Reinsurance Newsletter - September 2013

    View Author 3 September 2013



    Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013).

    In a non-reinsurance case, the United States Supreme Court recently defined the scope of the limited judicial review provided for under Section 10(a)(4) of the Federal Arbitration Act (“FAA”).  Section 10(a)(4) permits a court to vacate an arbitration award where the arbitrator has exceeded his or her powers (“Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made”).  Because this ground is one of the few grounds that parties to a reinsurance dispute may use to challenge an arbitration award, a Supreme Court decision on this ground is relevant to reinsurance disputes and to reinsurance arbitrators.

    In this case, which involved class action arbitration procedures that typically are not an issue in reinsurance disputes, the Court clearly defined the limited judicial review provided for under Section 10(a)(4). In essence, the Court held that as long as an arbitrator construes the contract, it doesn't matter whether the arbitrator's construction is wrong. An arbitrator cannot be said to have exceeded his or her powers if all the arbitrator is doing is interpreting the contract. If the arbitrator renders an award that is not based on interpreting the contract, but imposes the arbitrator’s view of sound policy, that will exceed the arbitrator’s powers and would be subject to judicial review under Section 10(a)(4) said the Court. Notably, the Court in this case implied that the arbitrator likely got it wrong, but performing the contract interpretation task poorly is not a basis to vacate an arbitration award. “The arbitrator’s construction holds, however good, bad, or ugly” said the Court. Thus, by choosing arbitration, the parties must now live with that choice, which includes the chance that the arbitrator may perform the contract interpretation task poorly.

    For arbitrators, the lesson is that when crafting an award it is essential to interpret the reinsurance contract and not impose the panel’s view of what it considers sound policy.  In other words, rough justice does not cut it if the contract is abandoned and is not being interpreted when issuing an award.  The potential good news for arbitrators is that if they construe the contract, their decisions should not be subject to review under Section 10(a)(4) even if their construction is off the mark.  That good news for arbitrators may be bad news for the parties who rely on arbitrators to interpret reinsurance contracts properly.


    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).

    In a very recent case, 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.  Instead, the court ordered the parties to complete the existing selection process for the one arbitration demanded and allow that panel to resolve issues concerning consolidation and application of the honorable engagement clause. 

    The dispute arises over asbestos losses and the cession of a settlement to three reinsurance contracts.  The reinsurer paid some of the cessions, but then stopped paying, which resulted in a demand for arbitration.  Party-appointed arbitrators were named and after a very long delay, umpire candidates were proposed.  The selection process stalled, however, when issues arose over whether there should be one or three arbitrations (over three reinsurance contracts in dispute) and over which honorable engagement clause should apply among the reinsurance contracts.  The cedents wanted an umpire appointed in a single arbitration and the reinsurer wanted three umpires in three arbitrations or a single arbitration using its preferred honorable engagement clause.

    In partially denying the cedents’ petition and denying the reinsurer’s cross-petition, 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 v. 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 FAA.  The court pointed out that procedural issues like consolidation and application of a particular contractual provision were for the arbitration panel to decide and not for the courts.  Under the FAA, sections 4 and 5 grant the courts limited power to either require the parties to arbitrate as agreed under section 5 or to appoint an arbitrator when there is an impasse under section 4.  Neither section, said the court, authorizes the court to decide “the two scope-of-the-arbitration agreement” questions posed by the reinsurer.  Because compliance with the parties’ chosen method of appointing the umpire was not impossible, the court ordered compliance under section 4.  The court rejected the notion that it could order three appointments because there had only been one arbitration demand and under section 4, the court can only order parties to proceed on disputes where a demand for arbitration has been made.

    Thus, 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. 


    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 claims 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.  Essentially, the fronting carrier defaulted and the real party in interest demanded arbitration for outstanding reinsurance recoverables.

    Notably, while each of the underlying reinsurance agreements has an arbitration clause, the reinsurance assumption agreement does not; but the reinsurance assumption agreement was appended as a scheduled agreement to reach reinsurance contract.  After the signatory to the assumption agreement demanded arbitration against the reinsurer, the reinsurer brought this action to enjoin the arbitration.  A temporary restraint of the arbitration was granted pending a full hearing on the motion for an injunction.  This decision was on the motion to dismiss the complaint and compel arbitration.

