1. MARCH 2014
This newsletter provides only
general information and should
not be relied upon as legal
advice. This newsletter may be
considered attorney
advertising under court and bar
rules in certain jurisdictions.
IN THIS ISSUE
NEWSLETTER
REINSURANCE NEWSLETTER
RECENT CASE SUMMARIES
NEW YORK FEDERAL COURT CONFIRMS “CONCEPTUAL”
ARBITRATION AWARD AS A FINAL JUDGMENT
R&Q Reinsurance Co. v. Utica Mut. Ins. Co., No. 13 Civ. 8013 (PAE), 2014
U.S. Dist. LEXIS 19040 (S.D.N.Y. Feb. 14, 2014).
Recent Case Summaries
Recent Regulatory
Developments
A Brief Review of Reinsurance
Trends in 2013
Recent Speeches and
Publications
EDITOR
Larry P. Schiffer
ABU DHABI
ANCHORAGE
DALLAS
DENVER
DOHA
DUBAI
NEW JERSEY
NEW YORK
RIYADH
WASHINGTON DC
PattonBoggs.com
A New York federal court confirmed an arbitration award as a final judgment
and rejected the cedent’ argument that the award was an interim award in an
arbitration that never reached completion. The case arises out of asbestos losses
ceded to nine facultative certificates covering the cedent’s umbrella policies
issued to an asbestos-defendant insured.
The arbitration proceeded under an arbitration protocol that specifically
indicated that a reasoned award was not required. After hearing, the panel issued
a “Final Order” that set out the panel’s findings, including a holding that the
facultative certificates did not cover defense costs, orphan shares, or declaratory
judgment expenses, and that future billings should conform to the Final Order
and the certificates. The Final Order did not calculate the specific amounts that
were owed by the reinsurer. The cedent sought reconsideration twice, which the
panel essentially rejected other than to say that all other requests for further relief
were denied.
In confirming the award, the court found that there was no material issue of fact
that would preclude confirmation. It rejected the cedent’s argument that the
award was not final because it failed to specify the exact amount the reinsurer
owed to the cedent. The court found that there was more than the required
barely colorable justification for the outcome reached.
The court noted that for better or worse, the parties asked the arbitrators to
resolve the dispute on a conceptual basis, not on an exact mathematical level.
Neither side in their proposed awards supplied the panel with data to determine
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2. the precise amount the reinsurer would owe under the various award scenarios. Essentially, the parties had to take the
panel’s findings and apply them to the billings now and in the future based on the framework provided. The court
stated that the parties pursued the arbitration in a manner that made it impossible for the panel to calculate the exact
amount owed and the cedent did not either stipulate to facts or present evidence necessary for the panel to make such
a calculation. That did not make the award any less final, held the court.
TENNESSEE FEDERAL COURT HALTS ARBITRATION OF PROTECTED CELL REINSURANCE
AGREEMENT
Milan Express Co. v. Applied Underwriters Captive Risk Assur. Co., No. 13-1069, 2014 U.S. Dist. LEXIS 8317
(W.D. Tenn. Jan. 23, 2014).
In one of the first cases involving a protected cell company in a reinsurance agreement, a Tennessee federal court
upheld a magistrate judge’s order stopping arbitration because governing state law barred arbitration of contracts
“concerning or relating to an insurance policy.” The case involved an insured’s attempts to contest fees demanded by
its reinsurer, who maintained a segregated “protected cell” from which a portion of the insured’s worker’s
compensation benefits would be paid. The insured and the reinsurer had entered into a three-year “Reinsurance
Participation Agreement,” which allowed the insured to capitalize the segregated cell account and “share in the benefit
of good loss experience at the risk of bearing the cost of unfavorable loss experience.” The Reinsurance Participation
Agreement was an adjunct to a reinsurance treaty between the insured’s direct insurers and the reinsurers. When fees
charged to the insured to capitalize the protected cell sharply increased, the insured stopped paying premiums, and the
reinsurer demanded arbitration. After more than a year of informal negotiations, the reinsurer’s efforts to open
arbitration in Chicago, and the insured’s request to stay arbitration and mediate, the insured sued in federal court.
In the Reinsurance Participation Agreement, the parties agreed to “resolve any disputes arising under [the agreement]
without resort to litigation.” As such, the parties were compelled to initiate informal dispute resolution prior to
demanding binding arbitration under American Arbitration Association rules. Any litigation that did arise under the
agreement was to be resolved under Nebraska law and in the state and federal courts of Nebraska. When the insured
sued in federal court, the reinsurer moved to compel arbitration and/or transfer the action to Nebraska. The court
denied both motions, concluding that the arbitration clause in the Reinsurance Participation Agreement was void and
unenforceable. The court found that Nebraska law renders any arbitration agreement “‘valid [and] enforceable,’ Neb.
Rev. Stat. § 25-2602.01(b), except when that written contract is ‘an agreement concerning or relating to an insurance
policy other than a contract between insurance companies including a reinsurance contract,’ Neb. Rev. Stat. § 252602.01(f)(4).” Although the reinsurer argued that the Reinsurance Participation Agreement was clearly, by its own
terms, a “reinsurance contract” and thus subject to arbitration, the court found that the reinsurance exception applied
only to contracts “between insurance companies.” Because the insured was not an insurance company, the litigation
amounted to a basic insurance dispute that could not be arbitrated. Moreover, because the reinsurance contract was
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3. part of a network of agreements that provided the insured with direct worker’s compensation insurance, the dispute
“‘relate[d] to’ an insurance policy” under the Nebraska statute, and thus the arbitration provision was unenforceable.
The court further concluded that the insured’s early efforts at dispute resolution and mediation did not constitute a
waiver of its rights to later challenge arbitration.
In considering whether to transfer the case, the court rejected arguments that the contract’s forum selection clause—
which mandated litigation in Nebraska—should govern the analysis. The court instead considered the federal transfer
statute, 28 U.S.C. § 1404(a), and concluded the convenience to the parties, including to witnesses overwhelmingly
located in Tennessee, warranted resolution of the case there.
NEW YORK FEDERAL COURT HOLDS PRECLUSIVE EFFECT, IF ANY, OF PRIOR ARBITRATION AWARD
FOR ARBITRATORS TO DECIDE
Citigroup, Inc. v. Abu Dhabi Investment Auth., No. 13 Civ. 6073 (PKC), 2013 U.S. Dist. LEXIS 167310 (S.D.N.Y.
Nov. 25, 2013).
In a recent non-reinsurance case, a New York federal court held that whether a prior arbitration award has a
preclusive effect on a subsequent arbitration is for the arbitrators to decide and not the courts. The dispute arises out
of a multi-billion investment agreement. The investment agreement contained an arbitration clause. The clause was
found by the court to be broad (“any dispute that arises out of or relates to the Transaction Documents, or the breach
thereof”).
The first award rejected the claims under the investment agreement and the award was confirmed. A second
arbitration demand was served, which allegedly raised claims that were raised in the first arbitration. This action was
brought to preclude the second arbitration.
In dismissing the complaint, the court held that the arbitrators had to determine the preclusive effect, if any, of the
prior award. Citing Nat’l Union Fire Ins. Co. v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir. 1996), the court held that
preclusion is a merits-based defense to be decided by the arbitrators. The court also rejected the plaintiff’s attempt to
use the All Writs Act to enjoin the arbitration.
FEDERAL COURT FINDS FOR REINSURER IN CASCADING EXCESS TAX DISPUTE
Validus Reinsurance, Ltd. v. U.S., No. 13-0109(ABJ), 2014 U.S. Dist. LEXIS 13981 (D.C. Feb. 5, 2014).
