LeBoeuf, Lamb, Greene & MacRae attorneys provide an overview of reinsurance trends over the course of 2001.
(1) Motions to compel
Cases last year involving motions to compel arbitration reinforced the courts' strong preference for arbitration. In Security Life Insurance Co of America v Hannover Life Reassurance Co of America, Civil No. 00-2328 (D. Minn. March 28, 2001), a Minnesota federal court agreed with a reinsurer that a contract containing a broad arbitration clause compelled the parties to arbitrate their dispute rather than resort to the courts. The court dismissed the cedant's suit and stayed the litigation pending arbitration.
The arbitration clause provided that "[a]rbitration is the sole remedy for disputes arising under this Agreement." The contract also included a service-of-suit clause, which provided that in the event of a dispute the reinsurer would agree to submit to the jurisdiction of a US court. The dispute arose when, pursuant to an assignment, the cedant demanded indemnification from the reinsurer's successor-in-interest. The cedant commenced litigation and the court was called upon to reconcile the arbitration and service-of-suit clauses.
The court interpreted the broad arbitration clause as a manifestation of the parties' agreement to arbitrate all disputes arising out of the contract. It rejected the cedant's claim that the service-of-suit clause was a modification of the arbitration clause. The court noted the majority view that service-of-suit clauses do not modify an agreement by the parties to arbitrate. The court therefore held that the service-of-suit clause provided access to the courts in limited instances, i.e. only as a means to compel arbitration or enforce an arbitration award.
In Kwelm v Public Service Mutual Insurance Co, No. 97-8886-A (Bankr. S.D.N.Y. April 18, 2001), a New York bankruptcy court granted cedants' motion to compel arbitration in the UK with their reinsurer even though cedants had demanded and moved to compel arbitration more than two years after commencing litigation against the reinsurer in the US. The cedants were a group of UK insurance companies that had been placed under a scheme of arrangement in England and Bermuda. In August 1997, cedants commenced proceedings against the reinsurer under section 304 of the Bankruptcy Code. Over the next two years, the parties engaged in discovery and several motions over discovery disputes. No substantive motions were made, nor were the proceedings placed on the court's trial calendar. Neither party had taken or scheduled depositions.
In December 1999, cedants demanded arbitration and moved the court under the Federal Arbitration Act to compel arbitration and stay the litigation. In opposition, the reinsurer contended that cedants had waived the right to arbitrate both explicitly (in an October 1996 letter from counsel threatening litigation if the claims were not paid or resolved by commutation) and implicitly (by litigating the action in the bankruptcy court for more than two years).
The court balanced the reinsurer's contentions of express and implicit waiver against the strong federal policy favouring arbitration, particularly in the context of international transactions. The court acknowledged that the Supreme Court had declared that any doubts concerning a defence to arbitrability such as waiver should be resolved in favour of arbitration.
The court also noted that, in the Second Circuit, it is well-settled that merely filing a lawsuit does not constitute an express waiver of the right to arbitrate. Therefore, the court concluded, a mere threat of litigation cannot be an express waiver of the right to arbitration.
In rejecting the reinsurer's implicit waiver contention, the court stated that to waive its right to arbitrate, a party must have engaged in protracted litigation, the abandonment of which results in prejudice to the opposing party.
The court concluded that the reinsurer had not been prejudiced because:
(1) the reinsurer had retained the outstanding balance due under the reinsurance contracts while the action was pending;
(2) there had been no litigation of substantive issues; and
(3) there had been only limited discovery which included no dispositions.
Even where an arbitration clause is present, however, not all disputes are subject to arbitration. For example, in Sphere Drake Insurance Ltd v All American Insurance Co, 256 F.3d 587 (7th Cir 2001), a federal appeals court held that the question of whether a valid arbitration contract existed in the first instance is an issue for the court to decide. In so holding, the court joined the majority of courts that have ruled on this issue.
