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The Illinois Supreme Court Rules that the Telephone Consumer Protection Act’s Statutory Damages Are Not Punitive

Tue, 18 Jun 2013 10:46:15 GMT

In an opinion adjudicating the insurability of claims brought under the federal Telephone Consumer Protection Act (“TCPA”), the Illinois Supreme Court recently ruled that public policy did not prohibit coverage of these claims. The decision is Standard Mutual Insurance Co. v. Lay, No. 114616 (Ill. May 23, 2013), and a copy of it is available here.

Ted Lay Real Estate Agency sent a blast fax to Locklear Electronic Inc. On behalf of a class, Locklear sued the Agency under the TCPA, which essentially forbids unsolicited faxes. The Agency settled the case for $1.7 million, a sum equal to the number of class members multiplied by $500. Locklear agreed that it would seek satisfaction of the judgment only from the Agency’s insurance policies. Even if insurance recoveries were unavailable, Locklear agreed that it would not seek recovery from the Agency’s non-insurance assets.

Standard Mutual Insurance Co., the Agency’s insurer, contested coverage of the settlement on the grounds that public policy prohibits insurance of punitive damages. $500 are the damages the TCPA dictates for each unsolicited fax. 47 U.S.C. § 227(b). The Illinois Supreme Court deemed the $500 per fax “non-punitive” (and therefore insurable) because that amount was both liquidated damages and an incentive for fax recipients to enforce the TCPA. It also found support in the fact that the TCPA trebled the damages for violations committed willfully or knowingly.

While Lay is law in Illinois, other states’ courts have reason to discount its persuasiveness as an authority. First, consider the nature of the $500 per fax as liquidated damages. Liquidated damages provide a recovery where the actual damages are difficult to ascertain. However, the liquidated damages’ amount still must be a reasonable estimate of the harm. E.g., UCC § 2-718. In fact, if the liquidated damages’ amount is found to be greater than the amount of the actual damages that should have been estimated, then the liquidated damages are a penalty. E.g., Restatement (Second) of Contracts § 356.

The court did not establish that $500 per fax were a reasonable approximation for the harm done to anyone in the United States upon receiving an unsolicited fax, no matter the circumstances. To the contrary, the TCPA permits recovery of “actual monetary loss” or $500, “whichever is greater.” 47 U.S.C. § 227(b)(3). If the recovery is $500, then in all likelihood the actual damages were less, which makes sense as these faxes are simply a nuisance. Indeed, the court justified the $500 as a “necessary” “added incentive” “because the actual losses associated with individual violations of the TCPA are small.”

Second, consider why the TCPA offers $500 per fax in order to induce fax recipients to enforce the TCPA. The threat of enforcement gives the law a deterrent effect, and deterrence is, as the court acknowledged, a function of a penalty. Congress specifically sought to ban unsolicited telecommunications so that they would not be sent. Whereas remedies merely correct harms that happened, penalties are threatened in order to discourage harms from happening in the first place. Insurance of penalties is forbidden, otherwise insurance would spare the policyholder the punishment. If unsolicited faxes are to be deterred, they cannot be insured.

Last, consider that $500 per fax in light of the possibility that they may triple if the violation were committed “willfully or knowingly,” 47 U.S.C. § 227(b)(3). That the larger amount is a penalty does not mean that the smaller amount is not. A reckless driver may pay a larger fine than a speeder does, because the reckless driver speeds with willful and wanton disregard for the safety of persons or property. But no one says that when the speeder is fined, he is not punished.

It remains to be seen how much Lay will persuade courts in other states to find the TCPA’s $500 per fax “non-punitive.”

REMINDER - HIPAA Complimentary Seminar - June 26, 2013

Tue, 18 Jun 2013 10:22:17 GMT

The HIPAA Final Rule: Impact on Privacy, Security, Breach Notification, and Enforcement

June 26, 2013
Edwards Wildman Palmer LLP
750 Lexington Avenue
New York, New York 10022

Edwards Wildman Speakers: Leslie J. Levinson, Eric D. Fader, David S. Szabo

Edwards Wildman Palmer LLP, Kroll Advisory Solutions and Advize Invite You to Join our Seminar

Breakfast and Networking: 8:00 am - 8:30 am
Program: 8:30 am - 10:00 am

Moderator:

Les Levinson - Partner and Chair of the Edwards Wildman Healthcare Practice

Speakers:

Eric Fader - Counsel, Edwards Wildman
Aviva Halpert - President, Advize Proactive Solutions, formerly of Mount Sinai Medical Center, NY
Jason Straight - Managing Director, Kroll Advisory Solutions
David Szabo - Partner, Edwards Wildman

Topics to Include:

HIPAA Omnibus Final Rule Privacy Changes
Business Associate Changes
Data Breach Response
Omnibus Final Rule Enforcement Provisions
Applying the Omnibus Final Rule in a Provider Setting
Assessing Information Security
Practical Implications:
-Modifications to Fundraising - The Good News and the Bad News
-The Right to Pay Cash for Services - What Does it Really Buy?

To RSVP, please e-mail NYevents@edwardswildman.com

Please Join the US Reinsurance Under 40s Group on Tuesday, June 18 for its Annual Bowling Event

Mon, 17 Jun 2013 10:08:35 GMT

On June 18, 2013, the U.S. Reinsurance Under 40's Group will be having its 3rd Annual Bowling Extravaganza at Lucky Strike Lanes in New York City (624-660 W 42nd Street, New York, NY 10036 (42nd St & 12th Ave)! The event will take place between 6:00 pm and 9:00 pm, and is being sponsored by Transatlantic Reinsurance Company and JLT Re. The Group has reserved a private room in the back of the venue to allow optimum networking opportunities, and we anticipate that the event will be very well attended.

No “Advertising Injury” Coverage for Clothing Design, Says Second Circuit

Mon, 17 Jun 2013 09:10:00 GMT

In CGS Industries, Inc. v. Charter Oak Fire Ins. Co., No. 11-2647-cv (June 13, 2013), the Second Circuit concluded that an insurance policy’s Coverage B did not cover liability alleged in a trademark infringement suit. The Court did, however, conclude that the insurer had a duty to defend because there “sufficient legal uncertainty about the coverage issue” at the time the tender was made. A copy of the decision can be found here.

In the underlying case, CGS Industries, Inc. (“CGS”) supplied jeans to Wal-Mart Stores, Inc. (“Wal-Mart”). Five Four Clothing, Inc. (“Five Four”) sued Wal-Mart for trademark infringement based on the use of a rear-pocket stitching design on the jeans. CGS was later added to the suit and asked its insurer, Charter Oak Fire Ins. Co. (“Charter Oak”), to defend it pursuant to its liability policy that contained coverage for “Advertising Injury,” including infringement of copyright, title or slogan -- but not trademark. CGS later settled the underlying action by payment on behalf of itself and Wal-Mart, and sought indemnification from Charter Oak for the settlement proceeds and for defense costs, including those incurred by Wal-Mart.

The lower court concluded that Charter Oak breached its duty to defend CGS in the underlying action. Accordingly, it went on to hold that Charter Oak was obligated to indemnify CGS for the settlement amount. Charter Oak appealed, arguing that it did not have a duty to defend CGS under the policy because the stitching did not constitute an infringement of “slogan” or “title” within the meaning of the policy.

Those terms were undefined by the policy, so the appeals court looked to federal law to supply the meaning. Federal courts frequently define slogan as “phrases used to promote or advertise a house mark or product mark, in contradistinction to the house or product mark itself.” Likewise, the court observed:

The vast majority of federal cases are clear that in this context—that is, in a list that includes “copyright” and “slogan,” but conspicuously does not include coverage of infringement of “trademarks”—“title” means the name or appellation of a product, and does not cover design elements such as pocket stitching that may serve as a trademark designating the origin of the product.

Based on these general principles, the Second Circuit held that the stitching design was not a slogan or title, and therefore was not within the scope of “Advertising Injury” so as to trigger coverage. The CGS decision therefore offers another example of how the Second Circuit will approach terms such as “slogan” or “title” in the context of trademark infringement claims, particularly where the alleged infringement constitutes designs incorporated into clothing or other products. The Court noted, however, that there are isolated cases that employ different definitions of “slogan” or “title” that could bring the terms within the scope of coverage. The Court held that these cases created legal uncertainty, which triggered Charter Oak’s broader duty to defend.

Separately, Charter Oak also argued that the underlying action did not allege that CGS had committed a covered offense in the course of advertising, because the first and second amended complaints only referred to advertising by Wal-Mart. The Court rejected this argument because the Four Five’s Third Amended Complaint alleged that both Wal-Mart and CGS advertised the jeans. The Second Circuit stated that, if Charter Oak believed that Four Five did not to intend this allegation, then it should have begun to defend CGS, and served a demand for a bill of particulars to resolve any ambiguity in the pleadings. It did not do so, and therefore waived any argument that the duty to defend had terminated.

The Court held that Charter Oak’s breach of its duty to defend made it liable for GCS’ defense costs, but that the breach of the duty to defend did not create coverage where none otherwise existed – with the result that Charter Oak was found not to have a duty to indemnify. Thus, the Court’s decision presents a reminder to insurers that the duty to defend applies if there is any “residual uncertainty” at the time of tender as to whether a court could find a term in the underlying claim to be ambiguous with regard to whether it came under the scope of coverage.

Client Advisory - President Obama Issues Executive Order Imposing Additional Iran Sanctions

Fri, 14 Jun 2013 16:01:30 GMT

On June 5, 2013, President Obama issued the Executive Order 13645 “Implementing Sanctions Set Forth in the Iran Freedom & Counter-Proliferation Act of 2012” that would become effective on July 1, 2013.

EO 13645 implements several statutory provisions of Iran Freedom and Counter-proliferation Act (IFCA) of 2012 but also imposes additional sanctions. Click here to read the entire Client Advisory.

The Supreme Court Rules that Courts Must Honor an Arbitrator’s Construction of Contractual Language in Favor of Class Arbitration, “However Good, Bad, or Ugly”

Fri, 14 Jun 2013 15:15:22 GMT

In Oxford Health Plans LLC v. Sutter, 569 U.S. ____ (2013), the Supreme Court all but ordered the federal courts to not decide whether one person can pursue arbitration on behalf of a class of other people. Dr. John Sutter had a contract with Oxford Health Plans to provide his services to people Oxford insured. In exchange, Oxford would pay him. In the contract, the parties agreed that “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey . . . .” Dr. Sutter initiated arbitration against Oxford, accusing it of failing to make full and prompt payment to New Jersey doctors under contract with Oxford. Oxford and Dr. Sutter asked the arbitrator to decide whether the arbitration would resolve the dispute only as to Dr. Sutter or as to all of Oxford’s New Jersey doctors. The arbitrator decided that the parties agreed to class arbitration. Oxford then petitioned the federal courts to vacate the arbitrator’s decision, taking its petition all the way to the Supreme Court.

According to the Supreme Court, Oxford did itself in by its own actions. Here, the court ruled, Oxford took on the obligation of class arbitration by submitting the class issue to the arbitrator. Hence the courts could vacate the arbitral decision only if the arbitrator exceeded his powers. He did not, because he arrived at his decision by construing the arbitration clause. The court pointed out that had Oxford not submitted the issue to the arbitrator, the availability of class arbitration might be a so-called “question of arbitrability” to be decided by a court.

At first blush, it may appear that the way to cope with the Oxford decision is for the party opposed to class arbitration to refuse to submit the class issue to the arbitrator and to argue that the court should decide this “question of arbitrability.” If only it were that simple. The First, Third, Sixth, and Seventh Circuits (if not others) recently held that the question of whether an arbitration may proceed as a class or consolidated dispute is a question to be put first to an arbitrator, not to a court. Likewise, district courts in the Second and Fourth Circuits have done the same, and the Fifth Circuit drew the same conclusion as to a clause that, as many arbitration clauses do, called for arbitration under the rules of the American Arbitration Association.

Under this caselaw, an arbitrator decides the class issue, and his decision stands so long as it appears to be an interpretation of the arbitration clause. The only exception would be if the parties agree that they did not agree to class arbitration, as they did when the Supreme Court vacated an arbitral award in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 130 S. Ct. 1758 (U.S. 2010). Expect few parties seeking class arbitration to make that concession.

What a terrible bargain a party turns out to have made once it is found to have agreed to class arbitration. It is not clear any class member is bound to the result of the class arbitration besides the one prosecuting the case, as Justice Alito noted in his concurrence in Oxford, because they did not agree that someone else could prosecute their claims. So if a respondent wins a class arbitration, it has not won any peace against anyone except the lone person who prosecuted the arbitration. And if it loses the arbitration, then it could be liable for an entire class’s worth of damages. And when that happens, as more than one court has pointed out, the respondent faces an award far more likely to bankrupt it than an individual award might, and it has little – if any – chance of review to correct error in the award. So it seems that in class arbitration the respondent has nothing to gain and everything to lose, and it probably drafted the arbitration clause.

Even when a party drafts an arbitration clause to explicitly disclaim class arbitration, there is no certainty that it will be spared class arbitration. The Federal Arbitration Act’s 9 U.S.C. § 10(a)(4) constrains the arbitrators somewhat, as a court will vacate their award if they “exceeded their powers.” And “precisely because arbitration is a creature of contract, the arbitrator[s] cannot disregard the lawful directions the parties have given them.” Edstrom Indus. v. Companion Life Ins. Co., 516 F.3d 546 (7th Cir. 2008). Consider an arbitration clause that seemingly excludes class arbitration, such as the one in AT&T Mobility LLC v. Conception, 131 S. Ct. 1740 (U.S. 2011), which clause limited a consumer to bringing a claim only in his “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” That language seems to give a plain, lawful direction against class arbitration.

Now consider this possible language in an arbitration clause: “The arbitrator exceeds his powers by ordering class, consolidated, or any other form of multi-petitioner arbitration without the express, written consent of the respondent, and the arbitrator exceeds his power if he orders any form of multi-petitioner arbitration beyond the terms and conditions the respondent gives in its express, written consent.” By repeating the language from the Act’s § 10, the contract cannot be clearer about when and how an arbitrator exceeds his power.

But if an arbitrator concluded that this language evidenced an agreement to class arbitration, would a court not accept his decision? Some courts have left the door open to the possibility that they will “vacate an award when the arbitrators’ interpretation was so wacky that it was no interpretation at all.” Prostyakov v. Masco Corp., 513 F.3d 716 (7th Cir. 2008). But the Supreme Court might not be one of those courts. To use the words of the Oxford opinion: under § 10(a)(4), “the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” “So long as the arbitrator was arguably construing the contract . . . a court may not correct his mistakes under § 10(a)(4). . . . The potential for those mistakes is the price of agreeing to arbitration. . . . The arbitrator’s construction holds, however good, bad, or ugly.”

Do not confuse “arguably construing” with “arguably correct.” The latter is an end; the former is a means. If the arbitrator notes that the sun shines during an Alaskan summer night, would the Supreme Court not accept that the arbitrator construed the contract when he decided “night” meant “day”? With a standard as forgiving as “arguably construed,” it is impossible to rule out the possibility that a federal court will confirm any award so long as the arbitrator claims to interpret the contractual language. Perhaps the respondent’s best tactic would be to insist that the arbitrator not explain himself when he rules on the class issue.

The issue of class arbitration has been reviewed in the Supreme Court at least four times in the last ten years. Perhaps it should be taken up a fifth time, this time to ensure that a court decides whether non-parties agreed that someone else would prosecute their claims and whether the party defending the dispute agreed to face a class in arbitration.

Click here for a complete copy of the Decision.

Delaware Rejects New York’s Call for a Moratorium on Securing Reserves with Captive Insurance Companies, While the NAIC Refuses to Act Hastily

Fri, 14 Jun 2013 12:58:39 GMT

Other state insurance regulators have responded coolly to the report released by the New York Department of Financial Services on June 12. That report recommended that “State insurance commissioners should consider an immediate national moratorium on approving additional shadow transactions until those investigations are complete . . . .” By “shadow transactions,” the report meant parental guarantees that some life insurers used to meet their capital requirements. One form of these guarantees involved captive insurers, which would reinsure the parent insurer’s claims, thereby freeing the parent’s reserves for other purposes. As the captive enjoys reserve and collateral requirements that are relaxed in comparison to New York’s, the parent usually bears the captive’s risks by paying claims if the captive’s reserves are exhausted (or so says the New York Department’s report). Edwards Wildman summarized the New York report here. Also, Edwards Wildman has summarized the NAIC’s white paper on this use of captives here, and it has analyzed the issue generally here and here.

Law360 reported that NAIC president and Louisiana insurance commissioner Jim Donelon expressed reluctance to impose any moratorium any time soon – see here. During a June 13 call between NAIC leadership and the media, Mr. Donelon stated that he was not in a hurry to respond to suggestions from New York. The NAIC would continue to study whether oversight of these transactions needed to be improved. For good measure, NAIC committee chairwoman and Tennessee insurance commissioner Julie Mix McPeak added that captive life insurers have uses that are legitimate.

While every state can decide for itself whether to heed New York’s call, Delaware has decided against it. At the AIRROC conference held in Chicago on June 13, Steve Kinion, Director of the Delaware Department of Insurance’s Captive Bureau, said that Delaware Insurance Commissioner Karen Weldin Stewart rejects any moratorium as to such uses of captive life insurers. In the Delaware Department’s view, these transactions are not “shadowy,” they are properly lawful. Indeed, the Department believes it would contradict the Delaware Revised Captive Insurance Company Act if it did impose a moratorium. That Act seeks growth of captive insurers in Delaware, and as of mid-May, 2013, Delaware had licensed 224 captive insurers, 10 protected cells, and 371 series business units. The Department remains confident in its ability to license and regulate captive insurers, and it believes that if the Department ought to react in any way to using captive insurers to meet capital requirements, it would simply devote more regulatory attention to those captives.

UK: FCA Publishes Report on Thematic Motor Legal Expenses Insurance Project

Fri, 14 Jun 2013 11:03:48 GMT

On 7 June 2013, the FCA published the report on its thematic review of motor legal expenses insurance (MLEI). MLEI provides cover for legal expenses incurred when a not-at-fault policyholder tries to recover uninsured losses from the driver who caused the accident. Some policies also provide cover for criminal defence costs where a policyholder is facing prosecution. MLEI is typically offered as an extra to motor insurance policies, often on an opt-out basis. The FCA’s research suggested that most of the benefit to consumers of this sort of cover comes from pursuing personal injury claims.

The review, the first of the FCA’s thematic projects, covered 16 firms of varying sizes and structures that make up 75% of the UK private motor industry by gross written premium. It also included research on consumer attitudes and understanding of MLEI. While the majority of firms believed that consumers understood MLEI, the consumer research did not corroborate this. Around 4/5 of customers believed that the product provided cover for legal costs if they were at fault for an accident and/or sued by another driver. This clear lack of understanding, coupled with often inadequate explanation at point of sale, was cited as a major cause for concern.

The FCA regards MLEI as a convenience purchase because it packages together products and services which can be obtained elsewhere. However, it also regards it as a product that can be useful to some consumers at least in the current market. This is particularly relevant given the UK’s recent legal funding reforms, which make “no-win, no-fee” claims a less attractive option than before because many personal injury claimants will now be expected to pay their lawyer a success fee (under a Conditional Fee Agreement) or a proportion of their damages (under a Damages-Based Agreement). If MLEI is available to support a claim for uninsured losses against an at-fault driver, the obligation to pay a success fee or a proportion of damages is likely to fall away. MLEI probably also means that the insured is more likely to be able to claim compensation for his uninsured losses because the reasonable prospect of success (RPS) test employed by insurers when they decide to fund a claim is generally lower (51% chance of success) than the test applied by no-win no-fee lawyers (75% chance).

Even so, the FCA now expects insurers to review the level of cover they provide and its potential value to consumers to make sure that each of these things is appropriate from a consumer perspective. The FCA has also explained that it regards the payment of criminal defence costs as valuable to consumers, but that a significant proportion of this value may be lost if cover does not extend to prosecutions where alcohol or drugs are a potential factor – something that many will regard as surprising from a public policy perspective.

The report raises serious concerns about the way MLEI is sold. The customer is generally asked whether he wants the product at the end of a long buying process. His decision is often, therefore, made without too much thought. This is exacerbated by:

the consumer’s apparent lack of understanding about what MLEI is, and what it does and does not provide;
the fact that the product is often sold as an add-on, on an opt-out basis - many consumers appear to lack the confidence to opt-out when the insurer’s default position is to include the product unless the consumer deselects it;
the fact that the product is sometimes sold “bundled” with other add-ons; and
the insurer’s response to de-selection, which may include alarming pop-ups which ask the customer whether he can really afford to be without MLEI.

The FCA therefore now expects MLEI providers to:

review their MLEI policies, to make sure they are useful and provide value to consumers – especially if the policy includes protection against the costs of defending a criminal prosecution, but that cover is subject to an RPS test or it is subject to drug, alcohol or other material exclusions;
review their sales practices, including considering replacement of the opt-out model with an opt-in system, to make sure their practises are fair, before adding that bundling in particular is “not consistent with fair customer treatment”; and
more clearly explain the scope and benefits of MLEI at all stages of the process.

The FCA is clearly also demonstrating its keen interest in behavioural-economics-informed (so-called “nudge”) selling practices, and takes a dim view of them when they may lead to mis-selling. This would be difficult to object to where a nudge is clearly in the seller’s interest at the expense of the consumer, but such clear-cut judgments will be rare. It raises concerns that in following the FSA’s lead and making value judgments on behalf of the average consumer, the FCA risks discouraging people from buying products from which some would benefit. Such policies also imply that consumers cannot be trusted to make informed decisions for themselves. It is, of course, important for the regulator to intervene to curb mis-selling; however, actively steering all consumers away from products the regulator does not consider useful in the general case could be a step too far.

Follow-up will be carried out in a year’s time, and firms who cannot justify their continued use of these practices are likely to face regulatory action. Some firms may consider avoiding the opt-in/opt-out debate altogether by including MLEI as part of their core motor offering. However, this may be difficult to justify in a market where most consumers buy on price, as it may cost the insurer its competitive edge. It is also important to note that this will not absolve firms of responsibility, as the report says, “firms that automatically include MLEI still need to provide a clear explanation of what the product covers and what it does not.”

The FCA’s report will be added to the findings of the “General insurance add-on study” which the FSA announced in December 2012. Several oblique references to opt-out selling practices in other types of insurance (eg home insurance) suggest that a similar approach may be applied across the industry, with the regulator expecting “nudges” to be more clearly in the consumer’s interest rather than what might otherwise be regarded as the other way around.

FIO Issues Its First Annual Report

Fri, 14 Jun 2013 10:53:51 GMT

On June 12, 2013, the Treasury’s Federal Insurance Office (“FIO”) released its first annual report on the insurance industry to the President and Congress, as mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Report discusses in more detail a number of the items covered in the Financial Stability Oversight Council’s (“FSOC”) last annual report, issued this past May.^[1] Several topics are addressed, including:

the financial performance and condition of the principal sectors within the industry;
recent insurer insolvencies;
risk management and portfolio investment activities;
key legal and regulatory developments affecting the insurance industry in the U.S. and abroad; and
current and emerging trends that may have a significant impact on the industry and the stability of the U.S. financial system.

Among the observations made, the Report highlights that life and health insurer insolvency levels are at the lowest point in 40 years, and property and casualty insurer levels are at relative lows compared to the last few decades. However, it acknowledges that certain segments of the industry, most particularly financial guarantors, had high failure levels recently, due in large part to the effects of the financial crisis.

The Report also discusses how, under the Act, the FDIC has authority with respect to the liquidation or rehabilitation of a “covered financial company” or a subsidiary thereof that is an insurer if the state regulator fails to file the appropriate judicial action within 60 days. This is known as “Orderly Liquidation Authority.” The FDIC issued its final rule for orderly liquidation in mid-2011.

On the legal and regulatory development front, the Report discusses the status of:

significant nonbank financial company designations by FSOC;
methodology set forth by the International Association of Insurance Supervisors (“IAIS”) to designate global systemically important insurers;
Solvency Modernization Initiative;
continued work and reform of the Solvency II Directive in Europe; and
IAIS’s progress on the Common Framework for the Supervision of Internationally Active Insurance Groups.

Under current and emerging trends, the Report touches on the low interest rate environment and the particularly harsh effects that these low rates may have on life insurers offering annuities with guaranteed benefits, and also the adverse effect of these rates with respect to the present value of life insurer contract obligations. This section also discusses the impact of recent natural catastrophes and the changing demographic in the U.S.

To see the full report, click here.

_________________________________
^[1] To see our blog on FSOC’s report, and a copy of the report, click here.

Caution to Insurers – New Duty to Defend Opinion Issued by New York’s High Court

Fri, 14 Jun 2013 10:39:36 GMT

A liability insurer found to have “breached its duty to defend…may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.” This is the latest pronouncement from the New York Court of Appeals in K2 Inv. Group, et al. v. Am. Guar. & Liab. Ins. Co., No 106 (June 11, 2013). A copy of the opinion is available here.

In this case, the insured, a lawyer, was sued by K2 Investment Group and ATAS Management Group (the “plaintiffs”) for failing to record two mortgages. The insured notified his malpractice carrier of the suit, and later of a settlement demand from the plaintiffs. The insurer, however, denied defense and indemnity coverage, arguing, inter alia, that the allegations against the insured were “not based on the rendering or failing to render legal services for others.” The insured subsequently defaulted and the plaintiffs took a default judgment against him in excess of policy limits. The insured then assigned to the plaintiffs all of his rights against the insurer. The plaintiffs followed by suing the insurer for breach of contract.

The insurer moved for summary judgment, relying on two policy exclusions. The plaintiffs cross-moved for summary judgment, arguing that the insurer breached its duty to defend and was thus bound to pay the judgment against the insured up to the limits of the policy.

The trial court ruled in favor of the plaintiffs. This ruling was affirmed by a majority of the Appellate Division, which held that the exclusions relied upon by the insurer were inapplicable to the malpractice claim upon which the default judgment was based. See K2 Inv. Group, et al. v. Am. Guar. & Liab. Ins. Co., 91 A.D.3d 401, 403 (N.Y. App. Div. 1st Dep’t 2012) (also holding that “the allegations of legal malpractice were focused solely on [the insured’s] negligence as plaintiffs’ counsel;” that is, the allegations were in fact based on rendering legal services).

The Court of Appeals then had its turn. The panel first held that “[i]t is quite clear that [the insurer] breached its duty to defend — indeed, it does not seem to contend otherwise now.” The panel next determined that it was not necessary to reach the issue of the applicability of the exclusions invoked by the insurer because, “by breaching its duty to defend [the insured], [the insurer] lost its right to rely on these exclusions in litigation over its indemnity obligation.” In other words:

an insurance company that has disclaimed its duty to defend ‘may litigate only the validity of its disclaimer.’ If the disclaimer is found bad, the insurance company must indemnify its insured for the resulting judgment, even if policy exclusions would otherwise have negated the duty to indemnify.

(The court did note that exceptions to the foregoing rule could exist, including in cases where public policy prevents an insured for obtaining coverage for his intentional wrongdoing).

This is the second decidedly pro-insured decision out of New York’s highest court in less than a week. See J.P. Morgan Securities v. Vigilant Ins., No. 113 (June 11, 2013) (for a summary of this decision, please click here).

NY Times Reports Comments by NY Superintendent on Reinsurance Transactions within Life Insurance Industry

Thu, 13 Jun 2013 08:58:08 GMT

On June 11, 2013, the New York Times reported that New York Superintendent of Financial Services Benjamin Lawsky joined the debate on the increasingly-popular use of captives and Special Purpose Vehicles (“SPVs”) to reinsure “XXX and “AXXX” reserve redundancies. Mr. Lawsky believes that life insurers are engaging in “shadow insurance” by taking advantage of the laws in other jurisdictions to use what he calls “hollow assets” to support reserves that would traditionally not be approved in New York, such as parental guarantees and conditional letters of credit. Mr. Lawsky also notes that he believes such transactions are being carried out “outside the regulators’ view.” The same New York Times article reported that MetLife has issued a statement assuring the public that it has sufficient reserves to pay its policies, and Prudential has noted that its captives are capitalized to a level consistent with the ratings of its issuing insurance entities.

The topic of captive and SPV reinsurance within the life insurance industry has been hotly debated recently, with both public and private sector industry players expressing divergent views. The NAIC has issued a new white paper addressing the issue, which we have recently blogged about here. In addition, Edwards Wildman has written a thorough analysis of the issue in Best’s Review –including the origins of such practices and the future of XXX and AXXX reinsurance transactions – which may be found here.

New York’s Highest Court Delivers Important Disgorgement Decision

Wed, 12 Jun 2013 15:24:10 GMT

On June 11, 2013, the New York State Court of Appeals reinstated a policyholder’s claim for coverage for a $160 million “disgorgement” payment to the SEC. The decision, J.P. Morgan Securities v. Vigilant Insurance, No. 113 (June 11, 2013), is available here.

The dispute stemmed from the SEC’s investigation of Bear Stearns (which merged with J.P. Morgan in 2008) for facilitating late trading and market timing on behalf of its hedge fund clients. In 2006, Bear Stearns entered into a settlement with the SEC; therein, “without admitting or denying the findings,” Bear Stearns agreed to pay $160 million as “disgorgement” and $90 million as a civil penalty. The SEC order memorializing the settlement stated that Bear Stearns “knowingly or recklessly processed thousands of late trades;...took affirmative steps to hide from mutual funds the identity of customers that were known market timers by…assigning multiple account numbers to customers;…[and] willfully violated [the ’33 Act and the ’34 Act].” Id. at *4.

After funding the $250 million settlement, Bear Stearns sought indemnification from its primary and excess insurers for the $160 million “disgorgement” portion. The insurers denied coverage and a declaratory judgment action followed. In its complaint, Bear Stearns alleged that $140 million of the disgorgement payment “represented illicit profits obtained by its hedge fund customers rather than gains enjoyed by Bear Stearns itself.” The insurers moved to dismiss, arguing that public policy prohibited indemnification for any portion of the disgorgement payment.

After contrary decisions by the Supreme Court and the Appellate Division, the insurer’s motion to dismiss came before the Court of Appeals. In a ruling certain to be welcomed by policyholders, the panel held that the SEC order “does not conclusively demonstrate that Bear Stearns…had the requisite intent to cause harm” necessary to preclude insurance coverage on public policy grounds. Id. at *11. See also id. (“the public policy exception for intentionally harmful conduct is a narrow one, under which it must be established not only that the insured acted intentionally but, further, that it acted with the intent to harm or injure others.”).

The judges further opined on a secondary public policy argument – namely, the principle that “the risk of being ordered to return ill-gotten gains – disgorgement – is not insurable.” Bear Stearns argued that this principle did not preclude coverage because “the bulk of the disgorgement payment — approximately $140 million — represented the improper profits acquired by third party hedge fund customers, not revenue that Bear Stearns itself pocketed.” Id. at *11-12. Again the Court ruled in favor of Bear Stearns: “The Insurers have not identified a single precedent…in which coverage was prohibited where…the disgorgement payment was (at least in large part) linked to gains that went to others. Consequently, at this early juncture, we conclude that the Insurers are not entitled to dismissal of Bear Stearns’ insurance claims related to the SEC disgorgement payment.”

This decision is likely to create a dilemma for insurance carriers. The statute that authorizes the SEC to bring enforcement actions allows the SEC to seek fines, penalties, and equitable relief. See 15 U.S.C. §78u, et seq. (codifying §21 of the Securities Exchange Act of 1934). As a general matter, courts have held that “equitable relief” includes injunctions and disgorgement, see, e.g., SEC v. Materia, 745 F.2d 197, 201 (2d Cir. 1984), but not “damages.” See generally Press Release, Securities and Exchange Commission, SEC Enforcement Director’s Statement on Citigroup Case (Dec. 15, 2011); Memorandum from the New York City Bar Association on Securities Litigation, SEC v. Citigroup (July 2012).

But the SEC is intent on seeking settlements that represent “damages,” not just disgorgement, because the SEC wants to put the money recovered into a fund to compensate victims. See generally SEC v. DiBella, 409 F. Supp. 2d 122 (D. Conn. 2006); 15 U.S.C. § 7246. Insureds are willing to go along with settlements that so provide because they are regulated by the SEC, and may see such a settlement as a credit against damages that might be awarded in private litigation. The private plaintiffs’ bar, not surprisingly, tends to take a different view.

Thus, carriers that insure risks in New York will have two choices: either provide clearly in their policies that there is no coverage for settlements that arise out of regulatory proceedings, or bring actions for declaratory relief if and when the carrier and the insured cannot agree that there will be no coverage for a settlement following the commencement of an enforcement action.

UPDATE: Connecticut Enacts Auto Glass Repair Disclosure Bill

Wed, 12 Jun 2013 13:59:33 GMT

This updates our May 17, 2013 blog post.

On June 3, 2013, Connecticut Governor Dannel Malloy signed into law HB 5072 (the “Bill”), restricting insurance companies and affiliated entities from influencing insureds into using specific automotive glass repair establishments. The Bill strengthens pre-existing laws that prohibited requiring that insureds use specific shops. The legislation places substantial restrictions on “steering” insureds towards glass repair shops by requiring insurers and their respective agents or administrators to inform an insured of its right to use a repair facility of its choosing “in the area” where such work can be performed. Now that Connecticut has passed the Bill, it remains to be seen whether other states will follow suit.

Please click here for a link to the Bill.

U.S. House Introduces Legislation Regarding Capital Requirements For Insurers Subject To Dodd-Frank

Mon, 10 Jun 2013 12:23:44 GMT

Late last month, Rep. Gary Miller, R-Calif., and Rep. Carolyn McCarthy, D-N.Y., introduced the “Insurance Capital and Accounting Standards Act of 2013” (H.R. 2140 or the “Act”) into the U.S. House of Representatives. The Act is in response to last year’s proposal by the Federal Reserve Board to apply certain capital requirements for financial institutions (i.e., Basel III global capital standards) to insurance companies that are part of depository holding companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Instead, if enacted, capital standards for such insurance companies would be tailored to their specific risk exposures and a rebuttable presumption would be created that compliance with state risk-based capital standards meets the requirements of Dodd-Frank. According to Congressman Miller, ““The Federal Reserve is mixing apples and oranges by imposing bank-centric rules on insurance companies, which have completely different business models and capital structures. As written, this proposal will lessen the availability and increase overall costs of insurance products and services to consumers and businesses in my district and across the country.” The American Insurance Association (AIA) has also announced its support of the Act.

The Act is currently under review by the House Committee on Financial Services. No corresponding legislation has been introduced yet in the U.S. Senate.

Click here for a copy of the Act.

Second Circuit: Excess D&O Coverage Not Triggered Until Underlying Limits Exhausted by Actual Payment

Fri, 07 Jun 2013 15:49:36 GMT

On June 4, 2013, the Second Circuit Court of Appeals in Ali v. Federal Insurance Company, et al., No. 11-5000-cv, affirmed a lower court’s decision declaring that the coverage obligations of excess D&O insurers are not implicated until the underlying insurance has been exhausted by actual payment of loss, even when the underlying carriers are insolvent. The appeal was taken from the United States District Court for the Southern District of New York. A copy of the Second Circuit’s decision is available here.

The case arose out of the 1994 bankruptcy of Commodore International Limited (“Commodore”), maker of one of the first popular personal computers, the “Commodore 64.” In anticipation that former directors and officers of Commodore (including former US Secretary of State Alexander Haig) would tender claims under its policy as a result of a lawsuit pending against them in the Bahamas, Federal Insurance Company (“Federal”), Commodore’s second and fifth-layer D&O insurer, brought a declaratory judgment action, seeking a declaration that it was not required to “drop down” to cover liability that would have otherwise been covered by Reliance Insurance Company (“Reliance”) and Home Insurance Company (“Home”), both of which were in liquidation. In turn, the directors filed a counterclaim against Federal, and sued Travelers Casualty and Surety Company of America (“Travelers”), seeking a declaration that the excess policies at issue were triggered once the total amount of the directors’ defense and/or indemnity obligations reached the policies’ attachment points, irrespective of whether those amounts had been paid or not. The Southern District of New York ruled in favor of Federal and Travelers, and denied the directors’ motion for partial summary judgment. The court’s opinion contains a detailed and thoughtful discussion of subsequent procedural maneuvering, but the result was that the Second Circuit concluded that it could review the denial of the directors’ motion.

Affirming the trial court’s judgment, the Second Circuit found that the excess D&O attachment points had not been implicated because there was no exhaustion of the underlying limits by actual payment of loss, due to the insolvencies of Reliance and Home. Relying on the “plain language” of the “exhaustion clause” contained in the applicable policies, the court stated that such language “requires the ‘payment of losses’ – not merely the accrual of liability – in order to reach the relevant attachment points and trigger the excess coverage.” In reaching this decision, the court also distinguished longstanding Second Circuit precedent in Zeig v. Massachusetts Bonding & Insurance Co., noting that the 1928 Zeig decision (which allowed recovery under an excess property policy when the loss exceeded underlying limits) involved a first-party property policy, rather than third-party excess liability policies, and that requiring actual payment, as the policies in issue required, protected the insurers against collusive settlements.

The Second Circuit’s ruling in Ali is consistent with other decisions in recent years finding that excess D&O coverage is triggered only when the underlying insurance has been exhausted by the actual payment of losses. See Comerica Inc. v. Zurich Am. Ins. Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007); Qualcomm, Inc. v. Certain Underwriters at Lloyds, London, 73 Cal. Rptr. 3d 770 (Cal. App. 2008).

Live Blog: DRI Insurance Bad Faith & Extra Contractual Liability Conference (Boston): Friday Late Morning Panel

Fri, 07 Jun 2013 12:18:14 GMT

The DRI Bad Faith Conference continued late Friday morning with a discussion of the impact of social media on bad faith litigation, led by Paul Berne of Lancer Insurance. Mr. Berne discussed the pros and cons of performing a social media search of claimants or policyholders. Although a fulsome investigation of a claim may very well involve a review of publicly available social media, there is a risk that the sheer amount of data may induce claims professionals to spend too much time in the investigation, at the expense of timely responding to the claim. Moreover, there is a risk that claims professionals will overestimate the evidentiary value of information discovered on social medial. Mr. Berne referenced several issues in the investigation process that may be impacted by social media, such as improper “friending” of a claimant or insured on social media, or the improper access of private information. Information gathered via social media also involve evidentiary issues, such as how to properly admit the results of a social media investigation into evidence. Defense counsel should be prepared to advise clients on the acquisition, authentication, and preservation of information learned through the use of social media for use at trial. Defense counsel may also wish to keep clients up to date on the latest case law about the use and admissibility of such information in litigation.

The discussion continued with a presentation by Asim Desai of Carlson, Calladine & Peterson LLP, on how to handle actual or perceived “mistakes” in the claims file. Insurers should recognize that many claims files contain some sort of a “mistake,” and that often these “mistakes” are not fatal to a case. “Mistakes” do not necessarily rise to the heightened standard necessary for a finding of bad faith. It may, however, appear that Policyholder counsels’ goal is to convert individual “mistakes” into indicia of institutional bad faith.

“Mistakes” may include interpretation of policy provisions, communications that do not conform to statutory requirements, insufficient investigation or evaluation, or timing issues. Counsel is advised to identify the “mistakes” alleged by policyholder counsel, as compared to any actual “mistakes.” It is also important to identify who made the “mistakes,” when they were made, whether any corrective action that was taken, and the nature of the harm, if any, caused. When faced with an actual or potential “mistake,” it is important to evaluate whether it was intentional, whether it was acknowledged, and whether proper corrective action was taken. Counsel is advised to evaluate claim files and notes early, and to identify the claims professionals that were involved with or may be aware of how the file was handled. Adequate preparation for depositions of the claims professionals is useful to frame the context in which “mistakes” were made during adjustment of the claim. Moreover, acknowledgment of any genuine mistakes during discovery may help diffuse them at trial. Focus groups and mock trials can also identify how a jury may evaluate “mistakes.” Mr. Desai also discussed how to handle and minimize “mistakes” during trial, from the jury selection phase through closing arguments.

FCA Bans Promotion of UCIS and Fines Investment Firm £6m for Related Failings

Fri, 07 Jun 2013 12:07:31 GMT

On 4 June 2013, the FCA published its final rules banning the promotion of Unregulated Collective Investment Schemes (UCIS) and various similar products to most retail investors. Collectively referred to as Non-Mainstream Pooled Investments (NMPIs), the products subject to the restriction are:

units in qualified investor schemes;
units in UCIS;
securities issued by SPVs which pool investment in non-share, non-bond assets; and
traded life policy investments.