We normally don’t report on tax-related matters in the Newsletter, however, this case is significant.. A Washington,
D.C. federal court addressed an issue of growing importance to off-shore reinsurers that assume risks from the United
States, but then seek retrocessional coverage from non-U.S. reinsurers. In this case, the off-shore reinsurer of U.S.
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4. risks purchased a retrocessional treaty for its own protection. The U.S. Internal Revenue Service (“IRS”) claimed that
the off-shore reinsurer owed the government an excise tax on the retrocessional premium under 26 U.S.C. § 4371.
Commentators have called this a cascading tax because the tax liability for U.S. risks cascades through the layers of
insurance and reinsurance.
In finding in favor of the reinsurer and against the IRS, the court held that § 4371 did not impose an excess tax on
retrocessional transactions because the language of that section does not apply beyond the first level of reinsurance.
The court found that the statute had a clear internal limitation on its application to reinsurance policies (i.e.,
application to premiums paid on reinsurance covering any of the contracts taxable (casualty insurance, indemnity
bonds, life insurance, sickness and accident policies, and annuity contracts)). Because a retrocessional contract
provides coverage against the risks of the assumed reinsurance contract, the court held it to be outside the scope of
the statute and not subject to the excise tax on reinsurance contracts.
It will be interesting to see if the IRS pursues an appeal considering the motivation by the Treasury Department to
broaden the extra-territorial effect of the U.S. Tax Code on as many businesses as a possible with any connection to
the United States.
NEW YORK MOTION COURT DISMISSES TWO OF REINSURER’S AFFIRMATIVE DEFENSES
Granite State. Ins. Co. v. Transatlantic Reinsurance Co., No. 652506/2012, 2013 N.Y. Misc. LEXIS 6142 (N.Y.
Sup. Ct. Dec. 23, 2013).
In a complicated reinsurance dispute, a New York motion court has dismissed two affirmative defenses to claims of
breach of contract by the cedent. The cedent’s motion to dismiss the remaining defenses and for summary judgment
was denied. This dispute arises from asbestos losses ceded to a series of facultative certificates. In reaching its
decision, the court describes the distinction between facultative and treaty reinsurance.
One of the affirmative defenses was that the cedent failed to settle the underlying action promptly. The court
dismissed this affirmative defense based on follow-the-settlements principles, holding that a reinsurer is bound to
accept the cedent’s good faith decisions on all things concerning the underlying insurance terms and claims against the
underlying insured. The court also dismissed the affirmative defense of breach of the duty of utmost good faith.
Because that defense was duplicative of its breach of contract defense and arises from the same set of facts, it was
dismissed. Other defenses were sustained and summary judgment was denied because of issues of fact and proof that
were required to be resolved.
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5. PENNSYLVANIA FEDERAL COURT DENIES STAY OF DISCOVERY IN MORTGAGE REINSURANCE
DISPUTE
Cunningham v. M&T Bank Corp., No. 1:12-vc-1238 (M.D. Pa. Jan. 14, 2014).
A Pennsylvania federal court denied an application by bank-related defendants to stay all discovery and proceedings
pending resolution of a parallel mortgage reinsurance case on appeal before the Third Circuit. There are quite a few
cases being brought against mortgage banks and their affiliated reinsurers for various claims of Real Estate Settlement
Procedures Act violations. This case is among those that assert the reinsurance contracts with the mortgage bank’s
captive reinsurer did not create a bona fide reinsurance relationship as there was no risk transfer and that the
transaction was merely a kick-back scheme.
In the companion case, the district court granted summary judgment to the mortgage back defendants and affiliates
and the defendants in this case wanted a stay until the Third Circuit ruled on the appeal of the grant to summary
judgment. The court denied the stay, holding that the mortgage bank defendants’ arguments were purely speculative
as discovery in this case could yield a different result.
WISCONSIN APPELLATE COURT NOTES THAT ASSUMPTION REINSURANCE IS NOT REINSURANCE
DeMarco v. Keefe Real Estate, Inc., No. 2012AP1933, 2013 Wisc. App. LEXIS 1062 (Wis. Ct. of App. Dec. 27,
2013).
We include this case solely for the court’s recognition that assumption reinsurance is not reinsurance. The case was
about whether certain carriers assumed the liability of the insured’s insolvent carrier. While one carrier had assumed
the insolvent carrier’s liabilities, the other had not. The court noted that typically reinsurance contracts provide no
direct liability of the reinsurer to the insured, but sometimes insurers do assume direct liability for policies issued by
another carrier. These agreements, said the court, “are not truly reinsurance contracts but are sometimes labeled as
such.” That was the case with the one carrier, which entered into an assumption reinsurance agreement. The other
carrier, however, did not assume liability under the insolvent carrier’s policies.
CALIFORNIA FEDERAL COURT UPHOLDS COMMON INTEREST DOCTRINE FOR PRIVILEGED
COMMUNICATIONS WITH REINSURER
Hawker v. BancInsurance, Inc, No. 1:12-cv-01261-SAB, 2013 U.S. Dist. LEXIS 180831 (E.D. Ca. Dec. 27, 2013).
Policyholders brought a motion to compel seeking documents, including communications with reinsurers, which were
being withheld or redacted on the ground of privilege. One of the main issues was whether common interest
protection applied to the requested documents. The insureds argued that their insurer had “offered no evidence to
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6. show any common interest between itself and any of its insurers; or an agreement to pursue a common legal defense
and/or to share costs of the litigation with its reinsurers.” Citing California Evidence Code §§ 912 and 952, the carrier
contended that the production of its reinsurance reports was barred based on privilege and therefore it had not
waived the privilege.
In denying the motion to compel, the court stated that, pursuant to California law, “where reinsurance documents
include attorney-client or protected work product communications, they would be entitled to the same privilege
protection as would similar communications between the ceding insurer and its attorneys handling the insured claim.”
In addition, the court noted that California law requires an insurer who obtains reinsurance to communicate “all the
representations of the original insured, and also all the knowledge and information he possesses, whether previously
or subsequently acquired, which are material to the risk.”
Therefore, court held that communications with a reinsurer, which include attorney-client information, are not
discoverable and that the carrier had not waived its privilege by its communication with its reinsurers.
CONNECTICUT FEDERAL COURT GRANTS REINSURER’S MOTION TO SEAL
Travelers Indem. Co. v. Excalibur Reinsurance Corp., 3:11-cv-1209-CSH (D. Conn. Nov. 26, 2013).
This case arose out of several errors and omissions policies. The reinsurer sought to seal certain documents, including
two unredacted memoranda of law filed by the cedent and two exhibits. Previously, the court had provisionally
allowed the reinsurer to designate a deposition as confidential information, but required the reinsurer to designate the
specific portions of the transcript if the reinsurer was going to move to seal. The reinsurer filed a motion to seal,
arguing that the designated portions of deposition testimony be limited to five pages of a transcript that spanned
nearly two hundred pages. Specifically, the reinsurer contended that those pages allegedly contained confidential and
sensitive business information and also its business practices and relationships.
In granting the motion to seal, the court weighed the strong presumption of public access against the significant
interest in protecting sensitive confidential business information from public dissemination. Further, the court
recognized that, upon a particularized showing of potential harm to the movant, sensitive business information may
provide a clear and compelling reason to warrant sealing. The court granted the reinsurer’s “narrowly tailored” request
to maintain sealing of the unredacted versions of the insurer’s memoranda and the designated portions of the
deposition transcript. As such, the court sealed, with permanency, the unredacted memoranda containing the
reinsurer’s confidential and sensitive business information, disclosure of which could have materially affected the
reinsurer’s ability to compete effectively as a business.