In Sphere Drake, the reinsurer's agent had actual authority to represent the reinsurer, but had an annual risk limit. According to the reinsurer, the agent exceeded that limit when it agreed to reinsure the cedant's policies. The reinsurer sought to resolve the issue of its agent's authority before the federal court. The cedant demanded arbitration. The court stated that the issue that had to be resolved was whether the agent was acting on authority from the reinsurer, because if the agent was not, then no contract (and therefore no arbitration clause) came into existence. The court reasoned that as arbitration depends on a valid contract, the argument that a valid contract does not exist cannot be logically resolved by the arbitrator. The appellate court therefore remanded the case to the district court to determine the extent of the agent's authority and whether a contract binding upon the reviewer had been created.
Sphere Drake is consistent with the preponderance of cases declaring that courts typically hear challenges to whether a binding agreement to arbitrate has been reached. [See also Bank of Am, NA v Diamond State Ins Co, 2001 US Dist. LEXIS 13751 (S.D.N.Y. 2001); General & Cologne Life Re of Am v Clarendon Nat Ins Co, No. 604614/00 (Sup. Ct., N.Y. County July 24, 2001)].
(2) Pre-hearing security
Cases decided last year reflect that courts will continue to enforce statutes requiring parties to post security as a condition to participation in court proceedings. For example, in International Insurance Co v Caja Nacional de Ahorro y Seguro, No. 00 C 6703, 2001 U.S. Dist. LEXIS 3465 (N.D. Ill. Mar. 23, 2001), the court held that an Argentinean reinsurer was required by state law to post security before filing a challenge to an arbitration award. The reinsurer objected to posting security because it was an instrumentality of a foreign government and therefore exempted from posting security under the Foreign Sovereign Immunities Act (FSIA). In ruling in favour of the cedant, the court noted that the FSIA specifically states that it is "subject to existing international agreements," and that the Convention on the Recognition and Enforcement of Foreign Arbitration Awards (`New York Convention') was an existing international agreement at the time FSIA was enacted. The court also stated that under the New York Convention, a court was allowed to order a party to give suitable security if an application for setting aside the award has been made. The court therefore concluded that the Argentinean reinsurer was not immune from posting security under state insurance law. The reinsurer was ordered to post security in the amount of the award against it as a condition precedent to filing a new answer.
Courts last year also continued to defer to arbitrators' awards directing that security be posted. In the case In re Arbitration Between Cragwood Managers, LLC and Reliance Insurance Co, 132 F. Supp. 2d 285 (S.D.N.Y. 2001), a New York federal court confirmed an arbitration panel's interim award of security against the manager of the failed Unicover Pool in spite of the manager's claim that it did not have the funds to post security. Noting that arbitration awards are subject to very limited review, the court rejected as conjecture the manager's claim of potential bankruptcy. Indeed, the court identified a number of cases where courts had confirmed sizable interim security awards even in the face of arguments that the awards could not be met and that a default would result.
Cases decided last year continue to demonstrate the courts' general reluctance to overturn arbitration awards. For example, in Federated Rural Electric Insurance Exchange v Nationwide 7 Mutual Insurance Co, 134 F. Supp. 2d 923 (S.D. Ohio 2001), the reinsurer sought, four years after receiving an unfavourable arbitration award, to reopen that award based on new case law. The reinsurer notified the cedant that it believed a recent decision of a state appellate court demonstrated that the arbitrators had misinterpreted applicable state law on loss allocation. The reinsurer claimed that the new appellate decision was based on principles of law that predated the 1996 arbitration and, therefore, the 1996 arbitration award was in manifest disregard of the law. The reinsurer demanded that the cedant return the amount paid based on the 1996 award, and the cedant refused. The reinsurer then demanded arbitration over repayment of the 1996 award. The cedant, in turn, sought to enjoin the reinsurer from re-arbitrating the 1996 award.
The reinsurer claimed it was arbitrating the interpretation of the "final and binding language" of the reinsurance agreements. The court, however, in rejecting the reinsurer's petition considered the reinsurer's argument to be "in reality, a thinly disguised effort by [the reinsurer] to re-arbitrate, in effect appeal, the 1996 award." The court stated that if the reinsurer's argument were accepted it would render meaningless the provision of an arbitration agreement, which says that arbitration awards shall be final and binding.