The regulator considers that such products are unsuitable for inexperienced investors, so should only be promoted to sophisticated investors who understand the risks (which, recently, have included total failure).

The timing of the ban is opportune because the FCA chose the following day to publish the final notice of a financial penalty against an investment firm for failings linked to traded life policy investments (otherwise known as death bonds). Sesame Limited was fined over £6m for failings in the oversight of its appointed representatives (ARs). Since ARs are not themselves authorised, but derive an effective authorisation from a Principal, the Principal must account to the regulator for any breaches by its ARs.

The breaches in question involved incorrect and unsuitable advice leading to mis-selling of investments in death bonds provided by Keydata Investment Services Limited. Despite the fact that Sesame informed its ARs that the products carried “a considerable amount of risk”, this information was not passed on to customers. However, the majority of the fine (almost £5.8m) was imposed because of systems and controls weaknesses, of which the Keydata mis-selling was symptomatic. The regulator expressed concern that the firm had failed to monitor and control its network of 1,220 ARs, treating them, rather than the final consumer, as its customers.

The decision should serve as a warning to other financial services networks to ensure that their ARs are subject to sufficient scrutiny. It may also, given the timing, have been a contributory factor in the FCA’s decision to ban financial promotion of death bonds to retail customers.

Live Blog: DRI Insurance Bad Faith & Extra Contractual Liability Conference (Boston): Friday Morning Panel

Fri, 07 Jun 2013 09:42:37 GMT

The DRI Bad Faith conference resumed on Friday with a presentation by Anthony Zelle of Zelle, McDonough & Cohen and Anne Kevlin of the Beazley Group. The panel observed that successful resolution of a bad-faith claim is a team effort, from in-house counsel, to the claims professionals, to defense counsel. The panel advised that, when considering a new claim that may eventually involve bad faith allegations, interested parties should talk about how to handle the claim so as to avoid bad faith. Counsel is reminded that written communication will be discoverable, and should therefore reflect the integrity with which the claim is handled.

Opening the discussion to the floor, the audience remarked that, even before a bad-faith set up is first identified, counsel should bring the possibility of a future bad-faith claim to the insurer’s attention, and to perform an independent review of the claims file to avoid unintentionally running head long towards a bad faith claim. The panel also observed that it is counsels’ role to identify a bad-faith set up, and should not depend on the claims professionals to do so. This subjects the claim process to independent review to ensure that the claim is being adjusted correctly and professionally and, when necessary, to identify possible corrective action. Although insurers’ training and policies are helpful to identify “triggers” or red-flags of a possible bad faith set-up, counsel should be cognizant that plaintiffs’ counsel will evaluate the claim handling against established policies and harp on actual or perceived deficiencies in the claim handling or even in the established procedures.

Counsel should recognize, however, that abrupt changes to the claims handling procedures could be used by plaintiffs’ counsel to argue an indicia of bad faith, arguing that the insurer had been handling the claim improperly and took corrective action. The audience also discussed the utility and risks of having a single corporate designee, versus delegating this to multiple unit or regional managers. On a related note, regional managers or even local regional counsel may have a better sense as to how particular tone will play to a jury in the subject jurisdiction, and in some cases may be more effective witnesses than national witness from outside the jurisdiction.

Live Blog: DRI Insurance Bad Faith & Extra Contractual Liability Conference (Boston): Thursday Late Afternoon Panel

Thu, 06 Jun 2013 16:19:07 GMT

The DRI Bad Faith conference concluded on Thursday afternoon with a presentation by Sarah M. Thorpe of Gordon & Rees LLP and Donald M. Carley of State Farm Insurance. The panel began with a discussion of the latest developments in strategies for defending bad faith claims. The panel observed that, when faced with an actual or potential bad faith case, counsel is advised to know the facts of the case by reviewing the claims file, interviewing key witnesses, identifying the undisputed and disputed issues, and reviewing the relevant case law. This allows an objective evaluation of the case, including good and bad aspects. Counsel should also carefully consider whether the case is one to bring to trial or whether it is one to settle, and if so, when settlement negotiations should begin. Cost-benefit considerations as to whether to settle include not only the chance of success, but also the financial and “human costs” of litigation, such as who will have to be deposed and whether the reputation of the company will be at risk.

The panel also recommended that counsel adopt a proactive approach to discovery. At an initial case management conference, counsel should have a well-thought out discovery plan, which can be an important defense against overzealous discovery tactics on the part of opposing counsel. In addition to formal discovery, counsel should consider utilizing informal avenues of discovery, such as social media. According to the panel, the use of publicly-available information is permitted in the majority of jurisdictions. This can be a very valuable tool in creative discovery.

Live Blog: DRI Insurance Bad Faith & Extra Contractual Liability Conference (Boston): Thursday Afternoon Panel

Thu, 06 Jun 2013 15:28:53 GMT

The Thursday afternoon panel opened with a presentation by David White of Breakstone, White & Gluck PC, who presented the view of bad faith litigation from the perspective of the policyholders’ counsel. Mr. White offered insight into how insurers can avoid bad faith litigation, including best practices at all levels of the claims handling process. Mr. White suggested that insurers should keep in mind that juries will often determine a case based on moral values, defined by the jurors’ political philosophy. Thus, insurers are advised to understand not only the legal and factual issues in the case, but to keep in mind moral values against which jurors will evaluate allegations of bad faith.

Mr. White identified several things that policyholders’ counsel looks for to establish a bad faith claim, including an insurer’s failure to respond or investigate, overly broad requests for unnecessary information, unreasonable delays in the claims handling process, “incredibly” low settlement offers, insurers driving clear liability cases to needless suit, and failing to protect interests of the insured. Mr. White pointed out several mistakes that insurers may make that could suggest bad faith, including unintentionally establishing formal or informal policies that could be used to demonstrate institutional bad faith, such as tying performance reviews and compensation to denial of claims. As an aside, Mr. White also warned that insurers’ expert witnesses can be used to further a policyholder’s case, because cross examination of an expert witness can reinforce actual or perceived deficiencies in the claims handling process, as compared to best practices.

Rick Hammond of Johnson & Bell Ltd. continued the discussion with a presentation on the latest trends and theories in bad faith litigation. Mr. Hammond observed that bad faith cases are often determined during the claims handling process or the early phases of litigation, and that in many instances, insurers often unwittingly supply the “bricks” that allow policyholders to establish a bad faith claim. To safeguard against this, insurers are advised to maintain an objective standard in the investigation of the claim. Similarly, claims handlers should be cognizant that entries into the claims handling file could later be used in bad faith litigation. Moreover, insurers are reminded that every policy provision is cloaked with the duty of reasonableness, and that policyholders’ counsel is becoming more adept at framing insurers’ claims handling practices in a poor light.

Edwards Wildman's Martin Lister Analyzes How the Hong Kong Insurance Industry is Preparing for a New Super-Regulator in Global Reinsurance

Thu, 06 Jun 2013 14:42:39 GMT

Martin Lister, a Hong Kong-based partner in Edwards Wildman's Insurance and Reinsurance Department, discussed how Hong Kong will be establishing a new independent super regulator for the insurance industry in Global Reinsurance. In the article, "How Hong Kong is Preparing for its New Super-Regulator," Lister said, "There will be some discomfort in the industry because these guys have got to do something. They may have 200 employees and 120 of them will be new. Some will come from some of the self-regulatory organisations but there will be a group of externally employed professionals – actuaries, accountants, investigators and lawyers – these are all people who don’t exist in the Insurance Authority at the moment.” Furthermore, Lister added, "They will come in and coalesce into an organisation that has the potential to be quite powerful and effective. And in principle a powerful and effective regulator is not a bad thing, but it is important it does not feel it has to justify its existence."

NAIC Subgroup Approves Draft White Paper On Life Insurers’ Use of Captives and SPVs for Reinsurance Transactions

Thu, 06 Jun 2013 14:31:34 GMT

On a call held this morning, the Captives and Special Purpose Vehicle Use (E) Subgroup of the Financial Condition (E) Committee of the National Association of Insurance Commissioners (“NAIC”) adopted a draft of the Captives and Special Purposes Vehicles White Paper. The White Paper is now being referred to the Financial Condition (E) Committee for review and further consideration.

During the call, the Subgroup members and interested parties discussed written comments provided by the American Council of Life Insurers, New York Life, the North American CRO Council, and the Vermont Captive Insurance Association.

Life insurers have utilized captive reinsurance subsidiaries and insurance securitizations to address “reserve redundancies” associated with requirements under Regulation XXX and AXXX. Such captives are now commonly referred to as special purpose financial captives (or “SPFCs”). The use of these SPFCs by commercial life insurers has attracted attention in both industry and mainstream press. In response to certain concerns raised regarding the evolution of a so-called “shadow insurance industry,” the NAIC charged the Committee to study insurers’ use of captives and special purpose vehicles (“SPVs”) and establish appropriate regulatory requirements.^[1] This Committee appointed the Subgroup to fulfill such charge.

For more on the emergence of these types of captive reinsurance transactions, click here for an article authored by three Edwards Wildman lawyers and published in Best’s Review (March, 2013). Notwithstanding the recent negative press, there is a clear trend by the states toward permitting the use of SPFCs.

To see a copy of the draft in substantially similar form to what was adopted by the Subgroup, click here.

____________________________________

^[1]In the White Paper, the Subgroup identifies a number of regulatory concerns associated with the broadened use of captive reinsurance transactions by life insurers. One of the concerns expressed is that these transactions may be used to address reserve redundancies resulting from the application of statutory accounting requirements under Regulation XXX and AXXX. Another concern expressed is with respect to a lack of disclosure and transparency. The Subgroup recommends enhanced disclosure in the ceding company statements regarding the impact of the captive transactions on their financial position.

Live Blog: DRI Insurance Bad Faith & Extra Contractual Liability Conference (Boston): Thursday Morning Panel

Thu, 06 Jun 2013 14:23:23 GMT

The Thursday morning panel provided insightful commentary on effective strategies for defending bad faith claims, including development of defense strategy and trial tactics that are effective with juries. The panel stressed the importance of developing a case “theme” that will resonate with the jury. The theme should be easy to understand, compelling, and should be consistent through all phases of the trial. Themes often turn the tables on plaintiffs or their attorneys. For instance, one effective strategy may be to highlight particularly egregious attorney’s fees. The panel also provided tips in the jury selection process, including the dangers of adhering to preconceived notions of what may constitute a desirable juror.

The panel went on to discuss techniques to manage and rebuff discovery tactics employed by Plaintiffs’ counsel, particularly in the context of “institutional” bad faith allegations. The panel discussed developing a comprehensive discovery plan both for leveraged-coverage cases, where the allegations of bad faith are particularly weak and have been raised by plaintiffs in an effort to pressure insurers to settle, and for cases where there are genuine issues of bad faith. In the leveraged-coverage case, the panel suggested aggressive discovery early on in order to set the bad-faith claims up for dispositive motion. In contrast, where the allegations of bad faith are genuine, the discovery plan should focus on gaining a careful understanding of the allegations, as well as an appropriate application of the attorney-client privilege, the work-product doctrine, and other privileges and doctrines during the discovery phase to limit the scope of discovery. Panelists provided insight as to how to spot institutional bad faith claims, and offered tips on how to minimize discovery, including objections on the grounds that an individual plaintiff’s discovery requests for corporate financial information, claims handling guidelines, and unrelated claims files are not relevant and unduly burdensome.

FSOC Closer to Formal Designation of SIFIs

Thu, 06 Jun 2013 14:19:20 GMT

Earlier this month, Prudential Financial, Inc. and American International Group, Inc. confirmed that they received notice of a proposed determination by the Financial Stability Oversight Council (“FSOC”) that they should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System as systemically important financial institutions (“SIFIs”), pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Prudential indicated that it is evaluating whether to request a nonpublic evidentiary hearing before FSOC to contest the proposed determination, as permitted under the Act.

While FSOC has not officially disclosed the names of any companies, press reports have indicated that GE Capital is also proposed for regulation as a SIFI.

We will continue to monitor this topic and will report on the designations once they are released.

The HIPAA Final Rule: Impact on Privacy, Security, Breach Notification, and Enforcement

Thu, 06 Jun 2013 13:23:41 GMT

June 26, 2013
Edwards Wildman Palmer LLP
750 Lexington Avenue
New York, New York 10022

Edwards Wildman Speakers: Leslie J. Levinson, Eric D. Fader, David S. Szabo

Edwards Wildman Palmer LLP, Kroll Advisory Solutions and Advize Invite You to Join our Seminar

Breakfast and Networking: 8:00 am - 8:30 am
Program: 8:30 am - 10:00 am

Moderator:

Les Levinson - Partner and Chair of the Edwards Wildman Healthcare Practice

Speakers:

Eric Fader - Counsel, Edwards Wildman
Aviva Halpert - President, Advize Proactive Solutions, formerly of Mount Sinai Medical Center, NY
Jason Straight - Managing Director, Kroll Advisory Solutions
David Szabo - Partner, Edwards Wildman

Topics to Include:

HIPAA Omnibus Final Rule Privacy Changes
Business Associate Changes
Data Breach Response
Omnibus Final Rule Enforcement Provisions
Applying the Omnibus Final Rule in a Provider Setting
Assessing Information Security
Practical Implications:
- Modifications to Fundraising - The Good News and the Bad News
- The Right to Pay Cash for Services - What Does it Really Buy?

To RSVP, please e-mail NYevents@edwardswildman.com

Court Denies Insurer’s Motion to Bifurcate Breach of Contract and Bad Faith Claims

Thu, 06 Jun 2013 12:08:16 GMT

In Osbourne Renfrow v. Redwood Fire and Casualty Ins. Co., et al., 288 F.R.D. 514 (D. Nev. 2013), the U.S. District Court, District of Nevada recently denied an insurer’s motion to bifurcate breach of contract and bad faith claims into two separate proceedings. The court ruling arose out of an underinsured motorist (UIM) claim involving Plaintiff Osbourne Renfrow, who was involved in an accident with an underinsured motorist, causing injuries to Renfrow’s neck, back and shoulders. Renfrow received $50,000 in insurance proceeds from the other driver’s liability carrier, plus an additional $5,000 in medical payments coverage from his own insurer, Redwood Fire and Casualty Insurance Company (“Redwood”).

Renfrow presented a claim pursuant to the underinsured coverage under his policy with Redwood, seeking the full policy limits of $1 million. The parties were unable to settle, so Renfrow brought suit against Redwood for, inter alia, breach of contract and bad faith causes of action, namely, for breach of the duty of good faith and fair dealing, insurance bad faith, and engaging in unfair settlement claims practices under Nevada law.

Redwood moved to bifurcate the bad faith claims from the breach of contract claim, arguing that the bad faith claims are not ripe for decision as they will not have accrued, if at all, until the underlying contractual dispute has been resolved. Redwood also argued that allowing both claims to proceed simultaneously would be prejudicial to Redwood, given that its valuation, investigation, and good faith efforts to reach a resolution on Plaintiff’s claim for UIM benefits remains ongoing. Finally, Redwood argued that bifurcation advances the interests of convenience, avoidance of prejudice, and expeditious and economical resolution of the dispute because it would simplify the issues for trial and reduce any prejudice by allowing the trier of fact to hear evidence on bad faith only where the breach of the underlying contract is established.

In opposing Redwood’s motion to bifurcate, Renfrow argued that Nevada law does not require that a plaintiff establish success on a contractual claim prior to proceeding with a bad faith claim where the actions supporting the breach of contract and bad faith claims arise from the same facts. Renfrow noted that his bad faith claims were not brought due to a denial of his claim. Instead, they related to Redwood’s alleged ongoing dilatory handling of his claim. Therefore, Renfrow asserted the bad faith claims could be decided concurrently with the breach of contract claim.

The Court agreed with Renfrow, observing that Nevada law does not require a plaintiff to establish success on a contractual claim prior to proceeding with a bad faith claim. The Court went on to find that Renfrow’s claim for bad faith related to Redwood’s actions which occurred during the handling of Renfrow’s claim. Accordingly, the Court found that the claims for breach of contract and bad faith may be brought concurrently and bifurcation of the claims was not mandatory. The Court also weighed the convenience and efficiency factors of Federal Rule of Civil Procedure Rule 42(b), determining that bifurcation would require the parties to present much of the same evidence and make the same arguments twice, require the same witnesses to testify twice, and increase the cost of litigation. The Court also noted that place an unnecessary burden on the Court, which would be required to hear the duplicative arguments, presentation of evidence, and testimony.

The Court’s refusal to bifurcate the proceedings, so as to allow coverage and bad faith issues to be litigated separately, represents a departure from the procedure most courts generally apply. Moreover, it is potentially bad news for Nevada insurers, who could be exposed to significant prejudice – not to mention increased discovery burdens – if insureds may seek to inject unrelated arguments concerning the insurer’s claims handling into coverage disputes.

Happy Birthday to Us!

Wed, 05 Jun 2013 14:41:47 GMT

Six years ago, InsureReinsure.com was born. We were one of the first insurance blogs, and we received a warm welcome from the industry (including from many people who did not know what the word “blog” meant at the time!).

A lot has changed during the past six years, but we are still blogging. We have had over 1 million visitors and have drafted 3,500 posts. We have become a well-respected source of industry information, a valued resource for industry publications and have repeatedly been identified as a top insurance industry blog. We regularly blog about industry developments in the United States, United Kingdom, European Union, Hong Kong and Latin America.

Click here to join our 1,000 subscribers who receive emails from us with links to the prior day’s blog posts.

You can also follow us on Twitter – we have over 2,600 followers – as we provide links to our blog posts and tweet about industry issues.

Healthcare Update: CMS Releases SHOP Program Rule; White House Memorandum Updates Exchange Progress

Wed, 05 Jun 2013 13:56:10 GMT

CMS Releases SHOP Program Rule

On May 31, the Centers for Medicare & Medicaid Services (CMS) released a final rule on the Small Business Health Options Program, part of the Affordable Care Act (ACA), as well as simplified application forms for the program. The final rule was published in the Federal Register on June 4.

Under the SHOP program, beginning October 1, small employers in each state will be able to choose from a range of health insurance options for their employees for coverage beginning January 1, 2014. The start of the SHOP program is intended to be synchronized with that of the state healthcare insurance exchanges, or marketplaces, that are also being created under the ACA. Enrollment periods and other aspects of SHOPs are also aligned with special enrollment periods for group insurance under the Health Insurance Portability and Accountability Act of 1996.

For plan years beginning on or after January 1, 2014 and before January 1, 2015, SHOPs in 16 states plus the District of Columbia may choose to offer their employees either one selected qualified health plan (QHP), or a choice of QHPs. In the 33 states in which the federal government will operate Federally-facilitated SHOPs (FF-SHOPs), however, employers will be required to choose a single QHP for their employees from the choices available. This transitional policy will be replaced by an employee choice model beginning in 2015.

CMS also released the final SHOP applications for employers and employees on its website. CMS pointed out that at only three and two pages long, respectively, the online applications are shorter and simpler than most insurance applications.

Click here for a complete copy of the Update.

Proposed Limitations on Fed’s Power Over Nonbank SIFIs

Tue, 04 Jun 2013 15:01:03 GMT

Last month, Representatives Gary Miller (R-Calif.) and Carolyn McCarthy (D-N.Y.) introduced a bill that would prohibit the Board of Governors of the Federal Reserve System (the “FRB”) from imposing additional capital standards on insurers that are designated as systemically important financial institutions (“SIFIs”). Currently, under Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Financial Stability Oversight Council is authorized to determine that a nonbank financial company (e.g. insurers and reinsurers) will be supervised by the FRB and subject to prudential standards if:

“material financial distress” at the nonbank financial company could pose a threat to the financial stability of the U.S.; or
the nature, scope, size, scale, concentration, interconnectedness, or mix of the nonbank financial company’s activities could pose a threat to U.S. financial stability.

If passed, H.R. 2140, entitled the “Insurance Capital and Accounting Standards Act of 2013,” would create a presumption that insurers, insurance affiliates and subsidiaries of insurers that comply with state-based capital standards meet the minimum capital requirements under the Dodd-Frank Act. However, the FRB may determine that the presumption is inapplicable to such entities on a case-by-case basis. Further, the bill prohibits the FRB from requiring that insurance companies comply with accounting standards that are different from those regulatory accounting standards applicable to insurance companies under state law.

The bill has been referred to the House Committee on Financial Services. No other actions have been taken at this time.

To see a copy of the bill, click here.

Webinar Replay - Potential Claim and Insurance Implications of the Boston Marathon Bombings

Mon, 03 Jun 2013 12:21:40 GMT

Four members of our Insurance and Reinsurance Department recently conducted a webinar in which they addressed potential claims arising from the Boston Marathon bombings as well as possible insurance implications related to those claims. They discussed a variety of issues, focusing on who will likely bear financial responsibility for the resulting losses and the availability of insurance coverage for both the victims injured by the blast and the scores of businesses impacted by the bombings. They also addressed potential claims that may be asserted by people who suffered physical injury as a result of the bombings, property damage and other forms of financial loss, including possible claims of sponsorship liability and the defense of sovereign immunity. Additionally, they discussed the potential application of terrorism coverages and exclusions, with a focus on TRIA and its application to these claims, as well as business interruption and contingent business interruption coverages, civil authority, ingress/egress, and event cancellation coverages.

In case you missed the live webinar on May 23, you can view the webinar by clicking here.

During the live webinar, several attendees submitted interesting questions and you can read the presenters’ responses by clicking here.

You can click here to read an article about the Boston Marathon bombings and the potential claims and insurance implications.

Finally, in connection with a discussion of sponsorship liability, the presenters referred to the District of Rhode Island opinion in Gray v Derderian as a recent example of the potential liability of event sponsors. You can review Gray v. Derderian by clicking here.

If you have any questions for the presenters, you can contact them directly – Darlene Alt, Laura Bange, Brian Green and Stephen Prignano.

They are following developments related to these issues and will provide updates here on InsureReinsure.com.

New York Legislation Pending for Proposed Private Right of Action Against Insurers

Mon, 03 Jun 2013 09:03:22 GMT

When a claim relates to loss or injury in a geographic area where the governor has declared a disaster emergency, New York lawmakers are considering a bill that would establish a private right of action against an insurer for engaging in unfair insurance settlement practices. The bill, A. 5780, would also provide for punitive damages if there is a finding that the insurer willfully or knowingly violated Section 2601 of the New York Insurance Law. Section 2601 prohibits New York insurers from engaging in unfair claims settlement practices.

Under the bill, disaster victims could accuse insurers of misrepresenting policy provisions, unfairly delaying decisions on claims, or offering substantially less than what policyholders ultimately recover through litigation. The proposed law leaves untouched the New York insurance regulator's power to impose fines for unfair claims settlement practices.

Supporters of the bill argue that, in the wake of Superstorm Sandy, there remains evidence that some insurers have taken advantage of insureds regarding the adjustment of losses sustained in disaster emergencies. The bill states that a private right of action is necessary “to make certain that insurers are held responsible for unfair claims practices.” Opponents of the proposed legislation, however, warn that it may influence insureds to file more individual and class action lawsuits against insurance companies. This ultimately could lead to higher rates for customers, and the potential to increase insurers’ legal bills. In addition, the legislation could also encourage insureds to retain attorneys to pursue these claims. Under the current regulations, an insured can pursue mediation, which does not require legal representation.

The bill remains pending in the New York State Assembly.

Industry Loss Estimates for Superstorm Sandy Remain at $18.75 Billion

Fri, 31 May 2013 14:22:49 GMT

On May 29, 2013, Property Claims Services ("PCS") released its third re-survey of Superstorm Sandy insurance industry loss estimates based on information gathered from affected insurers. The updated loss estimate was $18.75 billion, which remains unchanged from PCS’s first and second re-survey loss estimates released in January and March 2013, respectively. PCS’s first loss estimate related to Superstorm Sandy, released in November 2012, was $11 billion.

PCS, an independent company which investigates reported disasters and determines the extent and type of damage, normally considers the third re-survey loss estimate to be final and closes down an event after the industry loss estimate remains the same for two consecutive surveys. However, PCS has elected to allow for one more re-survey within 60 days due to the complexity and severity of Superstorm Sandy. PCS noted that the extended time would allow it to further analyze large commercial losses related to the Superstorm – such as transportation system losses and large commercial properties losses in downtown Manhattan – to address any remaining questions about the size of these losses, including business interruption losses.

With respect to Superstorm Sandy loss estimates, the $20 billion mark is a crucial industry loss figure for non-traditional reinsurance products, such as industry loss warranty (ILW) contracts and cat bonds. Should the loss estimates reach the $20 billion mark, as determined by an independent third-party such as PCS, then ILWs would be triggered and would have to be paid out.

Other Notable Developments

Last week, the New York Assembly Insurance Committee approved bill A. 7455, which would ban the use of anti-concurrent causation (ACC) clauses in insurance policies. ACC clauses typically exclude coverage for a loss that results from multiple contributing causes where at least one of the causes is excluded by the policy. In states like New York where ACC clauses are generally enforced, the clauses have been interpreted to exclude coverage for property damage where the loss is caused by both wind, which is typically a covered peril, and flood, which is typically an excluded peril under many first party property policies.

In the wake of Superstorm Sandy, where countless losses were caused by a combination of wind and water, proponents of A. 7455 believe the bill would bring New York in line with more catastrophe-prone states that have refused to enforce ACC clauses. Notably, however, hurricane prone states along the Gulf Coast of the United States tend to enforce ACC clauses. Opponents of the bill believe that it would force insurers to cover damages that were never intended to be insured and drive up premiums. Other commentators believe that a modified version of the ACC clause may result from the proposed legislation, noting that when causes of large natural disasters are so indistinguishable an ACC clause may be appropriate.

A similar bill seeking to ban the use of ACC clauses has also been introduced in the New York State Senate (S. 5581) and is currently before the Senate Committee on Insurance.

At this juncture, it is too early to determine whether the proposed anti-ACC legislation will ultimately become law, but the approval of A. 7455 by the New York Assembly Insurance Committee signals that some change to the wording and/or enforceability of ACC clauses is likely in the months ahead.

NY Demands Info on Insurers' Cyber Threats

Wed, 29 May 2013 14:59:05 GMT

The New York Department of Financial Services (“DFS”) sent “308 Letters” to the largest insurers it regulates yesterday, requiring information on their cyber security, according to a press release issued by New York Governor Andrew Cuomo. The information to be provided includes: (a) information on any cyber attacks the company has been subject to in the past three years; (b) the cyber security safeguards the company has in place; (c) the company’s information technology management policies; (d) the amount of funds and other resources dedicated to cyber security at the company; and (e) the company’s governance and internal control policies related to cyber security.

Earlier this month, Governor Cuomo announced the members of the newly formed Cyber Security Advisory Board, which is charged with “advising the administration on developments in cyber security and making recommendations for protecting the state’s critical infrastructure and information systems.” DFS Superintendent Benjamin Lawsky, who co-chairs the Cyber Security Advisory Board, said of the inquiry into insurer cyber security: “Cyber security at insurance companies is something that often gets overlooked, but it’s far too important to get caught in a blind spot. We need to make sure that those insurance records are protected from hack attacks that could put New Yorkers at risk.” Governor Cuomo stated: “The extraordinarily sensitive health, personal, and financial information that New Yorkers entrust to their insurance companies is a virtual treasure trove for hackers.”

For more information on privacy and data security, please see our White Paper, “Everyone's Nightmare: Privacy and Data Breach Risks,” or contact the authors of this blog.

Major Disasters in Northeast and Beyond Spur New Super Bowl Insurance Product

Wed, 29 May 2013 13:03:16 GMT

Recently, New York-based insurance broker DeWitt Stern announced that it will offer a new insurance product designed to protect businesses that would suffer loss of revenue due to the cancellation or relocation of Super Bowl XLVII, which is scheduled to take place on February 2, 2014 at MetLife Stadium in East Rutherford, New Jersey. The product, which will be underwritten by Houston Casualty Company, will provide coverage where an insured’s financial loss is due to a cancellation or relocation of the Super Bowl due to “an extreme winter storm” or “acts of terrorism in New York or elsewhere in the country.”

According to DeWitt Stern’s release (available here), the launch of the new insurance product was spurred by the cancellation of the New York City Marathon in the wake of Superstorm Sandy in November 2012, the power outage that occurred at the Super Bowl in New Orleans in February 2013, and the Boston Marathon bombings last month. The 2014 Super Bowl marks the first time that the game will be played in a cold-weather location in a stadium that does not have a dome.

The new insurance product, which is the first of its kind, will feature elements of event cancellation insurance and contingent business interruption insurance. Like event cancellation coverage, the new product will provide coverage for financial losses arising out of the cancellation or relocation of a covered event due to certain covered causes. However, unlike event cancellation policies, which typically insure against economic losses suffered by the organizer of the insured event, the new policy offered by DeWitt Stern will insure against economic losses to local companies such as hotels, caterers, limousine businesses, security firms and others that could stand to lose considerable revenue if Super Bowl XLVII were cancelled or relocated. In this way, the new product is somewhat similar to contingent business interruption insurance, which provides coverage for businesses that are highly dependent on other key businesses for revenue. While contingent business interruption coverage typically requires that the business on which the insured’s revenue depends suffers direct physical loss, the new policy offered by DeWitt Stern will contain no such physical damage requirement.

Coverage under the new policy will, however, be limited to cancellation or relocation of the Super Bowl. The mere postponement of the event would not result in coverage under the policy. Although DeWitt Stern acknowledges that the Super Bowl has never been cancelled or moved to another location on short notice, the broker appears to be confident that a market exists for its new product.

It remains to be seen how many other business will purchase this type of coverage, and it will be interesting to see if others bring similar products to the market in the coming years.

The Seventh Circuit Rules That Life Insurers May Create Retained Asset Accounts to Pay Death Benefits, if the Policy Does Not Require Lump Sum Payments

Wed, 29 May 2013 12:45:22 GMT

In Phillips v. Prudential Insurance Co. of America, No. 11-3870 (7th Cir. May 6, 2013), the Seventh Circuit recently affirmed dismissal of a putative class action that challenged a life insurer’s use of “retained asset accounts” to make payment of the policy’s benefits. On behalf of a putative class, Zena Phillips sued Prudential, alleging that by not paying her policy benefits in a lump sum, it breached an insurance policy, its statutory duty of good faith, and its fiduciary duties. The policy gave Michael Strang (the insured) and Ms. Phillips (his beneficiary) the choice of the way in which Prudential would pay the policy’s death benefit. Upon Mr. Strang’s passing, Prudential sent Ms. Phillips a claim form listing various options for it to pay her. While the policy entitled Ms. Phillips to elect a lump-sum payment, the claim form did not mention that option. Instead, the form permitted Ms. Phillips to write on the form any other “payment option allowed in the policy.” Ms. Phillips, however, did not express any preference, so Prudential used the death benefit to fund a retained asset account held within Prudential’s general investment account. Ms. Phillips could draw on this account as she pleased at any time. Prudential guaranteed that Ms. Phillips’s account would accrue interest at 3%, while Prudential kept any investment returns exceeding 3%.

The Seventh Circuit upheld dismissal of Ms. Phillips’s complaint, finding that Prudential did not breach the insurance policy because, by returning the claim form without selecting a payment option, Ms. Phillips selected the retained asset account by default. The policy explicitly contemplated this result. Moreover, the Court held that Prudential did not commit statutory bad faith because tendering the retained asset account to her did not delay payment of the death benefit. Finally, Prudential did not owe Ms. Phillips any fiduciary duties that it could breach: by holding the funds in its investment account, Prudential was a mere debtor, not a fiduciary.

Such use of retained asset accounts has been controversial, and regulators have acted to curb this practice. For example, the Illinois Insurance Code’s Section 5/244(l) requires an insurer to pay a beneficiary benefits plus interest at a rate of 10% per year if it does not pay the policy benefits quickly enough. Payment in the form of a retained asset account could permit the insurer to keep – and continue to invest – those benefits without paying 10% interest. The funds are taken from the insurer only as the beneficiary withdraws them from the account. Notably, in a Company Bulletin issued after Prudential set up Ms. Phillips’s account, the Illinois Department of Insurance determined that retained asset accounts – when the funds are, to use the Bulletin’s words, “held by the insurer” – do not spare an insurer from accruing interest under Section 5/244(l). It is not clear what effect this Bulletin would have in a beneficiary’s lawsuit against an insurance company, given that the Bulletin is merely the Department’s interpretation of Section 5/244(l). Certainly, the Illinois regulator’s statutory interpretation must be considered carefully, but it is not equivalent to an interpretation of an Illinois court. It is also not clear whether an insurer can comply with this Bulletin by having an affiliate hold the funds.

A copy of the Seventh Circuit’s decision can be found here.

* Chris Finney Commentary: EIOPA, a Highly Ambitious Work Programme and Another Land Grab

Wed, 29 May 2013 12:25:17 GMT

EIOPA came into existence on 1 January 2011. It’s one of the three European Supervisory Authorities (ESAs) that form part of the European System of Financial Supervision (ESFS). (The others are the European Securities and Markets Authority, and the European Banking Authority).

Like ESMA and the EBA, EIOPA’s objectives include “upgrading the quality and consistency of national supervision, strengthening oversight of cross-border groups and establishing a European single rulebook …”. (This seems to have come as a surprise to the UK’s Prudential Regulation Authority – see my blog of 28 May 2013.) To enable it to achieve these objectives, EIOPA has been given the power to: (i) draft technical standards for adoption by the European Commission; and (ii) “issue guidelines and recommendations on the Application of Union law”. And it’s already used these powers to make a significant contribution to the development of Omnibus II, Solvency II, IMD 2 and the revised IORP Directive, among others.

Towards the end of each calendar year, EIOPA publishes its work programme for the following year, and 2012 was no exception. Although “EIOPA … decided to reshape the structure of its Work Programme [for 2013, that] has not affected the highly ambitious programme presented for 2013” (the 2013 Work Programme is available here). To deliver a highly ambitious Work Programme, you need a highly ambitious budget and headcount, and EIOPA’s budget and headcount do not disappoint. In 2011, EIOPA’s operating budget was €10.6m and its headcount was 56. The equivalent figures for 2012 and 2013 were: a budget of €15.7m and a headcount of 89; and a budget of €18.8m and a headcount of 114. But that’s not quite enough: “Priorities still have to be made with regards to EIOPA[‘s] mandate, as the Authority will only reach its anticipated size in 2020”.

The mere fact that EIOPA is ambitious is not a surprise. When EIOPA’s chairman, Gabriel Bernardino, speaks, he very often reminds us that EIOPA is fully committed to Solvency II, and that he’s absolutely sure it will be delivered in due course. This is usually followed by an invitation to his European colleagues to begin to develop a global regulatory framework for insurers, which is akin to Basel and based on Solvency II. If we don’t do this, he argues, someone will do it for us, and we’ll regret the missed opportunity. That may be true. But as EIOPA’s critics point out: Solvency II hasn’t been Europe’s finest hour. It may therefore be better for EIOPA to clean up its own back yard, before having a stab at world domination.

The European Regulations which established EIOPA, ESMA and the EBA require the Commission to publish a report by 2 January 2014, which “considers the experience acquired as a result of the operation of the Authorit[ies] and the procedures laid down in [the] Regulation[s]”. The Commission is also required to consider whether it would be appropriate to (i) “continue separate supervision of banking, insurance, occupational pensions, securities and financial markets”; (ii) “undertake prudential supervision and supervise the conduct of business separately or by the same supervisor”; and (iii) “simplify and reinforce the architecture of the ESFS in order to increase coherence between the macro and the micro levels and between the ESAs”. The Commission’s review began with a conference in Brussels on 24 May 2013. Conference delegates heard arguments for and against (i) the status quo; (ii) a “twin peaks” supervisory model like the UK’s; and (iii) the merger of all three ESAs into one authority, that will be based in one location instead of three (EIOPA is in Frankfurt, ESMA is in Paris, and the EBA is in London).

Gabriel Bernardino seems to have taken a different approach: he used his introductory conference statement to call for “evolution, not… revolution”, and argued that we should:

Strengthen EIOPA’s operational independence by giving it an independent budget line in the General Budget of the European Union, consider giving EIOPA the power to levy fees on the industry, giving it greater budgetary flexibility so that it can continue to attract the highly qualified staff it needs for Solvency II implementation, and giving it a more efficient decision-making process so that it can avoid conflicts of interest with national supervisors;
Reinforce EIOPA’s independent challenging role towards national supervisors by giving it direct access to individual information, and the power to conduct an inquiry into a particular type of financial institution, product or conduct – a power that should be available generally to support EIOPA’s independent challenging role; and
Enhance EIOPA’s mandate and powers – for example, EIOPA has the power to ban or restrict financial activities, but it still “needs to be brought to life”. EIOPA “scope of action” should also be extended to include personal pensions, and it should be given a centralised oversight role in the field of internal models.

We probably shouldn’t therefore be too surprised by the flurry of “land grab” headlines that accompanied reports of the conference. Nor should we be surprised if they’re followed by questions about the extent of EIOPA’s ambition, its funding, and its democratic legitimacy. In the meantime, look out. EIOPA may be coming to a yard near you.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

IFCPA Potentially Expands US Sanctions Against Iran to Non-US Insurers and Reinsurers

Wed, 29 May 2013 12:15:08 GMT

President Obama signed the National Defense Authorization Act for Fiscal Year 2013 into law in January 2013, which includes a section entitled the Iran Freedom and Counter-Proliferation Act of 2012 (the “IFCPA”) designed to expand the current US sanctions regime against Iran in a number of ways. Of significance to the insurance and reinsurance industry, effective July 1, Section 1246 of the IFCPA imposes new sanctions on any person that knowingly provides underwriting services or insurance or reinsurance:

a) for any activity with respect to Iran for which sanctions have been imposed,
b) to or for any person
     i. with respect to or for the benefit of Iran’s energy, shipping or shipbuilding services for
        which sanctions are imposed under the IFCPA (see IFCPA Section 1244)
     ii. for the sale, supply or transfer to or from Iran of precious metals for which sanctions are
         imposed under the IFCPA (see IFCPA Section 1245)
    iii. subject to sanctions in connection with Iran’s proliferation of weapons of mass destruction
         or their delivery systems or Iran’s support for international terrorism, or
c) to or for any Iranian person on the specially designated nationals and blocked persons list maintained by the US Treasury Department’s Office of Foreign Assets Control (other than, in accordance with IFCPA Section 1246(b), an Iranian financial institution that has not been designated for the imposition of sanctions).

The IFCPA includes an exception (other than with respect to sanctions applying to proliferation and support of international terrorism) for persons who exercise “due diligence” in establishing and implementing compliance procedures to guard against engaging in conduct prohibited by the IRCPA.

Subject to the knowledge requirement, and due diligence exception, the plain language of IFCPA Section 1246 has the potential of covering non-US underwriters, insurers and reinsurers, who engage in actions that would be considered prohibited if taken by a US person, including actions by non-US underwriters, insurers and reinsurers, such as surplus lines companies issuing policies in the US. The precise scope of the new prohibitions are unclear as OFAC has not issued any guidance on this point. However, given Washington’s demonstrated commitment to enforcing US foreign policy and security interests which respect to Iran, non-US companies may wish to consider the implementation of compliance procedures with respect to these new prohibitions.

The National Defense Authorization Act for Fiscal Year 2013, which includes the IFCPA, can be found here.

We will continue to monitor this topic.

* Chris Finney Commentary: Solvency II and the Bailey Letters – Why Here? Why Now?

Tue, 28 May 2013 12:43:26 GMT

On 30 April 2013, Andrew Tyrie, Chair of the UK’s Parliamentary Commission on Banking Standards and the UK’s Treasury Committee, published his exchange letters with Andrew Bailey, a Deputy Governor of the Bank of England and CEO of the Prudential Regulatory Authority. It’s clear from these letters that Tyrie and Bailey have written to each other at least twice, but Tyrie’s opening salvo hasn’t been published. It’s not clear why.