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7. REVENUE SHARING AGREEMENT UPHELD IN FAVOR OF CEDENT AND AGAINST REINSURANCE
BROKER
Homeowners Choice, Inc. v. Aon Benfield, No. 13-1846, 2013 WL 6670981, 2013 U.S. App. LEXIS 25194 (7th
Cir. 2013).
In an unpublished decision, the Seventh Circuit Court of Appeal affirmed a district court ruling that a reinsurance
intermediary remained liable to a cedent on a revenue sharing agreement (“RSA”) after the cedent terminated the
insurance intermediary as its broker of record. The cedent issued a Broker Authorization Contract designating the
reinsurance intermediary as its broker of record in 2007. Later, in 2008, the parties began to negotiate the terms of an
RSA and in 2009 they entered into a written RSA for a one-year term that expired on May 31, 2010. In March 2013,
the cedent notified the reinsurance intermediary that it had selected another reinsurance intermediary and designated it
as the new broker of record for the following one-year term. The reinsurance intermediary argued that certain
language in the RSA precluded the cedent from receiving a rebate on brokerage because of the cedent’s decision to
appoint a new reinsurance intermediary (the “Termination Provision”).
The appellate court concluded that the Termination Provision relied upon by the reinsurance intermediary was
ambiguous, as the district court had also concluded. This ruling enabled the court to review evidence outside of the
four-corners of the RSA to determine the parties’ intent concerning the Termination Provision. Furthermore, because
the reinsurance intermediary had drafted the RSA, the court determined that it was proper to construe ambiguity in
the RSA Termination Provision against the reinsurance intermediary. As a result, the court affirmed that the
reinsurance intermediary was required to pay the cedent a rebate on brokerage related to placements made during a
one-year term covered by the RSA.
RECENT REGULATORY DEVELOPMENTS
VERMONT PASSES LEGACY INSURANCE MANAGEMENT ACT
Signed into law on February 19, 2014, the Legacy Insurance Management Act, H. 198, puts Vermont out front in the
business of providing a safe harbor for runoff operations. What the Act does is allows for the transfer of closed
blocks of non-admitted commercial property and casualty insurance and reinsurance to a Vermont-domiciled
assuming company established for the sole purpose of acquiring closed blocks under the Act. It does not apply to
personal lines, life, health, or workers’ compensation insurance. This Act is relevant to the reinsurance market because
it provides for a statutory novation and allows the assumption of closed blocks of assumed reinsurance as well.
Discontinued business, legacy and run-off units of insurance companies may find this Act useful in developing an exit
strategy for some of their portfolios. That, of course, is what the State of Vermont hopes will happen.
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8. Here are some notable features that affect reinsurance. A closed block means a block, line or group of commercial
non-admitted insurance policies or reinsurance agreements or both. The business cannot be admitted Vermont
business. The transferring insurer has to have ceased offering, writing or selling this insurance or reinsurance to new
policyholders and all policy periods have to be fully expired for not less than 60 months (no active premiums).
As part of the transfer plan under the Act, the assuming company must file a list of all outward reinsurance
agreements attaching to the policies or inward reinsurance agreements in the closed block. Also necessary, is a list of
policies and inward reinsurance contracts to be transferred, which by their terms and conditions prohibit assignment
and assumption of liabilities without prior written consent of the policyholder or inward reinsurance counterparty. A
statement of the outward reinsurance agreement assets attaching to any policy or inward reinsurance agreement must
be provided. A statement describing any pending disputes between the transferring insurer and any inward
reinsurance counterparty must be provided. Information identifying policyholder and reinsurance counterparties is
exempt from public inspection under the Vermont Public Records Act.
Notice of the transfer must be given to any inward or outward reinsurance counterparty. Objections must be filed by
these counterparties within the time permitted. Any objection must be express and in writing. If an objection is made,
the assuming company may submit a revised list excluding the objecting inward reinsurance counterparty and the
relevant reinsurance contract or file an express notice from that counterparty now accepting the plan and withdrawing
the objection. Otherwise, the plan is deemed accepted. If the reinsurance contract requires the consent of the inward
reinsurance counterparty to the transfer, that reinsurance contract shall not be transferred unless consent is obtained.
In reviewing the plan, the Commissioner of the Department of Financial Regulation must make findings concerning
whether any outward reinsurance agreement will be adversely affected by the transfer and whether the plan materially
adversely affects the interests of any outward reinsurance company, including the interests of any inward reinsurance
counterparty who has accepted the plan.
The key features of the Act include the ability of policyholders and inward reinsurance counterparties to object to the
plan and essentially opt out, and the requirement that if written consent is necessary to assign or transfer obligations,
that written consent must be obtained for that policy or reinsurance contract to be on the transfer list. Thus, the
cram-down features of a Part VII transfer do not appear in this Act. News articles suggest that industry objections
caused amendments to the proposed legislation to allow for these key features.
A BRIEF REVIEW OF REINSURANCE TRENDS IN 2013
The year 2013 brought us an important case from the New York Court of Appeals on follow-the-settlements in the
context of allocation, which introduced an objective reasonableness standard. 2013 also brought us a series of late
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9. notice defense cases. Courts also exhibited a continued willingness to stay litigation and compel arbitration where the
dispute fell squarely within the scope of the relevant arbitration clause. On the other hand, at least one motion court
also enjoined arbitration when there was evidence of misconduct. Arbitrator authority was another issue addressed by
the courts this past year, along with arbitrator panel composition issues, issues surrounding arbitration awards and
whether court filings involving reinsurance disputes should be sealed.
ARBITRATION
Compelling Arbitration
As with previous years and consistent with federal public policy, courts continued enforcing arbitration clauses in
2013. For instance, in Trenwick Am. Reinsurance Corp. v. Unionamerica Ins. Co., No. 3:13cv94 (JBA), 2013 U.S. Dist.
LEXIS 97518 (D. Conn. Jul. 12, 2013), a Connecticut federal court compelled arbitration against a reinsurer and
denied the reinsurer’s application to enjoin arbitration. The dispute was between a signatory to a reinsurance
assumption agreement, who claimed that the reinsurer under reinsurance agreements between that reinsurer and
another cedent was required under the reinsurance assumption agreement to pay certain amounts because of the
original cedent’s failure to pay obligations under the reinsurance agreements.
In granting the motion to dismiss and to compel arbitration, the court rejected the argument that it was without
jurisdiction to consider the issue or arbitrability. Nevertheless, it found the issues in dispute arbitrable. The court
noted precedent that a signatory to an arbitration agreement is estopped from avoiding arbitration with a nonsignatory
when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement the party has
signed. Because, held the court, the object of the arbitration was collection of reinsurance balances under the terms of
the reinsurance contracts the dispute clearly fell within the scope of the arbitration clause.
In another decision, a Minnesota federal court granted motions by the successor to a group of off-shore producerowned reinsurance companies and their owners to stay an action brought by a cedent pending arbitration of the
cedent’s claims against the reinsurers and their owners. Security Life Ins. Co. of Am. v. Southwest Reinsure, Inc., No. 111358 (MJD/JJK), 2013 WL 500362 (D. Minn. Feb. 11, 2013). This case involved a complex interwoven reinsurance
relationship between the cedent and its reinsurers and whether a dispute about what happened to trust funds
deposited as security for reinsurance should be heard in arbitration or by the court.
