Protecting Reinsurer Arbitration Rights in Insurer Insolvencies
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Protecting Reinsurer
Arbitration Rights in
Insurer Insolvencies
ALSO IN
THIS ISSUE
Cedent-Reinsurer Information
Sharing: Law and Practice, Part II
Follow the Fortunes: The Case for
Aggregation Under a CAT XL
The Role of Arbitrators in
Questioning Witnesses
Recent Reinsurance Decisions
in Federal Court: Part I
Q1 • 2022
TABLE OF CONTENTS
FEATURES
2 Protecting Reinsurer Arbitration Rights in
Insurer Insolvencies
By Robert M. Hall
2 Protecting Reinsurer 19 T
he Role of Arbitrators in ALSO IN THIS ISSUE
Arbitration Rights in Insurer Questioning Witnesses
Insolvencies By Charles E. Leasure, III and 1 EDITOR’S LETTER
By Robert M. Hall Daryn E. Rush
24 CASE SUMMARIES
8 Cedent-Reinsurer Information 22 R
ecent Reinsurance 28 RECENTLY CERTIFIED
Sharing: Law and Practice, Decisions in Federal Court:
Part II Part I 29 NEWS AND NOTICES
By Richard C. Mason, Esq. By James F. Jorden
BACK COVER
13 Follow the Fortunes: The BOARD OF DIRECTORS
Case for Aggregation Under
a CAT XL
By Curtis B. Leitner and Larry
P. Schiffer
EDITORIAL POLICY — ARIAS • U.S. welcomes manuscripts of original articles, book reviews, comments, and case notes from our members dealing with current and emerging issues
in the field of insurance and reinsurance arbitration and dispute resolution. All contributions must be double-spaced electronic files in Microsoft Word or rich text format, with all
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may require either a summary or an abridged version, which will be published in our hardcopy edition, with the entire article available online. Alternatively, the Quarterly may elect
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tachments. Material accepted for publication becomes the property of ARIAS • U.S. No compensation is paid for published articles. Opinions and views expressed by the authors are
not those of ARIAS•U.S., its Board of Directors, or its Editorial Board, nor should publication be deemed an endorsement of any views or positions contained therein.
COVER ARTWORK: KROLONE /ADOBE STOCK
EDITOR’S LETTER
We kick off the first ARIAS Quarterly Charlie and Daryn explore the limits
of 2022 with belated wishes for a hap- to arbitrator questioning and expand
py New Year and a request for article on the audience polling at the Fall 2021
submissions. If you have been read- Conference to provide a sense of how
ing these pages, you know we have the community feels about this issue.
been blessed with terrific articles from
across the ARIAS universe. But we need Our final article comes from James
more of them, and from more of you. F. Jorden of Faegre Drinker Biddle &
Reath LLP, who also got the hint and
We need ARIAS committee articles prepared what will be a two-part ar-
and reports. We need those of you who ticle based on his “Hot Topics in the
have presented or will be presenting Life Insurance Industry” panel from
sessions at fall and spring meetings the Fall 2021 Conference. Titled “Re-
or educational programs to turn your tential for waiver of the attorney-client cent Reinsurance Decisions in Feder-
presentations into articles (see below). privilege during a records inspection al Court: Part I,” the article discusses
If you are new to ARIAS or have not and discusses best practices for audits several important decisions in the life
been published, let the Quarterly help and the effect of non-payment and re- realm that may have gone unnoticed
you out and enhance your resumé. scission claims on the right to audit. by those who practice in the property
Don’t let your thought leadership lie This is an important article for anyone and casualty world.
dormant. Submit an article today. involved in reinsurance audits.
We hope that seeing two articles based
We have several excellent articles in COVID-19 has generated thousands on ARIAS conference panels prompts
this issue of the Quarterly. We start of claims under all forms of insur- some of you to join in the fun and write
off with another thoughtful article ance policies, from life and health to your own article based on your presen-
from Quarterly Editorial Committee travel and event cancellation to prop- tation. We look forward to (hopefully)
member Robert M. Hall of Hall Arbi- erty and liability. Cedents with large seeing everyone on Amelia Island in
trations. Bob has put together an in- numbers of these claims have been May for the ARIAS Spring Conference.
teresting piece on insurance insolven- considering whether some form of
cy, arbitration rights, and jurisdiction. aggregation under existing excess-of-
Titled “Protecting Reinsurer Arbitra- loss treaties is possible. Curtis Leit-
tion Rights in Insurer Insolvencies,” ner, counsel at Morvillo Abramowitz
the article addresses how the type of Grand Iason & Anello PC, looked at
jurisdiction matters when addressing aggregation (with some help from me)
arbitration rights in insurance insol- through the prism of the fol- Larry P. Schiffer
vencies. For those lawyers among you low-the-fortunes doctrine. The result- Editor
who forgot your civil procedure from ing article, “Follow the Fortunes: The
law school, this article will refresh Case for Aggregation Under a CAT XL,”
your memory. provides an interesting perspective.
We hope you find it informative.