In his replies, Bailey makes four points:

Solvency II is “an evolution of the current UK framework, but … a major change for Germany [and] France … [I]t is unclear to us that the French authorities will … be able to agree to any directive that we consider prudentially acceptable. Germany, in contrast, has long been supportive of a relatively prudent agreement … but needs a long transitional arrangement ... The process to finalise SII in the EU has ground to a halt in the face of these different national interests”;
When Solvency II “eventually” emerges, it will be maximum harmonised. This will make it difficult “for national supervisory authorities to impose sensible treatments to deal with more idiosyncratic risks. There is a risk that this … will be a battleground of the future as the judgmental approach of the PRA comes up against narrow interpretations of EU law”. “[A] principal concern is that Solvency II will be accompanied by overly-prescriptive rules … that will seek to establish a single approach to risk assessment and supervision that does not reflect the realities facing us in respect of individual firms…”;
“… there is a risk of over-reliance on complex models and of models being used to pare capital requirements. Moreover, there is a risk that SII overloads supervisors with very detailed model approval requirements. [This] is not consistent with the PRA’s … approach to supervision. To mitigate this risk, we plan to use ‘early warning indicators’ … We believe we can implement these … Indicators in the UK within the SII framework but in any event we would pursue this approach and accept the risk of EU challenge”;
“…I have been very concerned about … costs, which have been … staggering”. “It would be a help if Parliament could cast light on a process which has gone on for … ten years, and in which the EU process has assumed that firms and regulators will spend very large amounts of money to prepare for something that carries no promise in terms of when, or in what form, it will be implemented”.

This is all rather curious:

So far as I’m aware, this is the first time that a senior UK regulator has publicly accepted that Solvency II has “ground to a halt”, and that it’s done so for reasons of national interest, even though the trilogue negotiations on Omnibus II effectively ground to halt on 12 July 2012 for the same reasons. It is also the first time that a Deputy Governor of the Bank of England and the CEO of the PRA (or the FSA, its immediate predecessor) has been prepared impliedly to criticise other EU Member States;
We’ve always known that Solvency II would be maximum harmonising, and that it would gradually lead to a single European approach to supervision, a single European Handbook and - in all probability - a single European regulator. That’s part of the raison d’etre for (i) the Lamfalussy process (which is being used to build Solvency II); and (ii) EIOPA (a key contributor to the new regime, and an organisation that clearly sees itself as a single European regulator in waiting). That didn’t seem to trouble the FSA, although it was never going to go down well at the Bank. It’s now clear that it isn’t going down very well at the PRA either;
The reference to over-reliance on complex models, and models being used to pare capital requirements, reflects the Parliamentary Commission on Banking Standard’s Report on the failure of HBOS which notes that (i) Basel II relied too heavily on complex models; (ii) these models were used (in part and by some) to pare capital requirements; (iii) Basel II implementation generated so much work that it distracted banks and their regulators from other more immediate and more material concerns… oh, and (iv) Basel II is now widely regarded as a failure. This must be a lesson well learned.

What’s less clear is precisely what Bailey thinks the lesson is (his language suggests that his principal concern is that supervisors will be overloaded by the number and complexity of internal model approval applications in the pre-implementation phase); and whether the PRA’s proposed early warning indicators will really help (after all, the PRA insists that its early warning indicators have been designed to make sure that each firm’s internal model remains properly calibrated in the post-implementation phase – they won’t therefore do anything to mitigate the pre-implementation risk Bailey has properly identified).

The reference to the early warning indicators is also interesting for a second reason: so far as I am aware, this is the first time a senior UK regulator has impliedly accepted that these indicators may be unlawful because they go beyond what Solvency II seems to envisage or require. But no matter - the PRA accepts that risk; and
The PRA has invited Parliament to “cast light on a process which has gone on for … ten years”, when the FSA – the PRA’s immediate predecessor – was heavily involved in the Solvency II negotiations, and must have known precisely what was happening and why.

In his response, Tyrie explains that “The Committee takes your concerns very seriously and plans to examine them further in the coming months”. It will be interesting to see if this results in another critique of the FSA, whether it will be used to seek to persuade the European authorities that Solvency II should be switched from maximum towards minimum harmonisation, and whether it will eventually lead to the unpicking of some parts of Solvency II – even though the FSA regarded the Solvency II Directive as a major UK success, and the best outcome that could realistically be achieved.

One other thing is striking – but perhaps it’s no more than co-incidence: the Bailey/Tyrie letters were published in the UK on 30 April 2013. As a result, they were already the stuff of gossip and conjecture by the time the US/EU Insurance Symposium opened in Washington DC at the crack of dawn on 1 May 2013. Their publication could therefore easily have had – and may have been intended to have - a material impact on that Symposium. If that was the intention, it failed. The European and US delegates read out their prepared statements without reference to the Bailey/Tyrie letters – and without any apparent embarrassment at the fact that that was what they were doing. Even so, a different story played out in the margins. Some European delegates were clearly unhappy with Bailey, and regarded the publication of the letters as especially unhelpful at that time; others saw them more as pre-cursor to another set of “special pleadings” from the UK … a country that’s gradually moving to the European periphery and losing its influence as it goes.

Perhaps the most interesting thing now will be to see how the Committee examines the issues Bailey has raised (apparently at the Committee’s invitation), what conclusions it reaches, what recommendations it makes and what impact this will have on the final shape of Solvency II in the UK and elsewhere. Firms may therefore wish to look out for opportunities to give evidence to the Committee – whether it called for it, or not.

In the meantime, the Bailey/Tyrie letters are here, here and here. My previous blogs about the trilogue negotiations on Omnibus II are here and here; and my most recent blog about the PRA’s early warning indicators is here.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

Everyone's Nightmare: Privacy and Data Breach Risks

Tue, 28 May 2013 08:21:53 GMT

Edwards Wildman's Privacy and Data Protection Group is pleased to announce that the newest edition of its White Paper, "Everyone's Nightmare: Privacy and Data Breach Risks," has been issued. The paper discusses legal and regulatory privacy, data security and breach notification obligations and developments; exposures presented by data breaches and other cyber risks; privacy issues arising out of business practices and new technologies; recent court decisions; and lines of insurance potentially impacted.

Please use the link below to view the May 2013 edition of "Everyone's Nightmare: Privacy and Data Breach Risks."

www.edwardswildman.com/privacywhitepaper

For more information about our Privacy and Data Protection Group, please click here or contact:

Mark Schreiber - Chair of the Steering Committee, Privacy and Data Protection Group
617.239.0585
mschreiber@edwardswildman.com

Laurie Kamaiko - Steering Committee, Privacy and Data Protection Group
212.912.2768
lkamaiko@edwardswildman.com

Ted Augustinos - Steering Committee, Privacy and Data Protection Group
860.541.7710
taugustinos@edwardswildman.com

Alan Friel - Steering Committee, Privacy and Data Protection Group
310.860.8703
afriel@edwardswildman.com

I-5 Bridge Collapse Could Raise Several Thorny Insurance Issues

Fri, 24 May 2013 12:11:33 GMT

On the evening of May 23, a large section of the I-5 bridge over the Skagit River in Mt. Vernon, Washington collapsed into the river below. See news articles here and here. According to early reports, an “oversized” truck struck one of the overhead steel trusses on the bridge, which caused the entire structure to fail. Amazingly, only three people sustained minor injuries in the collapse. However, the enormous cost of repairing the bridge and the road could raise several complex liability and insurance issues.

The first issue is the allocation of fault. If the truck that struck the steel beam was indeed “oversized,” does it bear some fault for the collapse? If so, commercial auto policies might be in play.

To the extent that the bridge was negligently constructed, it was likely built by multiple contractors and subcontractors (and designed by engineers, etc.). If so, it is crucial to determine which part of the bridge was negligently constructed. Was it the steel beam itself? Was it some other part of the bridge to which the beam was connected, or a defective weld or bolt? Was the overall design flawed?

Assuming some negligent construction – and assuming the negligent parties were insured – the next issue is trigger of coverage. Certainly, the (rather limited ) bodily injury in this case occurred on May 23, so only occurrence-based policies issued at that time would be triggered for those injuries. And on the surface, according to early news reports, the “property damage” appears to have occurred when the “oversized” truck struck the steel beam. If liability lies solely with the contractors that built the bridge in 1955, and they have since gone out of business and stopped buying insurance, then there may be no insurance issues here at all.

But what if the beam or some other part had already been slowly cracking or failing over a long period of time? Would this constitute “property damage” under Washington law? If so, would it trigger policies issued since as early as 1955, when the bridge was built? Insurance policies issued that long ago could be lost, which raises its own host of issues. And if only a few older insurance policies are triggered – even if they are ascertainable – they may have very small limits. It could also be difficult to unravel “additional insured” status and contractual indemnity obligations among different contractors involved in the project so long after the bridge was built.

Then there is the much-contested issue of coverage for the replacement of the insured’s work product. If one portion of the bridge, built by one subcontractor, was defective, is the cost of repairing or replacing that defective element covered by that subcontractor’s general liability policy? What about damage to other portions of the bridge or roadway? What if the general contractor on the entire bridge is determined to be responsible (or is the only liable party with insurance)?

Finally, there could be complex allocation issues between the various triggered insurance policies. No doubt some or all of these interesting issues will surface in the inevitable litigation to follow.

* Chris Finney Commentary: two Solvency II updates from the PRA

Fri, 24 May 2013 12:01:40 GMT

On 23 May 2013, the PRA published two letters from Julian Adams to UK (re)insurers.

The first (available here) repeats what we already know, and can be safely filed under R. (Here’s a précis: Solvency II has been delayed; the timetable is uncertain; things should be clearer in the autumn; we’ll say more when we know what’s happening.)

The second (available here) is more useful because it describes the PRA’s “Early Warning Indicator” implementation plans.

The PRA has developed three Early Warning Indicators. It is proposing to use the pre-Solvency II implementation period to trial them using the ICAS regime for internal model firms. This will help the PRA to test the calibration of the indicators and “monitor” the downward drift in (re)insurers’ capital. (Hopefully, the PRA will do rather more than monitor downward drift!) If and when Solvency II begins to apply to firms, the indicators will be used as a non-modelled cross-check to make sure that firms’ internal models are consistent with Solvency II’s 99.5% confidence level over a one year period.

Life and general insurance business (excluding with-profits business)

In a Solvency II world, firms will be asked to calculate the ratio of their SCR to their pre-corridor MCR (pMCR). Until then, they will be asked to use their ICG as a proxy for the SCR, and to calculate the pMCR using EIOPA’s January 2013 long-term guarantee assessment specification. The PRA has set the ICG to pMCR indicator thresholds at 300% for (non-with-profits) life business, and 175% for general insurance business. It expects 10% of firms to fall below these thresholds. It doesn’t say why.

With-profits business

At this stage, the PRA is asking with-profits insurers to calculate (i) the SCR to pMCR ratio; and (ii) an “alternative modified indicator” using the formula: 15% x (cost of guarantees / moneyness of guarantees) + (10% x size of the free assets) + (2% x non-profit liabilities).

The with-profits indicator thresholds will be 125% for the ICG to pMCR ratio; and 200% for the alternative modified indicator.

Next Steps

From September 2013, the PRA will expect firms to (i) know how their models perform against these indicators; (ii) be prepared to discuss this performance, as well as the reasons for/causes of actual and protected changes, with the PRA. Early Warning Indicator results will also be reviewed on a sector basis every six months, and used as an input into the PRA’s internal ICAS and ICAS+ panel discussions. However, at least at this stage, the way the PRA sets ICG will not change “fundamentally”.

When the FSA first mooted the possibility of requiring firms to calculate and monitor a set of Early Warning Indicators, I suggested that firms would baulk at another set of calculations, and I pointed out that the indicators were probably gold-plating of the first order (my earlier blog is here). In fact, most of the firms I’ve spoken to about this have been unphased; and EIOPA is now considering Early Warning Indicators of its own. If they are adopted, the gold-plating allegation may fall away (at least on this count – I stand by the remainder of my earlier comments), and the FSA will be seen as the thought leader it always thought it was (with some justification, at least in the Solvency II space).

(Moneyness – the extent to which the guarantees are in the money.)

PLEASE JOIN US - 12th Annual Half-Day Insurance and Reinsurance Seminar - Complimentary Seminar

Fri, 24 May 2013 11:00:26 GMT

Program:

Insurance Linked Securities: The Convergence of Insurance and the Capital Markets

Discussion of the legal and regulatory issues for various ILS structures including CAT Bonds, ILW’s and Side Cars.

NAIC Amendments to the Insurance Company Holding Act Focusing on Enterprise Risk

Discussion of recent NAIC amendments which increase the group-level reporting requirements of insurance holding company systems, including the annual filing of an “enterprise risk report” by the ultimate controlling person of a regulated insurance company, and the status of the adoption of such amendments by the states.

How to Handle a Government Subpoena

There has been a sharp increase in government investigations and subpoenas in the financial services area. This is especially so given the emergency of aggressive state agencies that are now competing with federal entities in this area. This session will discuss where these trends are headed and how best to respond to these investigations.

Developments in Healthcare Privacy Exposure

Changes in Federal law, and developments and trends in enforcement, conspire to increase the costs related to privacy in the healthcare industry. This session will examine the sources of cost and exposure to companies that insure the privacy and data security risks of healthcare providers, health insurers and their business associates.

Dodging Antitrust Risks in Insurance Underwriting and Claims

Communicating and collaborating with employees of competing firms is a regular and often essential part of conducting an insurance business. This presentation will address the practical situations where antitrust risks do, and do not, arise when insurers deal with their competitors.

CLE:
This course may be used for 3.5 CLE credit hours. Edwards Wildman Palmer is an accredited provider of continuing legal education in the State of New York.

To RSVP: click here

There is no charge for attendance at this seminar. Lunch will be served. Space is limited.

UK: High Thresholds for Fraud and for Overturning a Finding of Fact by a Trial Judge

Thu, 23 May 2013 09:29:41 GMT

In Mutual Holdings (Bermuda) Limited and others (“the Mutual Group”) v Diane Hendricks and others (“Mr and Mrs Hendricks”) [2013] UKPC 13, the Privy Council found that the Court of Appeal of Bermuda was not justified in making findings of fraud and overturning the judgment of the trial judge.

Background

In Mutual Holdings, Mr and Mrs Hendricks participated in a complex “rent-a-captive” insurance scheme managed by the Mutual Group. After renewing the scheme, two ex-employees of the Mutual Group advised Mr and Mrs Hendricks that the renewal had been procured by fraud. It was alleged that the Mutual Group had overstated the extent of Mr and Mrs Hendricks’ exposure, in order to induce them to purchase unnecessary reinsurance and to renew the scheme.

Judgments

The trial judge rejected the allegation of fraud as Mr and Mrs Hendricks failed to prove that the Mutual Group did not genuinely believe the advice it gave Mr and Mrs Hendricks. The trial judge also did not believe that the ex-employees were reliable witnesses as there were inconsistencies in their evidence.

Subsequently, the Court of Appeal of Bermuda overturned the trial judge’s judgment as it believed the judge’s findings were incomplete, and made its own finding that the evidence given by the ex-employees should have been accepted. The Mutual Group appealed this judgment, and the matter was referred to the Privy Council (which is the court of final appeal for Bermuda).

The Council set aside the Court of Appeal’s judgment and restored the trial judge’s judgment. The Council’s reasons were that:

an appellate court is rarely justified in overturning a finding of fact by a trial judge, when the finding of fact is based on the credibility of a witness, especially in fraud cases as the standard of proof required is higher;
the material relied on for the finding of fraud was wholly inadequate, and the reasons given for accepting the ex-employees’ evidence were unsatisfactory; and
the Court of Appeal chose to believe the ex-employees, without addressing the trial judge’s criticisms of their evidence.

The case is a reminder to litigants that the standard of proof for fraud is high, and a finding of fact by a trial judge, based on the credibility of a witness, should rarely be overturned.

House and Senate Introduce Bills Deferring Tax Deductions for Foreign Insurers

Wed, 22 May 2013 16:30:45 GMT

Legislation was introduced this week to prevent foreign-controlled insurers operating in the United States from reducing their U.S. tax bill by reinsuring with their non-U.S. affiliates. Introduced by Rep. Richard Neal (D-MA) and Sen. Robert Menendez (D-N.J.), the proposed legislation would defer any available U.S. income tax deduction for reinsurance premiums paid to the offshore affiliate. This new proposed legislation is similar to legislation previously introduced by Rep. Neal and Sen. Menendez on this same point, although they say it addresses some of the concerns raised regarding such earlier proposals.

The actual text of either the House or Senate bills was not yet available as of the time of this posting. Once available, we will supplement this posting with a more detailed analysis.

Senate Finance Committee Leaders Seek Input on Medicare Physician Payment Reform

Tue, 21 May 2013 15:56:55 GMT

Healthcare News from Capitol Hill and the Department of Health and Human Services

In an open letter to the “health care provider community,” Senators Max Baucus (D-MT) and Orrin Hatch (R-UT), the leaders of the Senate Finance Committee, have asked for suggestions on reforming the Medicare physician payment system. The letter notes that the current Medicare sustainable growth rate (SGR) formula is broken and must be repealed.

Fee schedule payments by the Centers for Medicare and Medicaid Services (CMS) are determined by the SGR formula, as mandated by the Balanced Budget Act of 1997. Each year, Congress is required to pass temporary so-called “doc fix” legislation in order to avert major cuts in fee schedule payments. The SGR formula will lead to a 25% cut in physicians’ Medicare reimbursements by CMS on January 1, 2014, unless Congress again acts to avert the cut.

In the May 10, 2013 letter, the Senators state that they are committed to seeking a permanent solution to SGR and physician payment reform and that they are seeking input from healthcare providers in reaching this objective. The Senators write that they recognize that the current fee-for-service (FFS) system, which dictates reimbursement rates based on the SGR formula, will continue to be standard for the short term and, for certain physician practices, the longer term as well. However, the FFS system may lead to unnecessary utilization of healthcare services.

In their letter, the Senators request input on the following three questions:

What reforms should be made to the physician fee schedule to ensure that physician services are valued appropriately?
What policies should be implemented that could exist with the current FFS payment system and that would identify and reduce unnecessary utilization of healthcare provider services?
Within the context of the current FFS payment system, how can Medicare incentive physician practices to undertake the changes needed to participate in alternate payment models?

Public comments on the letter are due by May 31.

NEXT STEPS

Edwards Wildman’s Healthcare Practice Group will continue to monitor healthcare news from Capitol Hill, CMS, HHS, and other federal and state agencies and courts, and will bring you timely updates as new developments occur.

Edwards Wildman Palmer LLP is pleased to provide regular updates on issues affecting the Healthcare industry. Our lawyers not only provide sophisticated legal services to a broad array of clients in the healthcare industry, we also monitor and analyze federal and state legislative and regulatory processes to ensure that our clients are informed of government actions and initiatives.

Should you have any questions on the content of this advisory, or wish to discuss any other healthcare related issue, please contact those listed below or call the Edwards Wildman Palmer LLP attorney responsible for your affairs.

Les Levinson, Partner, Chair, Healthcare Services	+1 212 912 2772	llevinson@edwardswildman.com
Eric Fader, Counsel	+1 212 912 2724	efader@edwardswildman.com
George Greenslade, Counsel	+1 212 912 2724	ggreenslade@edwardswildman.com

REMINDER COMPLIMENTARY WEBINAR: Potential Claim and Insurance Implications of the Boston Marathon Bombings

Tue, 21 May 2013 08:43:33 GMT

Edwards Wildman Speakers: Darlene K. Alt, Stephen M. Prignano, Brian J. Green, Laura E. Bange

Thursday, May 23, 2013
12:00 PM - 1:00 PM (EDT)
Complimentary webinar

The tragic events in Boston raise a host of questions about who should bear financial responsibility for the resulting losses, and the availability of insurance coverage for both the victims injured by the blast and the scores of businesses impacted by the bombings. This program will explore the potential claims which may be asserted by those suffering physical injury, property damage and other forms of financial loss, including possible claims of sponsorship liability and the defense of charitable immunity. This program will also review the potential application of terrorism coverages and exclusions, business interruption and contingent business interruption coverages, and civil authority and event cancellation coverages.

Speakers:
From Edwards Wildman Palmer LLP
• Darlene K. Alt, Partner
• Stephen M. Prignano, Partner
• Brian J. Green, Counsel
• Laura E. Bange, Associate

CLE:
Edwards Wildman Palmer is an accredited provider of continuing legal education in the State of New York and California. Accreditation for the State of Illinois is pending. This course may be used for 1 CLE credit hour.

Note: Although multiple participants are welcome to join this program, any person who seeks CLE credit for attendance must be logged in individually and remain logged in throughout the duration of the program to receive credit.

RSVP:
To REGISTER for this Webinar, please CLICK HERE.

Complimentary webinar.

Connecticut Considering Auto Glass Repair Disclosure Bill

Fri, 17 May 2013 14:54:24 GMT

Earlier this week, the Connecticut House passed HB 5072, limiting the abilities of insurance companies or their representatives to “steer” insureds to specific automotive glass repair facilities. The new legislation follows a trend in Connecticut to dissuade insurers from directing insureds to use specific facilities. Connecticut’s existing laws prevent appraisers from requiring that specific locations or companies be used for automotive repairs.

In particular, the legislation prohibits any insurance company, third-party administrator, agent or adjuster from discussing potential repair establishments with an insured unless the insured is informed of his or her right to use any licensed glass repair facility. The bill does not specifically prohibit the “steering” of insureds to particular facilities so long as they are informed of their rights. However, if such glass repair facility is owned by the insurance company or its claims administrator, then the bill requires the insured to be informed of the actual name of another licensed glass facility “in the area” where such work could be performed so that the insured does not feel compelled to choose the recommended affiliated repair facility.

The bill is not without its controversy, and it is unclear if we will see similar anti-steering statutes arise in other jurisdictions. Opponents of the legislation have noted that complaints regarding steering were minimal, and other states, such as Rhode Island, have seen similar legislation vetoed. In addition, some experts in the industry believe that tighter restrictions on “steering” may result in higher auto insurance rates. In light of these concerns, it remains to be seen whether Connecticut will ultimately pass HB 5072, and if so, whether other states will follow in Connecticut’s path.

Please click here for a link to the bill.

With Securities Case Dismissal, Another Loss in the Southern District for LIBOR Plaintiffs

Wed, 15 May 2013 14:43:48 GMT

On Monday, Southern District of New York Judge Shira Scheindlin dismissed the entire suit in Gusinsky v. Barclays, without leave to amend and with prejudice. The plaintiffs, holders of American Depository Shares in Barclays Bank, had brought claims under Section 10(b) and Rule 10b-5 of the ’34 Act against Barclays, and Section 20(a) control person liability claims against individual directors of the bank for the bank’s role in the manipulation of LIBOR.

The plaintiffs alleged that Barclays made material misrepresentations in its financial statements from 2006-2011 regarding risk management and internal controls, corporate responsibility and ethics, and legal compliance. Among other allegations, they also alleged that the inaccurate LIBOR submissions made by Barclays over time were themselves actionable misstatements.

Judge Scheindlin, relying on Second Circuit law, concluded that general statements about a company’s business practices and integrity are usually too general to cause a reasonable investor to rely on them, and cannot form the basis for a 10b-5 fraud claim; in essence, such statements are “puffery.” Further, the plaintiffs’ allegations were simply too broad: “the connection between Barclays’ statements regarding risk management and its LIBOR practices is too attenuated to find that the alleged LIBOR misconduct rendered the representations regarding risk management materially misleading.. . [F]inding such statements actionable on these facts would render every financial institution liable to every investor for every act that broke the law or harmed reputation.” She went on to conclude that even were any statements made by Barclays’ actionable misstatements, the plaintiffs failed to connect the LIBOR submissions made by Barclays to their losses, and hence there was no loss causation. This was because the false submissions alleged took place in 2009 and before, while the corrective disclosures did not take place until 2012.

The Gusinsky plaintiffs now join the three categories of plaintiffs whose claims were dismissed in the multi-district litigation before Judge Buchwald, though Judge Buchwald has given those plaintiffs a chance to resurrect their antitrust claims by agreeing to consider their motion for leave to amend in the coming weeks. We will continue to monitor the twists and turns in these and the many other LIBOR suits that remain active.

The order can be found here.

HM Treasury Publishes Amended Draft Regulations for the Alternative Investment Fund Managers Directive

Wed, 15 May 2013 12:00:00 GMT

On 13 May 2013, HM Treasury published the response to its further consultation on the transposition into UK law of the Alternative Investment Fund Managers Directive. Published with the response were the amended regulations, representing the near-final draft form of the regulations as the Treasury plans to implement them.

The directive, due to be transposed into national law by 22 July 2013, aims to introduce an EU-wide framework for the regulation of Alternative Investment Fund Managers and their funds. This will include "many different types of asset manager, including managers of hedge funds, private equity funds, retail investment funds, investment companies, and real estate funds as well as common investment funds and common deposit funds".

FSOC Issues Its Third Annual Report

Wed, 15 May 2013 11:54:10 GMT

The Financial Stability Oversight Council released its third annual report on April 25, 2013, which fulfills its Congressional mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to annually report on its activities, describe significant financial market and regulatory developments, analyze potential emerging threats, and make recommendations for additional steps that should be taken to strengthen the financial system.

This report referenced several insurance-related topics, including (a) the low interest-rate environment, life insurance companies responses to the dip in rates and their overall interest rate risk management strategies, (b) developing a framework for the supervision of large, global systemically important insurers and the Financial Stability Board’s and the International Association of Insurance Supervisor’s efforts on this front and (c) continuing efforts by the National Association of Insurance Commissioners to update the Insurance Financial Solvency Framework.

To view a copy of the report, click here.

Shipping Insurer Settles with OFAC under Iranian, Cuban and Sudanese Sanctions

Wed, 15 May 2013 10:19:45 GMT

On May 9, 2013, the Office of Foreign Asset Control (“OFAC”) announced a settlement with the American Steamship Owners Mutual Protection and Indemnity Association, Inc. (the “American Club”) under the OFAC sanction programs against Cuba, Sudan and Iran. The American Club is a non-profit international marine mutual insurance association of merchant ship owners and charterers with its principal offices in New York. OFAC reported that, while the American Club did not voluntarily self-disclose any violations, there were mitigating factors present and any violations were non-egregious. For a copy of the official OFAC enforcement action, click here. The American Club agreed to pay $384,000 to settle potential liability under OFAC sanctions.

Connecticut Continues Efforts to Attract Captives

Wed, 15 May 2013 10:11:44 GMT

At Connecticut’s first Captive Insurance Day at the Capitol May 14, 2013, representatives of the Connecticut Insurance Department (the “CID”), the Connecticut Captive Insurance Association, the Department of Economic and Community Development, and the co-chairs of the Connecticut General Assembly’s Insurance and Real Estate Committee emphasized Connecticut’s continuing efforts to attract new captive insurers to the state, including through SB 1093.

Introduced in March 2013, SB 1093 attempts to modernize Connecticut’s current captive law by: (i) streamlining the procedure for moving foreign captives to Connecticut by making Connecticut’s redomestication statute applicable to captives; (ii) granting the CID Commissioner discretion to allow captives to take credit for reinsurance ceded to reinsurers not otherwise eligible for credit for reinsurance purposes in Connecticut; (iii) expanding the lines of authority that may be written by branch captives; (iv) repealing the requirement that branch captives maintain their principal place of business in Connecticut, and instead simply requiring that they maintain a place of business for their branch captive operations in the state; and (v) narrowing applicability of the Holding Company Act to captives formed as risk retention groups, but authorizing the CID Commissioner to adopt regulations establishing the circumstances under which other Connecticut captives would be subject to the Holding Company Act.

As we reported here, recent amendments to Connecticut’s captive statute effective July 1, 2012 expanded the types of permissible captives and created a tax credit for new captives, among other changes.

Edwards Wildman serves as general counsel to the Connecticut Captive Insurance Association. We will continue to monitor developments on this topic and post updates at InsureReinsure.com.

Court Allows Insurer to Retain Premium in a STOLI Case

Wed, 15 May 2013 10:05:27 GMT

In PHL Variable Insurance Company v. The P. Bowie 2008 Irrevocable Trust (May 13, 2013), the United States Court of Appeals for the First Circuit issued an order holding that a life insurer may retain premium in a case involving a stranger originated life insurance transaction.

The case, decided under Rhode Island law, is an appeal from the District Court’s grant of summary judgment allowing PHL Variable Insurance Company (“PHL”) to rescind a life insurance policy while retaining premium as damages to cover PHL’s costs in connection with underwriting, administration and servicing a policy when there were misrepresentations in the insurance application, among other things. Specifically, the policy application indicated that the insured, Peter Bowie, was a high net worth individual, who would pay policy premiums from his own account. However, in reality, Bowie could not afford to pay premiums, and the intent was to premium finance the policy with a non-recourse loan, with the underlying policy being assigned to the lender as collateral. The opinion indicates that the financing terms were such that the loan “could not be paid back,” meaning that policy ownership would transfer to the lender. According to the opinion, the “plan to pay the premium had originated with [the insured’s] brokers…who began negotiating with [the premium finance company]…even before filling out” the application. Furthermore, this “plan was directly contrary to the multiple representations in the application documents that Bowie himself would pay the premiums” and that “there was no plan for any third party to obtain an interest in the policy.”

The District Court issued a memorandum and order on September 5, 2012, granting recession of the policy, and finding that the P. Bowie 2008 Irrevocable Trust (the “Trust”) in its role in the premium finance plan had engaged in fraudulent conduct, and, while PHL had not pleaded an independent fraud case, such conduct was relevant to determining the appropriate remedy which, in this case, was rescission coupled with allowing PHL to retain premiums paid to offset its expenses in connection with the policy. The Trust appealed, arguing that summary judgment was inappropriate as the existence of fraud should be determined at trial, and that rescission must be coupled with a return of premium. The First Circuit rejected these arguments, noting, with respect to the fraud, that the issue was irrelevant because the Trust agreed to the rescission, and, with respect to permitting premium retention, there was support in case law for allowing such damages in the interest of equity, particularly since the Trust had “unclean hands.”

The May 13 order is available here.

TRIA Extension Bill Is Introduced in Congress in the Wake of the Boston Attacks

Mon, 13 May 2013 15:20:19 GMT

Last week, Representative Bennie Thompson, a Democrat Congressman from Mississippi, introduced the Fostering Resilience to Terrorism Act of 2013, which would extend the Terrorism Risk Insurance Act by ten years. TRIA, which is set to expire at the end of 2014, was the subject of another proposed extension earlier this year but that proposal merely extended the program five years.

In addition to extending the Program by ten years, the Fostering Resilience to Terrorism Act of 2013 would also change the certification process required for an act to trigger the federal backstop from the Department of Treasury to the Secretary of Homeland Security. It also contains a provision implementing the sharing of homeland security information and information on best practices to foster resilience to terrorist attacks by the Secretary of Homeland Security to insureds under the Program.

Rep. Thompson, the Ranking Democratic Member of the House Homeland Security Committee, stated the following when introducing the bill:

The Boston Marathon bombings last month serve as a stark reminder that terrorism and mass violence remain both a homeland security and economic threat. If TRIA is allowed to expire next year, there may be fewer insurers offering terrorism insurance and prices potentially could increase. By extending this program for 10 years, we will ensure much-needed stability and predictability for the business community.

The American Insurance Association has already issued its support for Rep. Thompson’s bill, which you can read here.

Click here to read Fostering Resilience to Terrorism Act of 2013.

We will continue to monitor developments related to TRIA and the possible extension of the Terrorism Risk Insurance Program.

If you have any questions, please contact Brian Green or Jack Dearie.

* Chris Finney Commentary: FCA Prosecutes a Former Mortgage Broker for Breach of the General Prohibition

Fri, 10 May 2013 08:39:54 GMT

On 29 April 2013, Michael Joseph James Lewis (a former mortgage broker) appeared at Medway Magistrates Court to face criminal charges brought against him by the Financial Conduct Authority (FCA). He was committed for trial at Maidstone Crown Court for 3 counts of Assisting a Fraud by False Representation (s44 of the Serious Crime Act 2007 and s2 of the Fraud Act 2006), and 13 counts of Breaching the General Prohibition (s19 of the Financial Services and Markets Act 2000, an offence under s23 of the act).

Mr Lewis had been subject to a ban from carrying on regulated activities in the UK since 9 August 2011, as a result of FSA enforcement action.

This prosecution is unusual in that, under the FSA, a breach of the General Prohibition (carrying on a regulated activity in the UK by a person who is not authorised or exempt) tended to result in a warning, after which most entities would stop the activity or apply for authorisation. In this case, a breach has resulted in criminal prosecution.

While it is possible that the FCA has chosen to prosecute these breaches because it considers them to be in flagrant disregard for the FSA's ban, or because of the connection with the fraud charges, it may also herald the start of a more aggressive approach to the enforcement of the General Prohibition. Which of these is the case will become apparent as more enforcement action is taken by the new regulator.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

Complimentary Webinar - Potential Claim and Insurance Implications of the Boston Marathon Bombings

Thu, 09 May 2013 15:05:46 GMT

Edwards Wildman Speakers: Darlene K. Alt, Stephen M. Prignano, Brian J. Green, Laura E. Bange

Thursday, May 23, 2013
12:00 PM - 1:00 PM (EDT)
Complimentary webinar

The tragic events in Boston raise a host of questions about who should bear financial responsibility for the resulting losses, and the availability of insurance coverage for both the victims injured by the blast and the scores of businesses impacted by the bombings. This program will explore the potential claims which may be asserted by those suffering physical injury, property damage and other forms of financial loss, including possible claims of sponsorship liability and the defense of charitable immunity. This program will also review the potential application of terrorism coverages and exclusions, business interruption and contingent business interruption coverages, and civil authority and event cancellation coverages.

Speakers:
From Edwards Wildman Palmer LLP
• Darlene K. Alt, Partner
• Stephen M. Prignano, Partner
• Brian J. Green, Counsel
• Laura E. Bange, Associate

CLE:
Edwards Wildman Palmer is an accredited provider of continuing legal education in the State of New York and California. Accreditation for the State of Illinois is pending. This course may be used for 1 CLE credit hour.

Note: Although multiple participants are welcome to join this program, any person who seeks CLE credit for attendance must be logged in individually and remain logged in throughout the duration of the program to receive credit.

RSVP:
To REGISTER for this Webinar, please CLICK HERE.

Complimentary webinar.

CFPB Refers First Debt Collection Case For Criminal Prosecution

Thu, 09 May 2013 14:54:57 GMT

On May 7, 2013, the Consumer Financial Protection Bureau (“CFPB”) announced the first criminal prosecution of a debt-relief service provider that arose specifically from an investigation conducted by the CFPB. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB was created to supervise banks, credit unions and other financial companies, such as debt-relief service providers and consumer credit reporting firms, and to enforce federal consumer financial laws. Included among the CFPB’s regulatory powers is the ability to audit the companies it regulates and, as with other federal agencies, to refer cases to federal authorities for criminal prosecution. In this instance, the service provider is accused of inappropriately obtaining more than $1.3 million in fees, among other violations of law. The CFPB filed a civil action against the service provider, and referred the matter to the US Attorney for the Southern District of New York for criminal prosecution.

As many debt-relief service providers are aware, the CFPB has been increasing the frequency of its audits. Consequently, industry observers do not believe that this referral for criminal prosecution is an isolated incident. Rather, it is being viewed as evidence that the CFPB is willing to aggressively utilize its full regulatory authority if it believes serious violations have occurred, whereas other federal agencies have historically limited their enforcement actions to civil and administrative proceedings.

To view the official press release, click here.

* Chris Finney Commentary: FCA Issues its First Public Sanction for Breaches of the Payment Services Regulations

Thu, 09 May 2013 08:33:46 GMT

On 30 April 2013, the Financial Conduct Authority (FCA) issued a public censure to Horn Express Ltd (formerly Qaran Express Money Transfer Limited). The censure stated that it would have been accompanied by a fine of £136,687, if the firm had not shown that it was in financial difficulties and that the fine would have caused it serious financial hardship.

While it is no longer trading as a money transfer business, during the period 1 December 2009 to 26 August 2011 the firm was carrying on the business of transferring money out of the UK under the authorisation of the Payment Services Regulations 2009 (PSR). During this period, they were found to have mixed customer funds with their own (without properly recording the amounts), in a bank account which was not set up for the purpose of storing customer funds. The latter meant that the customer funds could have been applied by the bank to settle the firm's own liabilities. As well as breaching its safeguarding and segregation obligations, the firm was also found to have failed to supervise its branches and agents adequately.

This case is significant because it is the first time that public sanctions have been imposed on a firm which was authorised under the PSR, for breaches of the PSR. This is a watershed moment for the FCA, which is setting out its stand as a regulator which intends to exercise actively the full extent of its regulatory powers, rather than confining enforcement action to firms regulated by the Financial Services and Markets Act 2000.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

SAVE THE DATE - 12th Annual Half-Day Insurance and Reinsurance Seminar - Complimentary Seminar

Wed, 08 May 2013 12:10:21 GMT

June 4, 2013
Edwards Wildman Palmer LLP
750 Lexington Avenue, 8th Floor
New York, New York 10022

Program:

Insurance Linked Securities: The Convergence of Insurance and the Capital Markets
NAIC Amendments to the Insurance Company Holding Act Focusing on Enterprise Risk
How to Handle a Government Subpoena
Developments in Healthcare Privacy Exposure
Dodging Antitrust Risks in Insurance Underwriting and Claims

CLE:

This course may be used for 3.5 CLE credit hours. Edwards Wildman Palmer is an accredited provider of continuing legal education in the State of New York.

To RSVP: click here.

There is no charge for attendance at this seminar. Lunch will be served. Space is limited.

Healthcare Update: CCIIO Issues Broker Guidelines for Exchanges; HHS Releases New Insurance Application Forms

Tue, 07 May 2013 15:14:33 GMT

CCIIO ISSUES BROKER GUIDELINES FOR EXCHANGES
On May 1, the Center for Consumer Information and Insurance Oversight (CCIIO), a part of the Centers for Medicare and Medicaid Services (CMS), issued guidance on the “Role of Agents, Brokers, and Web-brokers in Health Insurance Marketplaces.” The marketplaces, commonly known as health insurance exchanges, are scheduled to be in operation for open enrollment on October 1, 2013, with coverage to take effect on January 1, 2014.

Marketplaces may be operated entirely by a state, entirely by the federal government for a particular state (“federally-facilitated”), or by a state in partnership with the federal government. For the latter two types of marketplaces, all agents and brokers will be required to register in advance with CMS before they can assist individual consumers with plan comparison, plan selection, and enrollment for insurance coverage. Agents and brokers will also be permitted to assist qualified employers and employees in enrolling for coverage through Small Business Health Options Programs (SHOPs).

In Federally-facilitated Marketplaces and State Partnership Marketplaces, the amount and terms of any agent or broker commission will be negotiated by the insurer and the agent or broker. These marketplaces will not establish commission schedules or pay commissions directly to agents or brokers. In contrast, individual states may elect to have their State-based Marketplaces compensate agents and brokers directly, or provide for insurers to pay commissions.

The CCIIO guidance also describes the process by which consumers may select a health insurance plan through the website of an agent or broker. Such “web-brokers” will be subject to requirements regarding disclosure of compensation, how information on various insurance plans will be displayed on the site, and applicable security standards. Web-brokers’ websites will also be required to disclose that they are separate from the Federally-facilitated Marketplace website.

Click here for a complete copy of the Update.

Bill Restricting the Sale of Stop-Loss Insurance Gains Traction in Rhode Island

Mon, 06 May 2013 09:48:45 GMT

Members of the Rhode Island House of Representatives met on May 1, 2013 to discuss H.B. 5459, the Stop-Loss Insurance Act (the “Act”), which was introduced on February 14, 2013. The Act proposes to place further restrictions on the use of stop-loss insurance by employers who self-insure their employee benefit health plans. The latest version of the Act, introduced on April 23, 2103, establishes minimum attachment points for claims incurred of $20,000 per individual and in aggregate of 120% of expected claims. As previously discussed here, the prior version had individual attachment points of $60,000 per individual and in aggregate of 130% of expected claims. The Act was referred to the Rhode Island Senate Commerce Committee on May 2, 2013 for further deliberation.

Rhode Island is one of five states to introduce legislation regulating the sales of stop-loss insurance this year. California, Colorado, Minnesota, and Utah have similar bills pending. Third party administrators, producers and stop-loss insurers should be aware higher attachment points may be soon required in these states and should closely monitor developments in other states where they offer stop loss insurance in connection with self-insured plans.

Edwards Wildman Attends Aviation Insurance Association Conference

Mon, 06 May 2013 09:37:40 GMT

Brian Green (NY) is attending the Aviation Insurance Association Conference in Orlando, FL, on May 4-7. The AIA annual conference is the biggest conference in the aviation and aerospace insurance space.