    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 found that the reinsurer agreed to arbitrate with the signatory of the reinsurance assumption agreement based on Article I of the reinsurance agreement, which expressly references the schedule containing the assumption agreement.  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, collection of reinsurance balances under the terms of the reinsurance contracts was the object of the arbitration the dispute clearly fell within the scope of the arbitration clause.

    The court also left a statute of limitations issue for arbitrators to decide as it was not expressly carved out of the arbitration agreement.


    Nat’l Cas. Co. v. OneBeacon Am. Ins. Co., No. 12-cv-11874-DJC, 2013 U.S. Dist. LEXIS 92840 (D. Mass. Jul. 1, 2013).

    A Massachusetts federal court held that the issue of whether a court judgment confirming an arbitration award had a preclusive effect in a pending arbitration was for an arbitrator to decide, not a court.  On a motion to compel arbitration, the court also rejected the cedents’ request to disqualify an umpire candidate from consideration. 

    Cedents sought recovery for losses arising out of asbestos and silica claims brought against the cedents by several policyholders from reinsurers who were parties to a treaty reinsurance program.  The cedents demanded arbitration against one reinsurer and the arbitration panel ruled that the reinsurer was not obligated to pay for aggregated asbestos and silica losses as ceded.  The court confirmed the panel’s decision. 

    After the cedents brought a similar arbitration demand against the treaty reinsurers that were not parties to the first arbitration, the reinsurers sought declaratory relief regarding the preclusive effect of the court’s confirmation of the first panel’s decision on the second arbitration. 

    In reaching its decision, the court noted that, generally, if the underlying action is arbitrable, the preclusive effect of a prior arbitration on a subsequent arbitration is for the arbitrator to decide.  A court would have to decide whether the issues were “identical,” which would in turn require the court to interpret the language of the reinsurance contracts and the underlying claims.  The court found such an inquisition into the merits inappropriate. 

    The court noted that while the First Circuit had not yet addressed the issue, the Ninth Circuit has rejected the argument that a confirmation of an earlier arbitration award invests a federal court with the authority to consider a res judicata defense in a subsequent suit.  While judgment entered upon a confirmed arbitration award has the same force and effect under the FAA as a court judgment, it is not wholly parallel to a court judgment for all purposes.  A res judicata defense, as with other affirmative defenses such as laches and statute of limitations, is a component of the merits of the dispute and is thus an arbitrable issue.  Accordingly, the court held that the final judgment in the prior arbitration did not automatically have preclusive effect; that question was for the arbitrators in the second arbitration to decide.

    On the issue of the cedents’ challenge to the umpire candidate, the court pointed out that the FAA frowns upon a court removing an arbitrator for any reason prior to the issuance of an arbitral award.  In this case, not only had there not yet been an arbitral award, but the challenged candidate had not even been selected to serve as umpire and the arbitration panel had yet to be determined.


    Pine Top Receivables of Ill., Inc. v. Banco de Seguros Del Estado, No. 12 C 6357, 2013 U.S. Dist. LEXIS 81516, 2013 WL 2574596 (N. D. Ill. June 11, 2013).

    An Illinois federal court granted a reinsurer’s motion to dismiss claims to compel arbitration asserted by a cedent’s assignee in liquidation.  The cedent, which was ordered by an Illinois state court to liquidate, sold and assigned all of its rights to payment from the reinsurer.  The assignee filed suit after the reinsurer refused a demand for payment under the treaties.  The assignee argued that an arbitration clause in the treaties dictated that the dispute be arbitrated.  The reinsurer filed a motion to dismiss the claim to compel arbitration, arguing 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.  The court found that, while certain portions of the assignment agreement broadly transferred all of the cedent’s rights to obtain information, the provisions transferring the insurer’s rights to obtain payment under the treaties were limited to specifically defined powers, including the right to sue for, compromise, and recover amounts due.  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.


    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 our June 2013 Reinsurance Newsletter we discussed the ruling on the statute of limitations.  No new ground is broken on the denial of the motion to reargue.

    In denying the cross-motion to appoint an arbitrator, 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 the pending motion.  Now that the motion has been resolved, stated the court, the reinsurer was to proceed with the selection process provided by the reinsurance agreement.


    Platinum Underwriters Bermuda Ltd. v. Excalibur Reinsurance Corp., No. 12-70, 2013 U.S. Dist. LEXIS 98671 (E.D. Pa. Jul. 15, 2013).

