultative contract by failing to timely pay the loss payments billed after a definitive statement of the loss was provided.  In the lawsuit, the excess insurer seeks an award for all of the outstanding billings and attorneys’ fees for the costs associated with the suit.  The excess insurer further seeks a declaration that the reinsurer is obligated to pay past, current, and future billings in a timely manner pursuant to the terms of the facultative reinsurance contract.

For a copy of the decision click here

Bryan Richmond and Joseph Oliva

 

Reinsurance Broker Does Not Owe Fiduciary Duty to Reinsured Company

Workmen’s Auto Ins. Co. v. Guy Carpenter & Co., Inc. (Cal. Ct. App. May 4, 2011)

An appellate court in California held last week that an insurance broker does not owe a fiduciary duty to its client. Rather, “an insurance broker’s duties are defined by negligence law, not fiduciary law, and the agency of a broker must be viewed only through the lens of insurance law, which is a constellation of rules and policies all its own.” The court acknowledged the inherent conflict between insurance law and agency law on the issue, but refused to expand the scope of an insurance broker’s duties, noting that “the profession would be thrown into limbo because the exact scope of broker’s duties would have to be defined through years of litigation.”

The lawsuit arose when a reinsured company, Workmen’s Auto Insurance Company, sued its reinsurance broker, Guy Carpenter, alleging that the broker failed to secure the best available terms of reinsurance and acted with the intent to injure the company by incurring inflated commissions. The lower court granted the reinsurance broker’s motion for summary adjudication on the initial breach-of-fiduciary-duty claim. The reinsured company then asserted breach-of-fiduciary-duty claims in its second and third amended complaints, both of which the reinsurance broker demurred to. The lower court sustained the demurrers without leave to amend. Ultimately, a jury decided the negligence and breach-of-contract claims in favor of the broker.

On appeal, the court affirmed the lower court’s decision to dismiss the reinsured company’s breach-of-fiduciary-duty cause of action. To this end, the court stated that it was “unaware of even a single California precedent permitting a client to sue an insurance broker for breach of fiduciary duty.” Noting that the appeal required it to “decide whether to give insurance law or agency law primacy,” the court relied on the doctrine of stare decisis, holding that, “to achieve certainty, predictability, stability and convenience in the insurance industry, [it] was compelled to preserve the status quo” and refused to expand the doctrine of fiduciary duty to include insurance brokers. The court noted that “[d]ecades of case have drawn a policy line between what brokers must do and need not do. Because that line has been drawn, we decline to revisit the issue.”

For a copy of the decision, click here

 

Carrie Appler and Michael Saltzman

http://www.goldbergsegalla.com/attorneys/carrie-p-appler

http://www.goldbergsegalla.com/attorneys/michael-s-saltzman 

Motion To Strike Should Be Decided On Pleadings Only

Pacific Employers Ins. Co. v. Global Reinsurance Corp. of America E.D. PA., April 18, 2011

This case involves a dispute over a facultative reinsurance contract entered into by plaintiff policyholder with defendant reinsurer for an umbrella commercial liability policy insuring Buffalo Forge Co.  Some time after the facultative reinsurance contract was executed; Buffalo Forge was named as a defendant in numerous asbestos products personal injury lawsuits.  Plaintiff participated in the defense and indemnity of the suits and made payments in excess of $1 million.  Plaintiff then billed defendant reinsurer pursuant to the Facultative Certificate but has not paid the amounts billed. 

Plaintiff filed this complaint claiming breach of contract and seeks declaratory relief for a declaration of its rights under the Facultative Certificate.  Defendant then filed a counterclaim seeking a declaration that the $1 million limit of liability set forth in the Facultative Certificate is the maximum that plaintiff could potentially recover under the Facultative Certificate in connection with the asbestos litigation liabilities. 

The court is now asked to decide whether or not to strike certain defenses contained in defendant’s answers, affirmative defenses, and counterclaim.  Plaintiff contends that those paragraphs are no longer relevant because of representations made by defendant during the discovery phase of the litigation, including deposition testimony and responses to discovery demands. 

The court held that plaintiff was could file a motion to strike even though it has been more then 21 days after being served with a pleading because the rule allows the court to have discretion to act on its own.  Given the substantial disagreement between the parties regarding the affirmative defenses the court will consider the motion to clarify the issue before trial. 

The court held that plaintiff’s motion to strike will not be decided on references on matters outside of the pleadings because a determination of a motion to strike should be on the pleadings alone.

As to the claim of prejudice plaintiff’s motion will be granted since the court rejected plaintiff’s motion to compel discovery on that issue based on defendant’s representation that it had withdrawn its prejudice claim based on notice.  Specifically, the court rejected defendant’s motion that even though it has conceded to waive its prejudice argument, allowing that paragraph to remain in the pleading will not cause any harm to plaintiff. 

As to whether or not the breach of utmost good faith claim has been withdrawn, there is too much ambiguity and the motion to strike that claim is denied.  Specifically, the phrase “i.e., the only remaining dispute in this action” is too vague to operate as a waiver of the affirmative defense of breach of the duty of good faith. 

For a copy of the decision click here

Sarah Fang and Jon Kuller

http://www.goldbergsegalla.com/attorneys/jonathan-m-kuller

http://www.goldbergsegalla.com/attorneys/sarah-x-fang

Transfer of coverage dispute not warranted merely because related action is pending in different forum.

White Mountains Reinsurance Co. of America v. Travelers Cas. & Surety Co., Case No. 11 Civ. 390 (DLC) (S.D.N.Y., Apr. 13, 2011)

White Mountains filed an action against Travelers in the Supreme Court of New York, New York County, seeking a declaratory judgment and alleging breach of contract in connection with certain reinsurance contracts. Travelers removed the matter to federal court based on diversity jurisdiction, then moved to transfer the action, pursuant to 18 U.S.C. § 1404, to the District of Connecticut where Travelers had previously filed a related action against other entities. White Mountains was not a party to the Connecticut actions.

Travelers argued that the matter should be transferred to Connecticut because the Connecticut actions are related, and that White Mountains filed its action in New York as a “pre-emptive” suit for declaratory relief. In considering whether transfer of an action is appropriate, the Court considered the following well-established factors:

1) the plaintiff’s choice of forum; 2) the convenience of witnesses; 3) the location of relevant documents and relative ease of access to sources of proof; 4) the convenience of parties; 5) the locus of operative facts; 6) the availability of process to compel the attendance of unwilling witnesses; and 7) the relative means of the parties.

The Court denied the motion to transfer, explaining that White Mountains’ choice of forum is entitled to “great weight”. The court recognized that White Mountains could have filed its action in Connecticut, but its choice to file in New York was not inappropriate especially considering the underlying transactions have a strong connection to the Southern District of New York. Moreover, the only factor that weighed in favor of transfer was that the actions pending in Connecticut were related. Thus, Travelers failed to meet its burden of establishing, “by clear and convincing evidence”, that a transfer of venue was warranted.

For a copy of the decision click here

Patrick Omilian and Dan Gerber

http://www.goldbergsegalla.com/attorneys/patrick-b-omilian

http://www.goldbergsegalla.com/attorneys/daniel-w-gerber

District Court Denies Motion For Reconsideration Of Prior Ruling Against Reinsurance Policyholder Dismissing Case For Lack Of Subject Matter Jurisdiction

Health Facilities of California Mut. Ins. Co., Inc. v. British American Ins. Grp., Ltd. et.al.(United States District Court, Central District of California, April 5, 2011)

This reinsurance dispute arises from claims involving the return of excess deposits and premiums from certain reinsurance contracts entered into by plaintiff, Health Facilities of California (HFC), an incorporated risk retention group.  Defendants, British American Insurance Group (BAIG) and Peter Myrtle, are Louisiana citizens acting as reinsurance intermediaries transmitting premiums payments, payments of return premium and collecting payments. 

HFC entered into a reinsurance contract with defendants; however, before BAIG calculated the precise premiums, HFC provided a deposit upon execution of the contract with the understanding that any excess deposit would be returned.  After the premiums on the reinsurance contract were calculated, HFC was allegedly owed $2.1 million in excess deposits.  When HFC demanded a return of same, BAIC instructed plaintiff to apply the money to further insurance premiums, against HFC’s wishes, who then brought suit.