The conference is well-attended this year, and there is a full schedule of education sessions. Monday's keynote speakers will be William R. Berkeley, CEO of the W.R. Berkeley Corporation, and Steve Cass, Vice President, Communications, at GulfStream Aerospace. Monday evening’s reception will include an air show at Fantasy of Flight.

If you want to learn more about Edwards Wildman's aviation insurance or defense practices, you can email Brian at bgreen@edwardswildman.com.

Reminder to File Your BEA Reports

Mon, 06 May 2013 09:23:38 GMT

Several Bureau of Economic Analysis (“BEA”) reports will be due later this month, on May 31st, including a 5-year Benchmark Survey of Foreign Direct Investment. U.S. companies with foreign affiliates should ensure their compliance departments are working to timely file any applicable reports, including filing of any appropriate claims for exemption.

These reporting requirements are promulgated under the International and Trade in Services Survey Act (22 USC 3101-3108, as amended, the “Act”). The Act authorizes the BEA to collect information from U.S. companies that have foreign subsidiaries or parents,^[i] subject to certain confidentiality provisions.^[ii] In some instances, companies may be exempt from the requirements to report. However, a claim for exemption must still be filed. The penalty for noncompliance with the various filing requirements could be between $2,500 and $25,000 (although the BEA may waive penalties for failing to timely file for an exemption, if a company self-reports).

Some of the reporting requirements are listed below. There are several BEA reports, and we did not attempt to list them all, nor have we explained all of the potential exemptions. If you would like an assessment for your company, please contact Nick Pearson or Amber Mills.

1. 5-year Benchmark Survey of Foreign Direct Investment in the U.S.

This report runs on a 5-year cycle which ended in 2012 and is due May 31, 2013. Unlike several of the other BEA reports, this report does not have a threshold requirement that would typically exclude smaller companies. The Act enumerates several purposes for the collection of the information in this survey including to “identify location, nature, and magnitude of, and changes in total investment by any parent in each of its affiliates and the financial transactions between [them]…,” to collect employment data, information on tax payments and to determine the amount of R&D expenditures. There is a similar 5-year survey for the collection of information related to U.S. foreign direct investment abroad. The last reporting period for this survey ended in 2009 and the next reporting period will end in 2014.

2. 2012 Annual Survey of U.S. Direct Investment Abroad

BE-11A - Report for U.S. Reporter
BE-11B - Report for Majority-Owned Foreign Affiliate
BE-11C - Report for Minority-Owned Foreign Affiliate
BE-11D - Report for Established or Acquired Foreign Affiliate(s)
BE-11 Claim for Not Filing

Applicable reports are due May 31, 2013. A Claim for Not Filing (exemption) may be completed in lieu of filing any one of the reports if all of the foreign affiliates^[iii] of the U.S. reporting entity maintain “exemption level items” that do not exceed $60 million (positive or negative). “Exemption level items” generally refers to total assets, annual sales or gross operating revenues, and net income (loss). A Claim for Not Filing needs to be filed only once, and no further reporting obligation will be due unless/until the thresholds are exceeded.

There is also an annual survey for Foreign Direct Investment in the U.S. However, because 2012 fell on the end of a 5-year reporting cycle, the benchmark survey noted under #1 can be filed in lieu of the annual survey for the current reporting year.

3. Quarterly Survey of Foreign Direct Investment.

As the name implies, this report is due every quarter. Companies who meet the exemption criteria can file a claim for exemption. A claim for exemption can be made if all of the following items are each equal to or less than $60 million (positive or negative): total assets, annual sales or gross operating revenues, and annual net income (loss). Quarterly reports are generally due within 30 days after the quarter end.

4. Quarterly Survey of Insurance Transactions by U.S. Insurance Companies with Foreign Persons.

Completion of this survey is required of any U.S. insurance company that has engaged in reinsurance transactions with foreign persons, that has earned premiums from, or incurred losses to, foreign persons in the capacity of primary insurer, or that has engaged in international sales or purchases of services auxiliary to insurance. Quarterly reports are generally due within 30 days after the quarter end. Filing is mandatory if any of the following eight items exceeded $8 million (positive or negative) for the previous calendar year or can expected to be in the current calendar year on an accrual basis:

premiums earned on reinsurance assumed
losses on reinsurance assumed
premiums incurred on reinsurance ceded
losses on reinsurance ceded
premiums earned on primary insurance sold
losses on primary insurance sold
sales of auxiliary insurance services, and
purchases of auxiliary insurance services.

___________________________________
^[i] In particular, the purpose of the Act is:

to provide clear and unambiguous authority for the President to collect information on international investment and United States foreign trade in services, whether directly or by affiliates, including related information necessary for assessing the impact of such investment and trade, to authorize the collection and use of information on direct investments owned or controlled directly or indirectly by foreign governments or persons, and to provide analyses of such information to the Congress, the executive agencies, and the general public.

22 U.S.C. 3101(b).

^[ii] With respect to confidentiality of the information provided by a reporting company, the following provisions apply:

[Information collected under the reports] shall be available only to officials or employees designated to perform functions under this chapter, including consultants and persons working on contracts awarded pursuant to this chapter. Subject to the limitation of paragraph (1) [below], the President may authorize the exchange between agencies or officials designated by him of information furnished by any person under this chapter as he deems necessary to carry out the purposes of this chapter. Nothing in this section shall be construed to require any Federal agency to disclose to any official exercising authority under this chapter any information or report collected under legal authority other than this chapter where disclosure is prohibited by law. Information collected pursuant to [the above reports] may be used only—

(1) for analytical or statistical purposes within the United States Government; or

(2) for the purpose of a proceeding under subsection (e) of this section [penalty provisions] or under section 3105(b) or (c) of this title [civil and criminal actions].

No official or employee designated to perform functions under this chapter, including consultants and persons working on contracts awarded pursuant to this chapter, may publish or make available to any other person any information collected … in a manner that the person who furnished the information can be specifically identified except as provided in this section. No person can compel the submission or disclosure of any report or constituent part thereof collected pursuant to this chapter, or any copy of such report or constituent part thereof, without the prior written consent of the person who maintained or furnished such report … and without prior written consent of the customer, where the person who maintained or furnished such report included information identifiable as being derived from the records of such customer.

22 U.S.C. 3104(c).

The statute also permits interagency information sharing of selected identification information upon written request; specifically, authorization to disclose information to the Bureau of the Census and the Bureau of Labor Statistics. 22 U.S.C. 3104(d).

^[iii] “Affiliate” means an entity which is directly or indirectly owned or controlled by a person to the extent of 10% or more of its voting stock or an equivalent interest for an unincorporated business, including a branch.

UK: Commercial Court Finds 9/11 Attacks on WTC Were Two Events and Not One

Thu, 02 May 2013 12:18:16 GMT

The Commercial Court has decided that the 9/11 terrorist attacks on the World Trade Center constituted two events and not one, the first time an English court has ruled on this issue.

In Aioi Nissay Dowa Insurance Company v Heraldglen Limited and Advent Capital (No. 3) Limited [2013] EWHC 154 (Comm), Mr Justice Field upheld the decision of an arbitral panel which concluded that for the purposes of four retrocession excess of loss reinsurance agreements, there was not sufficient unity in time or location for the losses to have arisen out of a single event.

In deciding the case, Field J analysed the "unities" doctrine, which developed from the Dawson's Field Arbitration in 1972 and was clarified by Mr Justice Rix in Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd's Rep 664. As Rix J said in Kuwait Airways, although one occurrence may embrace several losses, the circumstances of the losses must be scrutinised to see whether they involve such a degree of unity as to justify their being described as or arising out of one occurrence. In assessing the degree of unity under the doctrine, regard may be had to such factors as cause, locality, time, and the intentions of the human agents. Ultimately, the doctrine is an exercise of judgment.

When considering the WTC losses, Field J held that the arbitral tribunal had not erred in considering the four unifying factors. In particular, although the hijackings were part of a single terrorist plot, this did not amount to an event of sufficient causative relevance to override the conclusion that there were two separate hijackings of two separate aircraft which caused separate loss and damage.

Field J recognised that the two event conclusion was different from that reached by the US Court of Appeals, Second Circuit, in World Trade Center Properties v Hartford Fire Insurance Co [2003] 345 F.154, where it was held that the WTC loss resulted from a single occurrence for aggregation purposes. However that case depended on different, broader aggregation wording where "occurrence" was defined as encompassing losses attributable directly or indirectly to one cause or one series of similar causes. Further, that US decision on the so-called 'Wilprop' wording did not apply to insurers on different policy forms, where the definition of "occurrence" was vaguer and the attacks were deemed multiple occurrences.

Hong Kong: Government Urged to Help Develop and Promote the Maritime Industry

Tue, 30 Apr 2013 07:58:43 GMT

The Hong Kong Federation of Insurers presented a study report on How to Position Hong Kong as a Maritime Centre for the Asia-Pacific Region to the Hong Kong Maritime Industry Council on 29 April 2013 (Report).

The Report provides a detailed analysis of the current position and challenges of Hong Kong's maritime services and makes reference to the experience of London, Singapore and Shanghai. A number of suggestions are made in the Report for enhancing the competitiveness and attractiveness of Hong Kong as an international maritime centre (IMC).

These suggestions include:

to provide tax incentives and tax exemption schemes to encourage the development of Hong Kong as an IMC by attracting companies to set up their offices in Hong Kong;
to join the ASEAN-China Free Trade Area agreement and speed up ratification of dual tax agreements (DTA) with ASEAN countries and other major trading partners;
to focus beyond port infrastructure and related logistics business to maritime services generally and in particular ship finance and maritime insurance;
to establish an admiralty court in Hong Kong and encourage more mainland companies to arbitrate domestic disputes in Hong Kong;
to attract and attain talent through training programmes and preferential immigration policies.

Hong Kong's maritime industry hopes that the Government will negotiate with the mainland Government to designate Hong Kong as a "Tier 2" reinsurance region with higher priority for maritime reinsurance cession in China and introduce double tax deduction to encourage local placement of insurance by Hong Kong shippers/exporters.

A copy of the full Report can be found here.

(Source)

NAIC Issues Draft White Paper for Final Comment

Mon, 29 Apr 2013 08:28:54 GMT

On April 1, 2013, the National Association of Insurance Commissioners (NAIC) issued its draft White Paper entitled The U.S. National State-Based System of Insurance Financial Regulation and the Solvency Modernization Initiative (the “Paper”). Broadly, the purpose of the Paper is to provide international regulators with a description of how the U.S. system of regulation works. More specifically, the Paper attempts to perform a critical self-evaluation to improve the insurance solvency regulatory framework in the U.S. and includes a review of international developments and potential options for use in U.S. insurance supervision. In addition, the Paper discusses the strengths of the state-based system of insurance regulation and improvements made over the last several years in connection with the Solvency Modernization Initiative, which started in 2008.

Interested parties should review the Paper and provide their comments to the NAIC by June 6, 2013. Click here to read more directly from the NAIC’s website, including a copy of the Paper.

UK: Actions of Insurers in Respect of the Retention and One Reinsurer's Share did not Breach Claims Control Clause

Mon, 29 Apr 2013 08:23:26 GMT

The High Court recently handed down a judgment in which a claims control clause in a reinsurance contract was held not to be breached by the conduct of the reinsured in agreeing to pay the insured their retention and the share of one reinsurer who had been involved in settling that part of the claim.

In Beazley Underwriting Limited and others v Al Ahleia Insurance Company and other companies [2013] EWHC 677 (Comm), a claim for repair or rebuilding of a faulty crude oil storage facility in Kuwait was referred to insurers (the Defendants, led by Al Ahleia Insurance Company (AIC), who handled the claim and represented the other Defendant insurers). Apart from a 10.5% retention, the risk was reinsured by the Claimants and AIG (not party to this litigation). The Reinsurance Contract, a Lloyd's slip policy, contained a claims control clause (CCC). This made it a condition precedent to liability that the reinsurers be notified of any loss as soon as reasonably practicable, that they should have access to all available information, be able to appoint relevant experts and to control negotiations, adjustments and settlements, and that settlements should not be concluded or liability admitted without their prior approval.

In this case, all reinsurers initially denied liability on the basis of an exclusion regarding a defect in the design of the tank. Later, however, AIG (who as joint lead reinsurers with Beazley, had reinsured 20% of the risk) and AON (the broker), both of whom wished to retain a positive commercial relationship with the insured (the Kuwait Oil Company/Kuwait Petroleum Company), agreed that AIG would pay their share of the loss as independently assessed by AIG's independently-appointed loss adjuster.

The court held that discussions (particularly the insured's statement to the insurer of how they wanted the claim to be handled) were not negotiations (they were, at most, the first step in a negotiation) and the resulting settlement between AIG, AIC and the insured did not constitute a settlement or an admission of liability in respect of the part of the claim which remained to be paid by the other reinsurers. The claim was therefore dismissed, so the case will now progress to the hearing of the secondary issue (the scope and effect of the exclusion for defects in design), scheduled for November 2013.

NAIC Spring National Meetings, Houston, Texas – April 5-9, 2013

Fri, 26 Apr 2013 14:49:25 GMT

The following is a summary of select developments and discussions addressed at the NAIC Spring National Meetings held in Houston, Texas on April 5-9, 2013.¹Executive Committee

1. Executive (EX) Committee/Plenary

The Executive (EX) Committee and Plenary met on April 9, 2013. During this meeting, the Committee took a number of actions, including, but not limited to the following:

Adopting the April 7 Executive (EX) Committee meeting report, including (i) adopting a model law development request to amend the Creditor-Placed Insurance Model Act (#375), (ii) creating the NAIC/American Indian Liaison Committee, and (iii) ratifying the 2013 SERFF Board members;
Adopting its March 1 conference call minutes, which includes the Committee’s 2013 charges;
Receiving reports from the Life Insurance and Annuities (A) Committee, Health Insurance and Managed Care (B) Committee, Property and Casualty Insurance (C) Committee, Market Regulation and Consumer Affairs (D) Committee, Financial Condition (E) Committee, Financial Regulation Standards and Accreditation (F) Committee, and International Insurance Relations (G) Committee;
Adopting the 2011 revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) for accreditation purposes;
Receiving an update on the states’ implementation of NAIC model laws and regulations; and
Referring an issue to the Health Insurance and Managed Care (B) Committee regarding treatment of fixed indemnity coverage under the federal Affordable Care Act.

2. Principle-Based Reserving Implementation (EX) Task Force

The Principle-Based Reserving Implementation (EX) Task Force met on April 6, 2013, and released a new draft of its principle-based reserving (“PBR”) implementation plan (“Plan”) for comment. The Plan calls for replacement of the current formulaic approach to determining life insurance policy reserves with the PBR approach, a reserving methodology which more closely aligns policy reserves to product risks. The Valuation Manual setting forth the PBR reserving requirements was adopted by the NAIC in December 2012. The Plan varies from prior drafts in certain respects, including addition of a new Section IV calling for the NAIC to further examine the solvency implications of life insurer-owned captive insurers and other alternative mechanisms, such as special purpose vehicles in the context of PBR. It notes that this will largely be based on the report of Captives and Special Purpose Vehicle Use (E) Subgroup's Report, and that a new working group will likely be created to focus on this issue. The attendees of the meeting discussed the captive issue in some detail, and noted that reserve redundancies expected to be eliminated upon implementation of PBR may reduce the need for captives and SPVs. The draft Plan also covers the resources necessary to implement and administer the new reserving regime, among other things. The comment period for the Plan is 30 days.

3. Producer Licensing (EX) Task Force

The Producer Licensing (EX) Task Force is charged with developing uniform standards of producer and adjuster licensees and licensing terminology, monitoring and responding to developments in licensing reciprocity, coordinating with industry and consumer groups regarding licensing reform priorities, and coordinating and consulting with the National Insurance Producer Registry (“NIPR”) Board of Directors to develop and implement uniform producer licensing initiatives. The Task Force met on April 7, 2013. During the meeting it received the report of the NAIC Producer Licensing Working Group (see below). The Task Force also discussed navigators under the Patient Protection and Affordable Care Act, which will serve at the first point of contact between consumers and state health care exchanges, essentially helping consumers “navigate” the system. The Task Force considered certification and education requirements with respect to navigators, among other things.

4. Producer Licensing (EX) Working Group

The Producer Licensing (EX) Working Group met on April 7, 2013. The Working Group discussed its 2013 charges, which include reviewing the process for examination development and delivery of education materials for pre-licensing education, providing oversight and ongoing updates to the State Licensing Handbook, maintaining and reviewing reciprocity guidelines, and providing input and feedback to NAIC/NIPR staff regarding the development of electronic-licensing applications, among other things. During the meeting, the Working Group indicated that it plans to develop a unified document with respect to continuing education (“CE”) course approvals, and discussed the proposed CE Education Standardized Terms and Definitions document developed by CE providers. The Working Group is accepting comments on this document until April 19, 2013. The Working Group also discussed uniform applications and is accepting comments with respect to the applications until April 19 as well.

Click here for more developments and discussions addressed at the NAIC Spring National Meetings.

Massachusetts High Court Holds That Title Insurers Do Not Have Broad Duty To Defend Counterclaims

Fri, 26 Apr 2013 14:13:23 GMT

The Supreme Judicial Court of Massachusetts recently held that where title insurers pursue litigation to cure defects to a title, they do not have a broad duty to defend any uncovered counterclaims against the insured. See GMAC Mortgage, LLC v. First American Title Ins. Co., No. SJC-11161 (Apr. 4, 2013).

The policyholder bank sought to import the concept of “in for one, in for all” that applies to third-party liability insurance policies containing a duty to defend to the title insurance context. Pursuant to that rule, under Massachusetts law (as in many jurisdictions), once a lawsuit against the policyholder contains a covered claim, the liability insurer must defend the entire suit. But the SJC rejected this argument. The SJC pointed out that unlike general liability policies containing a broad duty to defend against future risks, a title insurance policy is a contract providing for indemnity of specific losses from defects of title that have been inspected by the title insurance company at the time the title insurance policy is issued.

The policyholder bank’s rejoinder was that the title insurer should nonetheless be on the hook for defense of the counterclaims because its prosecution of the litigation “invited” those counterclaims. The SJC held that given the narrow nature of title insurance, this basis for imposing a defense obligation on title insurers should only “possibly” apply to compulsory counterclaims (of which there were none in the GMAC case).

The GMAC case may be significant for other types of indemnity contracts as well, where the indemnity agreement carries with it a defense obligation. It also may be instructive for cases involving other insurance policies that do not have a broad “duty to defend” a suit, but instead a narrower duty to reimburse or indemnify the insured for certain defense costs.

FIO Solicits Comments on Availability of Insurance for Natural Catastrophes

Thu, 25 Apr 2013 08:38:30 GMT

The U.S. Treasury Department’s Federal Insurance Office (FIO) is seeking comments on natural catastrophes and the current state of the market for insurance of natural catastrophe perils in the United States. FIO has also called for submission of papers analyzing natural catastrophes and the catastrophe insurance market.

FIO is required to report on the current state of the market for natural catastrophe insurance under the Biggert-Waters Flood Insurance Reform Act of 2012 after consultation with various constituencies including state insurance regulators, the insurance and reinsurance industry and policyholders. The Biggert-Waters Act extended the National Flood Insurance Program through September 30, 2017.

Comments and papers must be received by June 24, 2013.

Healthcare Update: OIG Updates Self-Disclosure Protocol

Tue, 23 Apr 2013 12:20:12 GMT

On April 17, 2013, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued a Notice updating the Provider Self-Disclosure Protocol (the “SDP”).

The SDP sets forth the specific process for healthcare providers to voluntarily identify, disclose, and resolve instances of potential fraud involving Medicare, Medicaid, and other Federal healthcare programs. The OIG first published the SDP in the Federal Register in 1998 and has updated the protocol through three Open Letters to Health Care Providers, issued in 2006, 2008, and 2009. This revised SDP supersedes and replaces the 1998 Federal Register Notice and all previous OIG guidance regarding the SDP.

Significantly, the revised SDP provides new guidance on the following:

The SDP and the 60-day Rule. The Affordable Care Act imposed a general duty to report and return any Medicare, Medicaid or other Federal healthcare program overpayment within 60 days. Providers that fail to meet this obligation risk liability under the False Claims Act and the Civil Monetary Penalties Law. In February 2012, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule suspending the obligation to report an overpayment for entities that enter into the SDP process in a timely manner. CMS also proposed to suspend the obligation to return overpayments until such time when the disclosing party enters into a settlement (or withdraws or is removed from the SDP process). As such, the revised SDP requires disclosing parties to agree, as a condition precedent to being accepted into the SDP, to waive and not plead statute of limitations, laches, or similar defenses to any administrative action filed by the OIG relating to the disclosed conduct, except to the extent that such defenses may have been available to the disclosing party at the time of submission. The OIG states that it will provide additional guidance once CMS finalizes its 60-day rule.
Estimating potential damages. Under the revised SDP, the disclosing party must calculate the estimated damages relating to improper claims based on either (1) all the claims affected by the disclosed matter, or (2) a statistically valid random sample of the claims affected by the matter. To be statistically valid, the sample must include at least 100 items and use the mean point estimate to calculate damages.
Disclosures relating to potential AKS or Stark Law (or both) violations. The OIG will no longer “accept any disclosing party into the SDP that fails to acknowledge clearly that the disclosed arrangement constitutes a potential violation of the AKS and, if applicable, the Stark Law.” Instead, under the revised SDP, the disclosing party’s narrative statement must contain a “concise statement” of all the details directly relevant to the disclosed conduct and a specific analysis of why each disclosed arrangement potentially violates the AKS and Stark Law, including the participants’ identities, their relationship to one another to the extent that the relationship affects their potential liability, the payment arrangements, and the dates during which the suspect arrangement occurred.
Disclosures relating to the employment of, or contracting with, excluded individuals. If the submission relates to excluded individuals, the disclosure must include the following information:

The identity of the excluded individual and any provider identification number.
The applicable job duties performed by the individual.
The individual’s dates of employment or contractual relationship.
A description of any background checks that were performed on the individual before or during his/her employment or contract.
A description of the provider’s personnel screening process (including policies and procedures) and any flaw or breakdown that led to the excluded individual being retained.
A description of how the provider discovered that the individual was an excluded individual.
A description of any corrective actions (including providing a copy of revised policies and procedures) that were taken to ensure that excluded individuals are not hired in the future.

Minimum Settlement Amounts and Multipliers. The revised SDP sets a minimum settlement amount of $50,000 for kickback-related claims and $10,000 for all other matters. OIG also acknowledged that it typically imposes a 1.5 multiplier of the single damages to resolve claims.

Please click here for the complete Update.

The Seventh Circuit Bars Malpractice Coverage for an Insured Law Firm Despite the Firm’s Subjective Belief That it Represented its Client Correctly

Tue, 23 Apr 2013 09:49:22 GMT

In Koransky, Bouwer & Poracky, P.C. v. The Bar Plan Mutual Ins. Co., No. 12-1579 (7th Cir. Apr. 2, 2013), the Seventh Circuit affirmed summary judgment against an Indiana law firm and in favor of its malpractice insurer, as the firm’s notice of claim to the insurer was untimely. This ruling highlights the difference between an objectively reasonable expectation of a malpractice claim, which gives rise to a duty to report the possible claim to the carrier; and a lawyer’s subjective belief that he did not commit malpractice, which belief is no barrier to a client bringing a malpractice claim.

While representing the would-be buyer of a pharmacy located in Ohio, the firm failed to deliver its client’s fully executed contract to the seller, and the seller sued to declare the contract never formed given the lack of delivery. The contract called for Ohio venue and for Ohio law to govern, and Ohio law does not require delivery for a contract to become enforceable. The seller filed suit in Alabama seeking a declaration under Alabama law, and Alabama law requires delivery. The Alabama court rejected the buyer’s motion to dismiss, then the buyer then threatened the firm with a malpractice suit. (Ultimately, the Alabama court declared that the contract never formed.)

After the firm tendered the claim under the firm’s current malpractice policy, the insurer declined coverage. As is common in malpractice policies, the policy in question covered acts or omissions that happened prior to the policy’s period only if, among other things, the policyholder “had no basis to believe that such Insured had committed such an act or omission.” Further, as is also common, the policy excluded coverage if the policyholder knew “of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim.” Both provisions rendered the firm’s claim untimely: prior to the current policy’s period, the firm was aware of the buyer and seller’s dispute and was aware that the dispute centered on the firm’s lack of delivery, but the firm did not give the insurer any notice until the former policy expired and the current one incepted.

After the seller repudiated its acceptance but prior to the firm’s current policy, one of the firm’s lawyers apologized to the seller for not sending the signed contracts, writing: “This whole situation is my fault and not the fault of my client.” In the Seventh Circuit’s view, this correspondence, coupled with the client’s insistence that the seller stick with the deal, meant that a reasonable attorney in the firm’s position “would realize that his client might bring a malpractice claim against him because, as a result of the attorney’s mistake, Seller was refusing to complete the negotiated sale.” And, the Seventh Circuit reasoned, the fact that shortly afterwards the seller filed suit (again, before the current policy) meant that it had no intention of honoring the agreement, so the firm “knew, beyond doubt, . . . that [its] failure to deliver the executed contract may result in a claim against it for malpractice.”

The firm argued that it should not have to report every error, no matter how trivial. Yet, the Seventh Circuit concluded, however difficult it may be to figure out which acts might “reasonably be expected” to lead to a malpractice claim, “this case is not a close one.”

A few features of this case are remarkable. The courts held that during the prior policy’s period, the firm had a reasonable basis to believe that it committed malpractice even though:

Though it knew of the seller’s refusal to perform because of the firm’s failure to deliver and was represented by other lawyers in both Ohio and Alabama, the client did not express unhappiness with the firm until after the Alabama court refused to dismiss the case. Then it seemed inevitable that the buyer would lose.
Until the Alabama court refused to dismiss, it seemed plain that there was an enforceable contract governed by Ohio law.

Importantly, it did not matter whether the firm actually committed malpractice. It only matters that the Alabama court was “the only thing standing between it and a probable malpractice claim.” The Seventh Circuit’s reasoning suggests that when a lawyer’s act or omission is the basis of a dispute between the lawyer’s client and another party, a malpractice claim should reasonably be expected, no matter how strong the client’s case may seem.

EU: Myanmar/ Burma Sanctions Lifted by EU

Tue, 23 Apr 2013 09:36:00 GMT

The European Union has lifted its sanctions in relation to Myanmar/Burma.

Due to the political reform in Myanmar/Burma, the EU has lifted its trade, economic and individual sanctions in relation to the country. The only sanction that remains in place is an arms embargo, which prevents the sale of arms and equipment that could be used for internal repression. The EU had previously suspended the sanctions in April 2012.

A provisional press release of a Council of the European Union meeting held on 22 April 2013, stated that the recent move is a permanent lifting of the sanctions, showing that "the EU is willing to open a new chapter in its relations with Myanmar/Burma".

UK: Causation and Inherent Vice: Court of Appeal Dismisses Appeal in Ace European Group Ltd v Chartis Insurance UK Ltd [2013] EWCA Civ 224

Tue, 23 Apr 2013 07:41:31 GMT

This case concerned which one of two insurers was liable for the losses caused by damage to economiser blocks which were to be incorporated in two boilers on a new energy-from-waste facility near Slough. The blocks were manufactured in Romania and transported by road or by road and sea. On installation at the facility, testing revealed cracking in the rows of tubing contained in the blocks.

Chartis subscribed to a primary marine project cargo/delay in start up policy (the "Marine policy") covering loss and damage occurring to the blocks in transit. Chartis and Ace, together, also subscribed to an erection all risks, public liability and delay in start up insurance policy (the "EAR policy") covering loss and damage occurring once the equipment was on site. Both policies contained a "50/50" clause such that each would respond on a 50/50 basis if it could not be shown whether damage occurred exclusively in transit (to which the Marine policy would apply) or once the equipment was on site (to which the EAR policy would apply). The Marine policy, as is usual, excluded liability for damage caused by inherent vice.

Claims were made on both insurance policies. Ace settled the claim for £4.6 million then sought to recover this from Chartis claiming it was wholly liable under the Marine policy. All parties accepted that the damage was caused by vibration and was fortuitous, but two issues arose in dispute: when did the damage occur (and which policy applied)? and, if it occurred during transit, was the loss caused by the excluded peril of inherent vice?

On the evidence, Mr Justice Popplewell held that the damage occurred during transit due to missing or ineffective packing between the tubes. Therefore, the Marine policy applied and Chartis was liable for the full amount of the loss. Chartis then argued that the damage was caused by an inherent vice, in that the blocks had not been fit for transit, so the loss was excluded from the cover under the Marine policy. Popplewell J found no inherent vice on the facts because the blocks could reasonably have been expected to survive transit without cracking based on their condition when they left the factory. The judge also noted that there was no room for inherent vice to operate where it had already been found that the damage occurred due to another cause, namely the vibration. Since only the Marine policy applied, and the loss was not excluded, Chartis was liable for 100% of the loss.

Chartis appealed and argued that the vibration during transit could not have caused the damage because the blocks had, in fact, been properly packed. It relied on photographic evidence of the packing at the Romanian factory, however the photographs had not been properly examined by either parties' experts at trial. The appellate court considered the photographs to be inconclusive in themselves and without such proper scrutiny, the court decided that it was not in a position to examine them as a judge at first instance could. Since there had been other evidence, besides the photographs, on which Popplewell J was entitled to rely in finding that the packing had been inadequate, it had been open to him to conclude that it was more likely than not that the damage occurred during transit and the appeal was dismissed.

In those circumstances, the Court of Appeal upheld Popplewell J's decision in finding that the entire loss fell on the Marine policy.

Click here to read our previous blog post on the first instance decision.

NAIC to Conduct Survey on Access to Reinsurance Data on Behalf of FIO

Mon, 22 Apr 2013 08:31:03 GMT

At the Spring Meeting of the National Association of Insurance Commissioners (NAIC), the NAIC Reinsurance Task Force announced that the Federal Insurance Office (FIO) requested that the NAIC conduct a survey on access to reinsurance data. The request is tied to Section 313(o)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which requires FIO to submit an updated report by January 1, 2015 to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs on the impact of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) on the ability of State regulators to access reinsurance information for regulated companies in their jurisdictions. The NAIC has not yet released any details on how it plans to conduct the survey.

Florida Senate Committee Approves Bill Repealing No-Fault Law

Mon, 22 Apr 2013 08:23:13 GMT

On April 17, 2013, the Florida Senate Committee on Banking and Insurance approved SPB 7152 as committee bill SB 1888 (the “Bill”). The Bill would eliminate Florida’s no-fault personal injury protection (“PIP”) coverage requirements, which were reformed just last year as the result of serious negotiations. To view our blog post covering last year’s reforms, click here. The reforms were one of Governor Rick Scott’s legislative priorities to crack down on the fraud abuses in PIP cases that have led to skyrocketing costs for coverage.

Currently, PIP coverage awards insureds up to $10,000 for medical bills and lost wages if an emergency medical condition exists or up to $2,500 otherwise, regardless of whether or not they caused the crash. Also, in order to obtain the benefits, injured persons are required to seek treatment from a licensed physician, osteopath, chiropractor or dentist, and not from a massage therapist or acupuncturist. This has led to litigation regarding the constitutionality of the reforms that is still pending.

The Bill would, among other things, replace PIP coverage requirements with bodily injury coverage requirements, in which case the insurer of the party at fault would pay for medical care. This change would require that the injured party bring a lawsuit against the insured. In addition, insureds would be required to have financial responsibility coverage of at least $10,000 for property damage, $25,000 for bodily injury or death to another and, subject to a $25,000 limit for one person, $50,000 for bodily injury or death of two or more people in one crash. A policy that provides at least $60,000 for combined property damage and bodily injury liability would also satisfy the financial responsibility coverage requirements. Proponents of the Bill believe that it will help curb fraud and reduce insurance rates. Opponents of the Bill are concerned that a tort based system would result in delays in accident victims receiving compensation to pay their medical bills along with their incurrence of court costs. There is also a concern that Florida ranks as one of the highest states in the amount of uninsured drivers, which could make it difficult for accident victims to recover all of their damages.

The Bill has been referred to the Senate Committee on Appropriations for review.

For a copy of the Bill, click here.

Swan Appointed Managing Director, Supervision by BMA

Fri, 19 Apr 2013 14:25:42 GMT

The Bermuda Monetary Authority (BMA) announced that it has appointed Craig Swan, formerly the BMA’s Director, Insurance Supervision, to the newly created post Managing Director, Supervision. Mr. Swan will lead all of the BMA’s regulatory functions. The Director, Banking, Trust, Corporate Services and Investment and Director, Insurance Supervision will each report to Mr. Swan.

Edwards Wildman - Insurance and Reinsurance Review - April 2013

Thu, 18 Apr 2013 14:54:33 GMT

Welcome to the first e-edition of the Edwards Wildman Insurance and Reinsurance Review.

On the U.S. side, we report on what insurers can do to avoid "institutional bad faith" claims; new federal guidance on fixed indemnity benefits under the Affordable Care Act; and contingent business interruption claims. We also make available a 50-state bad faith survey.

On the UK side, we consider the UK Supreme Court decision on legal advice privilege; a decision on the boundaries of a before-the-event (BTE) insurance policy; a decision on the proper forum for a dispute involving business placed in London for a U.S. insured; and a holding that apportionment does not apply to liability insurance.

Lastly, we consider the decision of the Hong Kong Court of First Instance on the transfer of long-term business under the Hong Kong Insurance Companies Ordinance.

Please click here to view. We hope you enjoy this edition of the Edwards Wildman Insurance and Reinsurance Review.

Paul Kanesfsky
Editor (New York)
t: +1 212 912 2769
e: pkanefsky@edwardswildman.com

Victoria Anderson
Editor (London)
t: +44 (0) 20 7556 4466
e: vanderson@edwardswildman.com

Patriot’s Day Bombing – Insurance Issues?

Thu, 18 Apr 2013 13:09:58 GMT

Monday’s attack affected hundreds of lives and businesses struck by the tragedy. Insurers and reinsurers will undoubtedly face claims and losses in the wake of Monday’s devastation. What follows are some of the insurance issues likely to arise in the aftermath of the bombing. We don’t yet have answers to these issues, but as the claims and factual investigations develop, so too will the coverage issues.

Will there be lawsuits filed against the Boston Athletic Association (BAA), which manages the Boston Marathon, or is the BAA subject to any statutory immunities because of its non-profit status?
Are the Marathon sponsors and their insurers likely to be the focus of claims in the months ahead?
Did the businesses that suffered damage during the attack have terrorism coverage or did their policies exclude such coverage?
Will the attack trigger the federal backstop under TRIA?
What effect does President Obama’s declaration that the attack was an “act of terrorism” have on terrorism coverage?
Does it matter, for purposes of triggering terrorism coverage, whether the individuals or organizations ultimately found responsible for the attack are foreign or domestic?
Will there be coverage under event cancellation policies for the various events (such as Celtics and Bruins games) that were canceled and/or rescheduled?
Will there be business interruption and contingent business interruptions claims due to the income businesses lost as a result of the attack?
How will the waiting period deductibles and the Patriots Day holiday, which led to the closure of many businesses on Monday, affect business loss coverages?
Will there be civil authority and/or ingress/egress coverage for claims stemming from the closure of certain areas around Boylston Street and the Copley Square train station?

Clearly, the Patriot’s Day attack will affect the insurance industry. The scope and extent remain to be seen. We will be certain to follow developments, and invite your input and questions.

FRB Issues Final Rule on SIFIs

Mon, 15 Apr 2013 14:25:02 GMT

On April 3, 2013, the Federal Reserve Board (“FRB”) approved a final rule (“Final Rule”) that establishes (1) definitions of the terms “significant nonbank financial company” (or, more commonly referred to as SIFIs or “systemically important financial institutions") and “significant bank holding company,” and (2) the requirements for determining when a company is “predominantly engaged in financial activities.” These terms are relevant to various provisions of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), including section 113, which authorizes the Financial Stability Oversight Council (“FSOC”) to designate SIFIs for supervision by the FRB.

Item 1
Under the Final Rule, the FRB has concluded that there is a sufficient basis for adopting a $50 billion asset threshold for purposes of defining significant nonbank financial companies and bank holding companies. The FRB has not included an inflation adjustment provision in the Final Rule because it determined that an inflation adjustment would add complexity and burden to the definition without any significant benefit in more accurately defining the relevant terms. However, the FRB may consider amending the $50 billion threshold in the future if it determines that such reconsideration is appropriate.

Item 2
For purposes of Title I of the Act, a company is considered to be “predominantly engaged” in financial activities if either (1) annual gross revenues from financial activities (including subsidiary activities), as well as from the ownership or control of an insured depository institution, represent 85% or more of the consolidated annual gross revenues of the company or (2) the consolidated assets of the company and its subsidiaries related to financial activities, as well as related to the ownership or control of an insured depository institution, represent 85% or more of the consolidated assets of the company.

The Final Rule also enumerates types of “financial activities” for purposes of determining whether a company is predominantly engaged in financial activities under Title I. This list includes the following insurance-related items:

insurance activities^[1]
insurance company portfolio investments^[2]
insurance agency and underwriting activities

The Final Rule will become effective on May 6, 2013.

To see a copy of the Final Rule, click here.

To see the FRB’s release on the Final Rule, click here.

_____________________________

^[1] Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities and acting as principal, agent, or broker for purposes of the foregoing, in any state, are financial activities specifically enumerated in the Bank Holding Company ("BHC") Act.
^[2]The BHC Act authorizes companies engaged in certain types of insurance activities to make portfolio investments. In particular, financial holding companies are authorized by the BHC Act if: (i) the shares, assets, or ownership interests are not acquired or held by a depository institution or a subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities; (iii) such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant state law governing such investments; and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment.

UK: PRA Publishes Policy Statement on Its Approach to Decision-Making and Enforcement

Fri, 12 Apr 2013 08:00:17 GMT

On 1 April 2013, the Prudential Regulation Authority (PRA) published a Policy Statement on its decision-making process, and disciplinary and enforcement procedures.

The Policy Statement:

Stresses that, at least in the PRA's view, its final decision-making process will be "fair and proportionate", and consistent with its legal obligations;
Promises that the PRA's decision-making committees (DMCs) will always include at least one member who was not directly involved in gathering the evidence on which the decision will be based;
Defends its final committee structure and the decision to group category 3, 4 and 5 firms together for decision-making purposes, saying that cases can always be escalated if necessary;
Defends its policy for calculating penalties, even when they're to be imposed on small firms, but concedes that different metrics may be used if that would be "more appropriate";
Accepts that urgent decisions should be taken by two people rather than one, and that one of the two must be independent of the evidence gathering process. It also accepts that these decision makers must be of "equal seniority to the membership of the DMC to which the case would have been put";
Promises to take firms' representations into account before deciding whether to publish, and what information to include in a published, a Supervisory, Warning or Decision Notice;
Promises to cooperate with the Financial Conduct Agency (FCA) and other regulators, before taking enforcement action against a firm, whilst stressing that there may be occasions when two or more regulators investigate a firm and issue penalties in respect of the same events.

Florida Appellate Court Decision Increases Pressure On Insurers To Settle Claims In Order To Avoid Potential Bad Faith

Thu, 11 Apr 2013 13:20:27 GMT

For insurers doing business in Florida, a recent appellate court decision reaffirms the importance of a timely offer of settlement even in extremely challenging conditions to protect against bad-faith liability.

Goheagan v. American Vehicle Ins. Co. involved a bad-faith claim against American Vehicle Insurance Company (“AVIC”) following a motor vehicle accident in which AVIC's insured, traveling at a high rate of speed with a blood alcohol of .19, rear-ended another vehicle. The driver of the rear-ended vehicle sustained catastrophic injuries and remained hospitalized in a coma until she died ten weeks later.

AVIC’s claims adjuster appears to have moved quickly upon the claim once she was notified of the accident. She immediately told the insured of the policy limits applicable, and informed him that every effort would be made to settle the bodily injury claim. However, before she could actually make an offer, several weeks had elapsed, and in that time a lawsuit had been filed against the insured on account of the injuries sustained by the driver of the rear-ended vehicle. The result of that lawsuit was judgment against the insured for nearly three million dollars.