Following Bob’s article, we have Part
II of “Cedent-Reinsurer Information Taking a cue from prior pleadings in
Sharing: Law and Practice.” Authored this column, Charles E. Leasure, III of
by Richard L. Mason of MasonADR, Stevens and Lee and Daryn E. Rush of
Part II addresses the less-well-un- O’Melveny & Myers LLP took their Fall
derstood law governing inspection of 2021 panel and turned it into an arti-
books and records under access-to-re- cle titled “The Role of Arbitrators in
cords clauses. Richard explains the po- Questioning Witnesses.” In this article,
ARIAS • U.S. QUARTERLY – Q1 · 2022 1
INSURER INSOLVENCIES Protecting Reinsurer Arbitration Rights in Insurer Insolvencies By Robert M. Hall When insurer insolvencies occur, re- period, but some lessons learned from receivership court conflict applies to insurance is often the largest asset of that saga remain valuable today when other parties as well, such as claim- the estate, making reinsurance recov- a reinsurer’s client becomes insolvent. ants [3], cedents [4], agents [5], sellers erables a top priority for state insur- of stock [6], securities brokers [7], and ance company receivers. This became One such lesson relates to the forum even other receivers [8].) a major issue for reinsurers following for resolving disputes between the the 1983-1992 time period, during receivers of primary insurers and the The outcome of this forum conflict which 385 insurers became insolvent insurer’s reinsurers. Receivers gen- between arbitration and the receiver- [1], partly as a result of a prolonged erally prefer the friendly confines of ship court, as well as the key in rem v. soft market plus unanticipated pol- receivership courts [2], while reinsur- in personam issue, is highlighted by lution and asbestos-related claims. ers generally prefer arbitration be- recent litigation in Puerto Rico con- Fortunately, insurer insolvencies de- fore insurance industry professionals. cerning an insurer rendered insol- creased substantially after that time (Interestingly, the arbitration versus vent from a series of hurricanes. The 2 www.arias-us.org
decisions in this case will be used as in that it did not contain a mechanism [T]he Court understands that the ar-
a jumping-off point to a broader ex- to resolve disputes over the qualifica- bitration of Integrand’s claims against
amination of whether and under what tions of arbitrators. The court rejected Defendants will not interfere with the
circumstances a reinsurance dispute this argument on the following bases: state’s insolvency scheme. Nonetheless,
will be handled in an arbitration rath- (a) given the strong federal policy in fa- if there was an existing state law, which
er than a receivership court. Finally, vor of arbitration, this was insufficient the Court found no such law exists, that
there will be recommendations on tac- to find the clause unenforceable; and prohibits arbitration of disputes involv-
tics to maximize the use of arbitration (b) Section 5 of the Federal Arbitration ing an insolvent insurer, then the FAA
in disputes with receivers. Act (FAA) allows a court to appoint an would preempt such law [13].
arbitrator when there is a “lapse in the
naming of an arbitrator” [10].
Initial Decision: Integrand Receiver’s Motion for
Assurance Co. v. Everest Re, The receiver also argued that the Reconsideration
No. 19-1111 (DRD) (DPR) “honorable engagement” language
and freeing the arbitrators from On the receiver’s motion to recon-
The initial decision in this matter “strictly following the rules of law” sider, the district court confirmed
was unreported. The fact situation in the arbitration clause were in but broadened and deepened its pri-
involved two successive hurricanes contravention of Puerto Rico law. Cit- or ruling. Integrand Assurance Co. v.
that struck Puerto Rico, with a rein- ing cases from the U.S. Supreme Court, Everest Reinsurance Co., No. 19-1111
statement of the cedent’s reinsurance the district court rejected this argu- (DRD), 2020 U.S. Dist. LEXIS 77407
limits in between. Reinsurers sought ment, stating, “[T]he Court under- (D.P.R. May 1, 2020). The court first
to enforce their contractual rights of stands that the FAA trumps any state ruled that the receiver had met none
inspection to sort out the damages law that undermines the liberal feder- of the tests for reconsideration, then
related to each hurricane. The cedent, al policy favoring arbitration, such as went on to consider the receiver’s sub-
however, refused, and the reinsurers is the case with Article 1207 of Puerto stantive arguments.
withheld payment of losses. The ce- Rico Civil Code” [11].
dent initially filed an arbitration de- The receiver cited both extensive pro-
mand against the reinsurers, but as it Additionally, the receiver argued rebus visions in the insurance code related
moved through rehabilitation to liq- sic stantibus—freely translated, that a to receivership of insurers and the
uidation and disputes over arbitrators fundamental change in circumstances insurance commissioner’s powers in
arose, the receiver’s approach changed should free the cedent from the terms an attempt to prove that the receiver,
to litigation. of its reinsurance contracts. The dis- and the receivership court, had ex-
trict court stated that there is a sev- clusive jurisdiction over matters per-
The reinsurers removed the receiver’s en-part test to the application of this taining to the cedent’s estate. The dis-
state court action to federal court and extraordinary remedy, the first being trict court rejected these arguments
moved the district court to compel that the change in circumstances be pursuant to the Supremacy Clause of
arbitration. Among other things, the unforeseeable. The court observed the U.S. Constitution:
receiver asked the court to declare the that hurricanes in Puerto Rico are
arbitration clause null and void due to hardly unforeseeable, particular- The court finds that the receiver-
ambiguity and other defects [9]. The ly since the cedent reinsured its ship/liquidation provisions of Puerto
arbitration clause contained standard hurricane exposure [12]. Rico’s Insurance Code do not afford
language, unusual only in that it con- the Receivership Court with “exclu-
tained an abbreviated time period for Finally, the receiver argued that the sive jurisdiction” to dispose of the
a hearing and award. arbitration would interfere with a causes of action in this case nor the
comprehensive scheme for liquidating arbitration procedures to be held as
The receiver argued to the court that insurers. The court rejected this argu- the result of the judgment entered
the arbitration clause was ambiguous ment, ruling as follows: by the Court [14].
ARIAS • U.S. QUARTERLY – Q1 · 2022 3
INSURER INSOLVENCIES
Even if this were not the case, The In Rem versus In jurisdiction. One is Davister Corp. v.
the court ruled, state law could Personam Distinction United Republic Life Insurance Co., 152
not divest the federal courts F. 3d 1277 (10th Cir. 1998). The plaintiff
of jurisdiction: The distinction between in rem and in sold certain real estate to the insurer,
personam jurisdiction is explained in but the domiciliary regulator ordered
The Supreme Court has indisputably Fuhrman v. United America Insurers, that the transaction be reversed. Be-
stated that “state courts are complete- 269 N.W. 2d 842, 846 (Minn. 1978): fore this was accomplished, the insur-
ly without power to restrain feder- er was placed in receivership and the
al court proceedings in in personam When a corporation is placed in receiver- receiver took control of the real estate.
actions like the one here.” . . . ship, the court which grants the remedy The seller of the real estate filed suit
[As a matter of law, the Liquidation and appoints the receiver also receives, to compel arbitration over the own-
Order cannot divest the Court of by operation of law, constructive posses- ership of the real estate. The court
jurisdiction to entertain the is- sion of the corporate assets. The corpus of declined to do so, as the action dealt
sues in the instant case. Plain- the property is the receivership res. It is with an asset of the estate (i.e., an in
tiff’s argument as to this matter is well settled that once the res comes into rem proceeding).
thus dismissed [15]. possession of the court, no action of any
kind may be maintained which would Another in rem decision is Profes-
Finally, the receiver claimed that the interfere with this possession. sional Construction Consultants, Inc.