    A Pennsylvania federal court has had a second chance to review an arbitration award arising out of a dispute between a cedent and reinsurer over the calculation of the experience account after commutation. Unlike the prior arbitration award, which was vacated when the panel removed the deficit carry forward clause and ordered relief not requested by the parties (PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 400 F. App’x 654 (3d Cir. 2010), the new award, the court found, drew its essence from the reinsurance contract and was confirmed.

    In its decision, the court provides a nice lesson on the role of a court in reviewing an arbitration award. Here are some good quotes: “I may vacate the Final Award only for irrationality, not for over or under ‘literality’.” “I may not vacate an arbitration award simply because I disagree with it.” The court distinguished its two decisions, stating that the current arbitration panel did not eviscerate the reinsurance contract, but grounded its decision on the language of that agreement. And that is the job of the arbitration panel: to render an award that draws its essence from the agreement.

    The prior arbitration award engendered a fair amount of controversy.  This award, as confirmed by the court, likely will not.


    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 applying California law 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, Kaiser Cement & Gypsum (“Kaiser”).  The cedent had issued excess umbrella coverage to Kaiser 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.

    The cedent first received notice of a possible loss under the Kaiser policy in 1988 and notice from Kaiser that its primary limits had been exhausted was not received by the cedent until 2001.  The reinsurer did not receive notice of a possible claim either in 1988 or 2001.  From 2001 to 2009, extensive litigation occurred between Kaiser and its excess insurers, including the cedent here, but notice was still not provided to the reinsurer.  During this period, the reinsurer commuted its own retrocession agreements that would have covered part of the Kaiser liability, but was unaware of the Kaiser claim as it negotiated those commutations.  Notice was provided to the reinsurer in 2009 when the underlying dispute between the cedent and Kaiser was settled.

    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.  The court rejected the cedent’s claim that the reinsurer was constructively on notice of the claim because notice of Kaiser-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.

    The court concluded that the reinsurer was entitled to a trial on whether it had suffered prejudice as a result of the late notice.  The court acknowledged that the reinsurer had identified several plausible grounds for finding prejudice, including that it had entered into commutations of its own reinsurance program without the benefit of knowing about its Kaiser-related exposure.  The court also noted that the cedent’s counsel in the underlying litigation had refrained from taking a particular litigation position because that position would not have been helpful to other excess carriers litigating against Kaiser.  This “best interests of the group” approach could have been avoided had the reinsurer been permitted to associate in the defense of the Kaiser claim to ensure that its interests were protected.

    Finally, the court addressed the question of whether the reinsurer could avoid having to prove prejudice if it instead could show that the cedent’s late notice was a result of bad faith.  Although the California Supreme Court has not ruled on whether a bad faith exception exists to the prejudice requirement, the court predicted that the California Supreme Court would in fact adopt such an exception.  The court permitted the reinsurer to take discovery on whether the cedent’s late notice was in bad faith and directed that the case then move to trial.


    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 has denied several motions to dismiss claims filed by a cedent against reinsurers and the reinsurers’ guarantors.  The dispute was over the interoperation of 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 breach of contract, and right for accounting.  The reinsurers and their guarantors moved to dismiss on the grounds of ripeness and under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

    The reinsurers and their guarantors argued that cedent’s claims were not ripe for litigation because the amounts due under the reinsurance and retrocession agreements—which were claims subject to arbitration—had yet to be determined and that the cedent was essentially asking the court to rule on a purely hypothetical dispute that may never arise.  They also argued that the cedent’s claims were properly subject to arbitration.  The court, however, disagreed and construed the guarantees as a guaranty of payment (collectable immediately upon default) rather than a guaranty of collection (collectible only after exercising due diligence in attempting to collect the debt). Because the guaranty was a guaranty of payment, the court determined that the cedent’s claims were ripe for consideration. Furthermore, because the guarantee agreements lacked a governing arbitration provision, the court ruled that the cedent’s claims as against the guarantors were not subject to arbitration even though the guarantee, reinsurance, and retrocession agreements were related agreements.

    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. 


    Munich Reinsurance Am., Inc. v. Utica Mut. Ins. Co., No. 13 Civ. 238 (KBF) (S.D.N.Y. Jun. 18, 2013).