The court also rejected the reinsurer's contention that the new case law should be applied. The court noted that the panel had not rendered "a baseless opinion that flew in the face of clearly established principles." Finally, the court noted that the reinsurer's failure to challenge the award within the three-month period allowed by the Federal Arbitration Act precluded the subsequent challenges. This case highlights not only the difficulty in persuading a court that an arbitration award should be overturned based on manifest disregard of the law, but also the dangers of failing to seek relief from an arbitration award within the time allotted by law.
Even when a court has jurisdiction over all the parties and the subject matter of the dispute, it may decline to hear the matter on the ground that it would more appropriately be heard in another venue. In Travelers Casualty & Surety Co v Philadelphia Reinsurance Corp, Case No. 3:01- CV-7058, 2001 US Dist. LEXIS 10913 (N.D. Ohio, May 10, 2001), an Ohio federal court granted a reinsurer's motion for change of venue from Ohio federal court to Connecticut federal court. The dispute arose out of asbestos personal injury claims on policies issued to Owens Corning Fiberglass (OCF), headquartered in Toledo, Ohio. When the reinsurer denied the cedant's demands for payment of the asbestos claims under certain reinsurance certificates, the cedant commenced an action in Ohio.
The reinsurer moved for change of venue to Connecticut federal court where the cedant had its principal office. In ruling on the motion, the Ohio court considered the following factors:
(1) convenience of the parties;
(2) convenience of the witnesses;
(3) the interests of justice; and
(4) whether the action might have been brought in the district to which the movant requested a transfer.
The court concluded that the reinsurer had demonstrated inconvenience based upon the fact that:
(1) the cedant's principal place of business was in Connecticut;
(2) many of the key witnesses and relevant documents were also in Connecticut; and
(3) the reinsurer was headquartered in Philadelphia, which is closer to Connecticut than to Ohio.
Cases decided last year reflect the courts' willingness to enforce document subpoenas issued by arbitration panels. In Riunione Di Sicurta, SPA v United National Insurance Co, No. 01-MC-72 (E.D. Pa. September 20, 2001), a reinsurer commenced arbitration seeking rescission against a cedant group claiming that the cedant made misrepresentations and failed to disclose information prior to the reinsurer's decision to reinsure the risk. An Italian insurer, with its principal place of business in the UK and a branch office in New York, was not a party to the arbitration but held relevant documents.
At the reinsurer's request, the arbitrators issued a subpoena duces tecum compelling the Italian insurer to produce the documents. The Italian insurer refused to produce the documents, arguing that the requests were overly broad, that the request for discovery from a foreign party violated the Hague Evidence Convention and the Protection of Trading Interests Act of 1990, and that the reinsurer was engaging in pre-action discovery by attempting to procure documents from the Italian insurer.
The reinsurer agreed to limit its request for documents and to reimburse the Italian insurer for costs, and an outside reinsurance consulting firm found that the modified request was not unduly burdensome. For these reasons, the court rejected the claim that the request was overly broad. The court then found that it had personal jurisdiction over the Italian insurer because it was licensed in Pennsylvania. When a court has personal jurisdiction, the court further reasoned, the Hague Evidence Convention is not necessarily applicable. The court also found that the Italian insurer had not alleged or offered sufficient evidence to warrant relief under the Protection of Trading Interests Act of 1990. Because the Italian insurer provided insufficient evidence to support its claim that the subpoena was part of a pre-action discovery attempt, the court also found this argument merit less.
In an important decision concerning the aggregation of losses, New York's highest court last year held that aggregation of numerous environmental injury claims as a single "disaster and/or casualty" was improper under the reinsurance treaties at issue. (Travelers Casualty & Surety Co v Certain Underwriters at Lloyd's of London, 96 N.Y.2d 583 (2001)). Although the decision is expressly limited to the facts of the case and to the terms of the contracts at issue, it will likely have wider implications for similar cases involving aggregation of claims, including disputes under insurance and reinsurance contracts covering World Trade Center losses.