Puerto Rico Insurance Code reverse v. Grimes, 552 F. Supp. 539 (W.D. Ok.
pre-empted the McCarran-Fergu- The crucial factor, however, is that not 1982), which was an effort to collect
son Act, which was the lever used by every suit brought against a receiver- on a performance bond issued by the
the reinsurers to seek an order to ship defendant is deemed to interfere insolvent insurer. The court ruled that
compel arbitration under the FAA. with the res. The distinction is com- only the receivership court could rule
In support of this claim, the receiv- monly made between the liquidation on an action to collect from the assets
er cited to Munich American Rein- of a claim and the enforcement of of the estate, citing to a similar result
surance Co. v. Crawford, 141 F.3d 585 the claim after it has been reduced to in United States v. Bank of New York &
(5th Cir. 1998) cert denied 525 U.S. 1016 judgment. Thus, an action in perso- Trust Co., 296 U.S. 463 (1936).
(1998). In this case, the court found nam to establish the extent of an in-
that (a) the state receivership code solvent’s liability on a claim is held not An early case finding in personam
did give the receiver exclusive con- to interfere with the receivership res. jurisdiction is Ackerman v. Tobin,
trol over the estate, (b) the receiv- By the same token, any attempted at- 22 F. 2d 541 (8th Cir. 1927). The court
ership code reverse pre-empted tachment or levy against the res made found that an action to determine li-
McCarran-Ferguson, and (c) the re- in connection with a judgment is nor- ability on a policy, as distinct from
insurer’s attempt to collect salvage mally in rem and directly opposed to collecting on the liability, was an in
from the estate was an in rem ac- the court’s dominion over the res. personam action.
tion against funds in the estate [16].
The Integrand court rejected the In essence, an action to establish li- Bernstein v. Centaur Insurance Co., 606
Munich American precedent, as the ability is in personam, but an action F. Supp. 98 (S.D. N.Y. 1984), represents
Puerto Rico Insurance Code did not that is a direct effort to collect assets the typical case in which the receiver
grant exclusive jurisdiction and did from the estate is in rem. sues for reinsurance proceeds and the
not apply to in personam claims by reinsurer removes to federal court and
the estate against a reinsurer [17]. moves to compel arbitration. The court
The district court supported In Rem versus In Personam distinguished an earlier case in which
this ruling with caselaw result- Caselaw the plaintiff was seeking to recover
ing from an earlier era of insur- insurance proceeds [the res] from an
ance insolvencies, which will be In addition to Munich American, sev- insolvent insurer. The Bernstein court
examined below. eral other cases demonstrate in rem granted the motion, stating, “In the
4 www.arias-us.org
instant case . . . the plaintiff [receiver],
not defendant, is the holder of the res
under the supervision by the state in- In essence, an action to
establish liability is in
surance department of insurance and
independent federal diversity jurisdic-
tion is present” [18].
A Ninth Circuit case distinguishing in personam, but an action
that is a direct effort to
personam jurisdiction is Hawthorne
Savings F.S.B. v. Reliance Insurance
Co., 421 F. 3d 835 (9th Cir. 2005), which
involved a suit by a bank against the
insurer on a loan default and defense
collect assets from the
of the claim by a directors and officers
liability insurer. During the course of
the suit, the insurer became insolvent,
estate is in rem.
but the district court declined to defer
to the receivership court and tried the
case to a verdict. The court ruled that Plaintiff here seeks contribution and question that [the insolvent cedent] has
determination of liability under the declaratory relief, but does not seek at- contract rights (assets) in the contracts.
D&O policy was an in personam action tachment or levy against any res made The goal here is to determine what [the
that the state court was without power in connection with a judgment. As an in cedent’s] and [the reinsurer’s] rights are
to enjoin. However, the court observed personam action, it would be a claim under the contracts. Therefore, the case
that should the insured receive a fa- reduced to judgment, which would is an in personam proceeding.
vorable ruling, the insured would still not interfere with the receivership
have to present its claim to the insur- res or with the liquidation proceeding While it is true that [the reinsurer’s] de-
er’s receiver in order to recover. as contemplated by . . . the California sired outcome in this case could cause
Insurance Code [19]. the cedent’s estate to be smaller than if
American Alternative Insurance Corp. v. [the reinsurer’s] rights under the con-
American Protection Insurance Co., No. The receiver of a ceding insurer at- tract are resolved in [the cedent’s] fa-
11-cv-01865-AWI-SKO 2013 U.S. Dist. tempted to arbitrate disputes over vor, that does not mean that this is an
LEXIS 41992 (E.D. Cal. Mar. 25, 2013), 43 reinsurance contracts that did not action in rem. The mere fact that [ce-
was an action for contribution for le- contain arbitration clauses in Midwest dent’s] claimants may receive less mon-
gal fees for a mutual insured. While Employers Casualty Co. v. Legion Insur- ey does not make this case in rem. [The
the action was pending, the defendant ance Co. (In Liquidation), No. 4:07-CV- cedent’s] ownership of the contracts
was placed in receivership. Citing ex- 870 CDP, 2007 U.S. Dist. LEXIS 82857 will not be affected by the determina-
tensively to Hawthorne Savings, the (E.D. Mo. Nov. 7, 2007). The reinsurer tion of the issue in this case [20].
court ruled that the action for contri- sought an injunction under the FAA
bution was in personam: barring the receiver from pursuing In Re Rehabilitation of Manhattan
arbitration and for declaratory relief Re-Insurance Co., No. 2844-VCP, 2011
Thus, a judgment in favor of Plaintiff as to its liability under the contracts. Del Ch. LEXIS 146 (Ch.Ct. Oct. 4, 2011),
AAIC would also not be in the nature The court found that this was an involved an action by the reinsurer
of an attachment, garnishment or ex- in personam action: against the receiver to prevent the
ecution, or any other action that could receiver from using the proceeds of a
conceivably interfere with the Reha- The object of this case is not to de- credit for reinsurance letter of credit
bilitation Order issued against Defen- termine ownership rights to the re- that was prematurely drawn down by
dant APC in Illinois. As in Hawthorne, insurance contracts. There is no the receiver and to refer the matter to
ARIAS • U.S. QUARTERLY – Q1 · 2022 5
INSURER INSOLVENCIES
an arbitration panel. The court found Because this dispute is in essence a con- loss payables. The receiver argued for
that the receiver had exclusive juris- tractual one, it should be arbitrated. Burford abstention, which is a deferral
diction over in rem claims against the And because the liquidator, who stands by a federal court due to interference
assets of the estate, but that this was in the shoes of the insolvent insurer, is with a complex state scheme of regu-
an in personam action and that the re- attempting to enforce Glacier’s con- lation. The receiver took this argument
ceiver stepped into the shoes of the in- tractual rights, she is bound by Glacier’s to the U.S. Supreme Court and lost by a
surer in receivership in terms of being pre-insolvency agreements. . . . unanimous vote [22].
subject to the arbitration agreement.