    A New York federal court granted a cedent’s motion to transfer a reinsurance dispute over a 1977 reinsurance contract from the Southern District of New York to the Northern District of New York.  The cedent had already commenced an action against the reinsurer in the Northern District of New York on a 1973 reinsurance contract and claimed that the cases were related and would include overlapping discovery.  In granting the transfer motion, the court found that the factors considered on this type of motion weighed in favor of transfer because the cedent has its place of business in the Northern District, the reinsurer did not have its principal place of business in the Southern District, none of the witnesses were in the Southern District, and the operative conduct took place at the parties’ head offices, which no longer include the Southern District.


    Aioi Nissay Dowa Ins. Co. v. Prosight Specialty Mgmt. Co., 11 Civ. 1330 (JPO), 2013 U.S. Dist. LEXIS 87050, 2013 WL 3111349 (S.D.N.Y. Jun. 20, 2013). 

    A New York federal court sided with a reinsurer in a dispute with a cedent over a series of excess-of-loss loss and reinstatement premium payment reinsurance agreements.  This case arose out of the infamous Fortress Re aviation pool.  The cedent participated on property and liability insurance policies to airlines, which unfortunately were involved in the September 11, 2001 attacks.  The reinsurer participated in four excess-of-loss reinsurance contracts through the Fortress Re pool.  The excess-of-loss contracts had reinstatement of premium provisions should the limit of liability be exhausted by the payment of loss. The cedent also entered into a series of premium protection contracts with the Fortress Re pool, which protected the cedent from its obligation to pay reinstatement premium under the excess-of-loss contracts. 

    Following the massive aviation losses from September 11, 2001 and other aviation losses during the relevant period, the cedent commuted its liabilities with certain members of the Fortress Re pool, which had become insolvent.  The reinsurer here declined to enter into a commutation agreement.  Apparently, the reinsurer did not know about the cedent’s commutation with the other Fortress Re pool members.  The cedent billed the reinsurer under the premium protection contracts as if it had not commuted with the other members of the Fortress Re pool.

    The reinsurer filed suit against the cedent, arguing that it was only obligated to reimburse for its percentage of reinstatement premiums actually paid.  After a bench trial, the court rejected the cedent’s counter-argument that the parties intended that the reinsurer’s payments under the premium protection contracts would match dollar-for-dollar the excess of loss reinstatement premiums that the cedent owed to the reinsurer.  Under New York law, the court held that the parties likely had no intent regarding what would result if commutations were made with the other Fortress Re pool members at the time the contracts were executed, the language of the premium protection contracts was controlling and, while ambiguous, the language was clear that the reinsurer was only liable for a percentage of reinstatement premiums actually paid.

    The court found that the reinsurer’s liability was limited to its assumed percentage of the percentage of reinstatement premium the cedent actually paid to the reinsurer under the excess-of-loss contracts following the commutations.  The court ruled that to hold the reinsurer liable for more would violate the ultimate net loss clauses in the contracts and was consistent with the several liability clauses limiting the reinsurer’s liability to its share of the total cost of reinstatement regardless of whether the other pool members could pay.

    The cedent argued that both types of contracts had to be read together as a package.  The court rejected this argument, finding that the contracts, while purchased from the same reinsurers, had no textual connection and were purposely kept separate for competitive reasons.  The court held that extrinsic evidence failed to show that the parties had any particular intent as to what should happen if members of the Fortress Re pool disappeared.  The court also rejected the cedent’s statute of limitations defense based on an open account theory, along with other defenses.


    Republic Ins. Co. v. Banco De Seguros Del Estado, No. 10 C. 5039, 2013 U.S. Dist. LEXIS 110842 (N.D. Ill.  Jul. 26, 2013).

    An Illinois federal court addressed competing summary judgment motions in a long-standing retrocessional dispute arising out of the old Pan Atlantic syndicate.  The retrocedent was seeking long overdue reinsurance recoverables.  The retrocessionaires were seeking rescission for breach of a retention warranty.

    In dismissing the counterclaims based on the retention warranty, the court analyzed the parties’ relationships and the relevant contract wording.  It found that the warranty language applied to the syndicate as a whole and not to the retrocedent, which acted as the fronting company for the syndicate in addition to its own syndicate participation. 