Previously, upon a detailed inquiry into the facts of the case, the court found a lack of diversity, dismissing the case for lack of subject matter jurisdiction.  Specifically, the court determined that the plaintiff failed to carry its burden in establishing a complete lack of diversity of the parties noting the board makes decisions, at least in part, on conference calls, where four of the seven board members are physically in California and three are not.  Moreover, the court was not persuaded that because the majority of the board of directors was located in California and because some board meetings have taken place in California via telephone that the principal place of business was, indeed, California.  The court further determined that plaintiff’s allegations as to the location of several board members and the concentration of their risks in California was unavailing and spoke to the corporation’s “‘center of gravity’ a diversity consideration dispensed with in Hertz v. Friend, 130 S. Ct. 1181 (2010).

On the motion for reconsideration, plaintiff proffered an entirely new argument that HFC’s nerve center was actually in Colorado and further argued that reconsideration was warranted under Federal Rule 60(b)(1)(excusable neglect), Rule 60(b)(2)(newly discovered evidence), Rule 60(b)(6)(any reason justifying relief) and Local Rules regarding new facts. 

The Court denied the motion for reconsideration holding that in the Ninth Circuit, attorney error does not fall within Rule 60(b)’s provision for excusable neglect that would allow them to disturb an Order.  The court stated, “[f]or the purposes of subsection 60(b)(1), parties should be bound by and accountable for the deliberate actions of themselves and their chosen counsel.  This includes not only an innocent, albeit careless or negligent attorney mistake, but also intentional attorney misconduct.” (Citation omitted).  Likewise, under Local Rule 7-18, the court noted that a motion for reconsideration is not an opportunity for the parties to raise an argument that could have, and should have, been raised earlier.  As the court concluded that “HFC’s Motion for Reconsideration [was] nothing more than a request for a second bite at the apple,” the court denied the motion in its entirety, again holding that HFC failed to meet its burden to establish that diversity jurisdiction existed between the parties.

For a copy of the decision click here

Patrick Omilian and Rick Cohen

http://www.goldbergsegalla.com/attorneys/paul-c-steck

http://www.goldbergsegalla.com/attorneys/richard-j-cohen

Insurer potentially liable to investor in Ponzi scheme where insurer ignored known misrepresentations by its insured, investment company

Ivie v. Diversified Lending Group, Inc., Case No. 1:09-CV-751, 2011 U.S. Dist. LEXIS 27680 (W.D. Mich., Mar. 17, 2011)

Plaintiff, Ivie, invested $2.2 million in a “guaranteed” 9% interest-earning note issued by DLG. DLG represented that the note was a “safe and conservative investment,” guaranteed by an A+ rated insurance company that issued “reinsurance” policies to reinsure Ivie’s principal investment. The investment contract contained a “Reinsurance Endorsement” that provided the principal amount of the investment will be insured by a AA rated or better insurance company that will issue a “Collateral Assignment” in the principal amount of the investment contract.

DLG then executed a “Collateral Assignment” by which it assigned to Ivie its interest in an annuity purchased from Jackson National Life Insurance Company. The Collateral Assignment described the annuity as “not more than $2,200,000”. The annuity itself was issued by Jackson to DLG with an initial premium of only $220,000, 10% of Ivie’s initial investment.

Ivie’s Complaint alleged that the investment scheme was a fraudulent Ponzi scheme, alleging that DLG did not invest money as it represented but instead funneled investors’ contributions for personal use and unrelated ventures. Further, Ivie alleged the reinsurance of its investors’ notes was entirely bogus because the annuities assigned to reinsure the notes were only a fraction of the notes’ total value.

As to Jackson, Ivie alleged that it was aware that DLG was marketing the assignment as reinsurance of Ivie’s total investment event though the value of the annuity was only a fraction of the total investment. Before Ivie invested his funds, he alleged, Jackson had sent DLG a cease and desist letter directing DLG to stop representing that Jackson was a reinsurance company or to start using a disclaimer in all materials that Jackson does not reinsure or underwrite DLG’s investments. DLG did not comply with the cease and desist letter. Nonetheless, Jackson continued to conduct business with DLG, issuing policies like the annuity assigned to Ivie.

Ivie sued both Jackson and DLG. As to Jackson, the Complaint alleged numerous counts including breach of contract, negligence, negligent misrepresentation, silent fraud, breach of duty of good faith and fair dealing, fraudulent misrepresentation, aiding and abetting breach of fiduciary duty, civil conspiracy and RICO. The court dismissed numerous counts against Jackson including the fraud and negligence claims because it found Jackson owed no duty in tort to Ivie. However, four claims survived Jackson’s motion to dismiss—breach of contract, aiding and abetting breach of fiduciary duty, civil conspiracy, and RICO.

The court ruled Ivie alleged a justiciable claim for aiding and abetting breach of fiduciary duty and civil conspiracy based on allegations that Jackson continued to issue annuity contracts to DLG after Jackson was aware DLG was misrepresenting the nature of the annuities as full reinsurance. Ivie alleged a breach of fiduciary duty by DLG, and Jackson’s assistance to DLG in issuing the annuities with knowledge of DLG’s misrepresentations as to the nature and value of the annuities. The court also held Ivie alleged an actionable breach of contract claim against Jackson based on allegations that Jackson refused to pay Ivie the full value of the annuity contract on his proper demand. In a prior ruling, the court refused to dismiss the RICO claim against Jackson.

As a result of the decision, Insurers issuing policies or annuities to back investment companies may find themselves liable for investors losses if the insurers become aware that the investment companies are misrepresenting to their investors the nature or value of the insurance but nonetheless continue to conduct business with the investment companies. Insurers do not need to proactively seek to discover misrepresentations of their insureds in this regard but must be take appropriate action when misrepresentations come to light.

For a copy of the decision click here

Patrick Omilian and Jeff Kingsley

http://www.goldbergsegalla.com/attorneys/patrick-b-omilian

http://www.goldbergsegalla.com/attorneys/jeffrey-l-kingsley

District Court Assesses Double Damages to Reinsurer Due To Willful And Knowing Conduct in Fraud

Trenwick Amer. Reinsurance Co. v. IRC, Inc. et.al. (United States District Court, District of Massachusetts, February 16, 2011)

This reinsurance dispute arises from claims that IRC Re and defendant Swasey breached a reinsurance contract under which IRC Re was to provide retrocessional coverage for the Compcare 2000 program, a managed workers' compensation insurance and employers’ liability insurance program.  Specifically, Trenwick sued defendant and Malcolm Swasey ("Swasey"), personally, for fraud and breach of contract in connection with the program.

The original arrangement included Hanover Insurance Company ("Hanover") as the direct insurer for the Compare 2000 program.  Hanover was then reinsured by the American Accident Reinsurance Group ("AARG"). A portion of the risk ceded to AARG was in turn retroceded to Managed Compensation Insurance Company, Ltd. ("MCIC"), another entity owned and controlled by Swasey, which then merged with and is now known as IRC Re.  Mr. Swasey continued as CEO of IRC Re and its majority stock holder.  The court noted that, in effect, a Swasey company was at the beginning of the chain, IRC, Inc. which administered the program, and at the end of the chain, IRC Re which participated in reinsuring it.

In 1996, Swasey changed the direct insurer of the program from Hanover to Reliance National Insurance Company.  Swasey procured reinsurance for the Reliance Compcare 2000 program, using a structure similar to what existed under the Hanover program. This time, plaintiff Trenwick America Reinsurance Corp. ("Trenwick") was to provide reinsurance, and according to the plaintiffs, 19% of the risk was retroceded to IRC Re ("the Contract"). The existence of this “contract” was the subject of the litigation.

Specifically, in early 2006, a dispute arose regarding the existence of a retrocessional agreement between Trenwick and IRC Re. When Trenwick's agents tried to collect IRC Re's share of the liabilities arising from the Compare 2000 program, IRC Re insisted, through Swasey, that it would not pay unless a copy of the written contract between Trenwick and IRC Re was produced.  For the very first time in their dealings, Swasey claimed that if any type of agreement existed between IRC Re and Trenwick, it was merely an "agreement to agree," further claiming that a reinsurance contract may have been contemplated, but was never actually prepared.

Plaintiffs insisted that there was a contract with IRC Re that was reflected in the documents, conduct and statements of all the parties, including Swasey, and if there were not, defendants who were charged with managing the program, were negligent for failing to prepare it.  With respect to IRC Re, plaintiffs sued to recover $4,182,057.52 plus interest in unpaid losses and loss expenses that they claim was due on the Contract. Since IRC Re apparently does not have the assets to cover the claimed losses, plaintiffs also sought to pierce the corporate veil and recover damages against IRC, Inc. and Swasey individually.