The insured sued AVIC, claiming it acted in bad faith by allowing those few weeks to pass before an offer of settlement was made. AVIC contended in its summary judgment motion that it acted fairly and honestly toward its insured with due regard for his interest, but was prevented from entering into settlement negotiations for two reasons. First, the injured driver was in a coma, and, therefore, there was no one to make the offer to. Second, since AVIC had been made aware of the fact that there was a lawyer involved, communications regarding settlement had to flow through counsel, regardless of the delays that came with tracking down counsel, making a settlement offer, and tendering the claim. The trial court granted summary judgment to AVIC on the first of these arguments: namely, that as the driver was in a coma, and no guardianship had been set up prior to her death, there was as a matter of law no one to whom to make an offer.

The appeals court disagreed. It analogized the financial exposure to the insured to a “ticking financial time bomb” and said that any delay in making an offer, even where there was no assurance that the claim could be settled, could be viewed by a fact finder as evidence of bad faith. Further, it noted that Florida law permits a guardian or personal representative who has not yet been appointed to negotiate a settlement on behalf of a deceased claimant. Presumably, this meant that the AVIC claims adjuster could have negotiated with the driver’s parents and tried to settle the claim with them. At a minimum, the Court said there was a dispute of material fact as to the timeliness of AVIC’s efforts, requiring the issue to be decided by a fact finder.

This decision suggests that under Florida law, where liability is clear and injuries are serious, an insurer may face exposure for not making an offer of settlement promptly, even under extremely challenging circumstances. The appellate decision can be found here.

UK: PRA Publishes Policy Statement on Its Power of Direction Over Qualifying Parent Undertakings

Thu, 11 Apr 2013 08:34:14 GMT

On 1 April 2013, the Prudential Regulation Authority (PRA) published a policy statement on its power of direction over qualifying parent undertakings, incorporating feedback from a consultation on this power.

The power of direction over parent undertakings is a statutory power under the Financial Services and Markets Act 2000 (FSMA) (as amended by the Financial Services Act 2012) which allows the PRA to issue directions to an unregulated parent company of a "qualifying authorised person" (a UK-incorporated body corporate that is a PRA-authorised firm or an investment firm). The power, its scope and procedure are contained in s192A-192N FSMA, and apply to "qualifying parent undertakings" (insurance holding companies, financial holding companies and mixed financial holding companies, which are incorporated or have a place of business in the UK). The power will apply equally to ultimate parent companies as to intermediate holding companies.

In response to queries raised during the consultation, the PRA said that it does not consider the power of direction to be a last resort. It also confirmed the right of an entity against which the power has been used, to make representations and appeal to the Tribunal. In response to a query about regulatory arbitrage to avoid the power, the PRA said that it did not foresee groups restructuring for this purpose, but that it was "empowered to act to counter" such actions. However, it did not explain what it means by this, and its assertion is likely to be without merit on some facts. Fears about inconsistent application of the power where firms are regulated by both the PRA and the FCA were addressed by reference to s192F FSMA, which requires the two regulators to consult before either gives an entity notice of a direction under the power (the FCA's policy statement on this and other matters may be found here).

The policy statement itself restated the provisions of the statute, setting out (as above) the entities to which the power would apply, the fact that either the general condition (that the PRA considers it desirable to give the direction in order to advance any of its objectives) or the consolidated supervision condition (that "(i) the PRA is the competent authority for the purpose of consolidated supervision … in relation to some or all members of the group of a qualifying authorised person, in pursuance of any of the relevant EU directives; and (ii) the PRA considers that the giving of the direction is desirable for the purpose of the effective consolidated supervision of the group") must be satisfied to use the power, the factors to which the PRA must have regard in deciding to use the power, and the content of directions under it. It also elaborated on the statute, referencing the PRA's general objective ("to promote the safety and soundness of PRA authorised firms") and insurance objective ("contributing to the securing of an appropriate degree of protection for those who are or may become policyholders"), listing risks of being part of a group which may require consolidated supervision and listing examples of circumstances where the PRA would consider using the power over a parent company rather than approaching the regulated entity directly.

Of particular note are:

paragraph 17 (directions will tend to support authorised firms "in complying with their obligation to ensure that their … group complies with consolidated requirements, but it will not absolve them of this obligation");
paragraph 18 (several factors, which on their own are not sufficient to merit the exercise of the power, may cumulatively make it desirable);
paragraph 24 (even though directions cannot apply to shareholders, they can mandate the company to "facilitate" shareholder actions by requiring it to call a general meeting and propose a motion); and
paragraph 26 (which concerns expiry and revocation of directions).

Annexed to the policy statement are non-exhaustive lists of "possible scenarios in which the PRA may consider exercising the power of direction" and "possible directions which the PRA may consider making". Examples of the former include:

Insufficient quantity or quality of funds or assets made available to an authorised firm to meet its solo requirements, or being available to meet consolidated group requirements;
Intra-group transactions and allocation of risks (e.g. large exposures, arrangements for the mitigation of risk such as reinsurance) which do not meet the standards expected by the PRA;
Group-wide remuneration policies which do not meet the PRA's standards;
Complex or opaque group structures which hinder risk management by the PRA or the authorised firm; and
Systems and controls to manage group risks which do not meet the PRA's standards.

Possible directions the PRA may make include:

A restriction on dividend payments or other payments on capital instruments;
a requirement for the group to be restructured;
a requirement to raise new capital; and
a requirement to take steps to facilitate the removal from office of directors of the parent undertaking who the PRA considers are not fit and proper to direct a holding company.

In some senses, this is a very "ordinary" list, because the FSA was able to achieve almost all of these things using its unamended OIVOP power. However, we anticipate that the power may actually be used in a much more controversial fashion over time. Whether we are correct will be seen as the new regulator finds its feet and begins to flex its statutory muscle.

Foreign Risk Retention Groups Permitted to Issue Automobile Liability Insurance in Nevada to Satisfy Statutory Minimum Coverage Requirements

Thu, 11 Apr 2013 08:19:57 GMT

In the recent case of Alliance of Nonprofits for Ins. v. Scott J. Kipper, et al., the Ninth Circuit determined that the Liability Risk Retention Act of 1986 (“LRRA”) preempted an order issued in 2010 by the Nevada Insurance Commissioner barring the Alliance of Nonprofits for Insurance Risk Retention Group (the “Alliance”) from issuing first dollar automobile insurance policies (the “Order”). The LRRA is a federal law which authorizes risk retention groups (“RRG”) to provide liability insurance coverage. The LRRA broadly preempts “any [s]tate law, rule, regulation, or order to the extent that such law, rule, regulation, or order would . . . make unlawful, or regulate, directly or indirectly, the operation of [an RRG].” 15 U.S.C. § 3902(a)(1).

The Alliance, an RRG chartered in Vermont, registered to transact liability insurance in Nevada with the Division of Insurance of Nevada’s Department of Business and Industry (the “Division”), but never obtained a certificate of authority from the Division. The Alliance offered its Nevada members first dollar automobile liability coverage to satisfy Nevada’s motor vehicle financial responsibility statute, which requires certain minimum coverages for car owners.

The Nevada Insurance Commissioner reasoned that the state minimum coverage requirements could only be met by purchasing coverage from an insurer that had a certificate of authority issued by the Division, which the Alliance does not. The Order required the Alliance to cease writing first dollar policies and suggested the Alliance could continue writing such policies through a fronting arrangement with an authorized insurer that holds a valid Nevada certificate of authority.

The three-judge panel of the Ninth Circuit disagreed and found for the Alliance, stating that the LRRA’s preemption powers apply, the Order did not fit into any of the exceptions to the LRRA’s preemption powers, and the Order was unjustifiably discriminatory against the Alliance. According to the panel’s opinion, it did not matter whether the Alliance could write dollar one policies via a fronting arrangement workaround, if the Alliance “and presumably other foreign RRGs . . . would be the only insurance companies required to take those steps.” Accordingly, the 9th Circuit mandated that the authorized insurer requirement under Nevada’s motor vehicle financial responsibility statute be read to include a registered RRG.

NAIC Releases PBR Implementation Plan for Comment

Mon, 08 Apr 2013 08:38:36 GMT

This updates our December 3, 2012 blog post.

Attorneys from Edwards Wildman attended the Principle-Based Reserving Implementation (EX) Task Force (“Task Force”) meeting of the National Association of Insurance Commissioners (“NAIC”) in Houston on April 6, 2013, where the Task Force released a new draft of its principle-based reserving (“PBR”) implementation plan (“Plan”) for comment. The Plan calls for replacement of the current formulaic approach to determining life insurance policy reserves with the PBR approach, a reserving methodology which more closely aligns policy reserves to product risks. The Valuation Manual setting forth the PBR reserving requirements was adopted by the NAIC in December 2012. The Plan varies from prior drafts in certain respects, including addition of a new Section IV calling for the NAIC to further examine the solvency implications of life insurer-owned captive insurers and other alternative mechanisms, such as special purpose vehicles in the context of PBR. It notes that this will largely be based on the report of Captives and Special Purpose Vehicle Use (E) Subgroup's Report, and that a new working group will likely be created to focus on this issue. The attendees of the meeting discussed the captive issue in some detail, and noted that reserve redundancies expected to be eliminated upon implementation of PBR may reduce the need for captives and SPVs. The draft Plan also covers the resources necessary to implement and administer the new reserving regime, among other things.

The comment period for the Plan is 30 days.

Click here for a copy of the draft Plan.

* Chris Finney Commentary: HBOS, Solvency II and Why It's Different This Time

Mon, 08 Apr 2013 08:22:58 GMT

The Fourth Report of the Parliamentary Commission on Banking Standards "'An accident waiting to happen': the Failure of HBOS" makes surprisingly interesting reading for insurers. (The Report, published on 5 April 2013, is available here.) Perhaps the most striking findings are these:

Between 2002 and 2004, the FSA identified, and drew HBOS' attention to, most of the risks that would eventually cause HBOS to collapse. However, the FSA didn't follow-up on some issues, and it "closed-off" others as if they'd been "resolved" when that was clearly not the case;
In late 2004, the FSA switched its attention from HBOS' prudential risks towards the implementation of Basel II. In 2004, Basel II was seen in much the same way as Solvency II is seen today: it used the most up-to-date modelling and risk management techniques to enable banks to calculate their capital requirements; and to identify, manage and monitor the risks inherent in their businesses. Banks were therefore much less likely to collapse and cause loss to consumers. Basel II was also regarded as appropriately risk sensitive and conservative, and its implementation was seen as essential if we wanted to reduce the risks inherent in the banking system. Like Solvency II, Basel II also relied on what was effectively a standard formula and a regulator approved internal model. Banks with approved internal models were given "advanced status", their regulatory capital requirements were thought to be more closely matched to the risks inherent in their businesses, and their regulatory capital requirements were invariably lower as a result;
Even so, Basel II was "immensely complex and immensely resource demanding". HBOS' staff devoted "tens of thousands of hours" to securing HBOS' advanced status, and that was a "huge distraction".

Now, of course, Basel II is regarded as a failure, and "a complete waste of time", and HBOS and a number of other banks have long since collapsed.

The parallels between these findings and today's environment are as easy to over-state as they are plain to see. Basel II and the FSA's apparent failures did not cause HBOS' collapse, even if they partially allowed it to happen. Even so:

The FSA is said to have failed to follow up on some key issues because HBOS pushed back so hard when they were raised. And the FSA's Board is said to have decided not to pursue national liquidity requirements "following push back from the industry". This is why the PRA now insists (apparently at the behest of the Parliamentary Commission) that firms must not respond to regulatory concerns as if they're part of an ongoing negotiation with their regulator (see my earlier blog on this point which is here);
Many of the flaws apparent in Basel II are also apparent in Solvency II. For example, Solvency II has been widely criticised as too complex to consistently to deliver on its objectives, whilst the development of internal models and the search for regulatory approval is widely regarded as complex, expensive and a huge distraction - even by firms that are actively pursuing (and may feel compelled to secure) internal model approval because of the "advanced status" and lower capital requirements that should deliver.

This can only make sense in business and regulatory terms if you think "it's different this time". But as Sir John Templeton pointed out - those are the four most expensive words in the English language. They're also very rarely proved to be right.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

New Rules Proposed to Prohibit Persons Connected with Stop-Loss Insurance Coverage from being Health Insurance Exchange Navigators; New Disclosure Requirements also Proposed

Fri, 05 Apr 2013 14:44:19 GMT

The Centers for Medicare & Medicaid Services (“CMS”), part of the United States Department of Health and Human Services, has proposed new rules to create conflict-of-interest standards applicable to navigators. Under the Patient Protection and Affordable Care Act (the “Act”), navigators will assist consumers in obtaining coverage from health insurance exchanges to be established under the Act. Navigators will not be paid by health insurance companies and will not need to be licensed as insurance agents or brokers, but rather will be compensated by the exchanges themselves.

Specifically, the proposed rules make entities affiliated with issuers of stop-loss insurance policies ineligible to become navigators, including those who are compensated directly or indirectly by issuers of stop-loss coverage. Large employers that self-insure may use stop-loss insurance to cover claims over a certain attachment point, and CMS believes that stop-loss issuers or those they compensate, if allowed to become navigators, may be incentivized to direct smaller employers into self-funded plans too. The new eligibility criteria are in addition to the Act’s prohibition on health insurance companies or persons that receive compensation from health insurance companies from becoming navigators.

The proposed rules also require navigators to disclose to the exchanges and consumers their financial connections, if any, to other types of insurance, any employment relationships their staff members or their spouses/domestic partners had in the past five years with issuers of health insurance or stop-loss coverage, and any anticipated relationships with such issuers in the future. This disclosure standard would apply only to federally run exchanges, state and federal partnership exchanges, and state-run exchanges funded by federal grants.

The Centers for Medicare & Medicaid Services (“CMS”), part of the United States Department of Health and Human Services, has proposed new rules to create conflict-of-interest standards applicable to navigators. Under the Patient Protection and Affordable Care Act (the “Act”), navigators will assist consumers in obtaining coverage from health insurance exchanges to be established under the Act. Navigators will not be paid by health insurance companies and will not need to be licensed as insurance agents or brokers, but rather will be compensated by the exchanges themselves.

Specifically, the proposed rules make entities affiliated with issuers of stop-loss insurance policies ineligible to become navigators, including those who are compensated directly or indirectly by issuers of stop-loss coverage. Large employers that self-insure may use stop-loss insurance to cover claims over a certain attachment point, and CMS believes that stop-loss issuers or those they compensate, if allowed to become navigators, may be incentivized to direct smaller employers into self-funded plans too. The new eligibility criteria are in addition to the Act’s prohibition on health insurance companies or persons that receive compensation from health insurance companies from becoming navigators.

The proposed rules also require navigators to disclose to the exchanges and consumers their financial connections, if any, to other types of insurance, any employment relationships their staff members or their spouses/domestic partners had in the past five years with issuers of health insurance or stop-loss coverage, and any anticipated relationships with such issuers in the future. This disclosure standard would apply only to federally run exchanges, state and federal partnership exchanges, and state-run exchanges funded by federal grants.

* Chris Finney Commentary: The Prudential Regulation Authority's Approach to Insurance Supervision

Fri, 05 Apr 2013 12:47:54 GMT

On 1 April 2013, the Bank of England published "The Prudential Regulation Authority's approach to insurance supervision".

When the Bank published the consultation version of this paper in October 2012, I wrote half a blog about it and called it "...the article I could hardly bring myself to write". In retrospect, the title probably gave too much away. Anyway. That was then, and this is now. Is the second version any better than the first? Well. It's just as difficult to read; just as repetitive and it's managed to suck just as much life out of the subject matter for it to be just as hard to keep reading it. Which is a shame. I suspect that most of the people who manage to get to the end will forget the messages - although the PRA will use it as a reference point, and an excuse to delete most of the guidance from its Handbook.

If you were already worried that the Bank didn't want to supervise insurers, doesn't understand them, and still regards them as the banking sector's poor relations, you'll find plenty of grist for your mill in the both papers. Although they're expressly dedicated to insurance supervision, the PRA's thinking is consistently explained by reference to banks and banking. You'll also notice that the PRA has dedicated less than 25% of its supervisory and risk resource to insurance, whilst almost 40% goes to the banks (and 35% must go to investment firms). OK. This makes it all sound pretty bad. And it may not be quite as bad as it seems: as the PRA notes - repeatedly - banking can be systemic, traditional (re)insurance probably isn't. It therefore makes sense to concentrate more resource on banking, especially as the PRA's statutory objectives include "promoting the safety and soundness of the firms [it] regulate[s], focussing on the adverse effects ... they can have on the stability of the UK financial system". (That isn't, of course, a complete answer to the poor relations question, because the PRA also has "an objective specific to insurance firms, to contribute to ensuring that policyholders are appropriately protected", which hardly gets a look in by comparison. But, hey - as I know to my cost - it's much easier to point out the flaws in these things than it is to try to resolve them.)

At least as presented, it looks as if the PRA's culture and supervisory approach will be very different to the FSA's, and that might also be a good thing. The PRA will, for example, concentrate on the most material issues and pay little or no attention to small beer; it will respond proportionately to issues and expect firms to do the same; it will also take a judgment based approach that's tailored to each particular firm and its circumstances. Finally, if experience shows that the PRA has put too much emphasis on an issue, it will admit its error and change its approach. This will be really tough - but just as valuable if it can be done. We all find it hard to admit that we got in wrong, before visibly changing our approach. That can be especially difficult if you're a regulator working in today's over-heated and risk-averse regulatory environment. The change of mind-set required will also be marked and shocking on a personal level if commentators are right when they say that supervisors are often inexperienced, worried about missing things and getting things wrong, and cannot therefore let anything go for fear that someone, sometime, will criticise them for doing so.

For me, two other rather worrying assertions stood out just as loudly as before, and I've added a third to my list. The PRA says that it will:

"ensure that it takes account of all relevant information in reaching its judgments" - which sounds sensible enough, but the FSA was often criticised for being unable to make a decision until it had "all relevant information" because, all too often, that meant "every last bit of information, however insignificant it might seem". These criticisms were often well founded and, when they were, the financial and opportunity cost of providing the information was high. Will the PRA really be any better?
"Insurers should not...approach their relationship with the PRA as a negotiation" - which would be reasonable enough, if you thought the regulator would consistently make the right decisions. In the real world, that isn't usually possible unless the regulator's thinking has been robustly challenged and subjected to a reasonable negotiation process. A confident and competent regulator would encourage the process. How should we view a regulator that isn't prepared to countenance it?
"The PRA is reviewing the [FSA's] Handbook, and will replace it with a rulebook...The PRA intends to limit strictly the use of guidance material in the rulebook...The PRA does not plan to issue significant amounts of detailed guidance to clarify its policy, whether in the form of general guidance [or guidance] to individual insurers. Where the PRA judges that general guidance material is required, this [will be] issued in a consistent format as...Supervisory Statements. Such material [will be] focussed on the PRA's expectations, aimed at facilitating insurers' judgment in determining whether they meet these expectations, and will not be over detailed..." Hmmm. So: (i) A shorter rulebook. Good. The FSA's handbook was 14 stories high and changing all the time. (ii) A shift back towards more principles based regulation - a divisive issue in the market, but let's go with it for now. (iii) Less guidance to help firms work out what the rules mean, and what they can or must do to comply - again, a divisive issue in the market, and unlikely to be welcomed by many. (iv) The publication of Supervisory Statements. That, I suspect, will go down badly - Not just because these statements will be brief and high level, but because they'll help to make it harder to find out what the PRA's views are on a particular issue. Now, the PRA's expectations will be spread across the rulebook, consultation documents, policy statements, speeches, discussions papers and...Supervisory Statements. And that's before you consider that the FCA will be producing a similar range of documents, and the regulators will not reproduce (and perhaps not even signpost) the European Regulations firms must comply with as well.

Still, on the positive side, the PRA has dropped the Latin from the final version of its paper. That's progress - unless it's still there and I've become immune to it.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

UK: Coming Into Force: The Consumer Insurance (Disclosure and Representations) Act 2012

Fri, 05 Apr 2013 10:09:15 GMT

On 6 April 2013, the Consumer Insurance (Disclosure and Representations) Act 2012 ("the Act") will come into force, and apply to all consumer insurance contracts entered into on and after that date.

As such, it is important to be aware of the impact of the Act.

The provisions in the Act are mandatory.
A duty of utmost good faith is replaced with a statutory duty upon a consumer to take reasonable care not to make a misrepresentation to an insurer.
An insurer cannot avoid a policy:
(i) if a consumer exercises reasonable care and makes a misrepresentation; or
(ii) where a misrepresentation is made; that misrepresentation would not have influenced its decision to agree to the policy.
An insurer can avoid a policy and refuse all claims if it can show that without the misrepresentation by the consumer, it would not have entered into the policy or would have agreed it on different terms.

A deliberate or reckless misrepresentation will allow an insurer to retain all the premiums paid. A careless misrepresentation means an insurer must return all the premiums paid.

If an insurer would have agreed to a policy on different terms, the policy is treated to have been entered into on those terms.

An insurer should also take greater care when extracting information from consumers. The Act specifies that clear and specific questions should be posed to a consumer, and the importance of answering questions in full should be communicated (specifically if a policy is being renewed or varied).
Further, the rule that a consumer's representation can be converted into a warranty is abolished, therefore, an insurer cannot rely on this to avoid a policy.

For a more detailed discussion of the Act, please click here.

Court Holds That Professional Services Exclusion In D&O Policy Applies To Broker-Dealer’s Distribution of REITs

Thu, 04 Apr 2013 15:07:12 GMT

A federal court, applying New York law, recently held that a “professional services” exclusion in a D&O policy applied to lawsuits against a broker-dealer arising out of its underwriting and marketing of shares issued by a set of real estate investment trusts (or “REITs”). See David Lerner Assocs. v. Philadelphia Indem. Ins. Co., No. 2:12-cv-01609-JFB-AKT (E.D.N.Y. Mar. 29, 2013).

The insured, a broker-dealer, served as the underwriter and sole distributor for share issued by a set of REITs. The Financial Industry Regulatory Authority (“FINRA”) later filed a disciplinary proceeding against the insured, alleging that it had misrepresented the value of these shares and failed to perform due diligence. Private class actions followed. The broker-dealer sought reimbursement of the cost of its defense of all of these suits under its D&O policy. The insurer, however, denied coverage on the basis of the policy’s exclusion for any claim arising out of “professional services.” The broker-dealer sued the insurer, and the insurer moved to dismiss.

The court granted the insurer’s motion, holding that the “professional services” exclusion – even though “professional services” was undefined in the policy – unambiguously applied to the underlying complaints. The court noted that the lack of a definition does not render a term ambiguous if, under its plain meaning, it clearly applies to the case at hand – as it did in this case. In short, ambiguity is determined on a case-by-case basis.

Aside from a general appeal to “ambiguity,” the insured’s main argument was an analogy to malpractice law: the insured argued that “professional services” should be interpreted to refer only to activities engaged in by individuals recognized as “professionals” under malpractice law, such as doctors, lawyers, and the like. The court rejected this argument as unsupported in insurance law. Rather, courts have interpreted the phrase “professional services” in insurance policies according to its common understanding, which results in a broader meaning than the technical definition proposed by the insured. Applying that meaning, the court found there was “no question” the activities at issue were “professional”, reasoning that “[t]o perform due diligence on REITs and market those securities, individuals are employed in an occupation, they rely on specialized knowledge or skill, and the skill is mental rather than physical.”

For support, the court cited New York cases holding that sales of life insurance, falsification of patient records, and insurance claim handling were “professional services.” The court also cited several cases in other jurisdictions specifically involving claims against financial institutions. Those cases also held that “professional services” exclusions (usually in D&O policies) applied to claims arising out of the management or marketing of investments.

Many investment companies purchase both D&O and E&O coverage, or policies containing a combination of both coverages, in which case this issue is less likely to arise. But this case illustrates that some financial institutions attempt to obtain liability coverage for their core financial services under their D&O policies. (In fact, in one case cited in David Lerner, the court specifically noted that the insured had elected to purchase only D&O and employment coverages, and not the professional services coverage available from its insurer. See Reinhardt v. Certain Underwriters at Lloyd's, London, No. A06-949, 2007 WL 900731, at *1 (Minn. Ct. App. Mar. 27, 2007).) For these situations, the David Lerner decision provides much-needed clarification to insurers, particularly under New York law.

Click here for a full copy of the Decision.

An Update On A Storm Named Sandy

Wed, 03 Apr 2013 13:13:33 GMT

23 April 2013
Edwards Wildman Palmer UK LLP
Dashwood, 69 Old Broad Street
London EC2M 1QS United Kingdom

Edwards Wildman Speakers: Darlene K. Alt, Nathan Hull

8:00 am - Registration and English Breakfast
8:30 - 10:30 am - Workshop

Programme:

Hurricane vs. Superstorm: Why the Distinction Matters
Wind vs. Water and Other Causation Issues
Business Income Claims and Coverage Considerations
Sandy-Related Litigation: What We've Seen and What We Anticipate
Post-Sandy Regulatory and Legislative Developments
Hours Clauses and Other Aggregation Issues
Implications for Cedents and Reinsurers
Next Steps for the Insurance/Reinsurance Industry

RSVP:

To register for this free event, please click here.

This seminar is free to attend and is eligible for 2 CPD points. Space is limited.

Connecticut Approves First Certified Reinsurer

Wed, 03 Apr 2013 12:58:18 GMT

The Connecticut Insurance Department (the “CID”) has approved Swiss Reinsurance Co. Ltd. as the first certified reinsurer eligible for reduced credit for reinsurance collateral requirements in Connecticut, according to a notice published on the CID website April 2, 2013.

As we reported here, Connecticut amended its credit for reinsurance statutes effective October 1, 2012 pursuant to Public Act No. 12-139 (the “Act”) to allow unauthorized reinsurers to apply for certified reinsurer status, following amendment of the NAIC Credit for Reinsurance Model Law in November 2011. The CID proposed corresponding amendments to Connecticut’s credit for reinsurance regulations in October 2012, which are based on the revised NAIC Credit for Reinsurance Model Regulation and which provide the standards by which a reinsurer may be certified as a reinsurer in Connecticut for credit for reinsurance purposes. The proposed amended regulations are currently pending approval by the Legislative Regulation Review Committee of the Connecticut General Assembly and filing with the Connecticut Secretary of the State.

In the interim, CID Bulletin No. FS-25, issued March 1, 2013, provides that, “insofar as the proposed amended regulations implement existing statutes and more closely reflect the national standard for credit for reinsurance in conformity with the NAIC Model Regulation,” insurers may seek to take credit for reinsurance ceded in accordance with the Act and the proposed amended regulations, and insurers may apply to become certified reinsurers in accordance with the Act and the proposed amended regulations. CID Bulletin No. FS-25 also provides a checklist to be used by applicants for certified reinsurer status in Connecticut.

Other jurisdictions that have amended their credit for reinsurance laws to date to permit reduced collateral for unauthorized reinsurers satisfying specific requirements include California, Delaware, Florida, Georgia, Indiana, Louisiana, New Jersey, New York, Pennsylvania and Virginia.

If you would like to speak with an Edwards Wildman attorney on this topic or any other credit for reinsurance related issues please feel free to contact the authors of this entry or any of the other attorneys in our Insurance and Reinsurance Department.

SDNY Judge Guts LIBOR Claims On Motion to Dismiss, But Banks Are Not Off The Hook Yet

Tue, 02 Apr 2013 15:30:00 GMT

In an exhaustive 161-page ruling issued on Friday, Judge Naomi Reice Buchwald of the Southern District of New York dismissed the majority of the claims brought by plaintiffs seeking damages for losses caused by LIBOR. The categories of cases in the multi-district litigation subject to Friday’s order include: (1) the “over-the-counter” class of plaintiffs, who bought “hundreds of millions of dollars” of interest rate swaps; (2) the exchange-based class of plaintiffs, who traded exchange-based products such as Eurodollar futures; (3) the bondholder class of plaintiffs, who are holders of LIBOR-based debt securities; and (4) Charles Schwab plaintiffs, who through the Schwab Fund “acquired billions of dollars’ worth of LIBOR-based financial instruments…which paid artificially low returns” due to LIBOR suppression.

Judge Buchwald made the following rulings on the various claims asserted by these plaintiffs:

Sherman Act and Cartwright Act Antitrust Claims: Dismissed
o Judge Buchwald concluded that the plaintiffs lack antitrust standing because the LIBOR-setting process is not in itself a competitive process, and that therefore any injury to plaintiffs “would have resulted from defendants’ misrepresentation, not from harm to competition.”
RICO Claim: Dismissed
o Judge Buchwald concluded that the claim is barred by the PSLRA, because an allegation of securities fraud cannot be the predicate act necessary for RICO, and because the claim seeks an impermissible extraterritorial application of United States law, as the “nerve center” of the alleged RICO enterprise was the British Bankers Association in England.
Exchange-based plaintiffs’ state law claim for “restitution/disgorgement/unjust enrichment”: Dismissed
o Because this claim is a quasi-contract claim, it requires some relationship between the plaintiff and defendant. Judge Buchwald concluded that any relationship between the plaintiffs and the bank defendants was too attenuated to support this claim.
Remainder of state law claims: No Supplemental Jurisdiction
o Judge Buchwald declined to exercise supplemental jurisdiction over the over-the-counter plaintiffs’ claims for unjust enrichment and restitution, and other California common law claims brought by the Schwab plaintiffs. She concluded that because no federal claims remained, judicial economy weighed in favor of dismissal.
Commodity Exchange Act Claim: Dismissed in Part
o The Judge concluded that the plaintiffs had properly pled claims of commodities manipulation under the Commodity Exchange Act, except that any claims that rely on contracts purchased from August 2007, the start of the class period, to May 29, 2008, when prominent news articles put plaintiffs on inquiry notice of these claims, were time-barred.

Judge Buchwald then went out of her way to offer insight into her thought process beyond the straightforward application of the law. She acknowledged that, in light of the admissions of wrongdoing the banks have made in their settlements with regulators, her ruling might be “unexpected.” She pointed, however, to the “broad public interests” behind the statutes at play here, which is met by the regulatory actions, and noted that private parties have a higher burden to meet than do governmental agencies under those statutes.

Though they’ve scored a major victory here, the bank defendants are not quite finished with LIBOR yet. The Judge left open the possibility of the filing an amended complaint by the plaintiffs on the Commodity Exchange Act claims based on new information gleaned from the regulatory settlements. Further, the plaintiffs will almost definitely appeal to the Second Circuit, if they do not first ask for a motion for reconsideration before Judge Buchwald herself. In addition, the regulators do not appear to be even close to completing their investigations and there may be many more high dollar regulatory settlements ahead. Lastly, many other complaints have been filed (both consolidated into the MDL and not) that are not directly affected by this ruling. While the defendants will certainly argue that Judge Buchwald’s reasoning controls, the remaining plaintiffs will undoubtedly put their best efforts into distinguishing the facts of their cases, and the applicability of the law.

A copy of the order can be found here.

Healthcare Update: HHS Ups Medicaid Expansion Payments Funding; BCBS of MI Antitrust Case Dropped

Tue, 02 Apr 2013 15:25:13 GMT

HHS UPS MEDICAID EXPANSION PAYMENTS FUNDING
On March 29, the U.S. Department of Health and Human Services (HHS) issued a final rule under which the federal government will pay the entire cost of covering newly eligible enrollees under the Patient Protection and Affordable Care Act's Medicaid expansion for the first three years of the program. The expansion, which the U.S. Supreme Court ruled last June could not be made a mandatory condition for states’ continued participation in the Medicaid program, will take effect in January 2014.

The increased federal funding, known as the Federal Medical Assistance Percentage (FMAP), will reward those states that have agreed to expand their Medicaid programs to cover individuals who have income up to 133% of the federal poverty level, or approximately $15,000 for a single adult. Beginning in 2016, the match rate will begin phasing down to an eventual 90% rate by 2020.

In a news release, HHS Secretary Kathleen Sebelius said, “Thanks to the Affordable Care Act, more Americans will have access to health coverage and the federal government will cover a vast majority of the cost.”

The rule will have a 60-day public comment period and is being published in the Federal Register on April 2.

Please click here for a copy of the complete update.

Washington Supreme Court Issues Two Anti-Insurer Decisions

Tue, 02 Apr 2013 15:15:41 GMT

Washington State just became even more hostile to insurers. Recently, the state’s highest court issued two decisions that will make claims-handling yet more difficult in the Evergreen State and that are in opposition to the majority view in U.S. jurisdictions.

First, in Staples v. Allstate Ins. Co., 295 P.3d 201 (Wash. 2013) (copy available here), the Supreme Court of Washington held that if an examination under oath is not “material” to a first-party insurer’s coverage investigation, the insurer cannot demand it. In other words, while most jurisdictions do not require a showing of prejudice for an insurer to deny coverage to an insured that refuses to submit to an examination under oath, Washington now does require such a showing.

In Staples, the insured gave recorded statements, but not under oath. The insured’s answers were inconsistent, and the insured refused to produce various documents in the course of the insurer’s investigation. He then also refused to submit to the examination under oath. He eventually sued for breach of contract and bad faith. Despite these facts, the Supreme Court held in an en banc decision (over one dissenter) that it was an issue of fact whether the insured’s refusal to submit to an examination under oath prejudiced the insurer. The court overruled the grant of summary judgment to the insurer.

In Cedell v. Farmers Ins. Co. of Wash., 295 P.3d 239 (Wash. 2013) (copy available here), in a 5-4 decision, the court held that the attorney-client and attorney work product privileges are presumed not to apply against a claim of bad faith. The insurer can only rebut that presumption, through an application for protective order and an in camera review process, with regard to advice to the insurer on coverage and strategy. Any communications or work product regarding investigation, evaluation, or processing of the claim cannot be withheld.

The court based this holding on Washington’s principle that an insurer stands in a “quasi-fiduciary” role toward its insured. The court concluded that the activities of claim investigation and evaluation are activities taken in that “quasi-fiduciary” role and, therefore, there can be no privilege as against the insured. If the attorney is retained to advise the insurer on “its own liability” by advising on coverage and strategy, on the other hand, these are not deemed “quasi-fiduciary” tasks and are, therefore, protected by the applicable privileges. The distinguishing factors for the court were that coverage counsel talked and negotiated directly with the insured.

Insurers will now have to grapple with several difficult problems when handling claims in Washington: how to distinguish between advice on “coverage and strategy” on the one hand, and “investigation and evaluation” on the other? The already difficult concept of acting as a “quasi-fiduciary” to an insured in the claims process – when the insured’s and the insurer’s financial interests are necessarily diametrically opposed – becomes even more inscrutable.

New FRB Regulations Affecting Foreign Bank Owned Insurers

Fri, 29 Mar 2013 08:02:54 GMT

Last Friday, the Federal Reserve Board (FRB) proposed rules to strengthen the oversight of U.S. operations of foreign banks.

The proposal, which implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would require foreign banking organizations with a significant U.S. presence to create an intermediate holding company over their U.S. subsidiaries (including U.S. insurers) to facilitate supervision and regulation of the U.S. operations of these foreign banks. Foreign banking organizations would also be required to maintain stronger capital and liquidity positions in the United States. The proposal generally applies to foreign banking organizations with a U.S. banking presence and total global consolidated assets of $50 billion or more. More stringent standards are proposed for foreign banking organizations with combined U.S. assets of $50 billion or more.

The FRB is proposing a phase-in period to give foreign banking organizations time to adjust to the new rules. Foreign banking organizations with global consolidated assets of $50 billion or more on July 1, 2014, would be required to meet the new standards on July 1, 2015.

Comments from the public will be accepted through March 31, 2013.

For more information, see the FRB’s release here.

* Chris Finney Commentary: EIOPA Brings Solvency 1½ a Step Closer

Thu, 28 Mar 2013 14:12:56 GMT

In December 2012, the European Insurance and Occupational Pensions Authority (EIOPA) said that it would consult on "comply or explain" Guidelines that would implement most of Solvency II's Pillar V across most of Europe in January 2014 (my earlier blog is here).

On 27 March 2013, EIOPA published four Consultation Papers on its proposed Guidelines, together with a cover note and three explanatory texts. These publications describe EIOPA's plans for the phasing in of Solvency II.

If the Guidelines are made in their current form, they'll be addressed to the National Competent Authorities (NCAs) of the European Member States, and they'll require them to apply a version of Pillar V to their firms; or explain - publicly - why they haven't done so.

The Guidelines on:

The System of Governance, "develop" Solvency II's governance requirements;
The ORSA, are based on EIOPA's Final Report of July 2012 (available here), with amendments to reflect the fact that EIOPA's Report was expressly subject to change, and this is merely a "preparatory phase";
The Submission of Information to the NCAs, propose that the NCAs ask firms to submit (i) a subset of Solvency II's reporting templates and narrative reports on a quarterly and annual basis; and (ii) their ORSA results within 14 days of completion;
Pre-Applications for Internal Models, cover most of the internal model framework, should "increase convergence of supervisory practices" and "help [firms] prepare to submit a final application".

These proposals deliberately seek to "phase in" Solvency II – even though:

It's far from clear that the trilogue parties (including Europe's elected representatives) still want Solvency II to be made and brought into force;
A material number of significant and relevant policy issues are still to be resolved; and
Some Member States won't be able to comply, and others will choose not to do so.

In pure policy and project management terms, this is clever stuff. EIOPA is using the powers it has to work its way around some of the most significant obstacles to Solvency II delivery. It could also be good news for firms: UK (re)insurers have spent more than £3 billion preparing for Solvency II. This could help them get some return on their money. These things aside, it's not great. Although EIOPA's cover note explains that its planning assumption is that Solvency II will apply from January 2016, it still commits itself to a review "at the end of 2013 based on the latest [Omnibus II] developments". (The European Parliament pencilled a plenary Omnibus II vote in for late October. EIOPA is concerned that it will slip again.) EIOPA will also expect the NCAs to submit annual progress reports from 2015, and implies that they'll also be needed in 2016, 2017, 2018… That may be sensible - Solvency 1½ could be a permanent (temporary) solution. Add in the significant risk of further distortion in the single European market, the impact on competition within and between Member States, the costs of adjusting to another interim version of Solvency II before readjusting to the final rules; and it's becoming a bit of sorry (EEA) state.

Little wonder then that (i) a senior Lloyd's official is reported to have "slammed" these proposals by asking "what planet are these guys on?"; (ii) Andrew Bailey (CEO of the PRA) has described the cost of implementing Solvency II as "frankly indefensible"; and (iii) the FSA is still to update its website to tell us about the Guidelines and the approach the PRA will take when it decides whether to comply…or explain.

EIOPA's consultations are open until 19 June 2013. The final Guidelines will be made in the autumn.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

Freddie Mac Suit May Change LIBOR Litigation Landscape

Thu, 28 Mar 2013 12:08:29 GMT

In a complaint filed last week in the U.S. District Court for the Eastern District of Virginia, home mortgage purchaser Freddie Mac has injected itself into the already sprawling network of cases alleging wrongdoings in connection with the USD LIBOR manipulation scandal. Freddie Mac has named more than a dozen major banks that sat on the USD LIBOR panel as defendants, and, in a new twist, is the first plaintiff to also sue the British Bankers’ Association and several related entities. The BBA oversaw the daily setting of the rate benchmark during the time the alleged manipulation took place. The complaint alleges antitrust claims under the Sherman Act, and common law claims for fraud, tortious interference with contract, and breach of contract. A copy of the complaint is available here.

Freddie Mac is already a class member of one suit pending in the multi-district litigation in the Southern District of New York, where the City of Baltimore is the lead plaintiff. That suit principally alleges antitrust claims under the Sherman Act. That case is currently subject to a motion to dismiss before Judge Naomi Reice Buchwald, who heard oral arguments on the motion in early March, but did not indicate which way she was leaning.

A spokesperson for Freddie Mac has stated that the organization felt it needed to preserve its claims that are distinct from those of the City of Baltimore class. In particular, Freddie Mac allegedly entered into swap master agreements with each of the bank defendants pursuant to which various pay-fixed swaps were made. Certain of these bank defendants have already admitted to USD LIBOR manipulation in settlements with regulators. The admissions that were part of those settlements (with UBS, Barclays and RBS) are woven heavily throughout the Freddie Mac complaint.

The defendants will likely move to have this case joined into the multi-district litigation before Judge Buchwald, hoping for a narrowing of the case or dismissal of claims should she rule their way. However, Freddie Mac’s somewhat unique direct relationship with the defendants may distinguish the complaint enough to keep it as a freestanding litigation in Virginia. The Eastern District is known colloquially as the “Rocket Docket” for the speed with which cases move through the court—if the case stays there, it is even possible that this later-filed case will be one of the first where definitive rulings are made.