    The court also rejected the retrocedent’s open account theory to avoid the retrocessionaire’s statute of limitations argument.  The parties disagreed over what law applied and after performing an analysis using Illinois choice-of-law principles, the court held that English law applied.  Based on English law, the court rejected the account stated theory and found that claims made on billings before a certain date were barred by the applicable six-year limitations period.


    Mine Safety Appliances Co. v. AIU Ins. Co., C.A. No. 10C-07-241 MMJ, 2013 Del. Super. LEXIS 229 (Del. Super. Ct. Jun. 6, 2013).

    A Delaware state trial court approved a Special Discovery Master’s memorandum opinion and clarifying letter granting in part and denying in part an insured’s motion to compel various insurance-related discovery from certain defendant insurance carriers.  The case involved insurance coverage for thousands of toxic tort claims brought against an insured.

    The insured had previously requested discovery of information on coal-dust-related claims submitted to the insurers by other policyholders, and information on the insurers’ agreements and communications with their reinsurers about policies issued to the insured.  On the insured’s motion to compel, the Special Master (1) denied the insured’s request to compel production of other policyholder information, (2) granted the insured’s request to compel production of reinsurance agreements only as to those insurers against whom the insured was seeking monetary damages, and (3) denied the insured’s request to compel the insurers to produce all communications between them and their reinsurers relating to policies issued to the insured, with a narrow exception for those insurers that had raised and maintained an untimely notice defense. 

    The insured argued that reinsurance information should encompass all fact-based affirmative defenses, and should not be limited to the late notice defenses.  The insurers presented various arguments in response: that the Special Master correctly concluded that only non-privileged communications with reinsurers regarding the late notice defense were sufficiently relevant to require production; that all communications between the insurers and their reinsurers are protected as work product or subject to the attorney-client privilege; that Delaware Superior Court discovery rules relating to insurance agreements do not apply to reinsurance contracts. 

    The reinsurers argued that because the insured was not a party to any reinsurance agreement, the reinsurers could not be liable for any risk beyond the terms of the reinsurance agreement and that any communications the reinsurers had with the insurer were protected by the work product privilege.  Those arguments notwithstanding, the court approved of the Special Discovery Master’s memorandum opinion, finding that the opinion properly applied Delaware law and was crafted to balance the need for relevant discovery, the burden on the parties in identifying and producing discovery, and applicable privileges. 


    Wellpoint, Inc. v. Nat’l Union Fire Ins. Co., 989 N.E.2d 845 (Ind. App.Ct. Jun. 19, 2013)(Memorandum Decision – Not For Publication).

    An Indiana state court of appeals affirmed a trial court grant of summary judgment against a cedent that secured several reinsurance contracts to cover errors and omissions liability.  The cedent had issued to itself policies for errors and omissions coverage and then entered into several reinsurance agreements for those policies. The cedent was later sued in several unrelated state and federal actions that alleged improper denial of reimbursement and claims arising under federal and state racketeering laws.  As a result of the settlement of some of these state and federal actions, the cedent sought reimbursement under its reinsurance contracts.  The reinsurers denied coverage and litigation ensued.

    The Indiana trial court held that the alleged wrongful acts of the cedent in the state and federal actions were not acts connected with “professional services in the form of claims handling or adjusting” and therefore the cedent was not entitled to coverage under its polices and therefore the reinsurance contracts did not have to respond.  In affirming the trial court, the court of appeals examined the policy language and determined that the underlying claims were not covered under the definition of “Professional Service” as the term was used in the policies.  One of the three appellate judges dissented, however, stating that the policies provided coverage for the rendering or failure to render professional services. The dissent’s opinion stated that it was unclear whether the claims against the cedent would qualify as a normal “failure to render” coverage, which would be within the scope of coverage rather than malicious and intentional acts which would be excluded from coverage.


    White v. The PNC Fin. Servs. Grp., Inc., No. 11-7928, 2013 U.S. Dist. LEXIS 86650 (E.D. Pa. Jun. 20, 2013).

    In this case, plaintiffs accused one of the defendant banks and its affiliated reinsurer of carrying out an illegal captive reinsurance scheme.  The defendants moved to dismiss the RESPA allegations and the court granted the motion based on untimeliness and a failure of the plaintiffs to justify a tolling of the limitations period based on concealment.  Leave to replead was granted.