Finally, plaintiffs sought damages and attorneys fees under Mass. Gen. L. Ch. 93A against all defendants relative to the alleged fraud and negligent misrepresentation, as well as for disavowing the contract in bad faith and engaging in a "moving target" strategy of constantly shifting positions throughout this litigation.

In an extensive opinion, the court held that a contract did exist between IRC Re and the plaintiffs, and that the contract provided that 19% of the plaintiffs' risk was retroceded to IRC Re.  The court noted it made the finding notwithstanding the statute of frauds, based on the extensive record provided. The court further held that IRC Re cannot escape liability here by raising the defenses that Reliance raised against the initial parties, because the "follow the fortunes" or the "follow the settlements" doctrine applied to the case at bar.  The court noted that this doctrine does not allow a reinsurer to raise defenses that the reinsured has already decided to waive in good faith.

However, the court declined to pierce the corporate veil with respect to the plaintiff’s breach of contract claim against IRC Re, as none of the factors for piercing were met.  Also, the court held that as a contract existed between IRC Re and the plaintiffs, a contract that has been breached, it did not have to address the other claims against IRC Inc. and Swasey that are predicated upon the failure to execute a written contract.

Importantly, the court found liability against both Swasey and IRC Inc as all of the defendants violated Massachusetts deceptive trade practices act (Massachusetts General Laws, Chapter 93A) in myriad ways.  Specifically, the court found that Swasey's conduct and that of the companies he created, controlled and administered, pre-, post- and during litigation was “simply outrageous,” turning what should have been a routine claim against a reinsurer into a tortuous marathon.  In addition, as to damages, the court found defendants acts to be willful and knowing.  As such, the court held that plaintiffs were entitled to an award of double damages against IRC Re, IRC, Inc., and Swasey along with attorneys' fees and expenses in an amount to be determined by the Court upon plaintiffs' submission of an affidavit of services rendered, and costs of suit.

 For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/jeffrey-l-kingsley

http://www.goldbergsegalla.com/attorneys/paul-c-steck

 

Reinsurer Claims Proceeds in Bankruptcy Proceeding

Acceptance Ins. Companies, Inc. v. Granite Reinsurance Co. Ltd.,

(Bankruptcy Court NE January 19, 2011)

A reinsurance company filed a proof of claim against an insurer in its bankruptcy proceeding claiming that it owed premiums of approximately $10.9 million. The reinsurance contract called for premiums of $15 million consisting of an ignition $6 million payment for coverage for crop years 2001 and 2002 and $3 million due in each of the following three years. The insurer objected to the reinsurer’s claim on the basis that the reinsurance premium was due on an annual basis for coverage received in that year and, due to the bankruptcy, it could no longer issue crop insurance policies and no longer needed reinsurance coverage. Despite these arguments, the Eighth Circuit federal appellate court held that, while the reinsurance contract permitted the insurer to pay the $15 million premium in deposit payments, the contract had a definite term of five years and had no provision for early termination. Accordingly, the payments due in the later years were only minimum deposits and the insurer owed the remaining premiums to the reinsurer under the terms of the contract.

After the opinion became final, the reinsurer moved for entry of judgment in its favor in accordance with the appellate decision. It requested allowance of its claim in the principal amount of $9 million, plus pre-judgment interest at the contract rate of 1.5 percent per month from January 1, 2003, through entry of the judgment on March 14, 2008, plus post-judgment interest at the contract rate of 1.5 percent per month from March 14, 2008, through July 31, 2010, and per diem interest at the contract rate thereafter. At issue with regard to pre-judgment interest was when the contractual rate began to accrue; on January 1, 2003, when the first of the three installment payments were due, on May 5, 2003, when the insurer repudiated the contract, or on the due dates for each of the installment payments. The court further considered what the appropriate post-judgment interest rate should be; the contractual rate or the federal statutory rate.

 

Determining that the insurer’s repudiation of the reinsurance contract did not accelerate the 2004 and 2005 premium payments, the court held that the reinsurer was entitled to pre-judgment interest at the contract rate from the date each payment was due through the date of the judgment. Accordingly, the court held that interest should be paid on the 2003 payment from January 1, 2003, through March 14, 2008, interest should be paid on the 2004 payment from January 1, 2004, through March 14, 2008, and interest should be paid on the 2005 payment from January 1, 2005, through March 14, 2008. The court further held that the reinsurer was entitled to post-judgment interest at the federal statutory rate.

For a copy of the decision click here

Bryan Richmond and Dan Gerber

http://www.goldbergsegalla.com/attorneys/bryan-d-richmond

http://www.goldbergsegalla.com/attorneys/daniel-w-gerber

Travelers sues reinsurer Factory Mutual for payments made to the ACandS Settlement Trust

Travelers Casualty and Surety Company v. Factory Mutual Insurance Co., No. 3:11-cv-00216 (D. Conn.)

In a Complaint filed on February 8, 2011, Travelers filed suit against its reinsurer, Factory Mutual Insurance Co., seeking approximately $539,000 for payments made by Travelers as part of a $449 million asbestos-related settlement on behalf of Travelers’ insured, Armstrong Contracting and Supply Company (“ACandS”). Travelers alleges that Factory Mutual promised to pay Travelers in accordance with reinsurance treaties to which Factory Mutual subscribed, known as Travelers Casualty’s Blanket Excess Loss program. The Reinsurance Treaties at issue cover the periods of April 1, 1976 through April 1, 1979. Travelers’ Complaint indicates an additional $275,000 due from Factory Mutual under the 1979-1980 treaty is not sought in the suit because it is subject to an arbitration provision in the treaty.

This suit by Travelers follows a similar suit filed in the same court by Travelers last month against three of its reinsurers seeking reimbursement for payments made by Travelers on behalf of ACandS as part of the $449 million asbestos settlement.

The impact of this decision is that Travelers continues to aggressively pursue repayment from its reinsurers for payments made to the ACandS Settlement Trust relating to asbestos injury claims made against ACandS. Additional suits may be in the offing as there is no sign that Travelers intends to ease up on seeking reimbursement from its reinsurers who subscribed to the Travelers Casualty’s Blanket Excess Loss program.

For a copy of the decision click here 

Patrick Omilian and Rick Cohen

http://www.goldbergsegalla.com/attorneys/patrick-b-omilian

http://www.goldbergsegalla.com/attorneys/richard-j-cohen

Reinsurer Files Declaratory Judgment Action to Disqualify Law Firm’s Representation of Insurer

Certain Underwriters at Lloyd’s London v. Sidley Austin LLP

(Mass Super. Ct. November 30, 2010)

 

Certain Underwriters at Lloyd’s London (“Lloyd’s”) issued a reinsurance policy to Liberty Mutual Insurance Company (“Liberty”).  After Lloyd’s refused to pay reinsurance billings, on April 6, 2010 Liberty commenced an arbitration against Lloyd’s.

 

Liberty retained the law firm of Sidley Austin LLP to give it advice with regarding to its potential claims under the reinsurance agreements.  Resolute Management Inc. (“Resolute”) manages United States direct insurance claims for Lloyd’s on insurance contracts entered into prior to 1993.  Thereafter, Resolute contacted Sidley Austin LLP about possible representation on an appeal of an injunction entered in a coverage action between Lloyd’s and Teck Metals Ltd. 

 

Lloyd’s commenced a declaratory judgment action seeking a preliminary and a permanent injunction disqualifying Sidley Austin LLP from acting as counsel for Liberty in the arbitration on the grounds that the firm has a concurrent conflict in violation of Rule 1.7(a) of the Massachusetts Rules of Professional Responsibility for which no informed consent had been given by Lloyd’s.  The complaint alleges that Sidley Austin must have known about but failed to disclose through various communications. 

 

The complaint alleges that Rule 1.7 of the Massachusetts Rules of Professional Conduct prohibits a lawyer from representing a client against another client unless each client consents after consultation.  Rule 9.1(c) of the Massachusetts Rules of Professional Conduct specifies that “consultation” denotes communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.  The complaint alleges that Sidley Austin did not obtain Lloyd’s consent after consultation to its concurrent conflict of interest because Sidley Austin did not inform Lloyd’s that, as of its retention in the Teck matter the firm was then representing and advising Liberty with regard to a large potential reinsurance claim against Lloyd’s and a potential claim of willful and intentional unfair or deceptive practices.  Additionally, the firm continued to seek Resolute’s signature on the engagement letter without at any time advising Resolute of the filing of the arbitration demand.  Moreover, the engagement letter excludes from the scope of the conflict consent any conflicting representation that is “substantially related” to the scope of the firm’s representation set forth in the letter.  The complaint alleges that a question of law involved in the Teck matter is also at issue in the arbitration, the two matters are substantially related.  Accordingly, even if the engagement letter did constituted a valid consent after consultation, that consent would not apply to Sidley Austin’s representation of Liberty against Lloyd’s.  The complaint alleges that the firm’s unconsented representation of Liberty against Lloyd’s deprives Lloyd’s of the loyalty which is an essential element of the lawyer’s relationship to a client.