Application of the FAA does not impair Eventually, the arbitration issue was
the liquidator’s substantive remedy resolved in Quackenbush v. Allstate In-
Other Caselaw Supporting under Montana law. Instead, it simply surance Co., 121 F.3d 1372 (9th Cir. 1997).
the Integrand Result required the liquidator to seek relief The receiver argued that it was inap-
through arbitration. The liquidator has propriate for arbitrators to consider
The receiver of Glacier General was presented no evidence that enforcing issues of state law such as setoff of
attempting to collect reinsurance pro- the arbitration clauses here will disrupt premiums against losses, but the court
ceeds in Bennett v. Liberty National the orderly liquidation of the insolvent found no such limitation in the FAA.
Fire Insurance Co., 968 F.2d 969 (9th insurer [21]. The receiver again argued interfer-
Cir. 1992). The receiver sued the re- ence with the state statutory scheme
insurers in state court, and the rein- Also within the Ninth Circuit was the of liquidation, but the court rejected
surers removed the action to federal long-running saga of Quackenbush that as well:
court and moved to compel arbitra- v. Allstate, which was an attempt by
tion. The receiver asked the court to the receiver of the Mission Group to Quackenbush points to the California
remand the action to state court on prevent Allstate from arbitrating var- statutory scheme for resolving claims
the basis that an arbitration would in- ious disputes with the receiver, par- against insolvent insurers and argues
terfere with her control of the estate. ticularly the right of a reinsurer to that arbitration would interfere with
The court disagreed: set off premium receivables against that scheme. But this statutory scheme
applies only to Allstate’s claims against
Mission; it does not apply to this case.
Thus, while the FAA might not man-
date arbitration of Allstate’s claims
against Mission, it continues to ap-
Application of the ply with full force to Mission’s claims
against Allstate [23].
FAA does not impair Atkins v. CGI Technologies & Solutions,
the liquidator’s
Inc. 724 Fed. Appx. 383 (6th Cir. 2018),
was an action by a receiver of a health
insurer against a vendor that supplied
substantive remedy administrative services to the insurer.
The vendor removed the state court
under Montana law. action to federal court and moved
to compel arbitration. The receiver
sought a remand, claiming “exclusive
jurisdiction.” The court denied the
remand, ruling that enforcing the ar-
bitration clause, consistent with the
FAA, would not invalidate or supersede
6 www.arias-us.org
a superior state interest and therefore receivership court, where it would be Supp. 2d 554 (S.D.N.Y. 1986).
does not reverse pre-empt the FAA. subject to the state priority-of-dis-
9 Slip op. at 4.
tribution statute. The key is to get all
of the disputes, other than collection 10 Id. at 14.
Arbitrations Tactics Based from the res of the estate, before an
on the In Rem versus In arbitration panel. 11 Id. at 17.
Personam Distinction
Subrogation and salvage recoveries. 12 Id. at 19-20.
Defensive use of arbitration. The easy Subrogation and salvage offer anoth-
13 Id. at 26.
lesson from the above caselaw is that, er opportunity for recovery based on
given a choice, it is better for a rein- a closer examination of in rem ver- 14 2020 U.S. Dist. LEXIS 77407 at *24.
surer that allegedly owes money to sus in personam jurisdiction. In the
the estate to await a suit by the re- Munich American case, the reinsurer 15 Id. at * 9 – 10 (internal citations omitted).
ceiver and then remove it to federal could have tried to establish that a
16 141 F.3d 595 at n. 6.
court and move to compel arbitration. ceding insurer (and its receiver) holds
Once the matter is in arbitration, the subrogation and salvage recoveries 17 2020 U.S. Dist. LEXIS 77407 at *24.
panel is free to consider what setoffs in trust for the reinsurer [24], which
and counterclaims the reinsurer is not part of the res of the estate 18 606 F. Supp. 98 at 103.
wishes to assert. and therefore is not subject to state
priority-of-distribution statutes. 19 2013 U.S. Dist. LEXIS 41992 at *12 – 13 (em-
phasis in the original).
Offensive use of arbitration. The more
subtle lesson is that in personam NOTES
20 2007 U.S. Dist. LEXIS 82857 at*7.
(rather than in rem) jurisdiction will
1 Best’s Special Report. 2016. Best’s Impair-
be applied to actions against receiv- 21 968 F.2d 969 at 972.
ment Rate and Rating Transition Study:
ers by reinsurers, cedents and others 1977-2015. A.M. Best.
as long as the actions are not a direct 22 Quackenbush v. Allstate Ins. Co., 517 U.S.
706 (1996). The author attended the oral ar-
effort to obtain assets of the estate. 2 The author was a leading reinsurer spokes-
gument, and Justice Scalia was at his acerbic
For instance, a reinsurer that is con- man on receivership issues in the 1980s and
best in questioning the attorney for the receiv-
testing coverage could file an arbitra- 1990s. Two of the largest insolvencies of that
er, who chose to argue the case himself rather
period, Mission Group and Transit Casualty,
tion for a declaratory judgment. If the than retaining experienced Supreme Court
were famous for the advocacy of their receiv-
receiver refuses to engage, based on a counsel. The receiver’s attorney claimed that
ership courts.
state anti-suit (and anti-arbitration) the 9-0 loss was actually a victory in that it
“cleared away the underbrush.”
injunction, the reinsurer can move a 3 Fragoso v. Lopez, 991 F. 2d 878 (1st Cir.
federal court to compel arbitration. If 1993); Murff v. Professional Medical Ins. Co.,
23 121 F. 3d 1372 at 1381.
the receiver declines to appoint an ar- 97 F.3d 289 (8th Cir. 1996).
bitrator and there is no power in the 24 Hall, Robert M. 2000. “Reinsurer Claims
4 Stephens v. American Int’l Ins. Co., 66 F.3d
reinsurance contract for the reinsurer to Subrogation and Salvage Recoveries in a
41 (2nd Cir. 1995).
to appoint a second arbitrator, the re- Receivership Context.” Mealey’s Insolvency
Report, No. 11 at 21.
insurer can petition the federal court 5 Knickerbocker Agency, Inc. v. Holz, 149
to appoint a second arbitrator and N.E.2d 885 (N.Y. 1958).