In granting the motion to stay the pending arbitration, the court discussed the standards for determining arbitrability
and the principle that nonsignatories can compel arbitration under certain circumstances. Here, the successor
reinsurer was being asked to respond to claims under reinsurance agreements that contained arbitration clauses. The
court agreed that at minimum, equitable estoppel applied to allow the successor reinsurer to enforce the arbitration
clause in the agreements. The court found that the arbitration clauses were broad and covered the cedent’s claims
against the successor reinsurer. The court rejected the claim that the successor reinsurer waived its right to arbitration
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10. and that the cedent was prejudiced by the successor reinsurer’s actions. The stay was granted to all parties, including
the trust administrator and trustee, but the case was not dismissed because of the various non-arbitrable claims alleged
in the amended complaint.
Although not cases compelling arbitration, the following two decisions involved denials of motions to compel
arbitration in unique circumstances. In the first, Pine Top Receivables of Ill., Inc. v. Banco de Seguros Del Estado, No. 12 C
6357, 2013 U.S. Dist. LEXIS 81516 (N. D. Ill. June 11, 2013), the issue before the Illinois federal court was whether
an assignee that received a right to obtain payment from a reinsurer from its cedent—after the cedent’s liquidation—
also received the cedent’s right to arbitrate all claims against the reinsurer. Here, the court granted a reinsurer’s motion
to dismiss claims to compel arbitration asserted by a cedent’s assignee in liquidation. The reinsurer argued that the
agreement assigning the right to payment from the cedent to the assignee did not indicate that the right to invoke
arbitration was included in the assignment.
In granting the reinsurer’s motion to dismiss and denying the assignee’s motion to compel arbitration, the court
agreed with the reinsurer. Because the assignment agreement specifically stated that it did not include a novation or
full assignment, the court held that the deliberate use of limiting language in the transfer of rights to obtain payment
evidenced an intent to convey only the rights expressly granted, of which the right to arbitrate was not one.
The same Illinois federal court in two earlier decisions addressed the insolvent cedent’s assignee’s attempt to collect
payments allegedly due from the assignor’s reinsurer. Pine Top Receivables of Illinois, LLC v. Banco De Seguros Del Estado,
No. 12 6357, 2013 U.S. Dist. LEXIS 15246; 2013 U.S. Dist. LEXIS 28040 (N. D. Ill. Feb. 5 & 25, 2013). In one of
those two decisions, the court granted the reinsurer’s motion to dismiss an assignee’s attempt to compel arbitration.
The court found that although the underlying reinsurance treaties contained binding arbitration clauses, the plain
language of the assignment agreement only granted the assignee limited rights to collect specific debts. Thus, rights
under the arbitration clause were not assigned. Indeed, the assignment plainly stated that it “shall not be construed to
be a novation or assignment” of the reinsurance treaties themselves. As such, the assignee did not have the power to
enforce the treaties’ arbitration clauses.
In New Jersey Physicians United Reciprocal Exchange v. ACE Underwriting Agencies, Ltd., No. 12-04397 (FLW/LHG), 2013
U.S. Dist. LEXIS 52035 (D.N.J. Apr. 11, 2013), a New Jersey federal court stayed litigation brought by a cedent
pending the outcome of arbitration over an alleged breach of a reinsurance contract. In finding for the reinsurers, the
court held that the arbitration clause was extremely broad and applied to all disputes and all differences arising out of
or connected with the second reinsurance contract. Because the dispute was based on the interpretation of contractual
terms and because the arbitration clause was so broad, the court found that the dispute fell within the scope of the
arbitration clause.
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11. Enjoining Arbitration
Two cases in 2013 dealt with the converse of compelling arbitration: staying/enjoining arbitration.
In the first case, Star Ins. Co. v. Nat’l Union Fire Ins. Co., No. 13-13807, 2013 U.S. Dist. LEXIS 130379 (E.D. Mich.
Sept. 12, 2013), a federal court in Michigan found that the facts in this case fell into the exception to the rule that
courts generally lack jurisdiction to review arbitration proceedings until a final award is issued. Counsel for the
reinsurer had an ex parte telephone conference with the reinsurer’s party-appointed arbitrator about the interim final
award (as apparently shown in his time entries produced to obtain an award of attorney fees) granted after a
reinsurance arbitration proceeding. The question the court had was whether the arbitration clause was breached and
whether a stay was appropriate to allow for that question to be researched and resolved. Essentially, the cedents
argued that instead of submitting the matter to a three-person panel, decisions were made by a two-person panel in
violation of the contract (and the ARIAS• U.S. Code of Conduct).
In granting the injunction, the court found that under Michigan law (which was the choice of law in the contract) all
the cedents had to do was prove the fact of ex parte communications to prevail on a request to remove a panel
member. Thus, the court found that the cedents would prevail on the merits and granted the preliminary injunction.
The court finished off with the following: “Although there is a strong federal policy favoring arbitration, the public
interest lies in the integrity of the arbitration process and in upholding arm’s length, negotiated contracts.”
This is an unusual, fact-specific case and the order has been appealed to the Sixth Circuit Court of Appeals. A
decision is expected in 2014, which may clarify the import, if any, of this case.
In the second case, in Allstate Ins. Co. v. OneBeacon Am. Ins. Co., No. 13-12368-NMG, 2013 U.S. Dist. LEXIS 146826
(D. Mass. Oct. 8, 2013), a Massachusetts federal court denied a reinsurer’s motion to enjoin arbitration. The reinsurer
sought a preliminary injunction to enjoin arbitration because the designated umpire received notification that the
cedent had proposed that he be appointed umpire.
In denying the motion, the court articulated four standard criteria that a movant needed to demonstrate in order for a
preliminary injunction to be granted: that the movant was likely to succeed on the merits; that the movant was likely
to suffer irreparable harm in the absence of preliminary relief; that the balance of equities tipped in the movant’s
favor; and that an injunction was in the public’s interest. Because the reinsurer failed to meet any of its burdens as a
movant, the court denied the reinsurer’s preliminary injunction. The court also ruled that, as the same four-factor test
applied to permanent injunctions, the reinsurer’s motion for a permanent injunction should be denied as well. This
result is the typical result when parties attempt to enjoin an arbitration in the face of a strong federal policy of
deferring to arbitration.
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12. Arbitration Panel Composition
Five cases in 2013 provided reasons to consider adding language to arbitration clauses to avoid problems associated
with arbitration panel composition. In the first case, a New York state motion court granted a cedent’s petition to
appoint an umpire to preside over a series of reinsurance disputes through a combination of the ranking and “strike
and draw” methods. In re American Home Assurance Co. and Clearwater Ins. Co., No. 653079/12, 2013 N.Y. Misc. LEXIS
103 (N.Y. Sup. Ct. Jan. 15, 2013).
In granting the petition in part to appoint an umpire, the court noted that while it was undisputed that the two
arbitrators failed to select an umpire, the reinsurer objected to the appointment of a court appointed arbitrator on two
grounds. First, the court rejected the argument that the court was not permitted to appoint an arbitrator under New
York law, CPLR 7504, because the CPLR was not referenced in the treaties. The court held there was no need for the
treaties to refer to the procedural statute because a contract generally incorporates the state of law in existence at the
time of its formation. The statutory mechanism for appointment of an arbitrator existed well before the formation of
the treaties.
Second, the court rejected the argument that CPLR 7504 should not apply because the cedent was to blame for a
breakdown in the selection of the umpire. The court rejected this argument because CPLR 7504 provides for the
court appointment of an arbitrator “if the agreed method fails or for any reason is not followed. . . .” The court noted
that the cedent demonstrated that the parties’ agreed method of appointing the umpire had failed.