    A similar result occurred in Menichino v. Citibank, N.A., No. 12-0058, 2013 U.S. Dist. LEXIS  101102 (W.D. Pa. Jul. 19, 2013) and Manners v. Fifth Third Bank, No. 12-0442, 2013 U.S. Dist. LEXIS 101100 (W.D. Pa. Jul. 19, 2013).



    The New York State Department of Financial Services (“DFS”) started an “investigation” of whether certain non-U.S. reinsurers that do business in New York may be violating the Iran sanctions by insuring companies involved in trading with Iran and Iran-related companies on the sanctions list. In late June, the DFS sent out an inquiry letter to around 20 non-U.S. reinsurers off the DFS’ Certified Reinsurer list, requiring a response by July 15, which was apparently extended to July 30. On July 24, the DFS issued Circular Letter No. 6 (2013), which requests similar responses from a group of around 20 non-US reinsurers on the DFS’ Accredited Reinsurer list. The due date for responding was August 16.

    Violations of the Iran Freedom and Counter-Proliferation Act of 2012 and other sanctions regimes are under the jurisdiction of the U.S. Treasury Department's Office of Foreign Assets Control (“OFAC”). OFAC has investigated and sanctioned some reinsurers for reinsuring cedents who issued property insurance and other coverages to Iranian shipping companies. Sanctions against reinsurers are still fairly unique, but all reinsurers that do business in the United States via affiliates or otherwise, need to be mindful that international sanctions, especially U.S. sanctions on Iran, are being strictly enforced and investigated by OFAC. While it is possible to get a “license” to enter into a transaction in advance (essentially pre-clearance), it is not an easy process. Still, OFAC is willing to work with insurers and reinsurers to avoid sanctions where possible.

    What the DFS is doing is another example of a state regulator/prosecutor, addressing an issue that is presumptively under federal jurisdiction. But the DFS has broad powers to investigate and obtain information from insurers and reinsurers doing business in New York so this probe will continue.

    It may be that this is just the second round of information requests, which may be followed up by requests to U.S. domiciled reinsurers who do international business and who are either accredited or licensed in New York. Even if your company has not gotten a DFS letter yet, it does not mean that you are off the hook. And in any event, if you do any overseas business, through affiliates or otherwise, having a sanctions compliance program in place is necessary.


    On July 12, 2013, insurance companies, banks and other financial institutions, received a reprieve from the Internal Revenue Service (“IRS”).  The agency delayed, by six months, withholding and other requirements mandated by the Foreign Account Tax Compliance Act (“FATCA”). The IRS announced the delay in Notice 2013-43. FATCA places onerous reporting and withholding obligations on foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”) to promote the disclosure of financial information of their account holders or owners. The delay will allow foreign governments and financial institutions more time to put in place the information technology structures necessary to comply with the reporting requirements of FATCA.

    Life insurance companies which issue, or are obligated to make payments for a cash value insurance or annuity contract, are considered financial institutions for FATCA purposes. Foreign reinsurance entities must determine whether they are FFIs or NFFEs and comply with the requisite obligations. FFIs must either (1) enter into an agreement with the United States (becoming participating FFIs), subjecting them to comprehensive reporting, due diligence, withholding, record-keeping, and other obligations with respect to their U.S. account holders; or (2) be in a country which has entered into an inter-governmental agreement (“IGAs”) with the United States. Otherwise, they will be subject to a 30 percent withholding tax to be applied to certain U.S. source payments. NFFEs must disclose their substantial U.S. owners to their payors, who then must pass this information onto U.S. authorities.

    Subject to certain exceptions, covered payments include any payment of U.S. source FDAP income.  FATCA regulations specifically include as a withholdable payment, premiums for life insurance contracts or annuity contracts and amounts paid under cash value insurance or annuity contracts. In addition, reinsurance premiums paid by U.S. insurance companies to foreign reinsurers are treated as U.S. source FDAP and thus a withholdable payment that may have to be withheld upon.

    The 6-month delay will allow withholding agents (reinsurance intermediaries and other insurance brokers may be classified as withholding agents), U.S. or otherwise, to begin withholding 30 percent on payments made to noncompliant FFIs for payments made after June 30, 2014, rather than the previously scheduled January 1, 2014, start date. The delay does not affect the timing provided in the final regulations for withholding on gross proceeds, pass-through payments, and payments of U.S. source FDAP on offshore obligations by persons not acting in an intermediary capacity. For the first FFI reports due March 31, 2015, FFIs will now only be required to report information for the 2014 calendar year (for U.S. accounts identified by December 31, 2014) rather than including information for 2013 as well. This will also apply to companies in countries which sign IGAs. Transition rules may apply to certain offshore obligations.