Robert M. Hall is a member
umpire under section 5 of the FAA. of the Quarterly Editorial
6 Davister Corp. v. United Republic Life Ins.
Committee, a former senior
Co., 152 F.3d 1277 (10th Cir. 1998).
A similar procedure could be followed vice president and general
counsel of a major reinsurer,
even if the reinsurer is owed premi- 7 Garamendi v. Caldwell, 1992 WL 203827 a former partner of a leading
ums. The liability can be established (C.D. Cal.) law firm, and an ARIAS-certi-
in the arbitration. The reinsurer could fied arbitrator and umpire.
then take the liquidated claim to the 8 Washburn v. Corcoran, 643 F.
ARIAS • U.S. QUARTERLY – Q1 · 2022 7ACCESS-TO-RECORDS CLAUSES Cedent-Reinsurer Information Sharing: Law and Practice, Part II By Richard C. Mason, Esq. Part I of this article, published in Inspection of Books The party asserting waiver in these the Q4 2021 issue of the ARIAS and Records circumstances may be the reinsurer it- Quarterly, discussed situations in self, which may contend that if a privi- which waiver of privilege or con- Waiver of privilege or confidentiality leged document falls within the scope fidentiality may occur when the may occur in the course of an inspec- of information it has a contractual cedent and reinsurer communicate tion of books and records pursuant to right to view, the cedent is precluded concerning a ceded claim. In Part an “access-to-records clause” in the from asserting privilege. II, I discuss the less-well-under- reinsurance contract. An access-to-re- stood law governing inspection of cords clause in a reinsurance contract The leading case concerning waiver in books and records under access-to- may require the cedent to disclose these circumstances has held that, ab- records clauses. proprietary or privileged information. sent explicit language to the contrary, 8 www.arias-us.org
a cedent does not give up its right to intended to … constitute a waiver of any control, in respect of business ceded un-
preserve the confidentiality of com- applicable privilege, including attorney der the Contract (“Records”). The Rein-
munications with its counsel regard- client privilege … [40]. surer’s notice shall reasonably describe
ing the underlying claims (including the nature of the inspection that it
coverage determinations) and in dis- The New York Appellate Division re- wishes to conduct, the persons conduct-
closing facts or producing documents jected the argument that the foregoing ing the inspection, the files that it wish-
in its possession relevant to the un- wording was intended only to protect es to review (after notice of available
derlying claim [37]. “Access to records against waiver vis-à-vis third parties files from the Company (if applicable).
provisions in standard reinsurance and held that the reinsurer that re- Subject to the limitations expressed in
agreements, no matter how broadly ceived privileged material could not this Article, this right of inspection shall
phrased, are not intended to act as a claim waiver. survive termination of this Contract
per se waiver of the attorney-client and shall continue as long as either par-
or attorney work product privileges” An example of a (relatively restric- ty has any rights or obligations under
[38]. Likewise, a reinsurer is not en- tive) audit conduct and confidentiali- this Contract.
titled under a cooperation clause to ty agreement is posted on the ARIAS
learn of any and all legal advice that website at www.arias-us.org/mason/. There are five issues that commonly
may have been obtained by the ce- arise concerning inspections and au-
dent with a “reasonable expectation dits. Each of these issues is addressed
of confidentiality” [39]. The Access-to-Records in turn below.
Clause: Law and Practice • May a reinsurer that is not current
in payments inspect?
• Whom may the reinsurer designate
The Audit and Confidentiality The principal features of a modern ac-
to inspect?
Agreement cess-to-records clause are as follows: • Can the cedent insist upon the re-
• It applies to all books and docu- insurer’s agreement that informa-
A large, “drains up” audit may be ments relating to business ceded; tion will remain confidential?
• It survives termination of the treaty; • What may the reinsurer inspect?
fraught with risk of inadvertent pro-
• It vests inspection rights in a desig- • May the reinsurer make and
duction of privileged material. For nated representative; retain copies?
example, I once received folders con- • It sets a time frame for the
taining attorney-client communica- inspection;
tions that were provided because the • It addresses the right to photocopy May a reinsurer that is not current in its
attorney author in question had de- or otherwise reproduce; and payments inspect records? One of the
• It requires confidentiality.
parted several years before, and a new most common grounds of contention
employee charged with producing the has never been resolved by a U.S. court.
documents did not realize they had Access-to-records clauses in certain A single decision, by an English court,
been prepared by counsel. reinsurance contracts have contained has addressed this question; it report-
wording the same as, or similar to, edly held that “The [cedent] is not …
A well-drafted confidentiality agree- the following: entitled in breach of contract to deny
ment is essential and may afford im- the debtor access to the only material
portant protection. The following Except as otherwise provided in this which would show whether or not the
wording has been found under New Article, the Reinsurer, or its duly au- debt is owing and then claim that he
York law to preclude waiver of privilege thorized representative, may upon has no material problem on which to
by a cedent that discloses information reasonable prior written notice to the contradict the bare assertion that it
to its reinsurer during an audit: Company, at Reinsurer’s own expense, is due” [41]. Thus, the commonly as-
examine at the offices of the Company, serted position that a reinsurer that is
Reinsurer agrees that any disclo- during normal office hours, the Com- “not current” cannot inspect records
sure of such information to Re- pany’s records and files as they exist in has never been endorsed by a legal de-
insurer [during the audit] is not the Company’s possession or reasonable cision, although it can be a plausible
ARIAS • U.S. QUARTERLY – Q1 · 2022 9ACCESS-TO-RECORDS CLAUSES
stance depending upon the material- legal authority that refusal to honor payroll records [47]. From February 23
ity of the non-payment. an access-to-records obligation may through May 12, the trustee’s auditor
be a material breach of the treaty and left at least six phone messages and
An arbitration panel may, of course, relieve a reinsurer or retrocessionaire faxed at least one request for docu-
seek to require a reinsurer to post se- of its duty to further indemnify [44]. ments. On June 12, the auditor finally
curity before commencing discovery A cedent’s “failure to provide relevant was able to meet with the company,
in arbitration [42]. Thus, a cedent that information” concerning the reinsur- but was told that the payroll records
believes it should not be required to er’s obligation to pay a claim has been were “not available at all.” The auditor
decided it could not complete the ex-
amination and took no further action.