Because the reinsurance treaties and CPLR 7504 did not set forth any substantive criteria for the appointment of the
umpire, the court adopted Justice Feinman’s approach in Lexington Ins. Co. v. Clearwater Ins. Co., No. 651280/2011
(N.Y. Sup Ct., Jan. 6, 2012), which used the ranking method, but modified it to incorporate aspects of the strike and
draw method. The court added that the umpire must be drawn by random lot in the event of a tie in the rankings of
the umpire or third arbitrator.
Typically, courts do not get involved in the details of panel selection, leaving it instead to the parties’ contract. But
where the contract does not provide the requisite procedures, or where there are multiple contracts involved with
competing clauses, courts now seem willing to step in and craft the panel selection mechanism.
Second, a California federal court partially denied the petition and denied the cross-petition of the cedents and
reinsurer, respectively, to appoint an umpire and compel arbitration. Granite State Ins. Co. v. Clearwater Ins. Co., No. C
13-2924 SI, 2013 U.S. Dist. LEXIS 118413 (N.D. Ca. Aug. 19, 2013). Here, the court ordered the parties to finish the
selection process they started on the only arbitration that was demanded and then have the selected panel address the
procedural issues of multiple or consolidated arbitrations and the application of the honorable engagement clause. To
do otherwise, said the court, was to overstep the court’s authority under the Federal Arbitration Act (the “FAA”). The
court pointed out that procedural issues like consolidation and application of a particular contractual provision were
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13. for the arbitration panel to decide and not for the courts. Therefore, rather than completely stand down and let the
parties fend for themselves (which some courts have done in these situations), this court at least made the parties
finish the selection process they started to allow the selected panel to address the procedural issues that were beyond
the power of the court to address under the FAA.
Third, in ROM Reinsurance Management Co. v. Continental Ins. Co., No. 654480/12 (N.Y. Sup. Ct., N.Y. Co. Jul. 29, 2013),
a New York State motion court denied a reinsurer’s motion to reargue an earlier denial of a petition to stay arbitration
because of a time bar and also denied the cedent’s cross-motion to appoint an arbitrator. In denying the cross-motion,
the court found that there was no basis to intervene in the appointment process because the reinsurer only refused to
appoint an arbitrator because of its pending motion. Because the motion had been resolved, stated the court, the
reinsurer was to proceed with the selection process provided by the reinsurance agreement.
In the final two cases, the courts addressed an unfortunately growing trend of motions to disqualify counsel in
reinsurance disputes. In Utica Mut. Ins. Co. v. Emp’rs Ins. Co., No. 6: 12-CV-1293 (N.D.N.Y. Sept. 26, 2013), which is
on appeal, a New York federal court denied a reinsurer’s motion to dismiss the cedent’s complaint in a case where the
cedent sought a declaration that its counsel should not be disqualified and that arbitration should proceed without the
obstruction by the reinsurers.
In an action against the underlying insured, the cedent and the reinsurers shared a common interest and were all
represented by a certain law firm. A dispute between the cedent and the reinsurers developed regarding the
appropriateness of the defense billings for the underlying claim. To resolve this dispute, the cedent used that same law
firm to demand arbitration against the reinsurers. The reinsurers requested that the law firm withdraw from its
representation of the cedent because the dispute being arbitrated was substantially related to the underlying matter in
which the law firm represented the reinsurers. The law firm declined to step down.
One of the reinsurers filed a complaint in Wisconsin seeking disqualification of the law firm. In response, the cedent
filed this action in New York. The reinsurers moved to dismiss on grounds that the New York federal court did not
have subject matter jurisdiction and that the cedent failed to state a claim upon which relief could be granted.
In denying the motion to dismiss, the court noted that there was a lapse in the naming of an arbitrator. Accordingly,
Section 5 of the FAA afforded the parties the opportunity to seek relief from district courts to designate and appoint
an arbitrator. The cedent thus had the authority to seek the relief it sought in the New York federal court. Therefore,
the court found the reinsurer’s motion to dismiss for failure to state a claim unpersuasive.
Finally, in Nat’l Cas. Co. v. Utica Mut. Ins. Co., No. 12-cv-657-bbc, 2012 WL 6190084 (W.D. Wisc. Dec. 12, 2012), a
Wisconsin federal court remanded the action back to state court after finding that the cedent had not shown that
federal subject matter jurisdiction was present. The dispute arose when the cedent’s counsel demanded arbitration on
several reinsurance contracts, all of which had arbitration provisions, after the reinsurer questioned its obligation to
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14. pay a settlement reached after litigating certain claims. It turned out that the cedent’s counsel had served as defense
counsel in the underlying coverage dispute. The reinsurer claimed that this caused a conflict of interest, because
counsel represented both the reinsurer’s and the cedent’s interests in the coverage litigation. When the cedent refused
to replace its counsel, the reinsurer filed this action to disqualify counsel in state court, which the cedent removed to
federal court.
The court was originally concerned with whether there was diversity of citizenship, but once that was resolved, the
court could not get past the amount in dispute. The cedent did not identify the amount in dispute in the arbitration or
the cost of replacing arbitration counsel. Although the amount in controversy was eventually identified and exceeded
$75,000—the threshold limit required in diversity of citizenship actions—the court had an issue concerning whether
the amount in controversy in the arbitration was the proper measure for the disqualification action as the object of the
disqualification litigation was not compelling arbitration or confirming an arbitration award. The court remanded the
case to state court essentially because it would not adopt the stakes in arbitration as the measure for subject matter
jurisdictional purposes.
Sealing Arbitration Panel Awards
The trend of courts rejecting the parties’ confidentiality stipulations and orders in arbitration continued in 2013. A
New York federal court granted an application by putative intervenors to unseal reinsurance arbitration information
originally filed under seal in a proceeding that was settled without court order. Eagle Star Ins. Co. v. Arrowood Indemnity
Co., No. 13 Civ. 3410 (HB), 2013 U.S. Dist. LEXIS 135869 (S.D.N.Y. Sept. 23, 2013). The “confidential” arbitration
information was filed in conjunction with a petition to confirm an arbitration award and a related motion to dismiss.
Before the petition and motion were fully briefed, the parties settled and agreed to discontinue the case. Nevertheless,
the putative intervenors, which apparently had an arbitration with the same respondent, moved and objected to the
arbitration information remaining under seal. After analyzing the court’s ability to address a sealing motion after the
parties had settled and the recent law on sealing motions, the court granted the motion to unseal the petition and
motion to dismiss (containing the arbitration information), but denied the motion to intervene as moot.
What makes this case particularly unusual is that parties to a different arbitration apparently wanted to get access to
the arbitration information from the first arbitration for use in their separate arbitration against the same respondent.
The court allowed this to happen. This case and others that reject sealing requests have ramifications for
confidentiality stipulations and their viability once a party goes to court to vacate or confirm an arbitration award.
Arbitration Awards
Ordinarily, courts have afforded great deference to arbitral decisions and displayed a reluctance to vacate arbitration
awards. In Arrowood Indem. Co. v. Trustmark Ins. Co., No. 3:03cv1000 (JBA), 2013 U.S. Dist. LEXIS 46566 (D. Conn.
Mar. 29, 2013), however, a Connecticut federal court denied a cedent’s motion for judgment and contempt against a
reinsurer where the motion sought to enforce an arbitration award that had been improperly revisited by the
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15. underlying arbitration panel. The court determined that the arbitration panel was functus officio, or without authority, to
determine the reinsurer’s ultimate responsibility to the cedent after a final award had been issued and the panel had
been disbanded. The court further held that whatever dispute the parties had about how the reinsurer carried out its
duties must be litigated in a separate proceeding.
