Our March 2018 Reinsurance Newsletter is now available for your reading pleasure. This issue covers the Global v. Century decision by the New York Court of Appeals answering the Second Circuit’s certified question as well as our annual review of reinsurance trends in 2017, as well as cases involving reinsurance for the September 11th terrorist attacks and cases on arbitration and discovery. You can find the newsletter here.
Direct actions against reinsurers have been on the rise for some time. To bring a direct action, a policyholder must get over the contractual privity hurdle and find some basis to show a direct relationship or third-party beneficiary relationship. Many policyholders try to bring these actions, but they more often than not fail at the motion to dismiss level. Sure, there are circumstances
where the reinsurer is truly the real party in interest and has the direct responsibility and liability to the policyholder. In those cases a direct action makes sense, but those cases are few and far between. Allowing a direct action against a reinsurer where there is no contractual privity or other basis to succeed would disrupt the manner in which risks are spread through the insurance and reinsurance industry. A recent case, highlighted below, shows how the courts address some of these issues.
Most companies that provide specialized or professional services, like stock exchanges, carry both directors and officers liability insurance (“D&O”) and errors and omissions insurance (“E&O”). These coverages are meant to be complimentary and not overlapping. D&O covers “wrongful acts” by directors and officers. E&O covers negligent acts in performing professional services. D&O policies typically exclude coverage for claims that arise out of the provision of professional services. All of this seems clear until the actual facts of the claim arise. Then the fight becomes which policy or whether both policies are required to respond to a claim. The Second Circuit recently addressed this issue in the context of claims arising out of an initial public offering on a stock exchange that did not go as well as anticipated.
In our last blog post, we predicted a likely up-tick in FCA disciplinary activity in 2018. It seems that we might have been right, as the FCA has already issued fines totalling nearly £2.5 million against fines and individuals in the first few weeks of the New Year. And the insurance industry has not escaped regulatory scrutiny. On 26 January, the FCA announced big fines on broker One Call Insurance Services Limited (“OCISL”) and its CEO / majority shareholder, John Radford (“Mr Radford”) of £684,000 and £468,000 respectively for breaching FCA rules on client money handling. In a rare move, the FCA has also prevented OCISL from charging renewal fees to customers for a period of 121 days, which may cost the firm £4.6 million.
Typically, courts are strict when it comes to insurance companies disclaiming coverage. Generally, a disclaimer must be specific and timely for it to have any chance of being effective. In many
cases, an insurance policy has an exclusion that the insurance company contends precludes coverage. In other cases, the coverage alleged is just not provided for in the insurance policy. In a recent case, the United States Court of Appeals for the Second Circuit addressed the difference between a lack of coverage because of an exclusion and because of lack of inclusion and how that difference bears on whether a notice of disclaimer is required.
In 2017, the UK’s financial services’ regulator, the Financial Conduct Authority (“FCA”), imposed fines totaling over £229 million for misconduct by regulated businesses and individuals.
Whilst 2017 did not see a return to the number or size of fines imposed by the FCA in 2014/2015 (which saw billions of pounds of fines following interbank rate and FX related misconduct), the year did see a tenfold increase in FCA fines from those imposed in 2016, just over £22 million. This may signify an upward trend in FCA disciplinary action and a possible increase in the size and number of regulatory disputes for all financial services’ businesses in the UK, including participants in the insurance industry.
There is a common misconception that suing everyone in sight is a good idea. Yes, if you don’t know exactly what related companies (or individuals) ultimately may be responsible for the loss it may make sense to cast a wider net (especially if the limitations period is approaching). But if it is obvious who the proper parties are, why bother to sue those who have no real involvement or liability. This issue arises in all types of litigation, including insurance coverage litigation, where policyholders sue the obvious policy issuing company and often add several affiliates and group members of the policy issuing company’s group.
An interesting trend has emerged from the New York Court of Appeals. In several recent cases, parties have asked the court to declare that a bright line rule of construction or presumption arises in every case where an insurance or reinsurance contract has certain language. The high court has rejected this call for a bright line rule and has reiterated that when interpreting an insurance or reinsurance contract under New York law, the normal rules of contract interpretation apply and each contract stands on its own terms, conditions and facts. The latest installment of this trend was issued on December 14, 2017, a bellwether day in New York reinsurance law (no pun intended).
In an effort to stabilize the National Flood Insurance Program (“NFIP”), Congress passed several bills that allowed the NFIP to access the private reinsurance market. First piloted in 2016, in 2017 the program resulted in a broker-placed $1.042 billion cover with 25 private reinsurance markets. The 2017 catastrophe excess-of-loss program provides coverage of 26% of losses between $4 billion and $8 billion for a premium of $150 million. Because of Hurricane Harvey, the NFIP’s catastrophe excess-of-loss program has been triggered and NFIP has put in a claim for the full $1.042 billion to the reinsurers. What happens next? Continue Reading
On 28 November 2017, the Bank of England (“BoE”) published its outlook for UK financial stability, a report on what it perceives as being the main risks to that stability. The headline grabber was the BoE’s view that the UK financial system was strong enough to withstand a disorderly Brexit. But buried away in the report was disconcerting news for all those who participate in the UK and European insurance markets.