    Initially targeted for July 15, 2013, the FATCA registration portal website was made accessible to financial institutions on August 19, 2013. Prior to January 1, 2014, any information entered into the system will not be regarded as a final submission. The IRS will not issue any global intermediary identification numbers (“GIINs”) in 2013. Instead, it will begin issuing GIINs as registrations are finalized in 2014. The IRS will now electronically post the first IRS FFI list by June 2, 2014, and will update the list on a monthly basis thereafter. To ensure inclusion in the June 2014 IRS FFI List, FFIs would need to finalize their registration by April 25, 2014.



    Teal Assurance Co. Ltd. v. W R Berkley Ins. (Europe) Ltd. and Aspen, [2013] UKSC 57 (31 July 2013).

    The Supreme Court of England and Wales has affirmed a lower court’s ruling that an insured cannot choose the order in which it presents claims to its insurers in order to avoid exclusions in certain layers and maximize its own recovery.  In this dispute, the insured had arranged a tower of insurance for worldwide claims, with the primary layer written by an unaffiliated insurer and the excess layers written by the insured’s captive.  A final “top and drop” layer, which became the primary lawyer upon exhaustion of all lower layers, sat above the captive’s intermediate layers.  That uppermost layer was also written by the insured’s captive, but then reinsured with unaffiliated reinsurers. 

    The dispute arose because of exclusions in the “top and drop” layer.  While the primary and intermediary excess layers covered claims arising from all jurisdictions, the “top and drop” layer excluded claims arising from the United States and Canada.  The insured found itself faced with significant U.S. and non-U.S. claims.  If the non-U.S. claims were settled first, the U.S. claims would be excluded from coverage under the “top and drop layer.”  Conversely, if the insured could allocate its U.S. claims to the primary and intermediate excess layers, the non-U.S. claims would be fully covered by the “top and drop” layer. 

    In upholding the Court of Appeals’ decision against the insured, the Supreme Court reaffirmed the principle that an insured’s claims exhaust the primary and successive excess layers in the chronological order in which the losses are ascertained, not based on the insured’s decision to change the order in which it pays claims in  order to maximize available insurance.  The Court noted that the insured’s captive, which wrote the “top and drop” layer in the first instance before ceding those liabilities to third party reinsurers, was only arguing that in favor of a maximization of its own insurance liabilities because it was affiliated with the insured and was then ceding liabilities to reinsurers. It would not have been commercially reasonable for an independent insurer to take such a position.


    Larry Schiffer is speaking on the NFL Concussion Injury Cases at the Claims Committee meeting of the Brokers and Reinsurance Markets Association on September 10, 2013, in New York City.

    Eridania Perez will be speaking on “Access to Records - Is Sharing Information on Claims With Reinsurers a Thing of the Past?”, at the Contract Wording Discussion Group on September 24, 2013, in New York City.

    John Nonna is chairing and Larry Schiffer is speaking on technology in reinsurance arbitrations at the ARIAS•U.S. Fall Educational program on October 30, 2013, in New York City.

    Eridania Perez is speaking on International Arbitration Issues in Latin America as part of the ARIAS•U.S. Fall Conference and Annual Meeting on October 31, 2013, in New York City.  Larry Schiffer is speaking at the same conference on Changes to the ARIAS•US Arbitrator Ethical Guidelines on November 1, 2013.

    Eridania Perez presented a “Practical Session on Cross-Examination,” including a mock cross-examination, at the International Commercial Arbitration Summer Seminar presented by the University of Florence and the ICC International Court of Arbitration on July 25, 2013, in Florence, Italy.

    Eridania Perez appeared in Law360’s Q&A Series in May 2013.

    Suman Chakraborty appeared in Law360’s Q&A Series in June 2013.

    Larry Schiffer’s Commentary, “Reinsurance and Emerging Risks,” was published on the website of the International Risk Management Institute, Inc.,, in June 2013.

    Larry Schiffer’s article, “A Primer on Technology in Arbitrations,” was published in the ARIAS•U.S. Quarterly, Vol. 20, No. 2, 2d Quarter 2013.