FOLLOW-THE-SETTLEMENTS CLAUSE
Two cases in 2013 recognized the persistent viability of the follow-the-settlements doctrine. In a closely watched
asbestos settlement allocation case, the New York Court of Appeals modified the order of the intermediate appellate
court to deny summary judgment to the cedent based on two issues of fact raised to challenge the reasonableness of
the cedent’s settlement allocation. United States Fid. & Guar. Co. v. American Re-Ins. Co., 20 N.Y.3d 407 (N.Y. 2013).
The court affirmed the judgment rejecting the other defenses to payment raised by the reinsurers.
In modifying the appellate division’s order, the Court of Appeals presented a detailed analysis of the rules governing
reinsurance allocation in the context of follow-the-settlements under New York law. It is important to note that the
reinsurance contracts here had a following clause binding the reinsurer to pay claims allowed by the cedent. The
court’s analysis was premised on the existence of a specific follow-the-settlements clause.
The court articulated the well-established rule that a follow-the-settlements clause (like the one here) ordinarily bars
challenge by a reinsurer to the ceding company’s decision to settle a case. That rule, said the court, makes sense
because there is little risk of unfairness as the parties are typically aligned to pay as low a settlement amount as
possible. In this case, the few exceptions to that rule did not apply because the reinsurers did not challenge the
cedent’s decision to settle or the amount of the settlement. Here, the dispute was about the allocation of the
settlement to the reinsurers; an issue that has been raised at the Second Circuit Court of Appeals numerous times.
In discussing the reinsurance allocation, the court accepted that the follow-the-settlements rule raises problems
because the interests of the cedent and the reinsurer may often conflict. The Court of Appeals agreed with the
majority of courts and held that a follow-the-settlements clause requires a level of deference to a cedent’s allocation
decision. The rationale for this deference was described by the court as providing for a more orderly and predictable
resolution of claims. But the court made it clear that deference did not mean that the cedent’s allocation decisions
were immune from scrutiny. The decision still had to be in good faith and reasonable.
This case provides the latest and certainly one of the more detailed roadmaps for addressing reinsurance allocation
determinations under a follow-the-settlements clause. Reasonableness is the catchword, but reasonableness based on
the objective standard of what the underlying parties’ to a settlement would consider reasonable if there were no
reinsurance. Allocating all of the settlement to claims covered by the cedent’s policies and nothing to the bad faith
claims may or may not be reasonable, but only a trial and a decision by a fact finder will decide that issue.
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16. The ultimate takeaway here is that the specific facts matter, that a reinsurer will still be bound to a cedent’s good faith
and reasonable claims determination, and that a follow-the-settlements clause like the one in this case will bind the
reinsurer to an objectively reasonable reinsurance allocation decision without regard to the cedent’s motive, as long as
it could have been derived from an arm’s length negotiation by the underlying parties as if no reinsurance existed.
In the second decision, a Connecticut federal court took pains to use the decision in U.S. Fidelity & Guaranty Co. v.
Am. Re-Insurance Co., 20 N.Y.3d 407 (N.Y. 2013), as its touchstone for deciding the scope of discovery needed by the
reinsurer where a follow-the-settlements argument was being made by the cedent. Here, the reinsurance contract was
governed by New York law. The court made it clear that the decisions of the New York Court of Appeals bound the
court in construing the contract and not the decisions of the Second Circuit.
The reinsurance contracts had a following clause that obligated the reinsurer to pay losses paid on the underlying
policies and “will follow the settlements of the Company, subject always to the terms and the conditions of this
Agreement.” Like U.S. F&G, this case was a dispute about the post-settlement reinsurance allocation. In interpreting
New York law on follow-the-settlements, the court enumerated four rules: (1) a follow-the-settlements clause requires
deference to the cedent’s post-settlement allocation; but (2) a cedent’s allocation decisions are not immune from
scrutiny, which includes; (3) whether the allocation is reasonable as one that the parties to the settlement might
reasonably arrive at without consideration of reinsurance; and in any event (4) an allocation that violates or disregards
reinsurance contract provisions is void.
After reviewing the competing arguments of counsel, the court found that the reinsurer was entitled to challenge the
reasonableness of the post-settlement allocation and to argue that the allocation violated the reinsurance contract.
Based on this finding, the court allowed the reinsurer’s motion to compel discovery.
What these cases show is that the trend toward allowing reinsurers to challenge a cedent’s post-settlement allocation
decision is expanding ever so slightly. The hurdles are high, but the door is not closed to a legitimate defense if the
specific facts demonstrate a lack of objective reasonableness.
LATE NOTICE
2013 was a year that saw an unusual amount of cases involving late notice, which has not been a serious reinsurance
issue for some time. Interestingly, all four of the late notice decisions were handed down by New York courts.
In the first case—a non-reinsurance case—the Second Circuit Court of Appeals affirmed a district court’s summary
judgment in favor of the insurer and specifically addressed the argument by the insurer on late notice. Weeks Marine,
Inc. v. Am. S.S. Owners Mut. Prot. & Indem. Ass’n, 510 Fed. Appx. 52 (Summary Order) (2d Cir. 2013). The insured did
not give notice to the insurer until two days after a judgment was obtained in favor of the underlying claimant. The
insurer disclaimed based on late notice. The district court found that New York’s “no prejudice” rule applied and
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17. granted summary judgment to the insurer. In affirming the district court, the circuit court noted the exception to New
York’s “no prejudice” rule in the context of a reinsurance contract. The court declined to extend the reinsurance
exception to marine insurance contracts based on the facts of this case.
Second, in a case that arose out of asbestos losses incurred by Foster Wheeler, a New York federal court examined
whether the cedent’s notice under nine facultative certificates was late (more than three years) entitling the reinsurer to
avoid coverage. AIU Ins. Co. v. TIG Ins. Co., 934 F. Supp. 2d 594 (S.D.N.Y. 2013). The cedent, which issued a series of
umbrella policies, purchased the facultative certificates of reinsurance from the reinsurer. The facultative certificates
all had a notice provision that stated “[p]rompt notice shall be given to the Reinsurer by the Company of any
occurrence or accident which appears likely to involve this reinsurance.” None of the certificates had a choice-of-law
clause. The case came down to whether Illinois or New York law applied. The Magistrate Judge concluded that
Illinois law should apply and recommended granting the reinsurer’s summary judgment motion. The court agreed and
determined that the Seventh Circuit’s ruling on late notice—that the reinsurer need not prove prejudice to avoid
coverage—was the rule of law that applied in this case. The court found that the cedent, a sophisticated insurance
company, waited more than three years before giving notice to the reinsurer even though the cedent was aware that
coverage under the certificates was available and that the notice provision was triggered. Under Illinois law, held the
court, the reinsurer could refuse coverage under the certificates because of the late notice without showing prejudice.
Third, in Ins. Co. of PA. v. Argonaut Ins. Co., No. 12 Civ. 6494 (DLC), 2013 U.S. Dist. LEXIS 110597 (S.D.N.Y. Aug 6,
2013), a New York federal court applied California law and granted partial summary judgment to a reinsurer on the
question of whether a seven-year delay in providing notice under a facultative certificate constituted late notice,
permitting the reinsurer’s claim of prejudice from the delayed notice to proceed to trial. The dispute arose from a
series of underlying litigation involving the original insured. The cedent had issued excess umbrella coverage above
the insured’s primary limit, and then facultatively reinsured some of that excess liability with the reinsurer. The
facultative certificate required the cedent to “promptly” notify the reinsurer of any occurrence that may implicate the
reinsurer’s liability. It also permitted the reinsurer the right to associate in the defense of any claim involving the
certificate.