The court held that the union had
breached the terms of the collective
The freedom, or bargaining agreement [48].
strictness, with which Practically speaking, if a cedent
demonstrates that a reinsurer did not
access to records is
genuinely need the inspection to de-
termine its obligation to pay and the
reinsurer’s refusal to pay was other-
granted may have wise unjustified, then the cedent’s re-
fusal to permit the audit likely will not
an unexpected subject the cedent to any liability or
adverse inference.
consequence. Who may inspect? It is very rare for an
agent, even an attorney, to be deemed
ineligible to act for the party for pur-
poses of conducting an onsite audit.
permit inspection until receivables held to have “violated the duty … owed Under a uniform stockholder’s agree-
are brought current may force an ar- to [r]etrocessionaires to act in good ment, for example, the stockholder
bitration if it believes it will be able to faith” [45]. may use any duly constituted agent,
obtain an order requiring the insur- including a consultant or attorney
er to post security based on its doubt In practice, then, a cedent that does not [49]. One audit firm was banned where
that the reinsurer will otherwise wish to freely permit inspection may (1) the parties already were in litiga-
satisfy its obligation. simply force arbitration. “In arbitra- tion, (2) the cedent had commenced
tion, the breaching party can produce suit against the audit firm on the
If the information the reinsurer seeks documents at the panel’s direction, ground it had taken a year to complete
is relevant to its obligation to pay (or to and then simply rely on the playground a two-week audit in order to delay
the amount), then a reinsurer’s refusal maxim ‘no harm, no foul’” [46]. the reinsurer’s payments, and (3) the
to pay may be deemed to be justified audit firm sued the cedent alleging
until it receives the required informa- Foot dragging, taken to extremes tortious interference with business
tion. It has been said that “the audit where an inspection right existed, has relationships. The court agreed with
right is so important that … when it is been found to give rise to a breach of the cedent that it was not obligated to
denied or delayed, there should be no contract. In one non-reinsurance case, permit that particular audit firm to in-
question of the right of the reinsurer a trust agreement required a union spect [50]. Certainly, a designee whose
to withhold payments until the audit to promptly furnish to a trustee all activities on behalf of clients give
or inspection is granted” [43]. There is records, including employment and rise to a genuine risk of bad faith or
10 www.arias-us.orgconfidentiality risks may be rejected risk or its obligation to pay claims. contract.” Circumstances in which
by a cedent. In other contexts, the phrase has financial records would meet this re-
been broadly construed. According to quirement are limited, but might
Does the cedent have the right to insist Fletcher on Corporations §2214, p. 755, include financial records shed-
on confidentiality? Although the an- for example: ding light on adequacy of reserves,
swer to this question seems plain, this particularly when reserves have been
is another issue that surfaces repeat- The common law rights obtains as to significantly strengthened or have
edly yet has never been the subject of the books and records not specified or proved deficient.
a reported decision. It has been com- included within the statutory provision,
mon for an inspection clause to fail to and … the specific mention of certain Is there an implicit right to receive
mandate confidentiality. Invariably, books and records does not in itself lim- copies of records? Reinsurers often
however, a cedent will insist on the re- it the right of inspection to such books express a need for their auditors to
insurer’s execution of a confidentiali- and records, or curtail the stockhold- make and retain (at least temporar-
ty agreement (at least), and reinsurers er’s right as to other books and records, ily) copies of documents. Cedents
customarily accede. or authorize the corporation to pre- have frequently sought to restrict or
vent examination of such other books preclude copying, and no court has
There is opinion to the contrary. and records at proper times and for resolved this fairly common point of
Requiring confidentiality as a con- proper purposes. dispute. Outside the reinsurance con-
dition to inspection arguably re- text, a number of courts have held
writes the reinsurance contract [51]. In this author’s experience, “books and that copying may be a necessary in-
An audit or access-to-records provi- records,” absent a clear showing of rel- cident to inspection, depending upon
sion that omits mention of confiden- evance, may not be deemed to include the circumstances:
tiality arguably waives the right to the following: • Where stockholders were permit-
insist on it. • operational manuals; ted to inspect records, the right to
• underwriting strategy; copies was deemed implicit [54].
• financial data not maintained as • A New York City municipal statute
Nevertheless, in other contexts, agree- permitted public disclosure of pa-
part of the file for the account;
ment to confidentiality has been • historical books and records no pers and records on request [55].
deemed an incident of the right to longer used on a current basis; or • A law giving union members the
inspect. A confidentiality agreement • attorney-client privileged documents. right “to examine any books, re-
“is a virtually sine qua non of a books cords, and accounts necessary to
verify” financial reports implicitly
and records inspection conducted of a An auditor who specializes in the class
permitted copying [56].
Delaware entity” [52]. In reinsurance, of business being inspected can be in-
the confidentiality of the inspection valuable to a reinsurer in establishing
process long ago became a well-en- a predicate for a broad inspection. For Nevertheless, in reinsurance dis-
trenched custom [53]. Accordingly, example, an auditor experienced in putes, a reinsurer, preferably through
while the particulars of confidenti- first-party property office risks may its auditors, may be required to
ality are sometimes debated in rein- be able to present a strong case for make a plausible showing why it
surance arbitration, it would be a rare inspection of underwriting files re- needs copies. Practically speaking, of
tribunal that would order inspection garding such matters as geographical course, a reinsurer dissatisfied with
where the reinsurer refused to agree to aggregations of risks. the scope of copying in an audit may
any confidentiality. commence arbitration. In this au-
Auditing of financial documents may thor’s experience, arbitrators will
What may the reinsurer inspect? be permitted in special circumstanc- frequently authorize, as “disclo-
“Books and records” relating to es. A reinsurer subject to the records sure,” access to copies which the re-
the business is generally under- clause quoted above would need to insurer would be unable to secure
stood to mean those records that re- demonstrate that the records are “in based solely upon the terms of the
late to the reinsurer’s underwriting respect of business ceded under the access-to-records clause.