 

The complaint alleges that allowing Sidley Austin to continue to represent Liberty inflicts immediate and irreparable injury to Lloyd’s and therefore seeks a preliminary and permanent injunction requiring Sidley Austin to withdraw from representing Liberty in the arbitration.

 

For a copy of the complaint click here

 

Toni Frain and Jeffrey Kingsley

 

http://www.goldbergsegalla.com/attorneys/Frain.html

 

http://www.goldbergsegalla.com/attorneys/Kingsley.html

District Court Dismisses Cases Against Reinsurance Policyholder Sua Sponte For Lack Of Subject Matter Jurisdiction

Health Facilities of California Mut. Ins. Co., Inc. v. British American Ins. Grp., Ltd. et.al.(United States District Court, Central District of California, January 11, 2011)

This reinsurance dispute arises from claims involving the return of excess deposits and premiums from certain reinsurance contracts entered into by plaintiff, Health Facilities of California (HFC), an incorporated risk retention group.  Defendants, British American Insurance Group (BAIG) and Peter Myrtle, are Louisiana citizens acting as reinsurance intermediaries transmitting premiums payments, payments of return premium and collecting payments. 

HFC entered into a reinsurance contract with defendants; however, before BAIG calculated the precise premiums, HFC provided a deposit upon execution of the contract with the understanding that any excess deposit would be returned.  After the premiums on the reinsurance contract were calculated, HFC was allegedly owed $2.1 million in excess deposits.  When HFC demanded a return of same, BAIC instructed plaintiff to apply the money to further insurance premiums, against HFC’s wishes, who then brought suit.

Previously, the court issued an Order to Show Cause regarding the court’s subject matter jurisdiction and its concerns that HFC was not diverse from Defendants BAIG and Peter Myrtle.  The complaint alleged that HFC is a Nevada domiciled mutual insurance company organized and operated under the federal Liability Risk Retention Act of 1986.  However, the complaint was silent as to HFC’s principal place of business, stating only that HFC issued professional and general liability insurance policies to California health facilities and that all of HFC’s insurance transactions and risks are in California.  The court noted that while it was undisputed that HFC’s board of directors, President, Secretary and Treasurer directed and controlled the management of the corporation, the issue was from where did they primarily operate. 

Upon a detailed inquiry into the facts of the case, the court found a lack of diversity, dismissing the case for lack of subject matter jurisdiction.  Specifically, the court determined that the plaintiff failed to carry its burden in establishing a complete lack of diversity of the parties.  The board makes decisions, at least in part, on conference calls where four of the seven board members are physically in California and three are not.  Based on Hertz v. Friend, 130 S. Ct. 1181 (2010), the court noted that “‘a corporation shall be a citizen of any state by which it has been incorporated and of the state where it has its principal place of business’” thus providing dual citizenship to any corporation meeting this criteria.

Here the court was not persuaded that because the majority of the board of directors was located in California and because some board meetings have taken place in California via telephone that the principal place of business was, indeed, California.  On the contrary, defendants showed that HFC’s President, Secretary, and Director were located in Louisiana, which was also the only place identified as having an office and which was listed on the firm’s website.  The court further determined that plaintiff’s allegations as to the location of several board members and the concentration of there risks in California was unavailing and spoke to the corporation’s “‘center of gravity’ a diversity consideration dispensed with in Hertz.”

Consequently, plaintiff’s failure to carry its burden in identifying the single principal place of business was fatal to establishing diversity and federal subject matter jurisdiction.  Moreover, as plaintiff appeared to share citizenship in Louisiana with BAIG and Myrtle, the court’s basis for subject matter jurisdiction was destroyed.

For a copy of the decision click here 

Paul Steck and Tom Segalla

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

Insurer sue three reinsurers to recover amounts paid in loss settlements for asbestos-related injuries on behalf of ACandS.

Travelers Casualty and Surety Co. v. Nationwide Mutual Ins. Co., Case No. 3:11-cv-00107 (D. Conn. Jan. 19, 2011).

On January 19, 2011, Travelers Casualty and Surety Company (“Travelers”) filed suit in the U.S. District Court for the District of Connecticut against three reinsurers who allegedly failed to pay valid claims. Travelers seeks a declaration of coverage and damages for breach of contract. The suit involves reinsurance treaties referred to as Travelers Blanket Excess of Loss Reinsurance Agreements, covering April 1976 through April 1979.

In its Complaint, Travelers alleges that the reinsurance treaties obligated the reinsures to indemnify Travelers for all losses paid out by Travelers and that the treaties considered all loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin to be considered as having resulted from a single accident or occurrence. The treaties further provided that the reinsurers would not second-guess settlements made by Travelers, would abide by the loss settlements of Travelers, and would pay amounts to Travelers immediately upon proof of loss settlement by Travelers.

At issue in the Complaint are loss settlements for asbestos-related injury claims made against Travelers’ insured, Armstrong Contracting and Supply Company (“ACandS”). Travelers made indemnity and defense payments on behalf of ACandS for pre-1976 policies until such policies’ limits were exhausted. Then, in 2007, Travelers settled post-1976 liability by paying $449 million to the ACandS Asbestos Settlement Trust. Travelers submitted the $449 million settlement as a single loss under the reinsurance treaties, but, Travelers alleges, the reinsurers wrongly refused to pay their respective shares of Travelers’ loss settlements as they were obligated to do under the reinsurance treaties. By its Complaint, Travelers alleges Nationwide is liable for $2.7 million, National Casualty is liable for $2.76 million, and Wausau is liable to it for $693,000 under the treaties.

For a copy of the complaint click here

Patrick Omilian and Thomas Segalla

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

First Department Reinstates Reinsurance Action Complaint

Global Reinsurance Corporation. v. Equitas Ltd. et.al. (New York Appellate Division, First Department, January 11, 2011)

This reinsurance dispute arises from claims that the Equitas defendants where at the center of a conspiracy to violate New York’s Anti-Trust law (General Business Law §340, the Donnelly Act) by eliminating claims service competition as to pre-1993 non-life retrocessional reinsurance coverage (i.e., the reinsurers that provide coverage to the insurers or cedents, that provide coverage to the underlying policyholders). The trial court granted defendants motion to dismiss and the retrocedent appealed.

Specifically, the complaint alleged that the conspiracy originated in 1996 when the Lloyds’ syndicate was faced with financial ruin because of potentially crippling losses stemming from unexpectedly large claims on certain pre-1993 non-life lines of business (i.e., long-tail asbestos and environmental coverage).  Plaintiff alleged that cost savings from the elimination of claims service competition with respect to the pre-1993 business were realized over the ensuing years at its expense and that of retrocedents, generally.  According to plaintiff, Equitas engaged in claims payment behavior that retrocessionaires subject to competitive constraints could not have engaged in (i.e., denying claims, and, when not denied, were paying less and later), causing plaintiff to suffer millions of dollars in damages as a result. 

The Appellate Court held that it was error to dismiss the complaint where it properly alleged defendants’ conduct in the handling of its claims service business and the competitive restraints it was subject to, as well as resulting damages.  The court held that plaintiff sustained anti-trust injury because the quality of what it purchased, retrocessional coverage with the attendant claim-handling service, was adversely affected by an agreement eliminating competition over claims-handling. 

In addition, the court held that it was improper to dismiss the complaint because the trial court did not discuss if the retrocedent adequately alleged a worldwide market.  Also, the Foreign Trade Antitrust Improvements Act,  15 USCS §6a did not deprive New York courts of subject matter jurisdiction over the retrocedent’s antirust claims because the retrocedent did not claim anticompetitive conduct affected competition over “new” retrocession business, and the retrocedent’s allegations of injury in New York sufficiently supported the adverse competition effects.

Based on the foregoing, the trial court’s decision was reversed and the complaint reinstated.

For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

Amendment to New York’s Credit for Reinsurance from Unauthorized Insurers Regulation issued.

Today, amendments to New York’s Regulation No. 20 (11 NYCRR 125), Credit for Reinsurance, took effect. The amended regulation includes numerous changes, including repeal and renumbering of sections as well as major modification to credits insurers may take as to recoverable reinsurance available from unauthorized reinsures.