In finding that the cedent had breached the notice requirements in the reinsurance certificate, the court concluded
that, at the very latest, notice should have been given to the reinsurer in 2002, when the insured filed a cross-claim
against the cedent asserting a claim under the excess policy, as opposed to 2009 when notice was actually provided.
The court rejected the cedent’s claim that the reinsurer was constructively on notice of the claim because notice of
insured-related claims had been provided to the reinsurer’s broker under different reinsurance agreements. In light of
the seven-year delay in providing notice, the court found the cedent in breach of its contractual notice obligations.
Finally, a New York State motion court granted part of a cedent’s motion for summary judgment in a case involving
the cession of asbestos losses after a substantial group settlement of an asbestos coverage action and denied the
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18. reinsurer’s defense that the cedent failed to give timely notice of the loss. New Hampshire Ins. Co. v. Clearwater Ins. Co.,
No. 653547/2011, 2013 N.Y. Misc. LEXIS 5117 (N.Y. Sup. Ct. Oct. 31, 2013).
The facultative certificate here provided that the cedent will promptly notify the reinsurer of any event or
development that it “reasonably believes might result in a claim against” the reinsurer. The reinsurer claimed that
although the cedent knew about the loss in 1991, the cedent did not provide notice until 1997 and then, later in 1997,
advised the reinsurer that it did not think its policy would be impacted. Thus, the reinsurer claimed, it did not receive
actual notice until 2010.
In rejecting the reinsurer’s late notice defense and granting partial summary judgment to the cedent, the court noted
that the reinsurer must show economic injury to sustain a claim of prejudice because of late notice. The reinsurer
claimed that it had commuted with its retrocessionaires. The court rejected the reinsurer’s claim because of a lack of
any detailed facts to support its claim of prejudice. The court also rejected the reinsurer’s claim that it did not need to
show prejudice when the cedent had failed to implement routine practices and controls to ensure prompt and timely
notice. The court held that New York law did not support that proposition.
STATUTE OF LIMITATIONS
As always, some actions failed in 2013 on statute of limitations grounds. In OneBeacon Ins. Co. v. Aviva Ins. Ltd., No. 107498, 2013 U.S. Dist. LEXIS 70212 (E.D. Pa. May 17, 2013), a Pennsylvania federal court granted partial summary
judgment to a reinsurer on statute of limitations grounds, but denied summary judgment based on genuine issues of
material fact on a number of issues. This case involved successor entities dealing with delays in claims cessions under
a contract that was never finalized between a U.S. cedent and a U.K. reinsurer.
Although all of the parties agreed that the limitations period was four years, they could not agree on when the
limitations period commenced. Because the court found, based on the parties’ stipulation, that the reinsurance
agreement (which was never formalized in writing) conditioned the reinsurer’s payment of reinsurance billings, the
court held that the statute of limitations ran from the performance of that condition (here, the submission of a claims
bordereau). Thus, bordereaux submitted more than four years before the cedent commenced the lawsuit and not
subject to the tolling agreement were barred by the statute of limitations.
DISCOVERY
At least one court in 2013 treated reinsurance contracts as discoverable. In two separate rulings, a California federal
court granted plaintiffs’ motion for production of reinsurance documents in a putative RESPA class action and struck
eight of the reinsurer’s affirmative defenses. Munoz v. PHH Corp., No. 1:08-cv-0759-AWI-BAM, 2013 WL 684388
(E.D. Cal. Feb. 22, 2013) and Munoz v. PHH Corp., No. 1:08-cv-0759-AWI-BAM, 2013 WL 1278509 (E.D. Cal. Mar.
26, 2013). Plaintiffs alleged that a mortgage lender received illegal referral fees from mortgage insurance companies
who agreed to reinsure with the lender’s captive reinsurance company. Ceded premiums allegedly funded reinsurance
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19. trusts, rather than funds from reinsurer, and, therefore, reinsurer allegedly assumed no real or commensurate risk. The
court’s order compelling production of reinsurance documents required reinsurer to produce documents given to the
federal Consumer Financial Protection Bureau (“CFPB”) pursuant to a Civil Investigatory Demand into the mortgage
lender’s captive reinsurance agreements.
CONTRACT INTERPRETATION
Three cases in 2013 dealt with issues relating to contract interpretation. The first case was an interesting decision
concerning when an excess facultative certificate is required to respond to a particular loss. In Seneca Ins. Co. v. Everest
Reinsurance Co., No. 11 Civ. 7846 (BF), 2013 U.S. Dist. LEXIS 151594 (S.D.N.Y. Oct. 17, 2013), a New York federal
court granted summary judgment to a reinsurer and dismissed the cedent’s case for breach of contract. The cedent
filed an action for breach of contract against a reinsurer after the reinsurer denied coverage to the cedent. The
facultative certificate specified a $5 million threshold that would trigger the reinsurer’s obligations to pay for loss and
other expenses. The case boiled down to the question of whether interest amounts ($2.43 million) were properly
considered “loss” or “interest on a judgment” under the reinsurance certificate. Finding the latter, the court concluded
that the judgment “loss” was $4.91 million, which fell just short of the $5 million loss threshold that would have
triggered the reinsurer’s obligation to pay. Therefore, the court granted summary judgment in favor of the reinsurer,
holding that the reinsurer did not breach the reinsurance contract when it denied coverage.
Second, a Florida federal court granted a reinsurer’s motion to dismiss a cedent’s complaint finding that there was no
coverage under the cedent’s policy and, therefore, no claim for reimbursement under the reinsurance contract. Public
Risk Management of Fl. v. One Beacon Ins. Co., No. 6:13-cv-1067-Orl-31 TBS, 2013 U.S. Dist. LEXIS 150091 (M.D. Fl.
Oct. 18, 2013). The case arose out of the reinsurance of a public official’s errors and omissions claim for a
construction project dispute between a municipality and a contractor. The reinsurance dispute concerned whether the
reinsurer was required to reimburse the cedent for expenses defending the underlying action between the contractor
and the municipality (indemnity was not an issue as the settlement payment was not ceded).
In dismissing the complaint, the court determined that the underlying complaint was not based on negligence and,
therefore, no “wrongful act” was alleged to bring the matter within the coverage grants of the policy. Additionally, the
policy excluded intentional breaches of contract. . Both these bases were sufficient to sustain the motion to dismiss
and to avoid any obligation on the part of the reinsurer. .
In a case that harkens back to the Second Circuit’s seminal decision in Bellefonte Reinsurance Co. v. Aetna Casualty & Sur.
Co., 903 F.2d 910 (2d Cir. 1990), a New York federal court granted summary judgment to a reinsurer in a dispute over
whether the liability limits of a facultative certificate were cost-inclusive. Utica Mut. Ins. v. Munich Reinsurance Am., Inc.,
No. 6:12-CV-0196 (LEK/ATB), 2013 U.S. Dist. LEXIS 141212 (S.D.N.Y. Sept. 30, 2013). The reinsurer issued a
certificate indemnifying the cedent for a percentage of an umbrella liability policy up to a set dollar limit, which was
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20. issued to a policyholder who incurred significant covered claims relating to asbestos exposure. The reinsurer
reimbursed the insurer for the entire limit under the certificate.
The umbrella policy, however, was cost-exclusive. The cedent filed suit against the reinsurer claiming that the
limitation under the certificate was also cost-exclusive, and therefore, the reinsurer was liable for a percentage of the
additional costs that the insurer incurred above the limits stated in the certificate. In granting the motion for summary
judgment, the court first pointed out that the certificate was silent as to inclusion or exclusion of costs on the liability
limit, and that under several prior New York cases, limit-of-liability provisions that were silent on whether they were
cost-inclusive or exclusive were deemed to be unambiguously expense-inclusive. The court reasoned that, unless costexclusion is expressly stated, reinsurers are entitled to rely on the liability limit as setting the maximum risk exposure.