ARIAS • U.S. QUARTERLY – Q1 · 2022 11ACCESS-TO-RECORDS CLAUSES
Potential Effect on 38 Gulf Insurance Co. v. Transatlantic Rein- (disclosure is deemed “contingent upon the
Subsequent Rescission surance Co., 788 N.Y.S.2d 44, 45-46 (N.Y. App. shareholder first consenting to a reasonable
Claims of Permission or Div. 2004). confidentiality agreement”); Stroud v. Grace,
606 A.2d 75, 89 (Del. 1992); Freund v. Lucent
Refusal of Access to Records Tech, 2003 WL 139766, *7 (Del. Ch. 2003) (con-
39 North River Ins. Co. v. Philadelphia Re,
797 F. Supp. at 369. ditioning inspection of books and records on
The freedom, or strictness, with which the execution of a confidentiality agreement).
access to records is granted may have 40 AIU Ins. Co., 2008 WL 5062030.
an unexpected consequence. Freely 53 Wollan, Eugene. 2003. Handbook on Re-
permitted access can preclude a re- 41 In re a Company (ex parte Pritchard) insurance Law, §8.07c, at 831. 2003 Supple-
[1992] B.C.L.C. 633. ment.
insurer from claiming down the road
that it is a victim of concealment by 54 Jones v. Ralston Purina Co., 343 So. 2d
42 See Pacific Reinsurance Management
the cedent, while a refusal of access 631, 639-42 (Mo. App. 1961)
Corp. v. Ohio Reins. Corp., 935 F.2d 1019 (9th
may make it easier for a reinsurer to Cir. 1991).
rescind based on concealment. 55 Becker v. Lunn, 192 N.Y.S.2d 754 (3d Dept.
43 Staring, Reinsurance Law and Practice § 1922).
One court observed that the retro- 15:8, n. 3.
56 “Verification of these reports requires a
cessionaire’s exercise of its inspec- detailed, painstaking analysis which, due
44 Michigan Mutual Ins. Co. v. Unigard Se-
tion right four years into the run-off to space and time constriction, can only be
curity Ins. Co., 44 F.3d 826, 829 (9th Cir. 1995)
of the treaty evidenced a lack of due (after reinsurer refused to honor panel’s de- partially completed on the premises of the
diligence and, thus, its claimed rea- mand that it disclose records, panel relieved union. Without the right to copy, the mem-
sons for rescission were deemed in- reinsurer of current and future obligations); bers would necessarily be unable to ade-
Manhattan Life Ins. Co. v. Prussian Life Ins. quately complete their analyses away from
sufficient [57]. The reinsurer claimed
Co., 296 F. 39 (2d Cir. 1924). the union’s premises and their right to ex-
that the cedent had concealed that a amine the records in order to verify the LM-2
significant portion of the ceded life reports would be nullified.” Conley v. United
45 Michigan Mutual, 44 F.3d at 829 (S.D.N.Y.
insurance business was composed of 1994); see also Philadelphia Reins. Corp. v. Steelworkers of America Local Union No.
multiple employer trust (“MET”) ac- Universale Ruckversichernogs AG, 1994 WL 1014, 549 F.2d 11122 (7th Cir. 1977).
counts. The court observed that the 4437 (S.D.N.Y. 1994) (arbitrator has power to
enforce audit rights). 57 Manhattan Life Ins. Co. v. A.J. Stratton
syndicates had retained an auditor to
Syndicate, 132 F.R.D. 139, 142 (S.D.N.Y. 1990).
audit the file, “an event which would
46 Veach, James, “Access to Records: Good
surely have disclosed” that the cedent
Faith Meets Hard Ball Tactics,” 900 PLI/ Richard C. Mason is a me-
was writing multiple employer trust Comm. 7. diator, arbitrator, and legal
business. Accordingly, the reinsurer’s consultant with Mason ADR,
right to inspect became the basis on 47 Roca v. Guardian Transport Co., Inc., LLC, with more than 30 years
2002 WL 31082959 (S.D.N.Y. 2002). of experience.
which the rescission claim failed.
48 Id.
The strength or weakness of a rescis-
sion claim, therefore, may depend in 49 Nama Holdings, LLC v. World Market
part upon the freedom and scope of Center Venture, LLC, 948 A.2d 411, 421 (Del.
access to records which the cedent had Ct. Ch. 2007).
historically permitted. This is import-
ant for cedents to keep in mind when 50 Mant v. ITT Management Co., Mealey’s
Litig. Rep. Reinsurance (11/20/96).
managing audit response.
51 Barlow, Lyde & Gilbert, “Reinsurance Prac-
NOTES tice and the Law,” 18:5-3.
37 North River Ins. Co. v. Philadelphia Re, 52 Nama Holdings, LLC v. World Market Cen-
797 F. Supp. at 368-69. ter Venture, LLC, 948 A.2d 411 (Ch. Ct. 2007)
12 www.arias-us.orgCOVID AGGREGATION DISPUTES
Follow the Fortunes: The Case for
Aggregation Under a CAT XL
By Curtis B. Leitner and Larry P. Schiffer
Across global reinsurance markets, jurisdictional lines (for example, aggregation debate, unpacks the fol-
reinsurers and cedents are negotiat- business interruption resulting from low-the-fortunes doctrine, and then
ing—and, in some cases, litigating or March 2020 closure orders in New suggests how cedents can take advan-
arbitrating—the cession of substantial York, New Jersey, and Connecticut). tage of it in aggregation disputes.
COVID losses under catastrophe ex-
cess-of-loss reinsurance treaties (“CAT Although much has been written on
XLs”). Anecdotally, a substantial num- COVID-related aggregation disputes, Aggregating COVID Losses
ber of these losses fall under event an important aspect of these disputes Under a CAT XL
and travel cancellation and business has not received adequate attention:
interruption policies. The disputes are the follow-the-fortunes doctrine. De- The loss occurrence definition of a
largely about aggregation—pooling pending (as always) on the specific CAT XL typically permits the aggrega-
individual losses into a single “loss contract language at issue, the fol- tion of a series of losses arising from
occurrence” for purposes of retention low-the-fortunes doctrine can provide one “event” or “catastrophe” during a
and indemnity limits. A significant a powerful argument in support of fixed period of time (e.g., 168 hours).