 Section 125.1 was repealed and a new Section 125.1 was promulgated which permits ceding insurers “act with financial prudence” when entering into reinsurance arrangements. The new Section 125.1 provides 8 risk criteria that ceding insurers should consider. Section 125.1 also requires a ceding insurer to manage its reinsurance recoverable proportionate to its own book of business and to diversify its reinsurance program.

The most notable amendment to Regulation 20 was the amendment of Section 125.4 which was renumbered as the new Section 125.2 and was modified significantly. The amended regulation allows a ceding insurer to take a credit, as an asset or deduction from reserves, for reinsurance recoverable by unauthorized insurers that maintain financial strength ratings from at least two rating agencies, such as S&P, Moody’s, Fitch, or A.M. Best. The amount of credit the ceding insurer is allowed to take is based upon the rating of the reinsurer, and can be no greater than the credit allowed for the lowest rating as provided in the table below:

 

Credit Allowed	Best	S&P	Moody’s	Fitch
100%	A++	AAA	Aaa	AAA
90%	A+	AA+, AA, AA-	Aa1, Aa2, Aa3	AA+, AA, AA-
80%	A, A-	A+, A, A-	A1, A2, A3	A+, A, A-
25%	B++, B+	BBB+, BBB, BBB-	Baa1, Baa2, Baa3	BBB+, BBB, BBB-
0%	B, B-, C++, C+, C, C-, D, E, F	BB+, BB, BB-, B+, B, B-, CCC, CC, C, D, R, NR	Ba1, Ba2, Ba3, B1, B2, B3, Caa, Ca, C	BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, DD

The collateral reduction credits are consistent with Florida’s regulatory scheme and NAIC recommendations. New York’s new credit provisions should not have lasting impact, however, because federal law will supersede the state regulation, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will be effective July 21, 2011.

Full Text of the revised Regulation No. 20 can be found here: 

http://www.ins.state.ny.us/r_prop/pdf/rp20a10t.pdf

District Court Concludes that Insurer Has Right To Intervene In Suit by Policyholder To Obtain Proceeds Of Judgment From Reinsurer

Callon Petroleum Co. v. National Indemnity Co. (E.D.N.Y. December 23, 2010)

In 2000, plaintiff policyholder obtained a judgment against defendant insurer intervener out of a surety bon issued by insurer.  Insurer failed to satisfy the judgment and policyholder commended that action against defendant reinsurer on the bond to collect the judgment out of the reinsurance proceeds.  Insurer subsequently filed a motion to intervene

Court held that insurer was a proper intervening party because it satisfied the four elements for intervening, namely: (1) file a timely motion; (2) show an interest in the litigation; (3) show that its interest may be impaired by the disposition of the action; and (4) show that its interest is not adequately protected by the parties to the action.  Specifically, insurer has demonstrated an interest in the litigation because policyholder seeks to recover reinsurance proceeds that the reinsurance agreement assigns to insurer.  In addition, insurer meets the minimal burden of showing that its interest may not be adequately protected in the litigation because the reinsurer is potentially indifferent to whom it must pay.

For a copy of the decision click here

Sarah Fang and Michael Glascott

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/MGlascott.html

Case provided courtesy of Lexis. 

 

Summary Judgment Granted to Insurer on Rescission and Exclusion

Great Lakes Reinsurance (UK) PLC v. Morales (S.D. Fla. December 9, 2010)

Plaintiff is a marine insurance company which issued a policy affording Hull & Machinery coverage on a 2005 33-foot Avanti power vessel owned by Romilio Morales.  On October 29, 2008, Jorge Barreiro operated the vessel, put the vessel on its trailer, parked the trailer in the driveway of his residence and went to work the next morning.  Barreiro’s residence did not have a fence or gate.  Barreiro’s wife noticed the vessel was missing the next afternoon.  Morales filed a claim and demanded payment of an amount equal to the insured value of the vessel, claiming a total loss of the vessel as a result of the theft.

The insurer moved for summary judgment, arguing that it was entitled to rescind the insurance policy on the ground that it was void because the application contained material misrepresentations of Morales’ experience, or lack thereof, in operating and owning vessels.  The application for the policy covering the vessel represented that Morales was the owner of the boat and had over twelve years experience in both the ownership and operation of boats.  During his deposition, however, Morales testified that he has never owned a vessel and that the information about having experience and owning boats for over twelve years was incorrect.  Barreiro’s application for coverage also represented that he had prior experience owning a boat.  Barreiro also testified that he never owned a boat and that the information on the application was incorrect.

The court held that defendants’ misrepresentations concerned essential facts that were material to plaintiff’s decision to issue an insurance quote and a policy of marine insurance thereafter.  The application forms specifically inquired as to defendants’ prior boating and ownership experience.  Accordingly, the court held that plaintiff was entitled to rescind the policy, and summary judgment was appropriate.

Additionally, the court granted summary judgment on the basis of an exclusion precluding coverage for theft of the scheduled vessel while on a trailer unless the vessel is situated in a locked and fenced enclosure or marina and there is visible evidence of forcible entry and or removal made by tools, explosives, electricity or chemicals.  The court held that the exclusion in the policy was unambiguous and provided no coverage.

 For a copy of the decision click here

Toni Frain and Dan Gerber

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Appellate Court Reverses Lower Court and Allows Claims Involving Reinsurance Reserves

Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Mgt. Inc., 2010 Slip Op. 8644 (1^st Dept. Nov. 23, 2010)

A U.S. based life reinsurance company which had reinsured more than 370,000 policies with an aggregate insured amount of $36.7 billion formed a new company and turned over its 2004 term life reinsurance liability to it.  The company paid for its reinsurance reserves by issuing preference shares and bonds.  Assured Guaranty guaranteed the company’s payments to note holders on one of the bond series issued.  The company then entered into an investment management agreement with J.P. Morgan, to which Assured Guaranty was a third-party beneficiary entitled to enforce the agreement.  Although the agreement was governed by New York law, it provided that “with respect to the assets held in the Reinsurance Trust Account, investment must be made in compliance with . . . Chapter 13 of the Delaware Insurance Code.”

After a monthly statement showed “precipitous declines” in the value of the assets in the company’s portfolio, in correspondence dated September 24, 2007 the reinsurance company exercised its contractual right to amend the investment guidelines and directed J.P. Morgan to make all future investments “in cash, cash equivalents, money market securities or AAA-rated obligations” of government agencies.  The guarantor later sued the investment manager alleging breach of fiduciary duty, negligence, and breach of contract.  Specifically, the guarantor alleged that the investment manager improperly invested substantially all of the account at issue in risky subprime real estate mortgage investments.  The Supreme Court, New York County, found that the fiduciary and negligence claims were preempted by the Martin Act, New York General Business Law §§ 352-359, and dismissed the contract, gross negligence, and willful misconduct claims. The guarantor appealed.

On appeal, the Appellate Division, First Department found initially that the Martin Act did not preempt otherwise validly pleaded common-law causes of action.  The Martin Act “authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.”  The appellate court held that while a private action cannot be maintained based upon the provisions of the Martin Act, common law causes of action that are properly pleaded are not preempted by the Act.  Accordingly, the court held that the guarantor’s fiduciary and negligence claims were not preempted.

The appellate division also reinstated the guarantor’s cause of action for breach of contract.  These claims were based upon an alleged violation of Delaware Insurance Code ch. 13.  Contrary to the investment manager’s argument, the court found that Delaware Code §1323 was not limited to individual mortgages and included references to bonds, notes, or other evidences of trust representing first or second liens on real estate.  The court further noted that a 90-day limit to objections set forth in the parties’ agreement was reasonable and operated as a statute of limitations.  Finding that the September 24, 2007 amendment to the investment guidelines constituted a written objection to the investment manager’s acts and transactions, the court held that only those claims that accrued before June 26, 2007 (90 days prior to September 24) were barred.  Accordingly, the Supreme Court’s order was modified to reinstate the contract claims that accrued on or after June 26, 2007, as well as claims for breach of fiduciary duty and gross negligence that accrued on or after that date.

For a copy of the decision click here

Bryan Richmond and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

Pennsylvania District Court Grants Defendants’ Demand For Claim And Underwriting Materials But Denies Request For Reinsurance Agreements

TIG Ins. Co. v. Tyco Intn’l Ltd. (United States District Court, Middle District of Pennsylvania, November 12, 2010)

This coverage case involved the interpretation of an excess insurance policy issued by TIG and whether the policy covered Grinnell's payment in settlement of the underlying lawsuit arising out of a warehouse fire in May, 1997 due to a faulty sprinkler system. An endorsement to the policy extended coverage to "prior acts" that occurred before the policy's inception but the same endorsement also excluded "any claims of which the Named Insured had actual or constructive notice prior to the commencement of coverage under this policy."  The fire took place during the "prior acts" period.