Second, the court found that the absence of a follow-the-form clause was indicative that there was no basis to
conclude that, just because the insurance policy was cost-exclusive, the facultative certificate should be deemed costexclusive. Accordingly, the court held that the cedent failed to raise an issue of material fact. This case is on appeal.
In another case on the liability limit in facultative certificates, an Illinois state court granted a reinsurer’s motion for
judgment on the pleadings in a case where the cedent sought a declaration that none of its facultative certificates
contained limits on expenses and that the reinsurer therefore breached its certificates with the cedent by refusing to
pay expenses in excess of the stated certificate limits. Cont’l Cas. Co. v. MidStates Reinsurance Co., No. 12 CH 42911 (Ill.
Cir. Ct. Sept. 10, 2013).
The certificates contained a provision titled “reinsurance assumed” that described the amount of coverage that the
reinsurer agreed to provide. Although both parties agreed that this provision limited the reinsurer’s liability to
compensate for losses, they disagreed on whether the provision applied to expenses as well. The court noted that
while the “reinsurance assumed” provision did not distinguish between “losses” and “expenses” when discussing the
reinsurer’s liability, a different provision in the reinsurance certificate did. The fact that the “reinsurance provision”
only discussed the reinsurer’s liability in general terms indicated that the contracting parties had no intention of
separating losses from expenses when calculating the amount for which the reinsurer should be liable.
The court also pointed out that the majority of cases that had dealt with this issue found that “reinsurance assumed”
provisions limited all liability and not just losses and expenses. Therefore, the court found that, as a matter of law,
there was a limit on the reinsurer’s liability and that limit covered both losses and expenses. Because there was no
genuine issue of material fact and the reinsurer was entitled to judgment as a matter of law, the court granted the
reinsurer’s motion for judgment on the pleadings.
Finally, in Greenlight Reinsurance, Ltd. v. Appalachian Underwriters, Inc., No. 12 Civ. 8544 (JPO), 2013 U.S. Dist. LEXIS
104605, 2013 WL 3835341 (S.D.N.Y. Jul. 25, 2013), a New York federal court denied several motions to dismiss
claims filed by a cedent against reinsurers and the reinsurers’ guarantors. The dispute was over the interoperation of
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21. several key provisions contained in reinsurance contracts, retrocession contracts, and two guarantees of the
retrocession contracts. While the reinsurance and retrocession contracts contained arbitration provisions, the
guarantees did not.
The cedent brought a declaratory judgment action under the guarantees for breach of contract associated with various
covenants in the guarantees and for an accounting. The reinsurers and their guarantors moved to dismiss on the
grounds of ripeness and for failure to state a claim.
In denying the motion to dismiss, the court found that the cedent pled sufficient facts to state most of its claims,
except for its claim for an accounting. The court dismissed the cedent’s accounting claim with permission for cedent
to replead.
COMMERCIAL STATUES IN REINSURANCE CLAIMS
In 2013, the courts continued to allow consumer claims statutes to be used in reinsurance disputes as long as the state
recognized bad faith claims. For instance, in The Travelers Indem. Co. v. Excalibur Reinsurance Corp., No. 3:11-CV-1209
(CDH), 2012 WL 424535 (D. Conn. Feb. 1, 2013), a Connecticut federal court granted a cedent’s motion to amend its
complaint in a dispute with its reinsurer. The underlying dispute involved insurance brokers’ errors and omissions
policies and the settlement of an underlying E&O claim. The reinsurer refused to pay and this action commenced.
Although the reinsurer objected to the cedent’s motion to amend the complaint in order to add two additional claims
beyond breach of contract—for account stated and violation of Connecticut’s Unfair Trade Practices Act
(“CUTPA”)—the court nevertheless found that the cedent adequately pled a plausible claim for an implied account
stated and for violations of CUTPA.
FOREIGN SOVEREIGN IMMUNITIES ACT AND PRE-JUDGMENT SECURITY
The Pine Top Receivables of Illinois, LLC v. Banco De Seguros Del Estado, 2013 U.S. Dist. LEXIS 15246 (N.D. Ill. Feb. 5,
2013) case, discussed above, also provides interesting commentary on the Foreign Sovereign Immunities Act
(“FSIA”). In that decision, the court interpreted the FSIA to preclude pre-answer security against sovereign-owned
reinsurers. The FSIA prohibits courts from imposing prejudgment attachments on the assets of foreign
instrumentalities. Here, the cedent sought pre-judgment security from a sovereign-owned reinsurer. The court held
that the cedent was not entitled to prejudgment security where it was functionally equivalent to an attachment under
FSIA and thus could not be imposed upon the sovereign-owned reinsurer.
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22. RECENT SPEECHES AND PUBLICATIONS:
Larry Schiffer and Norma Krayem presented a talk on Cybersecurity to the Reinsurance Association of America’s
Claims, Underwriting, and Emerging Issues Committees on December 12, 2013, in Washington, D.C.
Larry Schiffer will be speaking on Facultative Certificates as part of the Lloyd’s Market Association’s LMA
Masterclass Series on April 9, 2014, in London.
Larry Schiffer will be speaking on Negotiating and Drafting Secure and Comprehensive Commutation Agreements at
the American Conference Institute’s 9th National Run-Off and Commutations Summit, on April 23, 2014, in New
York City.
Suman Chakraborty will be speaking on Cyberrisks at the Brokers and Reinsurance Markets Association Committee
Rendezvous on April 28-29, 2014, in Clearwater, Florida.
Larry Schiffer will be speaking on a panel on Social Media and Decision-making in the Arbitration Process at the
ARIAS-U.S. Spring Conference, on May 9, 2014, in Key Biscayne, Florida.
Larry Schiffer’s Commentary, “Find the Right Reinsurer Years After Contract Termination,” was published on the
website of the International Risk Management Institute, Inc., IRMI.com, in December 2013.
Congratulations to Suman Chakraborty on his appointment to the ARIAS-U.S. Membership Committee.
PattonBoggs.com
Newsletter: Reinsurance Newsletter – March 2014
22

23. Authors contributing to this newsletter are: Editor, Larry P. Schiffer, Suman Chakraborty, Christina Rock, Maxine
Martin, Caroline Billet, Christopher Fontenelli and Zachary Novetsky. For more information, please contact your
Patton Boggs LLP attorney or a member of the Insurance and Reinsurance Dispute Resolution Practice Group:
JOHN M. NONNA
MARK D. SHERIDAN
LARRY P. SCHIFFER
Partner
646-557-5172
jnonna@pattonboggs.com
Partner
973-848-5681
msheridan@pattonboggs.com
Partner
646-557-5194
lschiffer@pattonboggs.com
ERIDANIA PEREZ
MARK C. ERRICO
SUMAN CHAKRABORTY
Partner
646-557-5137
eperez@pattonboggs.com
Partner
973-848-5668
merrico@pattonboggs.com
Partner
646-557-5142
schakraborty@pattonboggs.com
JASON F. KING
SHANNON W. CONWAY
EDWARD D. GEHRES
Of Counsel
973-848-5687
jking@pattonboggs.com
Partner
214-758-6609
sconway@pattonboggs.com
Partner
202-457-6016
egehres@pattonboggs.com
T. MICHAEL GUIFFRE
Partner
202-457-6441
mguiffre@pattonboggs.com
PattonBoggs.com
Newsletter: Reinsurance Newsletter – March 2014
23