fault line in these debates is whether multi-jurisdictional aggregation. This For most cedents, COVID losses like-
cedents can aggregate losses across article describes the state of play in the ly fall within the high limit for a loss
ARIAS • U.S. QUARTERLY – Q1 · 2022 13COVID AGGREGATION DISPUTES
occurrence under a CAT XL. Thus, ce- The thrusts and parries over the “loss “insurer and reinsurer should have a
dents generally want to aggregate occurrence” definition go on and on. shared destiny; the reinsurer must live
as many COVID losses as possible with the calamities and fortuities that
into one loss occurrence to exceed Lost in this debate are the background give rise to claims under the original
the retention and maximize their re- interpretive principles that govern risk insured” [5]. Although (again) the
insurance recovery. To that end, ce- how to construe and apply a reinsur- particular contract language always
dents have proposed broadly defined ance contract. For example, it has been controls, it is helpful to analyze the fol-
“events” that span multiple jurisdic- suggested that cedents should invoke low-the-fortunes doctrine as an um-
tions, such as the outbreak of COVID “honorable engagement” provisions brella concept that includes two over-
across countries, continents, or even in CAT XLs, which allow arbitrators to lapping principles: (1) the original risk
the entire world. Meanwhile, to re- decide disputes based on commercial principle and (2) the follow-the-settle-
duce claim payouts, reinsurers have reasonableness rather than a strict ments principle. Each principle may
tried to confine COVD-related “events” reading of contract language [4]. The be memorialized in more specific con-
to a single jurisdiction, such as losses follow-the-fortunes doctrine is anoth- tract language.
caused by a closure order in one state er interpretive principle that has been
or country. under-utilized in the debate. Under the original risk principle, the
reinsurer is bound by the underwrit-
The argument usually runs some- ing fortunes of the cedent. The “doc-
thing like the following: Reinsur- Unpacking the Follow- trine burdens the reinsurer with those
ers invoke a well-known U.K. court the-Fortunes Doctrine risks which the direct insurer bears
precedent stating that an “event” is under the direct insurer’s policy cov-
“something which happens at a par- A follow-the-fortunes clause of a re- ering the original insured” [6]. These
ticular time, at a particular place and insurance contract reads something original “risks” include both the risk
in a particular way” [1]. Cedents re- like, “It is the intention of this con- of claims predicated on insured per-
spond that other jurisdictions have tract that the fortunes of the rein- ils and the risks involved in the un-
broader definitions of an “event” and, surer shall follow the fortunes of the derwriting process—e.g., the number
in any case, U.K. precedents also state [cedent].” This provision memorial- of policies written, the premium col-
that the meaning of event “must take izes the general principle that the lected, and the credit risk associated
colour from the contractual context,
including the perils insured against”
[2]. In the CAT XL context, where hur-
ricanes, wildfires, and earthquakes
are the paradigmatic “events,” ce-
dents insist that an “event” must
Lost in this debate
be construed broadly.
are the background
interpretive principles
Reinsurers reply that, in the U.K. Fi-
nancial Authority’s test case on busi-
ness interruption policies, the U.K.
Supreme Court held that an “out-
break” of COVID is not an “event” [3].
that govern how to
Cedents counter that the test case
was decided in the context of retail
business interruption policies that
construe and apply a
insure entirely different risks than
a CAT XL—for example, vermin or
reinsurance contract.
clogged drains at one restaurant.
14 www.arias-us.orgwith those premiums. Reinsurance
contracts often memorialize the orig-
inal risk principle, at least for specific
contract language, in a follow-form
Under the original
clause, which “incorporates by refer-
ence all the terms and conditions of
risk principle, the
the reinsured policy” [7].
reinsurer is bound
by the underwriting
Several examples illustrate the ap-
plication of the original risk princi-
ple. If an insurance policy requires
payment in a particular currency,
and the price of the currency spikes fortunes of the cedent.
when payment is due, the reinsur-
er, like the cedent, must live with the
increased cost. If the local law govern- To bind the reinsurer, the cedent’s in- Suppose an insurance policy expressly
ing an underlying casualty policy un- terpretation of the underlying policy states that it does not cover punitive
expectedly changes to allow punitive must be reasonable and businesslike. damages. The cedent is subject to a
damages, and thereby increases the The follow-the-settlements principle judgment in a wrongful death suit of
cedent’s exposure, the reinsurer must facilitates settlements and promotes $1 million of compensatory damages
share in that exposure [8]. To take a coverage. Without it, a cedent could and $100 million of punitive damag-
COVID example, if a cedent litigates not settle a policy without risking es. The cedent settles with the vic-
with its policyholder over whether that the reinsurer would relitigate tim’s estate for $10 million while the
COVID caused “physical damage” un- all the defenses the cedent raised, judgment is on appeal. Because the
der a property policy, the reinsurer is or could have raised, in litigation settlement obviously includes mostly
bound by the court’s construction of with the policyholder. punitive damages, the reinsurer is not
the policy. bound by the settlement to the extent
that it includes punitive damages that
Under the follow-the-settlements Limits of the Follow- are expressly excluded by the reinsur-
principle, the reinsurer is bound by the-Fortunes Doctrine ance contract [12].
the settlements (or, as they some-
times are called, the actions) of the ce- The follow-the-fortunes doctrine is Yet to say that the follow-the-for-
dent regarding claims on underlying subject to the express limitations of tunes doctrine does not override the
policies. The follow-the-settlements a reinsurance contract. For example, language of a reinsurance contract is
principle is typically memorialized the New York Court of Appeals holds not to say that the doctrine is irrele-
in specific contractual language stat- that a follow-the-fortunes clause vant to the interpretation of a rein-
ing that the reinsurer is bound by “does not alter the terms or override surance contract. The First Circuit got
the settlements of the cedent so long the language of reinsurance poli- it right when it explained that “[o]
as they are within the scope of the cies” [10]. From a European perspec- f course, if sufficiently clear, specific
reinsurance contract. This princi- tive, the Principles of Reinsurance limits in the [reinsurance] certificate
ple “binds a reinsurer to accept the Contract law similarly state that the control over the general aim of con-
cedent’s good faith decisions on “follow-the-fortunes rule will not ex- currence and ordinary ‘follow’ claus-
all things concerning the under- pand coverage under the contract of es” [13]. But that is a very big “if,” es-
lying insurance terms and claims reinsurance” and that “the reinsurer is pecially in the context of the current
against the underlying insured: cov- only required to follow the reinsured’s unprecedented pandemic. When the
erage, tactics, lawsuits, compromise, fortunes, insofar as a claim is covered language of a reinsurance contract
resistance or capitulation” [9]. under the contract of reinsurance” [11]. is vague or ambiguous and thus not
ARIAS • U.S. QUARTERLY – Q1 · 2022 15You can also read