 TIG contended that coverage was barred because Grinnell had notice of the fire before the commencement of the policy. Grinnell refutes the allegation and claims that the exclusion must be construed to apply only if the insured (Grinnell) had notice of a loss in excess of the policy's attachment point, i.e. $60 Million, prior to the commencement of the policy. 

Grinnell sought TIG’s claims and underwriting manuals, information regarding reinsurance agreements and reserve information arguing that these documents would provide insight into the meaning of the policy's prior acts endorsement which bars from coverage "claims resulting from an occurrence of which the Named Insured had actual or constructive notice prior to the commencement of the policy.”

The court granted Grinnell’s requests for production of the claims and underwriting manuals, holding that whether an exclusion applies was relevant to Grinnell’s counterclaim, and these materials were relevant to determining whether an ambiguity existed, therefore aiding in its resolution. 

However, the court denied the remaining requests for information regarding reinsurance agreements holding that this information is more remote than the underwriting manuals in its efficacy at resolving the policy language.  Also, the court noted that TIG and its reinsurers may agree to a term that is not ipso facto probative of how the term is applied in the policy.  Likewise the court denied the Grinnell’s request for reserve information as too speculative to provide good cause for discovery.  The Court also denied TIG’s request for Grinnell’s litigation file because there was no common interest under the facts of this case and the underlying action.

For a copy of the decision click here

Paul Steck and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Angelino.html

http://www.goldbergsegalla.com/attorneys/Steck.html

Insurer Settles Reinsurance Dispute

Continental Casualty Co. v. AXA Global Risks (UK) Ltd. (W.D. Mo. November 18, 2010)

Continental Casualty Co. issued an insurance policy to Black & Veatch Corp. in connection with the construction of a Pleasant Hill, Missouri power plant.  The insurer also obtained a reinsurance contract from AXA Global Risks (UK) Ltd. (now Portman Insurance Co. Ltd.) and Assicurazioni Generali SpA (collectively referred to as “the reinsurers”).  In 2000, parts for the plant were damaged when the ship carrying them from Japan encountered a tropical storm.  The insurer denied Black & Veatch Corp.’s on the basis that losses stemming from “ocean transit” were not covered.  Black & Veatch Corp. sued and the insurer was held liable for $23 million by a Missouri jury.

While an appeal was pending, the insurer sought reimbursement for its expenses from the reinsurers.  The reinsurers rejected the claim on the basis that the insurer did not notify them of the claim in a timely manner.  The reinsurers filed a declaratory judgment action in England and the insurer filed a declaratory judgment action in Missouri.

In March 2010, the Missouri Supreme Court denied the insurer’s appeal from the jury’s decision.  The reinsurers moved to dismiss the declaratory action in federal court because their case was pending in the United Kingdom.  In April 2010, the United States District Court for the Western District of Missouri denied the reinsurers’ motion.  At the same time, the court denied the insurer’s motion for a preliminary injunction staying the case filed in England.  In July 2010, the insurer settled its claims against Assicurazioni Generali SpA.

On November 18, 2010, Continental Casualty Co. settled its claims against AXA Global Risks (UK) Ltd. and the declaratory judgment action was dismissed.  The settlement terms are confidential, but for the provision that each party will bear its own costs.

For a copy of the decision click here

Toni Frain and Dan Gerber

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Gerber.html

Texas Court Concludes Territorial Restrictions In Agency Agreement Unambiguous And Thus Breach Was Actionable

Texas All Risk General Agency, Inc. v. Apex Lloyds Ins. Co.  (Texas Court of Appeals, November 10, 2010)

The agent in this reinsurance coverage matter appealed from a trial court’s verdict in a non-jury trial which awarded the insurer, Apex, a judgment for breach of a general management agreement on the sale of policies within a specific geographic region.  Specifically, the agent claimed the court erred in its interpretation of the contract and without a showing of a breach of the territorial limitations, Apex was not allowed a recovery. 

The agency entered into a managing agreement with Apex, whereby the agency would sell insurance policies as a managing general agent of Apex.  The agreement contained a provision that restricted the percentage of policies that could be issued in certain counties.  Specifically, the agency was restricted from writing no more than ten percent of its policies with wind exposure in Harris County for a six month period from May 2007 to November 2007.  The agreement also required the agency to submit monthly reports to Apex relating to the location of where the policies were written.  After successive months of violating the terms of the restrictions Apex notified the agency of the breach and then terminated the agreement based on the continued breach.

The agent complained that the trial court erred in its interpretation of the territorial limitations by finding that the agency was in breach of the agreement.  The court held that the intent of the parties was that the agency was not to write more than ten percent of its policies in Harris County, and that the monthly reports were to determine compliance on a monthly basis.  Indeed, the agency’s computer software gave it the ability at all times to control where it wrote the policies.  Thus, the agreement was not ambiguous.  

Further the court held that the agreement was not “unreasonable, inequitable, or oppressive.”  Rather, it concluded that the trial court’s interpretation was reasonable in light of the other provisions of the agreement and the reinsurance agreement.  Specifically, if the agency were to have the entire six month period in which to determine its compliance, the purpose of the monthly and quarterly reports would be meaningless. Lastly, the court held that the subsequent performance by both parties pursuant to the agreement constituted an adequate consideration and therefore, the agreement was not illusory at the time of enforcement.

For a copy of the decision click here

Paul Steck and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

State Court Determined that Insolvency Fund is Not Responsible for Reinsurance Claim

Mass. Care Self-Ins. Group, Inc. v. Mass. Insurers Insolvency Fund (November 12, 2010)

This appeal involves the determination of what constitutes a covered claim under the Massachusetts Insurers Insolvency fund and whether a claim filed by workers’ compensation self-insurance group is covered.  The appellate court held that since plaintiff is a member of the insurance industry, claims filed by it are not a covered claim. 

First the appellate court determined what the purpose of the fund is and then it determined whether or not plaintiff can be considered a member of the insurance industry.  Finding that inclusion of insurance industry claimants in the fund would be against the purpose of the fund and that plaintiff does qualify as a member of the insurance industry, allowing it to file a claim would be inconsistent with the legislative purpose of the fund. 

Specifically, the Appellate Court held that the purpose of the fund is to benefit members of the public, individuals, and entities which are outside the insurance industry, from losses due to the insolvency of a member of that industry. 

As to whether plaintiff is a member of the insurance industry, the court held that membership in plaintiff’s program is an alternative to the purchase of traditional workers’ compensation insurance and by selling the same product; plaintiff competes with traditional insurers in the market for workers’ compensation coverage.  In addition, plaintiff provides its members with the same range of services traditionally provided by members of the insurance industry.  Plaintiff is also subject to all the provisions and regulations governing the conduct of insurers with respect to the payment of workers’ compensation benefits.

For a copy of the decision click here

Sarah Fang and Michael Glascott

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/MGlascott.html

Third Circuit Determined That Arbitrators Exceeded Authority by Rewriting Parties’ Contract; Award Vacated.

PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., No. 09-3963, 2010 U.S. App. LEXIS 23222 (3^rd Cir., Nov. 8, 2010).

The Third Circuit affirmed a District Court’s vacatur of an arbitration award on the grounds that the arbitrators, by granting unrequested relief and rewriting the parties’ contract, exceeded their authority. PMA Capital (“PMA”) is an insurance company and Platinum Underwriters (“Platinum”) is a reinsurance company. Platinum and PMA entered into a contract by which Platinum indemnified PMA for obligations arising from its insurance policies. The contract included a “deficit carry forward provision” that entitled Platinum to reimbursement for losses carried from one year to the next. A dispute arose concerning the scope of the carry forward provision. The parties submitted the matter to arbitration, requesting the arbitrators to interpret and apply the carry forward provision with respect to a specified time frame. The contract also included an “honorable engagement” provision allowing arbitrators to make an award effecting the general purpose of the contract in a reasonable manner rather than in accordance with a literal interpretation of the agreement.

The arbitrators granted PMA an award of $6,000,000 payable within thirty days, struck the carry forward provision from the contract, and extinguished all future rights or claims under the contract which require a deficit carry forward. PMA successfully petitioned for vacatur of the award.