Commentators have speculated that Fannie Mae may shortly file its own LIBOR suit, based on the recommendation of the Federal Housing Finance Agency, which oversees both organizations since their government bailout in late 2008. We are continuing to closely monitor developments in all major LIBOR-related litigation.

UK FSA Fines Prudential £30m, Censures CEO for Failure to Disclose

Wed, 27 Mar 2013 15:00:06 GMT

Earlier today, the UK Financial Services Authority fined two member companies of the Prudential Group a total of £30 million for failing to disclose its 2010 plan to bid for AIA, the Asian life and pensions arm of American International Group. Prudential plc was fined £14 million, and The Prudential Assurance Company Limited was fined £16 million, for failing to deal with the FSA in an open and cooperative manner. The FSA separately censured Prudential Group’s CEO, Tidjane Thiam, finding that his “serious error of judgment” caused him to bear responsibility for the companies’ failure to deal forthrightly with the regulator. The FSA’s final notices are available here, here, and here.

The FSA’s action stemmed from a conclusion that Prudential had failed to deal with the FSA in an “open and cooperative manner” because it did not inform the FSA of Prudential’s planned bid until after details had been leaked to the media on 27 February 2010. As recently as 12 February 2010, Prudential executives had not informed the FSA of the possible deal, even when the regulator asked “detailed questions” about Prudential’s growth strategy in the Asian market, and its plans for raising equity and debt capital. The proposed transaction, according to the FSA, would have transformed Prudential Group’s financial position, strategy, and risk profile, and risked a delay in publishing information on a £14.5 billion rights issue, which would have been the largest-ever in the UK.

The FSA concluded that Prudential wrongly allowed its judgment to be overly influenced by its concern about the risk of leaks, which caused Prudential to fail to give due weight to the importance of complying with its regulatory obligations. The FSA concluded, also, that Mr. Thiam played a significant role in the decision not to contact the FSA about the proposed acquisition, which made him “knowingly concerned” in the breach. In its censure, the FSA made no finding that Mr. Thiam lacked fitness or propriety. The FSA also concluded that, while serious, Prudential’s breaches were neither reckless nor intentional.

Today’s news is significant for several reasons. First, the two fines imposed are the 8th and 9th largest ever issued by the FSA, and they are the largest-ever fines levied against insurance companies. Second, this is the first time that the FSA has formally and publicly censured such a high-profile CEO. Third, this is more evidence, if it were needed, about the FSA’s revised “credible deterrence” enforcement strategy, which is much more likely to target high-profile firms and high-profile individuals, and to impose higher fines, than has previously been the case. Today’s action by the FSA should serve as a reminder to firms, board members, and executives alike about the importance of communication with the regulator.

Reemergence of the National Association of Registered Agents and Brokers Reform Act on Capitol Hill

Wed, 27 Mar 2013 13:14:07 GMT

A hearing by the Senate Banking Subcommittee on Securities, Insurance and Investment on March 19, 2013 kicked into gear legislation that would allow insurance producers to more easily obtain licensure to sell, solicit or negotiate insurance in multiple states. The National Association of Registered Agents & Brokers Reform Act of 2013 (the “Act”), introduced on March 12, 2013 as S. 534, is a reintroduction of the previous session’s S. 2342. Additionally, the House of Representatives has put forward its own version, H.R. 1155, which is a reintroduction of the previous session’s H.R. 1112.

The Act would establish the National Association of Registered Agents and Brokers (“NARAB”), a nonprofit corporation to license nonresident producers. Producers who are already licensed in one state could join NARAB and become licensed in all other states. Under the current process, a producer must apply for licensure in each state separately. Proponents of the Act believe NARAB will ease the administrative burden of filing applications in multiple jurisdictions.

Conversely, some consumer advocates who oppose the proposed bills do not believe a self-regulatory nonprofit organization should carry out such an important government function. Consumer advocates also argue the proposed 13-member NARAB board of directors is flawed as it contains eight regulators, five insurance industry representatives, and no consumer advocates.

UK: FSA Confirms FCA Approach to Using Temporary Product Intervention Rules

Wed, 27 Mar 2013 08:42:00 GMT

On 25 March 2013, the UK's Financial Services Authority (FSA) published a Policy Statement which confirms that the Financial Conduct Authority (FCA) will use its Temporary Product Intervention Rules (TPIRs) power in the way the FSA proposed (see our earlier blog). The FCA will be established, and its TPIR power will become available, on 1 April 2013.

The Policy Statement includes a description of the process the FCA will use for making a TPIR. The FCA will usually be required to consult the Prudential Regulation Authority and the public before making new rules (see section 138I of the Financial Services and Markets Act 2000 (FSMA)). However, TPIRs can be made without public consultation if the FCA considers that that is "necessary or expedient…for the purpose of advancing [its] consumer protection objective or the competition objective or [its] integrity objective [if a relevant integrity objective order is in force]" (see section 138M of FSMA).

If the FCA is considering whether to make TPIRs, it will prepare a paper for discussion by a committee, which will have the power to propose the TPIRs to the FCA's Board for making. If the FCA's Board makes the TPIRs, the FCA will publish them on its website together with a statement which explains the rationale for the rules.

Martin Wheatley, Chief Executive of the FCA, has said "The creation of the FCA is our opportunity to reset conduct standards. This power, along with our other new powers, helps define how we will regulate going forward. We know that some in the industry are concerned about us using this power too hastily…we know proportionate judgment is needed, and that is what we will exercise. I do not expect us to use this power frequently, but … we will not hesitate to use these powers where we have serious concerns".

NAIC Subgroup’s White Paper on Captives and SPVs

Wed, 27 Mar 2013 08:30:08 GMT

On March 14, 2013, the NAIC’s Captive and Special Purpose Vehicle Use (E) Subgroup (the “Subgroup”) released a revised version of its White Paper with respect to Special Purposes Vehicles (“SPVs”) and Captives (the “New Draft”). The New Draft is now open for a public comment period until April 28, 2013.

The Subgroup’s original White Paper, published on November 29, 2012, focused on, among other things, the use by life insurers of captives and SPVs to reinsure “XXX and “AXXX” reserve redundancies. The White Paper noted concerns that captives and SPVs established by life insurers to reinsure “XXX and “AXXX” reserves hold non-admitted assets. The White Paper also suggested that the operations of captives and SPVs are not subject to the same regulatory scrutiny as are those of sponsoring insurers. We discussed the White Paper and commented on these concerns recently. (See here and here for information.)

The New Draft differs from the original in several, important ways:

References to a “shadow insurance industry” and comparisons to the regulatory failure that contributed to the recent financial crisis have largely been removed.
The New Draft provides more background on the issue, notably by discussing the NAIC Special Purpose Reinsurance Vehicle Model Act.
The scope of the New Draft has been refined to more specifically cover the NAIC’s view of the motivations for risk transfer to captives and SPVs.
The New Draft explicitly concludes that a “higher level” of confidentiality should be afforded to captives since they do not issue policies to the public.
The Subgroup concedes that enhanced regulatory requirements on U.S. captives may very well lead to increased utilization of offshore jurisdictions.

In all, the New Draft reflects continued skepticism of certain practices within the life insurance industry, but has toned down overt criticism of the life insurance industry’s usage of captive and SPVs. The New Draft shifts focus toward the need for further study as opposed to concluding that such practices are detrimental. Further, it suggests that the recent changes to the NAIC accounting procedures should render most concerns moot going forward as, ideally, XXX and AXXX reserve redundancies will be curtailed without the need for captive and/or SPV transactions.

Additional information is available at Newsstand at www.edwardswildman.com.

Validus Launches a Challenge to the IRS' Cascading Federal Excise Tax Ruling

Fri, 22 Mar 2013 14:06:35 GMT

On 25 January 2013, Validus Reinsurance Ltd (Validus), a reinsurer domiciled in Bermuda, filed a suit in the District Court of the District of Columbia against the United States of America for the repayment of taxes which they allege were wrongly demanded by the IRS. The tax was assessed under the Federal Excise Tax (FET) regime, which (among other things) imposes a 1% tax on premiums under contracts of reinsurance with foreign reinsurers covering risks in the US (s4371 of the Internal Revenue Code). FET also applies at a rate of 4% to premiums for property and casualty insurance, and at 1% to policies for life insurance, sickness, accident and annuities. As reported in an earlier blog (available here), the IRS ruled on 7 March 2008 that the tax would apply to all contracts with an underlying risk based in the US (Revenue Ruling 2008-15).

This ruling was controversial, as the analysis it included made it clear that the IRS considered the tax to apply to reinsurance and retrocession contracts even where both the cedent (or retrocedent) and the reinsurer (or retrocessionaire) were based outside the US, and neither party conducted any business within the US. Even in the case of insurers domiciled in countries with a tax treaty which exempts them from FET, the 1% tax on reinsurance premiums is still payable if they obtain reinsurance from a foreign reinsurer domiciled in a country without such a tax treaty. Furthermore, if a UK insurer (which is ordinarily exempt under a treaty) insures a US risk and passes it on to a foreign reinsurer as part of a conduit arrangement, FET becomes payable both on the reinsurance policy and the underlying insurance policy, which loses the exemption. This sort of arrangement is common with captive insurers, and would result in double (or multiple, if the risk is further reinsured) taxation on the same risk.

While many have questioned whether this interpretation of the code is correct (as it appears to be double taxation), and whether the IRS has the authority to demand FET on a transaction between two non-US parties, neither of which conducts business in the US, the tax has been paid by a number of reinsurers since the 2008 ruling. Validus, as can be seen in their Complaint, was one such party. In February 2012, the IRS demanded $326,340 from Validus in unpaid FET for retrocession premiums paid to foreign retrocessionaires during 2006, and later demanded $109,040 in interest accrued on that sum. Validus paid both sums in full, and filed claims for a refund, as they considered the tax to have been wrongly assessed. In the absence of a response from the IRS, Validus has now launched a test case to recover the money paid plus interest.

The result of this case has serious implications for other non-US insurers and reinsurers which have paid the cascading FET. However, the statute of limitations for tax returns in the US is relatively short, and expires for returns made for the first quarter of 2011 on 30 April 2013. In anticipation of the result of the claim, insurers and reinsurers who are concerned they may have paid this tax in error should file a protective refund claim with the IRS, which effectively freezes the limitation period for a particular claim.

Indictment of Former CalPERS Head Puts Spotlight Back on Placement Agents and Private Equity Firms

Thu, 21 Mar 2013 10:35:59 GMT

Earlier this week Federico Buenrostro, who headed the influential California Public Employees’ Retirement System from 2002 through 2008, was indicted by a federal grand jury on fraud charges stemming from his involvement in falsifying documents as part of a “pay-to-play” scheme at the pension fund. The indictment is the result of a four year investigation by the SEC, the FBI, and the U.S. Postal Inspection Service.

Also indicted was Alfred Villalobos, a close friend of Mr. Buenrostro’s, who ran a placement agency in California called Arvco Capital Research LLC. Placement agents act as middlemen between money managers, such as private equity firms, and the pension funds that the managers seek as investors. Arvco was hired by PE firm Apollo Global Management to solicit investment commitments from CalPERS and other funds, and had been paid at least $48 million in finder's fees for such work. Apollo sought disclosure letters from CalPERS acknowledging that it was aware that Mr. Villalobos would receive commissions in connection with his work. When CalPERS refused to sign the letters, Mr. Buenrostro and Mr. Villalobos allegedly submitted fabricated versions to Apollo.

The “pay-to-play” scandal began several years ago, when regulators nationwide began to crack down on what was seen as improper influence by placement agents and their connections with pension officials from whom they solicited investments on behalf of their fund clients. Most well-known is Alan Hevesi, former head of New York state’s pension fund, who served prison time for his role in providing access to the pension fund for placement agents and their clients.

Since that time, various state and federal agencies have implemented regulations limiting the use of placement agents or requiring more disclosures. For example, since January 2011, placement agents have been required to be registered as lobbyists in California and are prohibited from earning fees based on the successful solicitation of investments. The SEC had proposed an outright ban on placement agents as early as 2009, but ultimately published a rule that merely required registration of agents that solicit public pension funds.

News of this indictment may reignite the debate over the proper role of placement agents and place a renewed focus on their use by small and mid-sized private equity and hedge funds. This could be particularly true as private equity firms face increased scrutiny from federal regulators under the Dodd-Frank Act, which requires PE firms with more than $150 million in assets under management to register with the SEC and submit to SEC audits. We will continue to monitor developments in the area and consider the insurance implications as the situation unfolds.

UK: FCA Outlines High-Level Approach to Consumer Credit Regulation

Wed, 20 Mar 2013 10:07:03 GMT

The government has announced plans to transfer consumer credit regulation to the Financial Conduct Authority (FCA) in April 2014, when the current regulator, the Office of Fair Trading (OFT) will cease to exist.

A consultation paper published by the Financial Services Authority, on behalf of the FCA, outlines the FCA's proposed high-level approach to the new regulatory regime for consumer credit. Another consultation paper on the new regime, published by HM Treasury on the same day is blogged here.

The FCA's proposed approach to the regulation of consumer credit

The FCA is proposing to reduce the regulatory burden on those firms carrying on lower-risk activities. Lower-risk activities are those which the FCA considers pose a limited risk to consumers and include consumer hire (e.g. tool and car hire to consumers), and consumer credit lending where no interest or other charges are levied, and the main business of the lender is the sale of goods and non-financial services (e.g. a sports club that allows payment by instalment for membership without any additional charge).

Lower-risk firms will not have to undergo the full authorisation process, and their supervision will generally be limited to reactive responses to problems that have already materialised, instead of the targeted proactive supervision intended for higher-risk firms. Reporting requirements for all firms will be limited, and the FCA will place a greater emphasis on assessing market-wide risks (rather than risks from individual firms). It does not propose to specify minimum capital requirements for firms (except for debt management firms) and there are no proposals for Financial Services Compensation Scheme cover.

The FCA's proposed approach to payday lending

The FCA will take a 'robust approach' to tackling problems in the payday lending sector. The FCA will have the power to cap the overall costs of these loans, as well as the power to restrict how long they can last for and how many times they can be rolled over. However, early use of the powers seems unlikely – in April 2014, the FCA will begin a detailed impact assessment to work out what effect the use of these powers may have on consumers and firms, before deciding whether and, if so, how to use its powers in due course.

Our previous blog on government intervention in the payday lending sector is available here.

UK: HM Treasury Outlines Framework For FCA Regulation of Consumer Credit

Wed, 20 Mar 2013 09:32:27 GMT

The UK Government has announced plans to transfer consumer credit regulation to the Financial Conduct Authority (FCA) in April 2014, when the current regulator, the Office of Fair Trading (OFT), will cease to exist.

A consultation paper published by HM Treasury on 6 March outlines the overarching model and legislative framework underpinning the new regime (the Treasury Paper). A further blog will follow soon on another consultation paper, published by the Financial Services Authority on behalf of the FCA on the same day, outlining its proposals for the new system.

The OFT regulates the consumer credit industry in accordance with the Consumer Credit Act 1974 (CCA) and the myriad of statutory instruments made under it. The FCA will regulate the industry using an amended version of the licensing, supervision and enforcement regime set out in the Financial Services and Markets Act 2000 (FSMA) instead.

Some provisions in the CCA which cannot be easily replicated under FSMA and through FCA rules (for example, certain consumer rights and protections) will be carried forward to the FCA and continue to apply in the initial years of the new regime. The draft Financial Services Act 2012 (Consumer Credit) Order 2013 (annexed to the Treasury Paper) provides for how the retained provisions of the CCA will operate and be enforced. The government is, however, confident that many of these provisions can eventually be replaced by rules-based consumer protections. To this end it has imposed a requirement on the FCA to review, by 2019, retained CCA conduct provisions and to develop rules-based alternatives where possible.

Further draft secondary legislation (Financial Services and Markets Act 2000 (regulated Activities) (Amendment) Order 2013), concerned with transferring consumer credit activities into the FSMA framework and modifying how parts of FSMA are to apply to the sector, is also annexed to the Treasury Paper. This draft order amends relevant secondary legislation under FSMA and repeals provisions of the CCA which are incompatible with the new FSMA-based regime (for example provisions which relate to the licensing regime, which will be replaced by authorisation under FSMA). In particular, the FSMA model will be applied to consumer credit regulation as follows:

1) Rule-Making: the FCA will be empowered to make rules which are binding upon firms. These will be complemented by high level conduct requirements and Principles for Business, to ensure firms comply not only with the letter of the rules but the spirit of the wider regime. Breaches of rules can be penalised.

2) Authorisation: will replace licensing, and threshold conditions will be applied to set a bar higher than the CCA's fitness test.

3) Approved Persons: for individuals who perform certain specified functions. Approved persons must pass the 'fit and proper' test for approval and then perform their controlled function in accordance with a set of standards.

4) Supervision: the FCA will take a risk-based approach to supervision, paying more attention to higher risk firms and less to those regarded as lower risk. Firms will have regular reporting requirements and be subject to ongoing supervision and monitoring. It seems likely, from the comments made by government ministers and the FCA itself, that it will take a much more intrusive and rigorous approach to the regulation of consumer credit firms and products than the OFT has traditionally taken.

5) Enforcement and Redress: the FCA will have a broader enforcement toolkit, with the power to bring unlimited fines (capped at £50k under the OFT), withdraw authorisation and bring criminal, civil and disciplinary proceedings. The FCA has been given the power to publish the fact that a warning notice has been issued to a firm in respect of disciplinary action. It also has product intervention powers allowing it to ban or impose requirements on financial products.

New York State Court Enforces Policy’s Noncumulation Clause and Finds That Multiple Lead Paint Claims Arose From the Same Occurrence

Tue, 19 Mar 2013 08:53:50 GMT

A New York appellate court recently held that an insurer’s liability for certain underlying lead paint claims was limited to a single per-occurrence limit, enforcing a policy’s noncumulation clause and finding that the claims arose from the same occurrence. See Nesmith, et al. v. Allstate Ins. Co., No. 12-00182 (4th Dep’t Feb. 1, 2013).

Allstate Insurance Company issued a liability policy to Tony Clyde Wilson, the owner of an apartment building in Rochester, New York. The Allstate policy was effective for a one year period (from November 1991-1992), and had a per-occurrence limit of $500,000. Wilson renewed the policy for two additional one-year periods, each of which also had a $500,000 per-occurrence limit.

In 1993, two children were exposed to lead paint while living in an apartment in Wilson’s building. One of the children suffered injuries as a result, and her mother filed suit against Wilson seeking damages (the “First Tort Action”).

A year later, two children of a subsequent tenant were also exposed to lead while living in the same apartment, and a separate action was brought against Wilson to recover damages for injuries sustained by those children (the “Second Tort Action”). While the lawsuit was pending, the First Tort Action settled for $350,000. Allstate paid the settlement on Wilson’s behalf, and took the position that its liability under the policy for all injuries related to lead exposure in the subject apartment was limited to a single per-occurrence limit of $500,000, pursuant to the policy’s noncumulation clause. Allstate then entered into a stipulation with Wilson providing that the plaintiffs in the Second Tort Action could recover the remaining policy limit ($150,000) if the noncumulation clause was enforced as Allstate contended, and offered to settle the action for that amount. The stipulation further provided that the plaintiffs in the Second Tort Action could recover a full per-occurrence limit of $500,000 if the noncumulation clause was not construed in the manner Allstate asserted.

The plaintiffs in the Second Tort Action commenced a declaratory judgment against Allstate in the Supreme Court, Monroe County, to resolve this issue. After both parties moved for summary judgment, the trial court found in plaintiffs’ favor, ruling that they were entitled to recover up to a $500,000 policy limit for the Second Tort Action. Allstate appealed the trial court’s decision to the Appellate Division, Fourth Department.

The policy’s noncumulation clause provided, as follows:

Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.

Relying upon the Court of Appeals’ decision in Hiraldo v. Allstate Ins. Co., the Appellate Division enforced the noncumulation clause in the manner urged by Allstate and reversed the trial court’s decision, finding that its indemnity obligation for the underlying lead paint lawsuits was limited to a single $500,000 policy limit. Specifically, the Appellate Division held that the children’s injuries, while occurring over several policy periods, resulted from “continuous or repeated exposure to the same general conditions” in the subject apartment, i.e., lead paint. The court noted that there was no evidence that Wilson had removed the lead paint hazard from the apartment during the period in which the different children lived there, or had added additional paint containing lead to the apartment. Moreover, the court concluded that because the children’s injuries arose from exposure to the same condition at a common location, and in consecutive years, those injuries had a spatial and temporal nexus such that they could be deemed as arising from a single occurrence under the policy, limiting Allstate’s liability to one policy limit.

A copy of the Appellate Division’s decision can be found here.

UK: Warranty to Insure Creates an Assumption of Risk and Responsibility

Fri, 15 Mar 2013 08:17:54 GMT

In Bunga S.A. v. Kyla Shipping Company Limited [2012] EWHC 3522 (Comm), the Commercial Court considered whether an arbitrator had made an error of law under Section 69 of the Arbitration Act 1996. The court concluded that a continuing warranty to maintain hull insurance created an assumption of risk and responsibility, defeating the contention that a charterparty had been frustrated.

The appellant chartered a bulk carrier vessel belonging to the respondent. Under the terms of the charterparty, the respondent was to provide the vessel to the appellant for its use, and the respondent warranted that the hull and the machinery of the vessel would be "fully covered" throughout the charter to the sum of USD$16 million.

After the vessel was delivered, it was damaged by a third party and could not be used by the appellant. Although the vessel could have been repaired, the respondent refused to do so as the estimated repair cost (USD$9 million) exceeded the vessel's sound value (USD$5.75 million). As such, the respondent claimed that the charterparty had been frustrated as the charter was radically different from what was originally contemplated by the parties.

If the respondent was successful in claiming frustration, the charterparty would have been discharged and the appellant would not have been able to claim damages for the respondent's failure to provide the vessel for its use.

The arbitrator had held that the charterparty had been frustrated as the cost to repair the vessel exceeded its value and that the insurance warranty given by the respondent was a standard term. The appellant sought permission to appeal the arbitrator's decision and appeal was granted in respect of a point of law.

The court had to determine whether the respondent's warranty to insure the hull prevented it from claiming that the charterparty was frustrated.

In allowing the appeal of the arbitrator's decision, the court found that:

the correct approach to determine frustration was to consider whether the contract provided for the event that occurred or allocated the risk of the event to either party;
the respondent's continuing warranty was not a standard term and created an assumption of the risk and responsibility to repair the damage to the vessel up to the sum of USD$16 million; and
therefore, the charterparty had provided for the risk of damage to the vessel and had allocated this risk to the respondent. As such, the respondent could not claim that the charterparty had been frustrated.

This case is a reminder that parties should be mindful of the implications in providing continuing warranties to insure.

*Chris Finney Commentary: How the FCA Could be More Transparent

Fri, 15 Mar 2013 08:07:13 GMT

On 5 March 2013, the UK's Financial Services Authority (FSA) published a Discussion Paper on behalf of the Financial Conduct Authority (FCA), one of the two regulators that will replace the FSA on 1 April 2013.

DP 13/1** is brief and (footnote 4 aside *) admirably transparent.

This gist is that the FCA could be more transparent than the FSA by, for example:

Telling whistleblowers whether it will act on the information they've provided, and what type of action it will take, instead of saying little or nothing to the whistleblower or anyone else;
Publishing more aggregated information about:
o The authorisation process – for example, how long it usually takes to get an application approved, and why applications are usually rejected or withdrawn;
o The results of its thematic work;
o The redress scheme arrangements made by particular firms – for example, how much redress has been paid and why.
Publishing insurance product complaints data. Here, the paper notes that:
"Transparency may be an effective tool in certain insurance markets…Our initial thinking suggests that this could work particularly well for add-on and non-core products such as warranty, home emergency, identity theft, and mobile phone insurance…[We]would need to agree the level of detail and the methodology required to deliver the most accurate information and to create an appropriate impact. The following examples have been suggested:
•         Claims per customer;
•         Successful claims percentage following an initial contact;
•         Premiums vs. payout ratios; and
•         Reducing/refusing claims due to non-disclosure.
[There] are limitations to what can be interpreted from the release of such data. There may also be valid reasons as to why some lines of insurance have low claims per customer…[What] may be useful for the market to view are outlier products or firms…and …trends over time…"

Like any Discussion Paper, this one sets out some preliminary ideas, and invites readers to get involved in the discussion that follows. Comments are should be submitted by 26 April 2013.

(* Footnote 4 simply reads: "Ibid".)

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

* Chris Finney Commentary: EIOPA's Opinion on a Prolonged Low Interest Rate Environment

Thu, 14 Mar 2013 12:52:53 GMT

On 28 February 2013, EIOPA published an Opinion on the "Supervisory Response to a Prolonged Low Interest Rate Environment" (available here).

The Opinion won't prompt major soul searching at the FSA. It probably won't trouble many UK (re)insurers either: - since the near collapse of the Equitable Life Assurance Society in 2001/2, the UK regulator and UK (re)insurers have been acutely aware of the risks that crystallise when guaranteed annuity rates and guaranteed investment returns come into the money. They've also recognised how vulnerable a firm can be when it has to rely on investment returns to compensate for poor underwriting and price sensitive markets. Finally, of course, Northern Rock has shown us how important it is for the regulator to challenge outlying business models. The FSA's Tiner Reforms, and many of its later rule changes, have been designed to mitigate these risks.

What might be surprising, however, is EIOPA's implied suggestion that some European supervisory authorities and (re)insurers are still blissfully unaware of the issues.

EIOPA begins by reminding us that:

7 Japanese life insurers failed between 1997 and 2001, after a long period of low interest rates and poor economic growth;
to mitigate the risk of more failures, the Japanese authorities allowed (re)insurers with a high probability of bankruptcy to vary their contractual guarantees down to the extent that that was necessary to allow them to survive;
EIOPA's 2011 Low Yield Scenario Stress Tests suggested that between 5% and 10% of European (re)insurers would breach their MCR, and many others would be at risk, if the Japanese experience was repeated here.

So what's EIOPA proposing? The Opinion recommends that:

European supervisory authorities pro-actively assess their firms to determine the nature and extent of the risks they face as a result of a prolonged low interest rate environment,...before reporting the aggregate results to EIOPA;
EIOPA co-ordinates stress tests to estimate when and where the biggest problems are likely to arise;
European supervisory authorities should intensify their monitoring and supervision of the (re)insurers with the greatest exposure - challenging them to take management actions to mitigate their risks; and
The authorities should consider "taking measures [including] conditionality and exit features" (whatever they are).

Although UK (re)insurers and regulators probably can't afford to be too complacent about this, we can at least be grateful that our road will be shorter and less rocky than the roads EIOPA clearly thinks others will have to travel. We can also allow ourselves a wry smile at the immediate trigger for the publication of EIOPA's Opinion: "...insurers [must] not store up risks that may crystallize suddenly with the implementation of Solvency II" ("sudden" and "Solvency II"?).

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

New Search Tool Available for Checking the Names of Specially Designated Nationals and Blocked Persons Subject to U.S. Sanctions

Thu, 14 Mar 2013 10:23:35 GMT

The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury recently launched a new version of SDN Search, the search tool for searching its Specially Designated Nationals (“SDN”) and blocked persons list. According to OFAC, the new version of SDN Search provides users with much more leeway when searching for names. For example, SDN Search no longer returns only exact matches. SDN Search now makes use of character, string, and phonetic matching algorithms to provide the user with a broader set of results. This gives SDN Search the ability to account for differences in spelling and transliteration.

SDN Search is available on OFAC’s website.

The Supreme Court of Washington Holds That an Insurer Cannot Recoup Defense Costs After Defending Under a Reservation of Rights, Notwithstanding a Determination That There is No Coverage

Tue, 12 Mar 2013 10:12:19 GMT

On March 7, 2013, Washington State’s highest court dealt a blow to liability insurers seeking to recover defense costs for uncovered claims. The court, in a 5-4 decision available here, held that where an insurer elects to defend its insured under a reservation of rights, it cannot force the insured to remit those defense costs if a court later determines that the insurer had no duty to defend.

The case, National Surety Corporation v. Immunex Corporation, stemmed from governmental investigations and lawsuits into Immunex’s manipulation of the price of its drugs. Immunex was alleged to have reported inflated wholesale drug prices, which, in turn, allowed the providers of those drugs – doctors, hospitals, and pharmacies – to receive Medicare reimbursements in amounts greater than what they actually paid.

Immunex tendered defense of the lawsuits to National Surety in October 2006, claiming that the suits were covered “under the umbrella insurance ‘Coverage B,’ which applied to cover ‘injury…arising out of…[d]iscrimination.” In a March 2008 letter, National Surety agreed to defend Immunex under a reservation of rights and pay defense costs as of October 2006. National Surety also indicated in the letter that it would pursue a declaratory judgment action to determine whether or not there was indeed a duty to defend. National Surety’s letter further stated that it “reserves the right to recoup the amounts paid in defense if it is determined by a court that there is no coverage or duty to defend.”

National Surety then proceeded with a declaratory judgment action. In April 2009, the trial court held that there was no coverage because the underlying complaints did not arise out of “discrimination,” but that National Surety nonetheless bore responsibility for defense costs incurred until the April 2009 ruling. Both the Court of Appeals and the Washington Supreme Court affirmed.

Writing for the majority, Justice Stephens held as follows:

It is the insurer that decides whether to defend (with or without a reservation of rights) before any judicial determination of coverage. Providing a defense benefits the insurer by giving it the ability to monitor the defense and better limit its exposure. When an insurer defends under a reservation of rights, it insulates itself from potential claims of breach and bad faith, which can lead to significant damages, including coverage by estoppel. In turn, the insured receives the benefit of a defense until a court declares none is owed. Conversely, when an insurer declines to defend altogether, it saves money on legal fees but assumes the risk it may have breached its duty to defend or committed bad faith.

We reject National Surety’s view that an insurer can have the best of both options: protection from claims of bad faith or breach without any responsibility for the costs of defense if a court later determines there is no duty to defend. This “all reward, no risk” proposition renders the defense portion of a reservation of rights defense illusory. The insured receives no greater benefit than if its insurer had refused to defend outright.

[…]

We hold that insurers may not seek to recoup defense costs incurred under a reservation of rights defense while the insurer’s duty to defend is uncertain. Accordingly, National Surety may be held responsible for the reasonable defense costs incurred by its insured until the trial court determined National Surety had no duty to defend.

In reaching this decision, the Court declined to follow states like California (Buss v. Superior Court), Colorado, Connecticut, and Florida, among others, where insurers are entitled to recoup defense costs where a duty to defend never existed.

Writing for the four dissenters, Justice Wiggins observed that the majority was bucking the rule prevailing in most states:

the majority fails to acknowledge that its rule – that insurers may never recoup defense costs paid under a reservation of rights even when it is later determined that the insurer owed no duty to defend – is the minority view. The majority does not mention that a majority of American courts have allowed insurance companies to recoup reservation-of-rights defense costs and overlooks the leading theory, unjust enrichment, that most of these jurisdictions…have invoked to justify insurer recoupment.

The dissent further argues that “Washington courts should make individualized determinations on the recoupment issue by balancing the equities of each case.”

The Immunex decision will surely be welcomed by insureds. Insurers in Washington electing to defend under a reservation of rights while also pursuing a declaratory judgment action will now have no right to recoup any defense costs advanced prior to a declaration of non-coverage. The Immunex decision is thus likely to incentive insurers to proceed as quickly as possible with their declaratory judgment actions, while providing the opposite incentive for insureds.

Healthcare Update: Sequester to Squeeze Medicare Payments; CMS Announces New Participants in Community-Based Care Program

Tue, 12 Mar 2013 07:56:34 GMT

SEQUESTER TO SQUEEZE MEDICARE PAYMENTS
The automatic spending cuts that went into effect on March 1 under the Budget Control Act, also known as the sequester, included 2% cuts to provider payments under the Medicare program. While cuts to other federal agencies were more substantial – an average of 8% – the new Medicare cuts would nonetheless amount to $11 billion over one year, according to the White House, if the sequester lasts that long. The Centers for Medicare & Medicaid Services (CMS) has announced that the payment reductions will be effective for services provided to Medicare beneficiaries on or after April 1.

The new cuts are in addition to recent payment reductions under the Patient Protection and Affordable Care Act, which particularly affected hospitals. Although CMS has not announced details of how it will implement the cuts, the 2% reductions are expected to apply roughly equally to Medicare payments to hospitals, physicians and other healthcare providers. As most know, in order to end the sequester, Congress must agree on replacement cuts.

Although payments to providers will be reduced by 2%, Medicare beneficiaries will not receive the benefit of comparable reductions of their deductibles and co-insurance payments.

In addition to the provider payment reductions, CMS's own administrative and staffing costs will be subject to the larger 8% cuts. If the sequester persists, it may affect the ability of CMS and the Department of Health and Human Services (HHS) to execute their obligations under the Affordable Care Act, including with regard to the establishment of state health insurance “marketplaces,” or exchanges; 26 states have elected to have the federal government operate exchanges for them, and seven other states opted for a partnership model with HHS for their exchanges. The sequester cuts will also affect previously approved federal grants to states to set up their exchanges. Open enrollment on state exchanges is scheduled to begin on October 1 of this year.

CMS ANNOUNCES NEW PARTICIPANTS IN COMMUNITY-BASED CARE PROGRAM
On March 7, CMS announced 20 additional participants in the Affordable Care Act’s Community-based Care Transitions Program (CCTP), an initiative with the stated goals of improving transitions of beneficiaries from hospitals to other care settings, improving quality of care, reducing hospital readmissions, and documenting savings to the Medicare program. CMS maintains a website with information on the CCTP and the 102 organizations chosen to participate in the initiative thus far, and a map showing their locations.

The CCTP was launched in 2011 and will run for five years. Participants are awarded two-year agreements that may be extended annually through the duration of the program based on performance. The CCTP is part of the Partnership for Patients, a nationwide public-private partnership that aims to reduce preventable hospital-acquired conditions by 40% and hospital readmissions by 20%. Participants in the CCTP include area hospitals, nursing homes, social service providers, home health agencies, pharmacies, primary care practices, and other healthcare providers serving patients in each community. Up to $500 million in total funding is available for the program over its five-year duration. Additional information on the CCTP is available in a CMS fact sheet.

NEXT STEPS
Edwards Wildman’s Healthcare Practice Group will continue to monitor healthcare news from Capitol Hill, CMS, HHS, and other federal and state agencies and courts, and will bring you timely updates as new developments occur.

Florida Senate Committee Approves Bill with Sweeping Changes to Property Insurance Laws

Mon, 11 Mar 2013 14:52:41 GMT

On March 7, 2013, the Florida Senate Banking and Insurance Committee approved SPB 7018 (the “Bill”) by a vote of 11-1. The Bill, if enacted, would make several changes to Florida’s property insurance laws. In particular, the Bill proposes the following changes, among others:

The establishment of the Florida Catastrophe Risk Capital Access Facility (“FCRCAS”) within the State Board of Administration, intended to increase the access of small domestic property insurers to additional capital for catastrophe risk coverage and alternative risk-transfer mechanisms. After an initial apportionment for its startup, FCRCAS would be funded entirely by participating insurers on a pro rata basis and perform four functions:
     o Aggregate the demand for risk finance from global capital markets among
       smaller volume domestic property insurance companies;
     o Design and execute risk-transfer tools such as insurance-linked securities and
       other securitization models for participating insurers, and use special purpose
       vehicles or protected cells, onshore or offshore, as appropriate, to increase
       access to risk capital;
     o Identify and coordinate appropriate risk-transfer products and opportunities,
       with an initial focus on the portion of the reinsurance market that provides
        layers of coverage below, alongside, and above the Cat Fund; and
     o Establish and maintain contact with global risk capital market participants,
        institutions, and investors for the purpose of satisfying and coordinating insurer
       demand for additional risk capital.
Bad faith claims against Citizens Property Insurance Corporation (“Citizens”), Florida’s state-run insurer of last resort, would be allowed though subject to Florida’s statutory sovereign immunity protection applicable to state agencies.
Insurers would be able to offer consent to excess rates to any number of policyholders in competitive counties, and up to 10% of their commercial policies and 5% of their personal policies in counties that the Florida Office of Insurance Regulation determines to lack a reasonable degree of competition.
Citizens would be prohibited from providing property coverage to residential dwellings with a replacement cost of $600,000 or more (down from $2 million), along with other new ineligibility standards.
Citizens would be permitted to enter into certain risk-sharing agreements with authorized insurers as part of agreements for insurers to remove policies from Citizens. Under such agreements, Citizens would act as a reinsurer on the removed exposure, to incentivize removal while reducing Citizens’ overall exposure.
Agents submitting risks to Citizens would be subject to more stringent documentation requirements.
Citizens would be subject to new rating standards that require its rates to be actuarially sound and not competitive with rates charged in the admitted voluntary market.

The goal of the Bill is to increase the availability of reinsurance in Florida and to reduce the need for consumers to seek policies from Citizens. If enacted, most of the changes would take effect on July 1, 2013. For a copy of the Bill, click here.

UK: Commercial Court Interprets Bermuda Form Policy Subject to English Law

Thu, 07 Mar 2013 08:17:25 GMT

In Astrazeneca Insurance Company v. XL Insurance (Bermuda) Ltd and ACE Bermuda Insurance Ltd, the English Commercial Court for the first time had to decide issues of construction concerning the Bermuda Form, applying English law.

The claimant, Astrazeneca's captive insurer, provided insurance to Astrazeneca under a Bermuda Form Policy (XL 004 Form), under which the claimant agreed, among other things, to indemnify Astrazeneca for certain liabilities arising out of its supply of pharmaceutical products. That policy was reinsured with the defendants in respect of those liabilities. Astrazeneca faced liabilities in relation to its Seroquel drug and after the claimant indemnified it for those liabilities, the claimant sought recovery from the defendants.

The Bermuda Form is ordinarily subject to a modified form of New York law and to English arbitration. However, the parties to the insurance agreed, by endorsement to the Policy, that the Policy be subject to a modified form of English law. Later, the parties to the reinsurance agreed that the requirement to arbitrate any disputes arising out of the reinsurance be waived and conferred jurisdiction on the Commercial Court in England. It was common ground that although the parties to the Commercial Court proceedings were insurers and reinsurers the issue before the court was the insurance policy, and not the reinsurance policy.

The court had to decide two issues: (1) whether, as the claimant contended, it was only necessary to demonstrate that its insured, Astrazeneca, settled an arguable liability or, as the defendants contended, it was necessary to demonstrate that the insured was under an actual liability; (2) whether Astrazeneca's entitlement to indemnity for defence costs depended on whether it was liable for the claims to which the costs related.

The court found that:

The insured, Astrazeneca, was only entitled to an indemnity under the insurance Policy where it demonstrated that it was under an actual legal liability. Where it had entered into a settlement, this meant that the insured had to show, on a balance of probabilities, that it would have been liable for the claim in question under the relevant governing law; and
The insured was only entitled to an indemnity for defence costs under the insurance policy where it established that it was or would have been actually liable for the claim in question, as required under 1. above.

This case is a reminder of the difficulties insureds face under English law in relation to proving liability for claims which have been settled. It may have been that a different result would have been reached if the insurance policy was, as it normally is, subject to New York law. If so, this case is a useful illustration of the effect of subjecting policies on the same terms to different governing laws.

TRIA – Possible Extension Involves Many Unresolved Issues

Thu, 07 Mar 2013 08:02:11 GMT

As we recently blogged, Rep. Michael Grimm (R-NY) and Rep. Carolyn Maloney (D-NY), both of whom sit on the House Financial Services Committee, have introduced a bill to extend the federal Terrorism Risk Insurance Program (the “Program”) through 2019. The Program, as enacted by the Terrorism Risk Insurance Act in 2002, amended by the Terrorism Risk Insurance Revision and Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) (collectively, including both amendments, “TRIA”), is currently set to expire on December 31, 2014. The Program requires that private insurers offer terrorism coverage to commercial customers and provides a federal backstop in the event of a large certified terrorist event that exceeds $100 million in aggregate insured losses.