Travelers involved the settlement of two large groups of environmental claims brought against two insureds. In both cases, the cedant settled the claims, which spanned several decades and covered multiple sites in multiple geographic areas, by allocating the sites as separate occurrences under its underlying insurance policies. After ceding the losses to facultative reinsurers, the cedant sought to treat each settlement as a single "disaster and/or casualty" under the terms of the applicable excess of loss reinsurance treaties. The definition of loss in the treaties provided that a "disaster and/or casualty" included all loss "resulting from a series of accidents, occurrences and/or causative incidents having a common origin and/or being traceable to the same act ... shall be considered as having resulted from a single accident ...."
In affirming the decision of the lower courts that the cedant's allocation did not fall within the terms of the treaties, the court rejected the cedant's argument that each insured's deficient waste disposal practice was the common origin upon which the aggregation of losses could be based. In rejecting this argument, the court noted that the words "common origin" and "traceable to" used to define "disaster and/or casualty" were modified by "series" which meant that the losses had to bear some spatial or temporal relationship to one another and a common cause. The court held that since there was no evidence showing such a relationship, the reinsurers were entitled to summary judgment dismissing the cedant's claims against them. In so holding, the court rejected the cedant's contention that the reinsurers were bound to accept the allocations under the `follow-the-fortunes doctrine'. The court stated that the follow-the-fortunes doctrine does not supplant the definition of `disaster and/or casualty' in the treaties. The court also noted that decisions upholding claims under the follow-the-fortunes doctrine involved challenges to the cedant's decisions to settle under the terms of the underlying policies and not, as here, to the cedant's allocation of settlements under the reinsurance treaties.
The question of subject matter jurisdiction in a reinsurance dispute was explored in Carlson Holdings Inc v NAFCO Insurance Co, No. 00-2080 RHK/JMM, 2001 US Dist. LEXIS 9563(D. Minn. January 12, 2001). In NAFCO, the insured brought an action against its insurers and the insurers' reinsurers seeking to recover millions of dollars spent on avoiding Y2K losses. In dismissing the reinsurers from the suit, the court found that it could not exercise jurisdiction over them because there was no legal relationship between the parties and therefore no justiciable controversy between them. Under Article III of the United States Constitution, a federal court may not hear a matter in the absence of a justiciable controversy.
Generally speaking, the absence of a contractual relationship between insureds and reinsurers renders litigation between them subject to dismissal for lack of a justiciable controversy. Courts, however, may find subject matter jurisdiction over claims by an insured against a reinsurer where the insured alleges that the reinsurer is merely the alter ego of an insurer that issued a policy to the insured. (See, e.g. ITT Indus v Zurich Insurance Co, B140234, 2001 Cal. LEXIS 4678 (Cal. Ct. App. 2nd Dist, April 4, 2001)).
Last year courts continued to reject attempts to consolidate reinsurance disputes. In Sphere Drake Insurance Ltd v All America Life Insurance Co, No. 99 C 4573, 2001 U.S. Dist. LEXIS 13917 (N.D. Ill. August 30, 2001), an Illinois federal court was asked to consolidate three reinsurance disputes. Two of the cases concerned the same retrocessional contract, but the third case involved other reinsurance treaties. The parties agreed to consolidate the first two cases, but the reinsurer opposed consolidation of the third case. In denying the motion to consolidate the third case, the court noted the similarity of the cases, but ruled that the issue in the third case (confirming or vacating an arbitration award) had to be resolved before any of the similar issues needed to be reached. The court held that because the first two cases required discovery and the third case could be resolved on the papers, consolidation would not save time and could prevent the prompt determination of the third case.
Where a cedant sought to compel a reinsurer to participate in three separate arbitrations, a New York federal court rejected the reinsurer's request for consolidation. [In the Matter of the Arbitration Between Clarendon Nat Ins Co and John Hancock Life Ins Co, No. 00 Civ. 9222 (LMM), 2001 U.S. Dist. LEXIS 13736 (S.D.N.Y. September 6, 2001)]. The court noted the Second Circuit's general rule that the Federal Arbitration Act does not empower the district court to consolidate arbitrations absent contractual language authorizing consolidation. Thus, held the court, the parties must arbitrate each treaty separately, regardless of how repetitive this may be. There have been a number of so-called `consolidation' cases recently. The decisions in these cases turn on the fine distinctions between the language of the arbitration provisions in the contracts and whether those provisions demonstrate an intent by the parties to agree to consolidation of multiple disputes.