The Court of Appeals, on review, determined the arbitration panel clearly exceeded its authority by striking from the contract the very provision that it was called on to implement. The parties had sought arbitration requesting the provision be interpreted and implemented with respect to a disputed carry forward amount over certain years. The Court determined, even considering that the honorable engagement clause allows the arbitrators to stray from judicial formalities, the award exceeded the panel’s authority and must be vacated.

For a copy of the decision click here

Patrick Omilian and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

Reinsurance dispute between a Swiss reinsurer and a Bermudian insurer permitted to proceed in the Courts of England under the Lugano Convention where the Policy was issued in the London markets and an action was pending against another participating reins

Gard Marine and Energy Ltd. v. Glacier Reinsurance AG, Civil Court of Appeal (London, England)

In a dispute over the proper jurisdiction to determine the calculation of benefits owed under an excess of loss reinsurance agreement, a suit was filed in the Courts of England by the insurer, Gard, a Bermudian Company.  The suit was filed against all non-settling participants in the reinsurance, including both a London domiciled reinsurer and a Swiss reinsurer.  The Swiss reinsurer, Glacier, had an action pending in Switzerland against Gard for the return of benefits it claimed it overpaid.  The claims were made after the primary insured company sustained losses in the Gulf of Mexico covered under the primary policy of $365 million as a result of Hurricaine Rita.

The primary insurance covered a company’s property and business interruption risks with a combined single limit of $400 million for any one accident in excess of a self insured retention.  The excess of loss reinsurance, in which Glacier participated at 5%, was issued by a London broker as part of a renewal of a London Market placement.

Gard had invoked the jurisdiction of the Courts of England under Article 6 of the Lugano Convention.  Although generally the Lugano Convention provides that a defendant must be sued in the country of its domicile, the convention further provides that a person domiciled in a participating country may also be sued where he is one of a number of defendants in the courts for the place where any one of them is domiciled.  English courts have held that this exception should be applied only where “it was expedient to hear and determine them together in order to avoid the risk of irreconcilable judgments resulting from separate proceedings.”

Gard contended that the Courts of England had proper jurisdiction as it had brought proceedings against a London domiciled participant in the excess of loss reinsurance and it was expedient to hear the claims together in order to avoid the risk of irreconcilable judgments.  Glacier contended that there was no such risk as its agreement for participation was governed by Swiss law and that there was no risk of irreconcilable judgments.

The English Court of Appeals held that English law applied to the reinsurance agreement.  The court further held that the contract’s closest connection was with England.  Accordingly, the court held that the dispute over the application of the reinsurance agreement is appropriately venued in England to avoid the risk of irreconcilable judgments and for the convenience and expedience of trying all claims in one jurisdiction.

For a copy of the decision click here

Bryan Richmond and Tom Segalla

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

Court Dismisses Two of Three Claims Involving Unpaid Brokerage Commission

Guy Carpenter & Company, LLC v. Lockton RE, LP (S.D.N.Y. November 4, 2010)

Guy Carpenter & Company, LLC (“Guy Carpenter”) is a reinsurance intermediary.  Lockton RE, LP and Lockton Insurance Agency, Inc. (collectively “Lockton”) is a competitor.  Two insurance companies were clients of Guy Carpenter and Guy Carpenter placed reinsurance contracts for them in exchange for a brokerage fee.  The parties agreed that the brokerage fee would be paid by allowing Guy Carpenter to retain a percentage of the quarterly premium payments its clients made to the reinsurers.  Eventually, the two insurers notified Guy Carpenter of their intent to use a different broker, Lockton.  This allegedly occurred when a particular broker left Guy Carpenter for new employment with Lockton. 

 Although the full commission was earned in June 2009 when the business was placed, the two insurers paid only a quarter of their premiums to Guy Carpenter and accordingly, only a portion of the brokerage fee they owed for the placement of those policies before the move to Lockton.  Guy Carpenter alleged that it was still owed over $1.5 million, and sued Lockton for conversion, tortious interference with contract and unjust enrichment.  Lockton moved to dismiss plaintiff’s claims for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure.

The United States District Court for the Southern District of New York denied Lockton’s motion to dismiss the first two causes of action, but granted Lockton’s motion with respect to the third.  With respect to plaintiff’s conversion claim, the court held that plaintiff identified a specific fund of money to which plaintiff claimed title.  In this regard, the brokerage fee was an identifiable chattel and was properly subject to a conversion claim.

With respect to plaintiff’s claim for tortious interference with contract, the court held that while the client relationship between plaintiff and the two insurers was terminable at will, the two insurers were not free to shirk their contractual obligation to pay Guy Carpenter its brokerage fee.  Plaintiff alleged that Lockton was fully aware of the insurers obligations to pay the brokerage fee, but refused to forward to plaintiff its portion of the premium payments when Lockton received the money from the two insurers.  This, combined with plaintiff’s allegation that it did not receive its full brokerage fee, was sufficient to state a claim for tortious interference with contract.

The court granted Lockton’s motion to dismiss plaintiff’s unjust enrichment claim, however.  The court held that New York courts do not allow unjust enrichment claims when there is a valid contract between the parties governing the subject matter at issue.  Here, plaintiff’s entitlement to the unpaid brokerage fee is governed by agreements between it and the two insurers.  Accordingly, the court held that the unjust enrichment claim is improper.

For a copy of the decision click here

Toni Frain and Michael Glascott

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/MGlascott.html

case provided courtesy of Lexis

Second Circuit Affirms Dismissal of Complaint Against Reinsurer

Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp.(2d Cir. (Conn.) October 8, 2010) 

Plaintiff’s predecessor, Royal Surplus Lines Insurance Company (“Royal Surplus”) entered into an agreement pursuant to which it assumed the liabilities and acquired the related assets of Connecticut Specialty Insurance’s Company (“Connecticut Specialty”) covered business as of December 31, 2001.  From February 1, 1999 until May 16, 2000, Employers Reinsurance Company (“Employers Reinsurance”) reinsured a class of policies Connecticut Specialty issued, including one to Equity Residential (“Equity”) that went into effect on December 15, 1999 (“Equity Policy”).

Equity filed a complaint alleging claims for RICO, breach of fiduciary duty, fraud and conspiracy arising out of its purchase of insurance from Connecticut Specialty.  In an amended complaint, Equity asserted claims for declaratory judgment, breach of contract and reformation of contract against Royal Surplus for losses occurring between December 15, 2000 and December 15, 2002.  Plaintiff paid Equity the sum of $4,100,000 to settle those claims and incurred $2,609,325.55 in claim expense.  Plaintiff sought reimbursement from Employers Reinsurance’s successor, Westport Insurance Corporation (“Westport”) for the settlement payment to Equity and claim expense in connection with losses occurring between December 15, 2000 and December 15, 2002.

Westport moved to dismiss plaintiff’s complaint, arguing that it was only liable to indemnify plaintiff for losses occurring in the first year of the Equity Policy and has no liability for losses occurring after December 15, 2000. The United States District Court for the District of Connecticut granted Westport’s motion, holding that the scope of the reinsurance agreement was limited to policies becoming effective on or after the effective date of the reinsurance agreement as a result of occurrences taking place prior to the reinsurance agreement’s termination date.  The reinsurance agreement stated that a policy issued for more than one year was considered as “becoming effective” at each anniversary date of the policy, limiting the coverage period to a year at a time, regardless of the length of the underlying insurance contract.  Accordingly, Westport had no liability for losses occurring after the anniversary date of the Equity Policy, December 15, 2000. 

On October 8, 2010, the United States Court of Appeals for the Second Circuit affirmed.  The court held that the reinsurance agreement’s “follow the fortunes” provisions apply only to matters falling under the reinsurance agreement.  The additional periods of insurance coverage under the Equity Policy fall outside the reinsurance agreement’s time limitations and are not subject to the “follow the fortunes” provisions because such provisions cannot expand the express limits of coverage imposed by a reinsurance agreement.  The court held that the reinsurance agreement expressly limited Westport’s reinsurance liability for multiple-year insurance policies.  The court noted that Arrowood pointed to nothing indicating the parties intended that limitation not to apply to one-year policies which, through modifications by the reinsured, result in coverage for multiple years.

For a copy of the decision click here

Toni Frain and Jeffrey Kingsley

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Kingsley.html

case provided courtesy of lexis

State Court Applies "Follow-the-Fortunes" Doctrine in Reinsurance/Asbestos Dispute

USF&G v. American Reinsurance

(New York Supreme Court, New York County  August 20, 2010)

 

In USF&G v. American Reinsurance, a New York trial court analyzed the "follow the settlement" doctrine and determined that American Reinsurance was required to reimbursed the cedent, USF&G, for $262,000 plus interest.