While it remains to be seen what happens over the coming months regarding a possible extension, there are many issues that need to be addressed before any extension is finalized, including the following:

Is an extension necessary? Is there enough capacity in the insurance marketplace that the federal backstop is no longer necessary? Has the rise of catastrophe bonds and collateralized-reinsurance markets provided sufficient capacity to the marketplace?
Will an extension be passed before December 31, 2013? This is important because one-year policies that are issued in 2014 will be in effect on the current expiration date of December 31, 2014. (By way of historical background, President Bush signed into law TRIPRA on December 26, 2007, five days before it was due to expire.)
For how many years should the Program be extended?
Should the threshold for triggering aid under the program be changed? Before TRIPRA was passed, several proposals called for lowering the threshold from $100 million to $50 million.
Should the Program require insurers to offer coverage for nuclear, biological, chemical and radiological attacks?
Should the Program include group life coverage?
Should the Program explicitly include cyber-terrorism? Although a cyber-terrorist attack could be covered by the Program if the Secretary of Treasury, Secretary of State and U.S. Attorney General all declare it an “act of terrorism,” there is no explicit language in the current statute that confirms that an act of cyber-terrorism would trigger the federal backstop.

We will continue to monitor developments related to the possible extension of TRIA. If you have any questions, please contact Jack Dearie or Brian Green.

SIFI Designations Expected in the Next Few Months

Tue, 05 Mar 2013 13:09:23 GMT

In comments made yesterday to the Institute of International Bankers conference in Washington, U.S. Treasury undersecretary for domestic finance, Mary J. Miller said she expected FSOC to vote on designation of some companies as systemically important and therefore subject to Federal Reserve oversight “in the next few months.”

Under Dodd-Frank, Congress charged FSOC with determining which nonbank financial companies and bank holding companies could potentially pose a threat to financial security in the event of collapse. Designation of companies as systemically important would bring them within the Fed’s purview and subject them to more stringent standards.

Miller said the authority to subject companies to Federal Reserve oversight “is not a power the council wields cavalierly.” She added that FSOC has been engaged in a thorough review, and that “careful assessments of these firms take time.”

American International Group Inc. and General Electric Co.’s financial unit are among the companies currently under review. According to Miller, FSOC is “nearing the end of that process.”

Miller’s comments come on the heels of criticism last week by Sheila Bair, former FDIC chairman, that regulators lacked the spine to make to the SIFI designations.

Rhode Island Touts New Health Benefits Exchange

Tue, 05 Mar 2013 10:10:32 GMT

In 2011 Rhode Island Governor Lincoln Chafee signed an executive order to create the state’s Health Benefits Exchange, which will offer a selection of state-approved health insurance plans to enable individuals and small businesses to compare health plan options. The Exchange was created as a result of the Patient Protection and Affordable Care Act (ACA), which requires states to develop exchanges, participate in multi-state exchanges, or allow the federal government to step in and create an exchange for the state. Exchanges are intended to facilitate the expansion of health insurance coverage contemplated by the ACA. Rhode Island has opted to build its own Exchange rather than use the federal mechanism available under the ACA. This past December the federal government granted Rhode Island conditional approval for its Exchange.

On February 28, Christine Ferguson, the director of Rhode Island’s Exchange, attended a meeting of small business and non-profit employers in the state to announce that the Exchange should contain “innovative” plan options, including those that may lower costs. Ferguson also recently testified before the Rhode Island Senate Finance Committee that the Exchange would provide “a robust marketplace for all Rhode Islanders to identify health insurance coverage options and, for those eligible, to purchase coverage.” State Insurance Commissioner Christopher Koller called the Exchange a “game changer” for small businesses.

Enrollment for all state exchanges is scheduled to begin in October 2013.

Florida Appellate Court Holds that Insurer Must Provide Separate Counsel to Co-Defendant Insureds

Mon, 04 Mar 2013 14:52:59 GMT

On February 20, 2013, the Florida Third District Court of Appeal held that an insurer was required to provide separate counsel to two co-defendants/insureds due to a conflict of interest between them.

The underlying action involved a child injured while at a swimming pool located on one of the co-defendant’s property, but operated by the other co-defendant. The plaintiff’s claims asserted that both the owner and operator were directly negligent and that the owner was vicariously negligent for lack of supervision over the operator. In a license agreement between the owner and operator for the swimming pool, the operator agreed to indemnify the owner for any claims stemming from the use of the swimming pool. Both the owner and operator were named as insureds in the operator’s commercial general liability policy, which also stated that the rights and duties applicable to the operator “applied as if each named insured were the only named insured and applied separately to each insured against whom a claim was made.”

On the same day the operator answered the complaint and asserted that the plaintiff’s claimed injuries were not caused by the operator, but by some other person or entity, the owner demanded that the insurer provide it with separate counsel based on a conflict of interest between the owner and operator. The insurer declined the request, stating there was no conflict between the parties because the operator was contractually bound to indemnify the owner for any liability arising out of the use of the swimming pool. Still, the owner obtained separate counsel and asserted a similar defense that the plaintiff’s injuries were caused by some other person or entity and not by the owner. After the case eventually settled without going to trial, the owner sued the insurer for indemnification for the owner’s attorney’s fees and costs incurred to defend the underlying action through separate counsel.

Although the trial court granted summary judgment in favor of the insurer, the Florida Third District Court of Appeal reversed, reasoning that a conflict of interest existed between the owner and the operator. The pleadings demonstrated this conflict, that both the owner and operator were directly negligent and that both defendants claimed that any liability on its part was relieved due to the negligence of some other person or entity, including the other defendant. The Court explained that “[t]here exists no factual dispute, as evidenced by the record, that, in defense of both co-defendants, [the insurer’s] counsel would have had to argue conflicting legal positions, that each of its clients was not at fault, and the other was, even to the extent of claiming indemnification and contribution for the other’s fault.” As a result of this conflict, the owner was entitled to separate counsel under the policy. Thus, the insurer had to indemnify the owner for its attorney’s fees and costs incurred to defend the underlying action.

Justice Shepherd wrote a dissenting opinion, explaining that no actual conflict existed between the owner and the operator, only a “paper conflict.” According to the dissent, defense counsel for both parties could, and did preserve the issue of appointment of fault and contribution through affirmative defenses, but that issue would not have actually gone before a jury. Neither defendant filed claims against the other and neither sought to prove liability of the other at any time during the course of the underlying action. As is usually the case in matters involving multiple defendants, the issues of contribution and indemnity are deferred until the liability case is resolved. Because the owner failed to show “how the disparity in potential liability between it and [the operator] affected in any way the joint defense” that the insurer provided, the dissent would have upheld the trial court’s decision to grant summary judgment in favor of the insurer.

A complete copy of the Court’s opinion is available here.

Regulator Rivalry Brewing Between SEC and FSOC

Fri, 01 Mar 2013 12:53:46 GMT

A Washington turf battle between the SEC and the FSOC spilled into public view in comments by SEC Commissioner, Dan Gallagher. The comments, made at the Practicing Law Institute’s “SEC Speaks” forum last Friday, criticized recent action taken by FSOC, created by the 2010 Dodd-Frank-Act.

Central to the dispute is money market fund reform – stemming from the 2008 Reserve Fund meltdown. In November, after the SEC abandoned a reform proposal, the FSOC put forward a near-identical reform measure to overhaul the $2.6 trillion money-fund industry. Gallagher cited what he and others perceive to be a threat to the SEC’s ability to function independently and its status as the primary federal regulator of investment products.

Former SEC Chairman, Mary Schapiro, who led the SEC’s aborted reform proposal, said that the FSOC’s role is critical to financial regulation. Citing the FSOC’s action in an interview earlier this week, she noted, “otherwise, it would have died at the SEC.”

Among its responsibilities, Congress charged FSOC with the authority to recommend to primary financial regulators, including the SEC, application of “new or heightened standards and safeguards for financial activities practices.” “It is immensely troubling then to think of the FSOC as an institutionalized mechanism for one set of regulators to pressure another in the latter agency’s field of expertise – yet that is exactly what is happening, “ said Gallagher.

Massachusetts Appeals Court Finds Duty to Defend Wrongful Conviction Suit

Fri, 01 Mar 2013 09:15:10 GMT

The Massachusetts Appeals Court recently held, in an unpublished decision, that an insurer breached its duty to defend a town against a suit filed by the sister of a man wrongly convicted for murder, in Waters v. Western World Insurance Company, No. 11-P-2124. A copy of the decision from the official Massachusetts reports website is available here.

Kenneth Waters was convicted of murder in 1983 and served 18 years in prison, until he was exonerated and released in 2001. (His story was the basis for the 2010 Hollywood movie, Conviction.) He died the following year in an accident, but his estate sued the town of Ayer for “unconstitutional and tortious conduct” resulting in Waters’ wrongful conviction and incarceration. The town was insured by Western World, which denied coverage. The trial court upheld Western World’s denial of coverage and the town appealed.

The appellate court first found that the complaint against the town alleged “negligent acts, errors, or omissions” under the policy’s insuring agreement. The court noted that the complaint alleged that the town failed to adequately train its employees and failed to undertake proper investigations into the existence of exculpatory evidence. It held that these allegations, among others, “leave open the potential for liability to be predicated on negligence.” The court also found that an exclusion for any “willful violation of a penal statute or ordinance” did not preclude a duty to defend, as the underlying complaint did not mention any penal statute.

But the most interesting and surprising holding in the decision is contained in a footnote. Western World’s policies covered the period of 1985-1991. Thus, Waters was wrongly convicted two years prior to the inception of its coverage. The policies’ coverage, meanwhile, applied “only to acts committed or alleged to have been committed … during the policy period.” The appellate court found that the town’s alleged ongoing failure to conduct any “reinvestigation” into the existence of exculpatory evidence and its alleged “affirmative obligation to come forward every year” during Waters’ incarceration triggered coverage. The court distinguished another Massachusetts coverage case involving wrongful prosecution – Billings v. Commerce Ins. Co., 458 Mass. 194, 196-97 (2010) – on the basis that Billings involved a policy requiring that the injury occur during the policy period.

In 2011, we wrote about a case involving very similar facts, but which reached a contrary result. That case (Gulf Underwriters Ins. Co. v. City of Council Bluffs, No. 4:07-cv-00135 (etc.) (S.D. Iowa Dec. 20, 2010)) also involved a policy issued after a wrongful conviction, and the policy covered “wrongful acts” occurring during the policy period. The court in Gulf Underwriters, however, held that there was no coverage, finding that the city’s ongoing failure to discover the exculpatory evidence and correct the wrongful conviction was not a new “wrongful act” sufficient to trigger coverage in a new policy year. The court reasoned that there was no “new, separate wrongful act” during the policy period. It reached the same conclusion regarding other policies that required “personal injury” during the policy period, but based on the same logic, and citing the Billings case. That logic is that the injury manifested itself and was complete when the claimant was wrongfully prosecuted; the ongoing incarceration or failure to correct that injury does not trigger subsequent coverage.

Indeed, the Gulf Underwriters opinion seems more persuasive than Waters. It is difficult to understand how the Waters court distinguished Billings. The fact that the trigger in Billings was “injury” rather than “act” would not seem to be a meaningful difference. The “injury” in Billings also continued through the period of the policies in question, as the claimant remained incarcerated. But the court held that since the injury was already complete and manifest prior to that time, its continued existence did not trigger coverage. The same is true with regard to the “acts” committed by the town of Ayer. According to the complaint, Ayer officials wrongfully withheld exculpatory evidence and convicted Waters in 1983. At that time, the alleged evil acts were complete; they merely continued to stand uncorrected in 1985-1991.

The lesson for insurers in Massachusetts is that before denying a defense, a comprehensive analysis of the allegations of the complaint must be completed, especially when policies contain broad coverage for “acts, errors, or omissions.”

Brazil Passes Risk-Based Capital Requirements

Wed, 27 Feb 2013 08:39:56 GMT

Brazil has passed a series of resolutions aimed at strengthening insurers' capital requirements. Brazil's insurance supervisor SUSEP said it drew up the resolutions which were approved by the National Council of Private Insurance (CNSP). The resolutions set out a risk-based framework in line with international best practice for supervision. They establish criteria for determining capital risk and operational risk and will impact insurers, reinsurers, securities and pension funds. There is also a change to the calculation of minimum capital requirements, which will now be the highest of base capital and risk capital. The full text of the resolutions, including implementation dates, was not available at the time of writing.

NAIC Defers Action on Stop Loss Insurance Attachment Points; Some States Begin Increases

Wed, 27 Feb 2013 08:35:08 GMT

During the NAIC 2012 Fall National Meeting, a proposal to amend the NAIC’s Stop Loss Insurance Model Act to increase the minimum individual attachment point – the equivalent of a “deductible” – for stop loss insurance from $20,000 to $60,000, as well as changes to aggregate attachment points, was defeated by a 10-8 vote. Proponents of the measure were concerned that employers seeking to reduce health insurance cost are utilizing stop loss insurance as a form of standard high-deductible health insurance due to low attachment points without the stop loss insurance being regulated as health insurance. By contrast, some critics of the proposal, such as the Self-Insurance Institute of America, believe higher attachment points will discourage the use of self-insurance programs to address increasing health care insurance costs. As a result, employers may be more likely to discontinue health care insurance plans despite penalties under the Patient Protection and Affordable Care Act of 2010 (the “Affordable Care Act”) forcing employees to turn to the insurance exchanges created under the Affordable Care Act for health care insurance for themselves and their dependents.

The NAIC’s failure to institute higher attachment points has not stopped states from considering their own measures. On February 1, 2013, Bill SB-161 was introduced in the California Senate that would set the individual attachment point as it relates to stop loss insurance at $95,000; on February 14, 2013, Rhode Island Bill H 5459 was introduced proposing to raise the individual attachment point to $60,000; and an amendment to Minnesota’s stop loss insurance laws was recently introduced to raise the individual attachment point from $20,000 to $60,000. All three states have also taken steps to modify minimum aggregate attachment points. Whether the actions by these three states over the last two months are indicative of a movement to higher individual attachment points for stop loss insurance is unclear. However, employers considering self-insurance programs and third party administrators, producers and stop loss insurers should be aware of the distinct possibility of higher attachment points in some states and should closely monitor developments in states where they utilize or offer stop loss insurance in connection with self-insured plans.

Healthcare Update: HHS Releases Market Reform and Essential Benefits Rules; Federal Government to Operate Exchanges in 26 States; CMS Issues Proposed MLR Rule for Medicare Advantage and Part D; Supreme Court Blocks Georgia Hospital Merger

Tue, 26 Feb 2013 08:29:29 GMT

HHS RELEASES "MARKET REFORM" RULE AND REPORT
On February 22, the Department of Health and Human Services (HHS) released a final rule to implement several key provisions of the Patient Protection and Affordable Care Act (PPACA), including a prohibition against denying health insurance or charging "discriminatory" premiums to enrollees who have pre-existing medical conditions. An accompanying press release from HHS proclaimed, "Health care law protects consumers against worst insurance practices - Key health insurance protections for all Americans moves forward." The "Health Insurance Market Rules; Rate Review" rule will be published in the Federal Register on February 27.

In addition to the "guaranteed availability" provision for new insurance applications, the final rule provides for guaranteed renewability, prohibiting a health insurer from refusing to renew an insured’s coverage after an illness. Insurers also may not charge insureds different premiums except based on age, tobacco use, family size and geography, and cannot create separate risk pools to charge higher premiums to higher-cost insureds. Finally, “catastrophic plans” will be available to people for whom coverage would otherwise be unaffordable. HHS issued a fact sheet containing a summary of the rule’s protections.

Also on February 22, HHS released a report entitled "Health Insurance Premium Increases in the Individual Market Since the Passage of the Affordable Care Act," which concluded that the rate of increases in premiums in the individual health insurance market has slowed since PPACA was enacted in 2010.

Click here for a complete copy of the Update.

Lessons Learned from Sandy: National Hurricane Center Report Highlights Issue of Whether “Hurricane” Warnings and Definitions Should Be Modified

Mon, 25 Feb 2013 08:02:22 GMT

In a report issued last week analyzing Superstorm Sandy, the National Hurricane Center (NHC) reviewed why Sandy was downgraded from hurricane status to a post-tropical cyclone before it made landfall in New York, New Jersey and elsewhere in the northeast, and made recommendations for changes in definitions and procedures going forward. As to Sandy, the NHS report noted that sustained hurricane force winds and storm surge were felt on shore while Sandy was still a hurricane offshore, and that additional sustained hurricane-force winds “almost certainly occurred in New Jersey, although these are believed to have occurred exclusively after Sandy’s extratropical transition.” The report also noted that much of the damage was attributable to storm surge, highlighting the importance of that as a factor in warnings going forward.

The classification of Sandy as a post-tropical cyclone rather than a hurricane when it made landfall in the northeast was significant to property owners and their insurers whose policies included, among other potentially pertinent provisions, a higher “hurricane deductible.” In the immediate aftermath of Sandy and its downgrading to a post-tropical cyclone right before it hit landfall in the northeast, the insurance departments and governors of a number of states declared that hurricane deductibles should not apply to Sandy-related insurance claims, at least under homeowners policies. (See our article in our prior blog). The NHC report, with its reference to hurricane force winds in some of those states, is likely to contribute to an ongoing debate as to the propriety of those directives and their application to certain policies, particularly those referencing hurricane force winds and storm surge as a trigger for the application of hurricane deductibles.

The NHC report further noted that the National Weather Service (NWS) is exploring proposals that would result in changes to the hurricane warning definition so that it would be “broadened to apply to systems after their tropical cyclone stage has ended, thus allowing hurricane or tropical storm watches and warnings to remain in effect for post-tropical cyclones.” The report also proposed the introduction of storm surge warnings, stating that “with the implementation of a storm surge warning, the NWS will warn explicitly for the phenomenon that presents the greatest weather-related threat for a massive loss of life in a single day.” Changes in NWS warnings and definitions, and the recognition of the critical role of storm surge, is also likely to fuel the debate as to whether policy wordings, particularly the definitions triggering the application of higher “hurricane deductibles,” should be modified.

The NHC report also noted that preliminary U.S. damage estimates are near $50 billion, making Sandy the second-costliest cyclone to hit the United States since 1900. The report stated that at least 147 deaths across the Atlantic basin, including the Caribbean, were attributed to the Sandy, with 72 of those fatalities in the mid-Atlantic and northeastern United States, according to the report. At least 650,000 houses were either damaged or destroyed and 8.5 million people were left without power.

House Committee Urges FIO to Release Its Long Over-Due Reports

Fri, 22 Feb 2013 13:07:07 GMT

The Dodd-Frank Wall Street Reform Act charged the Federal Insurance Office (FIO) with submitting several reports to Congress, including an annual report as well as recommendations for modernizing insurance regulations. To date, those reports remain outstanding. In its oversight plan submitted to Congress earlier this month, the House Committee on Financial Services, chaired by Jeb Hensarling (R-TX), urged the FIO to submit “long overdue reports without further delay.” The reports, which were due in January 2012, are expected to provide insight into how the FIO plans to use its authority. A senior Committee aide added that the Chairman may hold hearings to formally question the Administration about the delay.

Although the Obama Administration has remained quiet about the timing of the reports, the Under Secretary for Domestic Finance at the Treasury Department recently broached the issue. While testifying before the Senate Banking Committee on February 14, 2013, the Under Secretary, Mary Miller, said that “FIO will soon release its first annual report on the insurance industry and its report on how to modernize and improve the system of insurance regulation in the United States. FIO is working diligently to release these and several other reports in the coming months.”

For a copy of the oversight plan, click here.

Reflections on the 2013 PLUS D&O Symposium – Day Two

Tue, 19 Feb 2013 08:33:39 GMT

The second day of the 2013 PLUS D&O Symposium featured panel discussions on typical concerns of corporate directors, D&O exposures outside the United States, D&O claims handling, and thoughts about what will drive the industry in 2013. There was also an insightful luncheon keynote address on coping with the volatile economy.

The common theme of the day’s panel discussions was just how broad the set of risks faced by today’s corporations is. Government and civil investigations, whistleblowers, activist investors, say-on-pay, claw-backs, and seemingly inevitable lawsuits that arise out of any kind of merger or acquisition are recurring concerns. As illustrated by SEC investigations prompted by Facebook posts from the CEO of Netflix, a company’s social media strategy has had to become a board-level issue, too. Throughout the day, various panelists commented that the natural inclination of most officers and directors is that their D&O insurance will protect them when a claim arises; but that may not always be the case, depending on what the relevant policy actually says.

Over the course of the day, several panelists touched on the difficulties of applying US-issued D&O policies to proceedings in other jurisdictions. Particularly in light of increased criminal and regulatory exposures abroad, panelists noted, more companies are looking to their D&O policies for a defense and indemnity. The trouble is that the terms of US-based coverage may not translate well into a different legal regime (particularly in civil law countries). For instance, what would often be the subject of mere civil litigation in the US can easily take the form of a criminal action elsewhere.

Particularly in an era of economic volatility, it is clear that D&O insurance remains an important risk mitigation strategy for companies of all types, public and private, domestic and international. There was near universal sentiment that D&O rates are likely to increase as the challenges that the coverage is called upon to address proliferate.

Reflections on the 2013 PLUS D&O Symposium – Day One

Tue, 19 Feb 2013 08:30:08 GMT

The first day of the 2013 PLUS D&O Symposium featured panel discussions on regulatory and securities litigation trends, D&O claims in the context of private companies and non-profits, coverage “wish lists,” and current issues in underwriting for financial institutions. There was also a luncheon keynote address on the general convergence of reinsurance and specialty insurance.

The day’s panels examined a number of claim trends in the D&O world. Among the most significant were what some panelists identified as a newly-energized SEC, which seems to have adopted a stronger focus on penalties and sanctions, and the trend toward judicial inquiries into private settlements. Several panelists said that some courts’ recent refusals to approve settlements that do not include admissions of fault has pushed more cases closer to trial, while others maintained that judicial inquiry into the terms of a proposed settlement could be what is needed to give better effect to the securities laws and tamp down on the multi-forum litigation (typically, Delaware, the Southern District of New York, and at least one or two other forums) that seems to be launched against a corporation for even the most seemingly innocuous proxy disclosures and proposed mergers.

Private corporations and non-profits have presented their share of challenges this year. Private corporations, panelists noted, tend to face emotionally-charged claims that arise out of family bankruptcies, freeze-out mergers, and theft of information from prior employment, among many others. And while most private corporations have D&O insurance for the entity coverage, it can come as a rude shock to those corporations that defense costs deplete the indemnity limits. For non-profits, the largest challenges that the panels identified were regulatory compliance (e.g., audits), donor claims, and discrimination claims.

Financial institutions, too, have had a challenging year. Significant exposures include anticipated lawsuits about the LIBOR scandal and the potential of a Eurozone collapse, to say nothing of the increasingly challenging US and European regulatory environments.

There was broad consensus that every risk is insurable, for a price; and that that price is likely to increase in the short and medium term. Among the policy provisions that might be bargained over are bump-up exclusions, investigations coverage (both formal and informal), subrogation and recoupment clauses, and traditional policies as opposed to ones that offer only Side A coverage.

UK: Supreme Court Finds That Extended Warranty Contracts are Contracts of Insurance

Tue, 19 Feb 2013 08:23:10 GMT

In Digital Satellite Warranty Cover Limited v Financial Services Authority [2013] UKSC 7, the Supreme Court unanimously held that extended warranty contracts covering satellite television equipment were contracts of insurance. It was therefore found that Digital Satellite Warranty Cover Limited (the Appellant) was carrying out regulated activities that required FSA authorisation.

The appeal arose out of an application by the Financial Services Authority (the Respondent) for an order to wind up the Appellant under s.367(1)(c) of the Financial Services and Markets Act 2000 (FSMA), on the ground that it "is carrying on or has carried on a regulated activity in contravention of the general prohibition." The general prohibition is that at s.19 of FSMA, which provides that no person may carry on a regulated activity unless he is either an authorised or exempt person.

The Appellant sold and performed extended warranty contracts under which it contracted to repair or replace satellite television dishes, satellite boxes and associated equipment. It was common ground between the parties that the contracts in question were contracts of insurance and that the Appellant was not authorised under FSMA to carry on any kind of insurance business. However, the Appellant submitted that the extended warranty contracts were not of a type which required authorisation under FSMA because the classes of regulated activities did not extend to contracts which only provided benefits in kind, i.e. repair services and replacement goods.

The Supreme Court rejected the Appellant's argument on the ground that there is no material distinction between a contract providing only for repair or replacement and a contract providing an indemnity for costs incurred by the insured, as the risk covered is essentially the same and both can be properly categorised as a contract protecting the insured from financial loss. As such, the appeal was dismissed.

This case confirms that an extended warranty contract will be construed as a contract of insurance by the English courts. The judgment also highlights the willingness of the FSA to pursue those businesses it believes to be flouting the regulations and ought to act as a deterrent to any unauthorised firms that operate within the regulated insurance space.

UK: The High Court Rules on Interpretation of Single Premium With-Profits Policy

Tue, 19 Feb 2013 08:13:54 GMT

In Phoenix Life Assurance Limited v The Financial Services Authority [2013] EWHC 60 (Comm), the High Court upheld the interpretation of the claimant, Phoenix Life Assurance Limited (Phoenix), in respect of a single premium with-profits policy (the Policy).

Phoenix had sought a declaration on the proper interpretation of the Policy, which was sold to policyholders between 1986 and 1992. The Policy guaranteed certain minimum benefits that would be paid to the policyholders on an annual basis.

The Financial Services Authority (the FSA) agreed to act as the defendant in the matter, due to the need for an urgent resolution and the lack of a representative policyholder as party to the proceedings.

The Court was called upon to examine the Policy, in particular, a provision which dealt with payment of the minimum benefits. The provision in dispute stated the minimum benefits to be the sum of £34,634 (the Sum), and guaranteed "this amount" to be sufficient to cover the annual payments to the Policyholders. The FSA argued that the phrase "this amount" referred to the Sum alone and did not include any bonuses that may be paid in addition to the Sum. Phoenix, however, contended that the Sum was to be inclusive of any additional bonuses. Phoenix highlighted further uses of the same term within the Policy, and submitted that an interpretation which provided a consistent use and application was to be preferred.

The Court found in favour of Phoenix and in doing so held that the interpretation was clear from the wording of the Policy itself, provided the most consistent outcome when reviewing the Policy as a whole, and was further reinforced by the statutory background.

Hong Kong: Challenging Years Ahead for the Insurance Industry

Tue, 19 Feb 2013 08:06:09 GMT

Hong Kong has one of the most developed and competitive insurance markets in Asia. Commentators observe that Hong Kong is over-serviced by insurance companies and market shares are unusually diffuse: in 2011, for example, the top insurer had a market share of only 8.3%, while the top five had a market share of just 30.9%.

As at 31 December 2012, there were 155 insurers authorised in Hong Kong. Of these insurers, approximately 60% were general insurers, 28% were life insurers and 12% were composite insurers. According to the figures released by the Hong Kong Insurance Authority, total gross premiums for insurance business in 2011 increased 14% year-on-year to US$30.4 billion. For general business, accident and health (27%), property damage (23%), general liability (23%) and motor vehicle (10%) business were the major lines of business in terms of gross premiums for 2011. For long term business, individual life business (94%) was the most important line in terms of office premiums for 2011, followed by retirement scheme management (4%).

Besides responding to a prolonged uncertain economic environment, over the next two years, the Hong Kong insurance industry will also need to cope with various regulatory changes that could increase the operating costs of insurance companies, including the makeover of the Insurance Authority into an independent supervisory body; a review of the Insurance Companies Ordinance (Cap.41); the establishment of a policyholder's protection fund; the introduction of a risk-based capital system; and the introduction of a standardized and government-subsidized private medical insurance product known as the Health Protection Scheme. As a result of the increased cost burden, smaller domestic companies might be driven out of the market while multinational branch operations may no longer be practical.

Nonetheless, being a leading insurance centre in Asia, Hong Kong continues to attract new foreign insurers, particularly those writing specialty lines, for example, Starr International, Allied World Assurance Company, AXA Corporate Solutions and Allianz Global Corporate & Specialty. Singapore-based personal lines insurer Direct Asia has also recently set up a direct writing operation in Hong Kong.

Please click here for our previous blog on this subject.

Source

TRIA Extension Bill Proposed in Congress

Fri, 15 Feb 2013 13:11:05 GMT

Legislation was recently introduced in the House of Representatives to extend the federal Terrorism Risk Insurance Program through 2019. The lead sponsors of the bill, the TRIA Reauthorization Act of 2013 (H.R. 508), are Rep. Michael Grimm (R-NY) and Carolyn Maloney (D-NY), both of whom sit on the House Financial Services Committee.

The Terrorism Risk Insurance Act was initially enacted in 2002, and amended by the Terrorism Risk Insurance Revision and Extension Act of 2005 (“TRIREA”), and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). It provides a federal backstop for terrorism-related insurance claims (collectively, including amendments, “TRIA”). TRIA is now set to expire on December 31, 2014.

By way of background, property and casualty insurers under TRIA must make available to their insureds terrorism coverage, which the insureds have the option of purchasing or declining. TRIA covers most commercial property and casualty lines, including excess insurance, workers’ compensation insurance, and D&O liability insurance, but does not include several types of insurance such as professional liability insurance, flood insurance, or reinsurance.
Even though the program is not set to expire this year, many in the industry are pushing for an extension before the end of this year so that there will be clarity before policies that will be in effect on December 31, 2014 are issued.

We anticipate that there will be significant debate regarding whether a federal backstop is necessary for the market to cover this risk.

Although the recently proposed bill is merely an extension of the program, it will be interesting to see if alternate extension proposals emerge. Although a cyber-terrorist attack would arguably qualify for the federal backstop if the Secretary of the Treasury Department certified the attack as an act of “terrorism” (assuming other statutory requirements are met), alternate proposals may clarify the issue by explicitly including “cyber attacks” as acts of terrorism that would trigger the federal backstop.

We will continue to monitor developments related to TRIA and the possible extension of the Terrorism Risk Insurance Program.

If you have any questions, please email us at insurereinsure@edwardswildman.com. Click here to read a copy of The TRIA Reauthorization Act of 2013.

DOJ Official Indicates That Companies May Avoid FCPA Prosecutions if They Implement Compliance Programs

Fri, 15 Feb 2013 08:44:09 GMT

According to industry reports, an official at the US Department of Justice (“DOJ”) has indicated that it looks favorably upon companies that implement programs to ensure compliance with the Foreign Corrupt Practices Act (“FCPA”), an act designed to prevent corporate corruption and bribery with respect to business outside the US. The official cited guidance issued by the DOJ in November 2012 to show that companies with strong FCPA compliance programs, may, in some cases, avoid prosecution for FCPA violations that inadvertently arose despite existence of the compliance program, as such programs demonstrate a corporate commitment to upholding the principles of the FCPA. This underscores the importance for all US companies and foreign companies and their subsidiaries conducting business in or from the US, including insurance and reinsurance companies, to implement strong FCPA compliance programs.

Edwards Wildman Palmer LLP is well versed in issues surrounding the FCPA and has routinely been called upon to provide FCPA advice and design compliance programs. In connection with our FCPA practice, we would like to welcome our new partner, John Fusco, to our Stamford office. Fusco’s experience includes advising companies as to restrictions on doing business overseas, such as the FCPA, and rules stemming from the Committee on Foreign Investments in the US. Fusco also advises clients on compliance with various regulatory programs, such as the International Traffic in Arms Regulations and the Export Administration Regulations.

Click here to see the DOJ's 2012 guidance with respect to FCPA compliance.

California Continues to Publicize Insurers Involved in Iranian Investments

Fri, 15 Feb 2013 08:38:36 GMT

In recent years, California has sought to establish disincentives for insurance companies to invest in certain sectors of the Iranian industry. However, in early 2012, following challenges to its authority to require divestment, the California Insurance Department (the “Department”) entered into a settlement and agreed not to bar insurers from investments in companies doing business with Iran. The Department may, however, make available to the public a list of all insurers engaging in such investments (the “List”). In addition, insurers no longer need to provide quarterly reports detailing their Iranian investments, as such information is already required to be disclosed in their annual financial statements.

Currently, the List serves to identify insurance companies that invest in companies that participate in the nuclear, military and energy sectors of Iran’s economy. The Department has indicated that such investments may be subject to “potentially volatile reductions” in stock prices. However, the Department reserves the right to expand the List based on other “risk-related considerations.”

The List has been and may continue to be updated periodically, and was updated as recently as February 12, 2013. This week, the California Commissioner of Insurance Dave Jones declared the efforts to encourage divestment a success, noting that only $198 million remains invested by California insurers in these “volatile” Iranian companies, compared to approximately $6 billion in 2009. An insurer who does business in California should be aware that the Department is committed to publicizing the names of companies engaged in these kinds of investments and therefore should carefully consider whether an investment in an Iranian company may impact business reputation or affect regulatory relationships.

A link to the Department policy on Iran-related investments can be found here.

Kentucky Introduces a Bill Allowing Policyholders to Use Life Settlement Proceeds to Pay for Medicaid-Covered Long-Term Care

Thu, 14 Feb 2013 10:15:52 GMT

On February 11, 2013, Kentucky Representative Robert R. Damron (D) introduced House Bill 314 (the “Bill”) which, among other things, allows owners of certain life insurance policies to use life settlement contracts to cover the cost of Medicaid long-term care services. The Bill is similar to one recently introduced in Florida in that it proposes to alter existing law requiring exhaustion of a person’s assets, including allowing any in-force life insurance policies to lapse, before paying out Medicaid benefits (see our February 12, 2013 blog post for a summary of the Florida bill).

Under the Bill, the value of an existing life insurance policy will not be considered an asset for purposes of determining Medicaid eligibility if the policy owner enters into a life settlement contract pursuant to the sections of Kentucky law governing life settlements generally, and certain other conditions are satisfied. In particular, the Bill requires the following:

The face value of the life insurance policy must be over $10,000;
The life settlement contract must be in exchange for guaranteed periodic payments to the Kentucky Medicaid program;
The contract must reserve the lesser of 5% of the face amount of the policy or $5,000 as a death benefit payable to the owner’s estate or beneficiary;
The balance of payments required under the contract unpaid at the death of the owner must be paid to the owner’s estate or a named beneficiary;
The contract must include a schedule evidencing the total amount payable to the owner, the number of payments, and the amount of each payment required to be paid under the life settlement contract; and
All proceeds of the life settlement contract must be held in an irrevocable trust or federally insured account.
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Marketing materials used in connection with these contracts must be filed with the Kentucky Department of Insurance. The Bill also stipulates that the Department for Medicaid Services will provide to the applicant, as part of the application for Medicaid, written notice of the options to enter into a life settlement contract.

Click here for a copy of the Bill.

We will continue to monitor this topic.

Binding Arbitration Clauses in Insurance Policies Found Unenforceable in Washington

Thu, 14 Feb 2013 10:05:15 GMT

In State of Wash. Dep't of Transp. v. James River Ins. Co., No. 87644-4 (Wash. Jan. 17, 2013), the Washington Supreme Court recently determined that a state statute prohibits binding arbitration clauses in insurance policies. The decision arose out of an insurance coverage dispute between James River Insurance and one of its insureds, the Washington State Department of Transportation (the "Department"). The Department had been named as an insured by the contractor on a state highway project under the contractor's liability policy with James River Insurance. Following an automobile accident at the project location, representatives of those killed and injured in the accident sued the contractor as well as the Department. The Department tendered the defense of the suit to James River and James River accepted while reserving rights.

James River subsequently attempted to initiate arbitration against the Department pursuant to the binding arbitration provision of the policy. The Department objected to arbitration, and sought a declaration that the policy's binding arbitration provision was unenforceable. The trial court ruled that RCW 48.18.200(1)(b), which voids any insurance contract provision "depriving the courts of this state of the jurisdiction of action against the insurer," rendered the policy's arbitration clause void. The court further held that the Federal Arbitration Act (FAA) did not preempt this state statute based on “reverse preemption” under the McCarran-Ferguson Act.

On appeal, the Washington Supreme Court affirmed the trial court decision, holding that, among other intentions, RCW 48.18.200 protects the right of policyholders to bring an original “action against the insurer” in the courts of Washington state. Thus, RCW 48.18.200 is properly interpreted as a prohibition on binding arbitration provisions, such as the provision at issue in this case. The court also affirmed the trial court's holding that the FAA did not preempt RCW 48.18.200. Although the FAA generally preempts state law, there is an exception when the state statute was enacted “for the purpose of regulating the business of insurance” within the meaning of the McCarran-Ferguson Act. In finding that RCW 48.18.200 regulates the “business of insurance,” the court determined that the McCarran-Ferguson Act “reverse preempts” the FAA, shielding the statute from invalidation.

UK: Court of Appeal Holds Bank Not Liable for Losses Arising From Alleged Breaches of its Statutory Duty

Thu, 14 Feb 2013 08:34:36 GMT

In Zaki & Ors v Credit Suisse (UK) Ltd [2013] EWCA Civ 14, the Court of Appeal upheld the decision of the High Court in finding that Credit Suisse (UK) Ltd (the Respondent) was not liable for financial losses suffered as a result of alleged breaches of its statutory duty.

The Applicant in this case was the widow and two daughters of an Egyptian businessman (Mr X) who had died in 2010. Mr X had invested in structured financial products bought from the Respondent with the assistance of loans from an associate company of the Respondent in 2007. Following the severe downturn in the markets in 2008, the Respondent issued a margin call which Mr X was unable or unwilling to meet and his holdings were subsequently liquidated causing Mr X to suffer financial losses to the value of US$69.4 million. The Applicant claimed damages on the grounds that the losses were caused by the Respondent's breach of its statutory duty, namely the FSA's Conduct of Business Rules 5.3.5 and 7.9.3.

Rule 5.3.5 required the Respondent to take reasonable steps to ensure that its advice on investments or transactions was suitable for Mr X. Rule 7.9.3 required the Respondent to assess Mr X's financial standing and take reasonable steps to ensure that the arrangements for the loan, and its amount, were suitable for the type of investment proposed.

The Court of Appeal considered the obligation of a financial institution to assess the suitability of a loan made to a customer for an investment opportunity, and held that the judge at first instance had been entitled to find that the relevant loan had been suitable for the customer, having regard in particular to both his experience, and the market and financial information provided to him. As such, the appeal was dismissed.

This case serves to highlight both the objective and the subjective elements that the Court will consider in assessing whether or not advice given by a financial institution ought to be deemed as suitable for the investor.

A copy of the full judgment can be viewed here.

UK: Court of Appeal Decides In Favour of Insured in Asbestos Case

Wed, 13 Feb 2013 12:20:27 GMT

In International Energy Group Limited v Zurich Insurance Plc UK Branch [2013] EWCA Civ 39, the Court of Appeal overturned the first instance decision of Mr Justice Cooke in the High Court. The Court of Appeal decided that the defendant insurer (the Defendant) must indemnify the claimant insured (the Claimant) in full for the damages paid by the Claimant to an employee who had died of mesothelioma, following exposure to asbestos fibres during his 27 year employment with the Claimant. The Defendant had provided employers' liability insurance to the Claimant for 6 of these 27 years and had argued that it was liable to indemnify the Claimant for only a proportionate amount of the damages paid to the employee. This was rejected by the court.

The Defendant's alternative argument that the Claimant should be prevented from receiving the full indemnity for reasons of fairness, was also rejected by the Court of Appeal.

New Jersey issues Order to Speed Up Processing of Superstorm Sandy Claims

Wed, 13 Feb 2013 08:12:58 GMT

On February 5, 2013, the New Jersey Department of Banking and Insurance (“DOBI”) issued Order No. A13-104 (the “Order”) requiring insurers to expedite their response to claims complaints resulting from Superstorm Sandy. Insurers must now respond to inquiries from DOBI within five business days of receipt of a DOBI claim inquiry, and may only request one extension for an additional five business days in which to respond. Pursuant to N.J.A.C. 11:2-17.6(d), insurers would otherwise have fifteen business days to respond, and no limits are placed on the number of extensions that may be requested. Any claims that are not related to Superstorm Sandy are specifically exempted from these changes.

According to the press release, approximately 22% of the estimated 430,774 homeowners, commercial property, personal and commercial auto and business interruption insurance claims that were filed are still outstanding. In addition, the press release notes that approximately 70% of flood claims remain unresolved.

Click here to view the official press release.

Click here for a copy of the Order.

Florida Bill would Allow Policyholders to Use Viatical Settlement Proceeds to Pay for Medicaid-Covered Long-Term Care

Tue, 12 Feb 2013 15:30:03 GMT

On January 24, 2013, Florida Representative Jimmy T. Patronis (R) filed House Bill 535 (the “Bill”), which, among other things, would allow owners of certain life insurance policies to use viatical settlement contracts to cover the cost of Medicaid long-term care services. If adopted, the Bill would alter existing law, which requires exhaustion of a person’s assets, including allowing any in-force life insurance policies to lapse, before paying out Medicaid benefits.