Unicover-related disputes continue to yield decisions, albeit slowly. In Reliance Insurance Co v Unicover Managers Inc, No. 00 Civ. 0791 (LLS) (S.D.N.Y. January 4, 2001), one of the corporate officers of Unicover, sued in his individual capacity for fraud and breach of fiduciary duty, sought to dismiss the claims against him. The federal court, in denying the motion to dismiss, rejected the officer's claim that he could not be held liable for tortious actions taken on behalf of the corporation. After finding that a corporate officer can be held personally liable for acts undertaken on behalf of the corporation under New York law, the court held that plaintiffs had adequately stated a claim against the officer for fraudulent concealment. This decision is especially relevant to companies that have claims against underwriting managers for specific acts causing harm. For underwriting managers, the lesson appears to be that operating in corporate form is no guarantee that personal liability will be avoided for acts undertaken on behalf of the corporation.
In AIU Insurance Co v Unicover Managers Inc, 282 A.D.2d 260 (1st Dept. 2001), a New York intermediate appellate court affirmed an order granting summary judgment dismissing a cedant's declaratory judgment action seeking to bind a reinsurer to a contract signed by an MGU. The cedant claimed that because the MGU signed the slip confirming the reinsurance placement, the reinsurer was bound. In affirming the dismissal of the complaint, the appellate court found as a matter of law that the parties' correspondence and course of dealings, as shown by contemporaneous documents, established that the parties did not intend for the reinsurance to become bound until the slips were signed by the reinsurer and returned to the cedant or its agent. The court noted that any inference that might otherwise have been drawn that the MGU had actual or apparent authority or that the reinsurer ratified the binding of the reinsurance by the MGU was negated by undisputed evidence of the cedant's persistent efforts to obtain slips signed by the reinsurer before any premiums would be paid.
In Cologne Life Reinsurance Co v Zurich Reinsurance (North America) Inc, 286 A.D.2d 118 (1st Dept. 2001), an appellate court converted a proceeding to stay arbitration to a declaratory judgment action. The Unicover pool advised a cedant to the pool that its contract was void because the MGU lacked authority to enter into the contract. The cedant demanded arbitration and the pool brought a proceeding to stay arbitration. Meanwhile, after a judgment on the stay application holding that there was no valid contract, the cedant commenced an action in another state and withdrew its arbitration demand. On appeal of the judgment on the stay application, the appellate court upheld the judgment finding that there was no valid contract, but remanded the matter for trial on whether there had been a ratification of the contract by the pool.
In J. Lee Covington III v UMC Ltd, No. 01AP-213, 2001 Ohio App. LEXIS 3929 (September 6, 2001), the Court of Appeals of Ohio held that reinsurance claims do not have lower priority status than direct insurance policy claims in the distribution of the assets of an insolvent insurer.
An insolvent reinsurer's predecessor had issued several reinsurance contracts to clients of the claimant. The claimant filed its proof of claim as a class 2 creditor under Ohio's liquidation priority statute.
The Ohio liquidator issued a claim determination assigning the claimant as a class 5 general creditor. The Liquidation Court confirmed the liquidator's determination, but the Court of Appeals disagreed. In reaching its decision, the court found that Ohio's liquidation priority statute was not ambiguous and that class 2 priority included all claims under insurance policies, including reinsurance. The court also relied on the Rehabilitation and Liquidation Model Act (`Model Act'), which had served as a basis for Ohio's liquidation priority statute. The court found that the omission of the exclusionary language for reinsurance from the Model Act was evidence of the Ohio legislature's intent to include reinsurance in the same priority category as policyholders. The Ohio Supreme Court has taken this case on appeal.
Larry P Schiffer et al
The Reinsurance Newsletter, compiled by LeBoeuf, Lamb, Greene & MacRae LLP, is edited by Larry P Schiffer, a partner in LeBoeuf's New York office. He can be contacted on: +1 (212) 424-8086.