 

USF&G insured Western Asbestos from 1948 to 1960.  At some point, Western Asbestos became insolvent and was purchased by MacArthur Company, which formed Western MacArthur as a result.  In the late 1970's, Western MacArthur was sued by numerous claimants for asbestos-related injuries and sought coverage under its predecessor's policies. USF&G resisted coverage for the asbestos claims, both on the basis that it did not insure Western MacArthur and that its policies had been lost and had not been demonstrated to have products liability insurance.  After 10 years in litigation and after it was essentially determined that USF&G would loose its coverage case, it settled the coverage action.  As part of the settlement, it funded a trust to pay future claims, the amount of which was based upon estimates for certain injuries.  It sought to collect the reinsured portions of the settlements from its reinsurers.

 

American Reinsurance resisted, asserting:  (1) that it did not owe for losses less than $100,000; (2)  that it did not owe for exposures after 1960; and (3) that since USF&G's underlying policies limited losses to $200,000 per occurrence, it did not owe more than $100,000 per claim ($200,000 limit - $100,000 retention).

 

The court held that the reinsurer was required to "follow the settlement," unless the settlement was undertaken in bad faith or with no legal obligation to pay.  The reinsurer did not allege bad faith or assert that USF&G had no obligation to pay.  Rather, it sought court review of each and every payment to each and every claimant to determine if its reinsurance obligations were triggered. 

 

Noting that the purpose of the "follow the fortunes" doctrine was to avoid relitigating settlement of underlying claims, the court held that "where the cedent's good faith payment is at least arguably within the scope of the policy," the reinsurer was obligated to reimburse the cedent.  Since the reinsurer sought to re-examine covered claims, the court granted summary judgment against it and ordered it to reimburse its cedent according to the terms of the reinsurance treaty.

 

For a copy of the decision click here

 

Sarah Delaney and Tom Segalla

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Segalla.html

District Court Declares That Concurrent Lawsuits Between Two Insurers Regarding Enforceability of a Reinsurance Agreement Does Not Present “Extraordinary” Circumstances To Stay Federal Court From Exercising Jurisdiction.

Guaranteed Trust Life Ins. Co. v. American Medical and Life Ins. Co., 2010 U.S.Dist. LEXIS 96382 (N.D. Ill., September 15, 2010)

In 2006, Guarantee Life Insurance Company ("Guarantee"), an Illinois mutual insurance company and American Medical and Life Insurance Company ("American"), a New York insurance company, entered into an agreement whereby American would sell insurance on Guarantee’s policy forms in states where American was not authorized to sell policies. The parties negotiated a reinsurance agreement under which Guarantee Life would reinsure policies sold by American in 30 states (the "2006 Agreement"). The 2006 Agreement was never executed. Guarantee filed an action in the Illinois state court seeking a declaration that the 2006 Agreement was null and void and in the alternative, seeking rescission of the 2006 Agreement.

The parties nonetheless continued to do business together. In 2008, the parties entered into a Reinsurance Agreement (the "2008 agreement") under which American sold policies on Guarantee’s policy forms, American agreed to reinsure 40% of the liability under the policies it sold on Guarantee’s forms, and Guarantee ceded premiums to American. The 2008 Agreement contained a provision that allowed each side to offset any amounts it owed to the other based on amounts the other owed it, including amounts owed under any other agreement. Things went awry between the parties. Guarantee asserts American failed to pay its share of claims and American claims it was justified in offsetting amounts owed to American from Guarantee under the 2006 Agreement. Guarantee filed suit in federal court for breach of the 2008 Agreement, alleging that the 2006 Agreement was neither valid nor enforceable.

American filed a motion to dismiss, asking the federal court to abstain from hearing the case based on the pending action filed in state court by Guarantee relating to the 2006 Agreement. The court denied the motion, relying upon the Supreme Court’s admonition in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976), that federal courts have a "virtually unflagging obligation" to exercise jurisdiction even where a state suit is already pending on the same matter. Only the "clearest justification" will warrant dismissal.

In considering whether to abstain, the court first determined whether the matters were parallel. Because the issue involved in the state court, whether the 2006 Agreement was unenforceable, was an element of the federal action, the two actions were "parallel", potentially subject to abstention. Next, the court considered ten criteria which must be balanced in determining whether abstention is justified:

(1) whether the state has assumed jurisdiction over property; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained in the concurrent forums; (5) the source of governing law; (6) the adequacy of state-court action to protect the federal plaintiff's rights; (7) the relative progress of state and federal proceedings; (8) the presence or absence of concurrent jurisdiction; (9) the availability of removal; and (10) the vexation or contrived nature of the federal claim.

The court also noted the general presumption against abstention. In considering and balancing the ten factors, the court determined abstention was inappropriate, explaining that there was no extraordinary reason or clear justification for abstaining in this case. "In this case, the federal case was filed second, but that will be true perhaps 50% of the time when a federal and a state court are exercising contemporaneous, concurrent jurisdiction. Something that happens 50% of the time is not extraordinary. It is just as convenient to litigate the case here as it is to litigate in the state court, which is located a few blocks away."

Finally, the court assumed that the parties would seek to take advantage of the preclusive effect of a judgment in the state action should it conclude first, and noted, "this is an expensive place to litigate, and the loser is subjecting itself to the winning party's costs pursuant to Rule 54(d) of the Federal Rules of Civil Procedure."

The court’s decision not to abstain from exercising jurisdiction over a matter which was subject to a parallel state action illustrates that a court will not abstain from exercising jurisdiction solely for matters of convenience or cost, but rather, there was be a truly "extraordinary" reason for abstaining.

For a copy of the decision here

Patrick Omilian and Anthony Golowski

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Golowski.html

case published courtesy of Lexis

District Court Rules Against Abstention Of Federal Claims In Parallel Filings Of Reinsurance Declaratory Judgment Actions

Seaton Ins. Co. v. Clearwater Ins Co.

(United States District Court, District of Rhode Island, September 2, 2010)

 

The issue in this reinsurance matter was whether abstention of the pending federal case was appropriate given a related, but first-filed state case had been stayed in Connecticut Superior Court.  Specifically, Clearwater filed a declaratory judgment action against plaintiffs in Connecticut state court arguing no coverage for losses Seaton incurred involving certain asbestos-related claims under two reinsurance agreements. Thereafter, Seaton filed a complaint in federal court on the basis of diversity jurisdiction seeking monetary relief and a declaration involving the same two reinsurance contracts, but also raising claims under eleven additional contracts between the parties.  Clearwater moved to dismiss or stay the federal matter arguing abstention under the well-settled federal precedent and the magistrate issued a Report and Recommendation denying Clearwater’s motion for abstention. 

 

In affirming the magistrate’s decision, the district court reviewed the case de novo and conducted a detailed analysis on the appropriate standard to apply in evaluating the abstention issue, based on Colorado River Water Conservation Dist. v . United States, 424 US 800 (1976) and Wilton v. Seven Falls Co., 515 US 277 (1995).  In acknowledging that it could not show “exceptional circumstances” under Colorado River, Clearwater argued that the more lenient abstention standard in Wilton applied here, and that the magistrate erred in not invoking his discretion under Wilton.  In analyzing the issue the district court acknowledged the Wilton standard, which allows for a more lenient abstention standard is commonly applied in declaratory claims as opposed to the “so-called ‘coercive’ claims” seeking damages or injunctive relief which fall under Colorado River. 

 

However, without specifically ruling on this issue, even applying the more lenient discretionary standard of Wilton, the court found that Clearwater failed to establish that abstention was warranted.  Specifically, the district court concluded that when the five Wilton factors were applied, the balance of the factors “leaned away from abstention.”  The court noted that federal claims are more comprehensive due to the additional contracts at issue and because the damages claims are absent from the state case.  Thus, the state court would not be able to dispose of all claims, which weighed heavily against abstention.  Also, it was concluded that there was no prejudice to either party in litigating the matter in federal court.  Likewise, there were no common factual issues that could be determined by the state court because each claim turned on a legal determination of coverage.  Lastly, the state court did not present any advantage over the federal court or demonstrate a greater interest in resolving the claim in Connecticut, and there were no identifiable conflicts of interest.

 

In light of the foregoing the district court concluded that the circumstances tilted toward maintaining jurisdiction, and thus affirmed the magistrate’s order denying Clearwater’s motions to dismiss or stay the proceedings.

 

For a copy of the decision click here

Paul Steck and Rich Cohen 

 

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Cohen.html