Specifically, the Bill would allow an owner of a policy with a face value in excess of $10,000 to enter into a viatical settlement contract, pursuant to Chapter 626 Part X of the Florida insurance law governing viatical settlements, in exchange for guaranteed periodic payments to the viator’s health care services provider to cover Medicaid-covered long-term care services. Any such viatical settlement contract must reserve 5% of the policy value, or $5,000, as a death benefit payable to the viator’s estate or beneficiary, and provide that any payments available under the contract not paid to a health care services provider be paid to the viator’s estate or designated beneficiary. The contract must include a schedule setting forth the total amount payable to the viator, the number of payments, and the amount of each payment. Furthermore, it must state that all monies will be held in an irrevocable state or federally insured account.

Marketing materials used in connection with these contracts, including benefit projections, sales brochures, and all contracts used by viatical settlement providers, must filed with the Florida Office of Insurance Regulation (“FOIR”). Pricing and valuation materials must also be filed, and the FOIR will be granted the authority to conduct periodic market examinations and financial audits of viatical settlement providers issuing contracts to cover long-term care benefits.

In addition to the provisions allowing payment of Medicaid long-term care with viatical settlement proceeds, the Bill also provides that the value of an in force life insurance policy will not be considered an asset in determining Medicaid eligibility if the policy owner: (1) irrevocably names the State as a beneficiary of a life policy not to exceed the amount of Medicaid costs provided the recipient plus premiums and other costs incurred by the agency to the issuing insurer, (2) collaterally assigns ownership of the policy to the State pursuant to a written agreement submitted to and recorded by the issuing insurer, or (3) irrevocably assigns ownership of the policy to the State. Upon the insured’s death, any amounts not used to cover Medicaid benefits will be paid the designated beneficiary. Note, however, that any designation of the State as a beneficiary or assignment to the State will be void if Medicaid benefits are denied.

If adopted and signed into law, the Bill would go into effect July 1, 2013.

Click here for a copy of the Bill.

EU: European Commission Publishes Competition Study on Co(re)insurance and the Subscription Market

Tue, 12 Feb 2013 08:44:28 GMT

The European Commission (Commission) has published a study conducted by Ernst & Young on potential competition issues relating to the operation of co(re)insurance pools and ad hoc co(re)insurance agreements on the subscription market. The study was performed in the context of the Commission's ongoing monitoring of the operation of the Insurance Block Exemption Regulation (BER), the latest version of which was adopted in 2010 (please see our previous blog here); the Commission's Business Insurance Sector Inquiry (BISI), which was completed in 2007; and the issue in 2008 by the European Federation of Insurance Intermediaries (BIPAR) of its high-level principles for placement of risks with multiple insurers.

In the BISI report, the Commission noted that there were a number of practices which it believed potentially breached EU competition law. One of the focuses of the Commission was the degree of cooperation between insurers, in particular the use of mechanisms which provided for the upward alignment of premiums and terms and conditions between participants, which occurred where a two-step procedure involving lead and following underwriters was used. The Commission's view was that, where there were agreements between insurers to align premiums, this could give rise to a breach of competition law. Following publication of the BISI report, BIPAR developed five high-level principles for placing risk with multiple insurers, one of which bars the upward alignment on premiums.

Reporting on the London subscription market, Ernst & Young states that no agreements or concerted practices between undertakings to align premiums had been identified. The study also notes that, while premiums continue typically to align with the premium of the leader, there is in fact "intensive competition" in the market for the selection of the leader and hence for the corresponding initial determination of premiums.

The Commission has stated that this study will be used in its future review of the BER, which will expire in 2017. Given the findings in the study, the Commission could decide to narrow or remove the BER altogether, although it is too early to predict the Commission's approach with certainty.

The Ernst & Young study, which has 645 pages of general analysis and country reports, can be accessed here.

New York Federal Court Finds That Insurer Was Prejudiced By Late Notice of an Insured's Claim, Relieving Insurer of its Duty to Defend or Indemnify

Fri, 08 Feb 2013 10:18:51 GMT

A federal court in Manhattan recently found that a policyholder’s untimely notice of a roof collapse relieved a general liability insurance carrier of any duty to defend or indemnify. The decision is notable because it involved a carrier’s late notice defense under New York Insurance Law § 3420(a)(5), which changed New York’s long-standing no-prejudice rule for policies issued on or after January 17, 2009. A copy of the opinion rendered by the U.S. District Court for the Southern District of New York, captioned Atlantic Casualty Ins. Co. v. Value Waterproofing, Inc., (S.D.N.Y. Jan. 15, 2013), can be found here.

Value Waterproofing was hired to perform work on the roof of a non-residential property located at 685 Lenox Avenue in New York. After Value completed its work, a snowstorm hit New York City, depositing roughly 20 inches of snow on the roof, causing it to collapse. The property owner’s insurer paid the related damages and then commenced a subrogation action against Value seeking reimbursement.

Value sought coverage for the lawsuit under a commercial general liability policy issued by Atlantic Casualty Insurance Company, effective for the policy period of May 12, 2009 to May 12, 2010. Although Value had been informed of the roof collapse on February 27, 2010, the collapse was not reported to Atlantic Casualty until September 2, 2010. Atlantic Casualty subsequently denied coverage on various grounds, including late notice, and brought a declaratory judgment action with respect to its defense and indemnity obligations under the policy.

After a bench trial, the court found that Atlantic Casualty had no duty to defend or indemnify Value for the underlying suit because, among other things, Atlantic Casualty had not been provided with timely notice of the roof collapse, as required by the policy. Specifically, the court held that the roughly six-month delay in notifying Atlantic Casualty of the incident was untimely under New York law, given that the policy required that notice be provided “as soon as practicable” with respect to any “occurrence” that might result in a claim. The court rejected Value’s argument that its notice obligations were not triggered until a later date, finding that Value was aware of its potential liability for the roof collapse at least five months before notice was given. Moreover, the court also found that it was not impractical for either Value or the property owner to have given prompt notice of the roof collapse to Atlantic Casualty, given that both entities were aware of the policy’s existence.

Because the subject policy was issued to Value after January 17, 2009, however, New York Insurance Law §3420(a)(5) required Atlantic Casualty to prove it was prejudiced by the breach of the policy’s notice clause in order to prevail on that defense. In that regard, the court held that Atlantic Casualty satisfied its burden under New York law, as the late notice materially impaired its ability to investigate the underlying claim and defend against it. Indeed, the court noted that Atlantic Casualty was prevented from being able to independently ascertain the potential causes of the roof collapse, in contrast to the property owner’s insurer, who was adverse to Value in the underlying action and able to inspect the property on multiple occasions. Thus, as a result of the late notice, Atlantic Casualty was forced to rely on its insured’s adversary’s investigation, putting Atlantic Casualty at a major disadvantage if it were required to defend Value in the underlying suit.

PLUS D&O Comment: Private Companies, Tortious Interference, and Contractual Liability Exclusions

Thu, 07 Feb 2013 14:52:09 GMT

On the first morning of the PLUS D&O Symposium, a panel discussed the emerging field of D&O insurance issued to private and non-profit companies, and whether this market was a “Nest Egg or Power Keg.” The panelists commented that insurers of private companies can be exposed to broad lawsuits involving unexpected liabilities that were not intended to be within the scope of D&O coverage. One common example that was raised was claims of tortious interference with contract, which are often asserted by a competitor when the insured company hires an individual formerly employed with the competitor. The panelists observed that it can be difficult to avoid a duty to defend in these cases. They specifically addressed application of an exclusion for “unfair trade practices,” saying that it would be difficult to apply the exclusion at the duty to defend stage.

Edwards Wildman attorneys Craig Stewart and Jonathan Toren were successful in convincing a court that an insurer had no duty to defend a case fitting exactly the description discussed by the PLUS panel, based on the policy’s contractual liability exclusion. In Radianse, Inc. v. Twin City Fire Ins. Co., No. 1:10-cv-10120-RGS (D. Mass. Oct. 6, 2010), the insured (a private company) was sued by an accounting agency for hiring one of the agency’s former employees in violation of the employee’s non-compete clause. The agency sued the insured for tortious interference with contractual relations and violation of the Massachusetts consumer protection statute. The insured sought coverage under its D&O policy. However, that policy contained an exclusion for claims “based upon, arising from, or in any way related to any liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement.” Citing this exclusion, the insurer denied coverage.

In his decision, District Court Judge Richard G. Stearns granted summary judgment to the insurer. He rejected the insured’s argument that the exclusion could only apply to claims that the insured breached its own contract. He noted that the exclusion applied to “any” liability under “any” contract or agreement, not only contracts to which the insured is a party.

The opinion is available here.

NAIC Fall National Meeting Foreshadows More Flexibility for Life Insurers

Thu, 07 Feb 2013 12:08:45 GMT

The National Association of Insurance Commissioners (“NAIC”) held its Fall National Meeting (the “Meeting”) from November 29th through December 2, 2012. Among the topics discussed was the need to address the perceived “XXX and “AXXX” reserve redundancies applicable to life insurers. These additional reserve requirements have been seen by many life insurers as excessive and burdensome, and has arguably led to an increased reliance on cession of risk to special purpose vehicles (“SPVs”) where letters of credit and other dependable assets may be used as collateral for such risk.

During the Meeting, the Valuation Manual was passed by 43 of the 50 states, which will allow for a new Principles-Based Reserving (“PBR”) approach to reserve requirements to be presented this year. If adopted by a state, PBR would shift the reserve requirement analysis to a case-by-case basis, focusing on a life insurer’s history, including its claims experience and the insurer’s own internal forcast. While there may be some risk that an insurer will intentionally develop favorable models to decrease its reserve requirements, the Valuation Manual provides regulators increased access to information about the insurers’ risk and risk management. In the long-run, a PBR approach may make available additional capital to the life insurance industry.

The adoption of PBR may complement, rather than eliminate the use of SPVs within the life insurance industry. While the need to manage perceived reserve redunancies may be eliminated, a number of states allow the use of SPVs as a means to securitize risk and to access the capital markets. While there are concerns in the industry that proper regulatory supervision of SPVs is lacking, states have the ability to properly regulate the use of SPVs. PBR may in fact clear some hurdles for the use of SPVs by life insurers to access the capital markets to finance redundant reserves and/or bring in new capital.

Edwards Wildman Is At PLUS D&O Symposium

Wed, 06 Feb 2013 17:00:00 GMT

The annual PLUS D&O Symposium is underway in New York. Once again, Edwards Wildman attorneys John Hughes, Mary-Pat Cormier, Alex Henlin, and Jonathan Toren are attending the event, and will provide updates on what they see and hear. This year’s symposium features eight strong panels, touching on regulatory and securities litigation trends, underwriting risks for private companies and non-profits, the unique underwriting challenges presented by financial institutions, coverage “wish lists,” potential D&O exposures outside the United States, and more.

Additional information about this year’s program is available at the PLUS website.

UK: Court of Appeal Considers Balance of Probabilities

Wed, 06 Feb 2013 08:14:17 GMT

In (1) Michael Nulty Deceased (2) Wing Bat Security Limited (3) National Insurance and Guarantee Corporation Limited (NIG) v Milton Keynes Borough Council (the Council) [2013] EWCA Civ 15, professional indemnity insurer NIG unsuccessfully appealed against a decision which saw the actions of its insured, an electrical engineer, described as the most probable cause of a fire in Milton Keynes in 2005. The standard of proof in civil cases in England and Wales is the balance of probabilities.

At first instance, three possible causes for the fire were suggested. Mr Justice Edwards-Stuart found that none of the three suggested causes were inherently likely. However, having found on the factual evidence that two were "very much less likely", he concluded that the third, a theory that the electrical engineer carelessly discarded a cigarette end inside the recycling centre, therefore in law became the most probable cause. He therefore considered that Milton Keynes Borough Council had discharged the burden of proving that the electrical engineer had caused the fire and gave judgment in its favour.

On appeal, Lord Justice Toulson said Edwards-Stuart J had erred because no rule of law existed which required him to conclude that a third theory was the most probable cause simply because the first and second were very much less likely. Quoting Lord Mance in an earlier case, Toulson LJ said there was an inherent risk that a systematic consideration of the possibilities could become a process of elimination "leading to no more than a conclusion regarding the least unlikely cause of loss". He suggested that at the end of any such systematic analysis, the court must stand back and ask itself whether it was satisfied that the suggested explanation is more likely than not to be true.

Despite agreeing with NIG that Edwards-Stuart J had erred in law, on examining the factual evidence, the Lord Justices in the Court of Appeal agreed with Edwards-Stuart J's conclusion that the actions of the electrical engineer had caused the fire. The court therefore affirmed the first instance decision in favour of the Council and dismissed the appeal.

Please click here for a link to the judgment.

Insurance of Ships Using Bunker Oil Produced From Iranian Crude May Not Violate Sanctions

Mon, 04 Feb 2013 15:33:19 GMT

On January 29, 2013, the International Group of P&I Clubs (IGP&IC) released Frequently Asked Questions relating to Council Regulation (EU) No. 1263/2012. For the IGP&IC FAQs click here and for the E.U. council regulation click here. Council Regulation 1263/2012 amends the E.U. regulation concerning restrictive measures against Iran, Regulation (EU) No. 267/2012. Referring to revisions to Article 12(1)(d) and (e) of Regulation 267/2012, the IGP&IC notes that ships may be able to use fuel (bunker oil) that includes a blend of Iranian origin crude oil “produced and supplied by a third country other than Iran” without running afoul of E.U. sanctions prohibiting transport of Iranian oil.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has issued an interpretation under its Iranian Sanctions and Transactions Regulation (31 C.F.R Part 560) providing an exemption relating to importation of or transactions relating to goods containing Iranian-origin raw materials if “those raw materials … have been … substantially transformed in a third country by a person other than a United States person.” 31 C.F.R. 560.407. OFAC has not specifically applied this interpretation to bunker oil that includes a blend of Iranian crude produced in a third country or indicated whether production of bunker oil from Iranian crude would constitute substantial transformation.

The revised E.U. regulation allows and, perhaps the OFAC interpretation cited above may permit, use of bunker oil that includes Iranian oil components for fueling ships. This is important to insurers and reinsurers who wish to ensure that their provision of marine or casualty covers to ships using such bunker oil not violate E.U. and/or U.S. Iranian financial sanctions. Note that it is unclear whether the E.U. would permit the shipment of such bunker oil.

By Geoffrey Etherington, partner in Edwards Wildman Palmer LLP’s Insurance and Reinsurance Department in New York, New York, and Carlos Ortiz, partner in Edwards Wildman’s Litigation Department in Madison, New Jersey

HHS Broadens Notification Obligations in Final Data Breach Notification Rule

Mon, 04 Feb 2013 13:48:08 GMT

As we reported here, the U.S. Department of Health and Human Services (“HHS”) recently issued final regulations (the “Final Rule”) implementing changes to HIPAA mandated by the HITECH Act. The long awaited Final Rule addresses a number of privacy and security topics, including breach notification. With regard to breach notification requirements, the Final Rule replaces an Interim Rule issued by HHS in 2009 (the “Interim Rule”). The Final Rule becomes effective March 26, 2013, and compliance with the Final Rule by HIPAA covered entities and business associates is required by September 23, 2013. Significantly, the Final Rule substantially expands the definition of “breach” for purposes of breach notification requirements.

Pursuant to the Interim Rule currently in effect, covered entities must notify affected individuals, HHS, and in some cases, the media, in the event of a breach of protected health information (“PHI”). In addition, business associates are required to notify covered entities of such a breach. The Final Rule does not materially change the timing, manner or content of the required notices, but it does substantially expand the definition of “breach,” with the effect of broadening the circumstances that require notification.

Pursuant to the Interim Rule, a determination of whether a data security incident constitutes a “breach” requiring notification turns, in part, upon whether the incident “poses a significant risk of financial, reputational, or other harm to the individual” (the “Harm Threshold”). In contrast, the Final Rule removes the Harm Threshold, and presumes an impermissible use or disclosure of PHI under certain circumstances to be a “breach” unless the covered entity or business associate, as applicable, demonstrates that there is a low probability that the PHI has been compromised. The Final Rule specifies four factors that must be considered in a risk assessment regarding the probability that PHI was compromised, focusing on: (i) the nature and extent of the PHI involved; (ii) the unauthorized person who used the information or to whom the disclosure was made; (iii) whether the PHI was actually acquired or viewed; and (iv) the extent to which the risk to the PHI has been mitigated.

As a result of this definitional change, after the Final Rule becomes effective, an incident involving unauthorized use or exposure of PHI by a covered entity or business associate will be more likely to constitute a “breach” requiring notice to affected individuals, HHS, and potentially the media.

UK: Principal's Remedies for Secret Commission

Mon, 04 Feb 2013 08:18:40 GMT

The insurance industry employs many agents (for example, brokers, coverholders, underwriting agents) and inevitably there have been occasions when an agent has been in receipt of a secret commission (or bribe) in breach of the agent's duties to its principal.

In the recent case of FHR v Mankouris [2013] EWCA civ 17, the English Court of Appeal has again considered the question of whether the wronged principal has a proprietary right to trace the proceeds of the secret commission or is limited to an action for an account. The difference is important, and the tracing remedy more valuable, if the agent is insolvent or the secret commission has been used to invest in assets with a higher value. The Court openly invited the Supreme Court (or Parliament) to clarify the law in this area, but held that if it could be shown that the agent had obtained a benefit by taking advantage of an opportunity that was properly that of the principal, then the benefit was held on constructive trust for the principal, and was accordingly subject to a tracing remedy.

On the facts in FHR v Mankouris, this meant that the buyers of a hotel were entitled to trace into a secret commission paid to its agent by the vendor since if the buyers had been aware of the commission, they would have had an opportunity to negotiate a lower price for the hotel. By analogy, a policyholder could trace into a secret commission paid to its broker by an insurer if it could be shown that the policyholder would have negotiated a lower premium if the commission had been disclosed.

UK: Supreme Court Rules on Legal Advice Privilege

Fri, 01 Feb 2013 08:11:53 GMT

The Supreme Court has confirmed that legal advice privilege (LAP) applies only to advice given by members of the legal profession. By a majority of 5-2 in the much anticipated judgment of R. (on the application of Prudential Plc) v Special Commissioner of Income Tax 2013 WL 128056, the Supreme Court decided to maintain the status quo and not extend LAP to other professionals, such as tax accountants who, as Lord Sumption noted, have commonly provided legal advice on tax since the 1960s.

For a full analysis of the decision and its implications, please see the forthcoming March 2013 issue of Edwards Wildman's Insurance and Reinsurance Review. Please click here for a link to the judgment.

Edwards Wildman Complimentary Seminar – Directors and Officers Insurance: An International Perspective

Thu, 31 Jan 2013 09:00:30 GMT

February 5, 2013
Edwards Wildman Palmer LLP
750 Lexington Avenue, 8th Floor
New York, New York 10022

Edwards Wildman Speakers: John D. Hughes, Mary-Pat Cormier, Mark Meyer

Registration: 3:15 - 3:30 PM
Program: 3:30 - 5:00 PM
Drinks & Canapes: 5:00 - 6:00 PM

Our panelist will review developments in the D&O Market in various jurisdictions around the world.

Review of the International D&O Market from the Broker Perspective – James will provide an update on the D&O market from the broker perspective, including the primary considerations to bear in mind when selecting a carrier for and designing the structure of an international D&O program.

Canada - The globalization of the economy has substantially expanded potential legal and regulatory exposure for directors and officers of publicly-traded companies in Canada. Mary-Pat will survey some key developments in securities litigation in Canada over the past year, with particular attention to the continued increased emphasis on securities class actions and what liability risks may ensue, including: securities class action litigation trends; significant settlements, such as the $117M (CDN) settlement of the Sino Forest case; extraterritorial effects of provincial securities litigation; and the implications of the Ontario Securities Commission's proposed use of "no-contest settlements". As well, we will touch upon noteworthy Canadian decisions that had particular relevance for executive risks in 2012, and what that could mean for the D&O markets in 2013 and beyond.

UK - Mark will analyze the very recent decision of the UK Court of Appeal in ACE European Group .v Standard Life Insurance, concerning the apportionment of mitigation costs between insured and uninsured objectives, which raised interesting issues regarding coverage for settlements of liability claims against directors, professional persons and organizations.

Germany - Mark will explain the new D&O policy being developed for supervisory board members in light of the increase in liability cases being brought against them.

BIOGRAPHIES
John D. Hughes practice has focused on advising liability insurers of financial institutions, particularly banks, investment advisers, mutual funds, venture capital funds, and insurance and securities brokers on claims under ERISA, the Investment Company and Investment Advisers Acts of 1940, federal and state securities laws and state law on negligence and breach of fiduciary duty.

Mary-Pat Cormier focuses her practice in the area of financial services and securities litigation, including disputes arising out of both coverage and bad faith claims handling against professional and specialty lines liability carriers.

James Jackson has extensive knowledge of placing Directors' and Officers' Liability, Errors and Omissions Liability, Employment Practices Liability, Crime and Fiduciary Liability for UK, US and International clients, both Financial Institutions and Commercial. His responsibilities include managing market relationships, developing new business and day to day client management.

Mark D. Meyer leads the firm's D&O practice in London. He has extensive experience in disputes involving coverage and policy construction. He acts for many insurers and reinsurers in the London Insurance market.

CLE:
This course may be used for 1.5 CLE credit hours. Edwards Wildman Palmer is an accredited provider of continuing legal education in the State of New York.

RSVP:
If you are able to join us for the Seminar, please click here. There is no charge for attendance at this seminar. Space is limited.

Edwards Wildman’s Insurance Practice Paves the Way for Firm-Wide Use of Social Media

Thu, 31 Jan 2013 08:01:11 GMT

For several years, the editors of insurereinsure.com have used social media tools to share blog posts and other information. Now, Edwards Wildman is following suit. Firm-related content is now available in a number of popular social media formats. Readers can now:

Follow Edwards Wildman and the IRD blog on Twitter.

Connect with Edwards Wildman on LinkedIn.

Add Edwards Wildman on Google +

BMA Announces Solvency II Will Not Apply to Captives

Wed, 30 Jan 2013 10:34:21 GMT

Joining Guernsey and the Cayman Islands, Jeremy Cox, CEO of the Bermuda Monetary Authority, announced that Bermuda will not apply Solvency II to captives. Mr. Cox’s remarks came during his presentation of the BMA’s 2013 Business Plan on January 29, 2013. Click here for the BMA’s press release.

However, Mr. Cox noted that the BMA will implement refined reporting requirements for captives including reporting risk return as part of consolidated annual filings. Information about risk return will enable the BMA to obtain information about “key risks” faced by captives. Mr. Cox stressed that it is important for the BMA to make independent decisions about the Bermuda market “while taking into account achieving global recognition for [the BMA’s] supervisory regime.” Guernsey and the Cayman were lauded for their decisions not to apply Solvency II-type regimes to captives and some suggested that the jurisdictions might gain competitive advantages over captive jurisdictions that did not clearly opt-out of Solvency II.

Mr. Cox also announced that the BMA remained committed to “international engagement” and that it plans a new licensing and supervisory regime for the recently enacted Corporate Service Provider Business Act.

Massachusetts Enacts Legislation Prohibiting STOLI and Restricting Life Settlements

Wed, 30 Jan 2013 09:14:27 GMT

On January 8, 2013, Massachusetts adopted legislation designed to prohibit stranger originated life insurance transactions (“STOLI”), i.e., initiating or causing the issuance of a life insurance policy for the benefit of a person or entity without an insurable interest in the life of the insured, and to restrict life settlements. Prior to the adoption of the new legislation, Massachusetts only regulated viatical settlements.

The new legislation, H 4296 (the “Act”), among other things:

Makes STOLI transactions illegal;
Repeals existing viatical settlement law, and replaces it with life settlement law with specific additional requirements if the owner of the policy is terminally ill (note, existing viatical settlement licensees are considered qualified as life settlement brokers or providers, as the case may be);
Regulates life settlement contracts, including mandating that contract and disclosure forms be filed with and approved by the Insurance Commissioner;
Establishes licensing and training requirements for life settlement brokers and providers;
Requires that life settlement providers file annual statements with the Insurance Commissioner;
Grants the Insurance Commissioner the authority to examine any licensee, and provides the Insurance Commissioner with subpoena powers;
Prohibits settlement of a policy during a 2-year period from the date of issuance (with limited exceptions); and
Prohibits fraudulent life settlement acts (which are defined to include acts or omissions in obtaining a life settlement contract with the intent to defraud, and acts committed by a person or such person’s employees or agents in furtherance of a fraud or to prevent detection of the fraud, among other things) and authorizes the Insurance Commissioner to investigate fraudulent life settlement acts, and authorizes penalties for violations, including monetary penalties, and license revocation.

Click here for a copy of the Act.

Illinois Appeals Court Declines To Extend “Time and Space Test” For Determining Number Of Occurrences To Cases Involving Single Negligent Act

Tue, 29 Jan 2013 13:42:22 GMT

In a recent decision, an Illinois appellate court determined that the collapse of a porch, resulting in injury or death to more than forty individuals, constituted a single “occurrence” for the purposes of determining coverage under a commercial general liability insurance policy. With this decision, the court recognized an important limitation on the applicability of a test previously adopted by the state’s Supreme Court for determining the number of occurrences implicated by a claim. The case is Ware v. First Specialty Ins. Corp., No. 1-11-3340. A copy of the decision is available here.

The insurance policy at issue, which provided coverage for “bodily injury,” contained limits of liability of $1 million per occurrence and $2 million in the aggregate. The policy defined occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurer, First Specialty Insurance Corporation, argued that because all of the victims’ injuries resulted from a single cause, the collapse of the porch, the incident constituted one occurrence. The victims and their estates, who had obtained an assignment of rights against the insurer, argued that the injuries constituted more than one occurrence because several individual victims’ injuries did not manifest themselves for days or weeks after the collapse.

Affirming the decision of the lower court, the appellate court held that because the collapse was the sole cause of the victims’ injuries and deaths, and because the policy defined “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these [at] any time,” the victims’ injuries and deaths were the result of a single occurrence. The court found that this result was mandated by the clear and unambiguous terms of the policy.

The court further found that it would have reached the same conclusion even if it had looked beyond the clear language of the policy. The court explained that where the terms of an insurance policy do not permit a definitive determination as to the number of occurrences implicated by a claim, Illinois courts apply the “cause theory,” under which a court considers how many separate events or conditions led to a party’s injuries. The court found that under the cause theory, the collapse of the porch constituted only one occurrence because all of the victims’ injuries emanated from a discrete incident, the collapse of the porch. In reaching this conclusion, the court rejected the plaintiffs’ argument that it should have applied the “time and space test” articulated by the Supreme Court of Illinois in Addison Ins. Co. v. Fay, 232 Ill. 2d 446 (2009) to determine the number of occurrences implicated by the claim. Under the “time and space test,” a court considers whether the injuries and their cause are so closely linked in time and space as to be considered one event. The Ware court declined to apply the test, observing that the “time and space test” is reserved for circumstances in which multiple injuries are sustained over a period of time due to an ongoing negligent omission.

*Chris Finney Commentary: The FSA Was Deeply Flawed, While the TSC Knows Not What it Says

Tue, 29 Jan 2013 08:09:46 GMT

On 18 January 2013, the Treasury Select Committee (TSC) published its "Report on the appointment of John Griffith-Jones as Chair-designate of the Financial Conduct Authority" (FCA).

The report is brief and to the point:

"The [FSA] failed consumers. Although it devoted a great deal of time and effort to conduct matters, it left consumers exposed to some of the worst scandals in UK financial history. It created a 'box-ticking' culture whose benefits were far from evident and which still failed to pick up major failures in the making";
"The board of the FSA ...appeared to fail in its oversight of ... the Authority";
"The [FCA] needs to develop a markedly different culture from that of its predecessor, which was deeply flawed";
"Many customers of the financial services sector have been as poorly served by regulators as by firms in recent years".

Although these assertions are partially true, they're also deeply revisionist. They blame the man for the policies of his master, and a policeman for a criminal's crime. They also give us a glimpse of regulatory failures to come. One thing the FSA has been especially good at is recognising when things have gone wrong, admitting its errors, and trying to do better next time. One of its early mistakes was to take what now seems like an overly relaxed approach to the authorisation of new firms, and the approval of new controlled function holders. When the FSA extended its significant influence function regime, and started to interview applicants for controlled function holder status, it admitted that its earlier approach had been wrong. Strange, then, to see the TSC note that, although "the incentives for regulators not to take the risk of authorising a new bank are strong... We will expect the FCA to demonstrate that it is doing everything it can to make the authorisation of would-be new entrants to the banking sector as fast and straightforward as possible". Surely, they know not what they say.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

Healthcare Update: Grassley Urges Action on Sunshine Act; HHS Awards New Exchange Grants

Mon, 28 Jan 2013 13:53:49 GMT

GRASSLEY URGES ACTION ON SUNSHINE ACT
In a January 22 letter to the White House, Sen. Chuck Grassley (R-IA) bemoaned the administration’s continued delay in implementing the Physician Payments Sunshine Act, part of the Patient Protection and Affordable Care Act (PPACA). The Sunshine Act requires that physicians report to the Department of Health and Human Services (HHS) their ownership and investment interests in, and payments or gifts that they receive from, manufacturers of drugs, devices and supplies.

Last May, the Centers for Medicare & Medicaid Services (CMS) announced that it would not require data collection under the Sunshine Act until January 1, 2013, to allow manufacturers to prepare for data submission and for CMS to have time to fully address the input it received in more than 300 comments from the public. The Sunshine Act required CMS to issue final regulations by October 1, 2011, but that expected guidance to pharmaceutical and medical device manufacturers has not yet been released.

Sen. Grassley, who co-authored the Sunshine Act with Sen. Herb Kohl (D-WI), has repeatedly expressed concern regarding the implementation delays. His letter urged the administration to release the final rules, which were delivered to the White House’s Office of Management and Budget on November 28 for review, “without further delay.”

HHS AWARDS NEW EXCHANGE GRANTS
On January 17, HHS announced that it had awarded $1.5 billion in new grants to 11 states to fund the establishment of online “Affordable Insurance Exchanges” as provided under PPACA. In the latest round of grants, Delaware, Iowa, Michigan, Minnesota, North Carolina, and Vermont received “Level One” Exchange Establishment Grants, while California, Kentucky, Massachusetts, New York, and Oregon received multi-year “Level Two” Exchange Establishment Grants. Level One grants are issued to states to begin building their exchanges and Level Two grants are issued to states that are further along in the process. CMS intends to continue awarding Exchange Establishment Grants through 2014.

The Center for Consumer Information & Insurance Oversight (CCIIO), part of CMS, maintains a comprehensive website with updated information on state exchanges, including a map with details and amounts of the Exchange Establishment Grants awarded to each state. Every state but Alaska has applied for and received at least a Planning Grant, and 34 states and the District of Columbia have received at least a Level One grant.

Thus far, 17 states plus DC plan to operate their own exchanges, and seven other states plan to operate exchanges in partnership with the federal government. The deadline for states to elect to operate a partnership model exchange is February 15. In states that do not run their own exchanges, either alone or as a partnership, the federal government will operate a “federally facilitated exchange.” State exchanges are scheduled to being accepting enrollment applications on October 1, 2013, and providing health insurance coverage on January 1, 2014.

NEXT STEPS
Edwards Wildman’s Healthcare Practice Group will continue to monitor healthcare news from Capitol Hill, CMS, HHS, and other federal and state agencies and courts, and will bring you timely updates as new developments occur.

Please Join the U.S. Reinsurance Under 40s Group for its First Social Event of 2013

Mon, 28 Jan 2013 09:45:07 GMT

The U.S. Reinsurance Under 40s Group will be hosting its first social event of the year this Wednesday, January 30th, at Three Sheets Saloon, which is located on 134 West 3rd Street (between 6th Avenue and MacDougal St.). The event will kick-off at 5:30 pm, and include various drink specials until closing. There is no charge for this event, but please let us know if you plan on attending – you can RSVP via e-mail or through our website. Come enjoy a few drinks, network with industry colleagues, and support the Re Under 40s!

UK: Supreme Court Child Abuse Ruling Has Important Implications for Insurance Industry

Mon, 28 Jan 2013 08:33:37 GMT

The Supreme Court has for the first time confirmed the existence of dual vicarious liability in the landmark ruling of The Catholic Child Welfare Society and others v Various Claimants (FC) and The Institute of the Brothers of the Christian Schools and others [2012] UKSC 56.

The case concerned a group action by 170 men alleging physical and sexual abuse suffered at the hands of Brothers who taught at St William's School between 1958 and 1992. There were two sets of defendants:

(1) representatives of the Middlesbrough Diocese (the Middlesbrough Defendants) who managed the school and held employment contracts with the Brothers; and
(2) the De La Salle Institute of Brothers of Christian Schools (the Institute) to which the Brothers were bound by oath and which required the Brothers to take up specific teaching posts in furtherance of its mission.

At First Instance and in the Court of Appeal, the Middlesbrough Defendants were found to be solely vicariously liable for the Brothers' conduct because they had employed the Brothers. However, in a unanimous decision of the Supreme Court, the Institute was held to be dually vicariously liable for the abuse along with the Middlesbrough Defendants.

According to Lord Phillips, despite the absence of an employment contract, the relationship between the Institute and the Brothers had "all the essential elements of the relationship between employer and employees." Moreover, there was a sufficiently close connection between the relationship and the acts of abuse.

This decision indicates that despite the absence of an employment contract, an organisation could be vicariously liable for the torts of another organisation's employees. Insurers should take heed and thoroughly scrutinise such relationships, whether or not there is an employment contract, with particular regard to the level of control that an organisation has over an individual.

The Supreme Court judgment can be viewed here.

* Chris Finney Commentary: Solvency II - Nothing But (a Conspiracy), Blood, Toil, Tears and Sweat

Mon, 28 Jan 2013 08:17:24 GMT

If you're responsible for Solvency II implementation at a long-term insurer, you probably have your head in your hands (again) today (28 January 2013). There could be any number of reasons, but I bet your list includes:

Trying to keep senior management engaged, when you're suffering terrible implementation fatigue, you've already spent more time and money on Solvency II than you'd care to admit...and there's still no end in sight;
(If you're really lucky) you've been carefully selected to participate in EIOPA's Long-Term Guarantee Assessment, which starts today (they've given you what you need, right? *);
You and your colleagues are already working all hours trying to prepare your FSA returns, without having to worry about EIOPA as well;
You've just heard the German Life Insurance industry really is trying to push Solvency II back until at least 2017, if it can't get rid of it altogether (it's all those policy guarantees);
Although you've been telling everyone for ever that Solvency II will force insurers to reduce their holdings in bank equities and bank debt, they wouldn't listen. But when Tidjane Thiam, Chief Executive of UK Insurer Prudential made the same point in Davos last week, policy makers suddenly sat up. (EIOPA officials are privately admitting that Mr Thiam's right...and that Pillar 1 will have to be re-written.)

If you're responsible for Solvency II implementation at a general insurer, you may not quite believe your luck. After all, most of the outstanding technical issues (and the costs and risks that go with them) are on the life insurance side, so your work is almost done. Omnibus II could have been amended to allow Solvency II for general insurers to proceed on time. But it wasn't. Why not?

One possible answer lies with the conspiracy theorists. If Tidjane Thiam is right (and I think he is - don't you?) the last thing policy makers need right now is a new set of regulations that encourage the biggest holders of bank equity and bank debt (insurers) to reduce their investments...at the same time as Basel requires the banks to hold more capital, and the politicians somehow expect them to keep on lending. That doesn't mean there isn't anything in the Long-Term Guarantee Issues - there undoubtedly is; but what it does mean is that there's rather more to these issues than previously met the eye. Just a little more transparency, please; and I'm sure we'll all feel better.

* Probably not. In case it helps, EIOPA's discount curve spreadsheet, and Part 2 of its LGTA Technical Specifications are available here.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

Will 2013 be the year of ILS?

Fri, 25 Jan 2013 14:49:01 GMT

The New Year seems to be starting with a bang for the ILS industry. On January 23rd, KKR announced it had taken a 24.9% stake in Nephila. Earlier in the month Validus reported a $400 million capital raise to fund investments in collateralized reinsurance and ILS. In a transaction on which Edwards Wildman Palmer LLP advised Transatlantic Re, Transatlantic Re in December acquired a minority interest in Pillar Capital Management and announced a strategic partnership with Pillar, a manager of funds investing in collateralized reinsurance and ILS.

These transactions indicate there is a strong interest in investing in insurance risks among a wide-range of investors both financial and strategic. Clearly, investors expect that there will be demand for collateralized reinsurance and ILS to fill gaps in market capacity and offer pricing options tailored to ceding company requirements. Collateralized reinsurance and ILS also provide opportunities for cedents to reduce credit exposure to the traditional reinsurance market in general and/or to a concentration of risk to a single or group of reinsurers specifically.

We will continue to monitor developments in the ILS industry and report periodically here. Should you have more specific questions about collateralized reinsurance or ILS, please contact Jeff Etherington, getherington@edwardswildman.com, or Albert Pinzon, apinzon@edwardswildman.com, who are both partners in our New York City office.

Directors and Officers Insurance: An International Perspective

Thu, 24 Jan 2013 15:34:36 GMT

February 5, 2013
Edwards Wildman Palmer LLP|
750 Lexington Avenue, 8th Floor
New York, New York 10022

Edwards Wildman Speakers: John D. Hughes, Mary-Pat Cormier, Mark Meyer

Registration: 3:15 - 3:30 PM
Program: 3:30 - 5:00 PM
Drinks & Canapes: 5:00 - 6:00 PM

Our panelist will review developments in the D&O Market in various jurisdictions around the world.

Review of the International D&O Market from the Broker Perspective – James will provide an update on the D&O market from the broker perspective, including the primary considerations to bear in mind when selecting a carrier for and designing the structure of an international D&O program.

Canada - The globalization of the economy has substantially expanded potential legal and regulatory exposure for directors and officers of publicly-traded companies in Canada. Mary-Pat will survey some key developments in securities litigation in Canada over the past year, with particular attention to the continued increased emphasis on securities class actions and what liability risks may ensue, including: securities class action litigation trends; significant settlements, such as the $117M (CDN) settlement of the Sino Forest case; extraterritorial effects of provincial securities litigation; and the implications of the Ontario Securities Commission's proposed use of "no-contest settlements". As well, we will touch upon noteworthy Canadian decisions that had particular relevance for executive risks in 2012, and what that could mean for the D&O markets in 2013 and beyond.

UK - Mark will analyze the very recent decision of the UK Court of Appeal in ACE European Group .v Standard Life Insurance, concerning the apportionment of mitigation costs between insured and uninsured objectives, which raised interesting issues regarding coverage for settlements of liability claims against directors, professional persons and organizations.

Germany - Mark will explain the new D&O policy being developed for supervisory board members in light of the increase in liability cases being brought against them.

BIOGRAPHIES

John D. Hughes practice has focused on advising liability insurers of financial institutions, particularly banks, investment advisers, mutual funds, venture capital funds, and insurance and securities brokers on claims under ERISA, the Investment Company and Investment Advisers Acts of 1940, federal and state securities laws and state law on negligence and breach of fiduciary duty.

Mary-Pat Cormier focuses her practice in the area of financial services and securities litigation, including disputes arising out of both coverage and bad faith claims handling against professional and specialty lines liability carriers.

James Jackson has extensive knowledge of placing Directors' and Officers' Liability, Errors and Omissions Liability, Employment Practices Liability, Crime and Fiduciary Liability for UK, US and International clients, both Financial Institutions and Commercial. His responsibilities include managing market relationships, developing new business and day to day client management.

Mark D. Meyer leads the firm's D&O practice in London. He has extensive experience in disputes involving coverage and policy construction. He acts for many insurers and reinsurers in the London Insurance market.

CLE:

This course may be used for 1.5 CLE credit hours. Edwards Wildman Palmer is an accredited provider of continuing legal education in the State of New York.

RSVP:
If you are able to join us for the Seminar, please click here. There is no charge for attendance at this seminar. Space is limited.

To view this invitation, click here.

Ex-Senator Ben Nelson Has Been Named CEO of the NAIC

Thu, 24 Jan 2013 08:17:56 GMT

In a press release issued on January 22, 2013, the National Association of Insurance Commissioners (NAIC) announced that former Nebraska Senator Bill Nelson has been named as CEO of the NAIC. In his new position, Nelson will be the primary advocate and chief spokesperson for the NAIC in Washington, D.C. Nelson’s responsibilities at the NAIC will also include outreach to federal and international governmental entities, as well as state government associations, consumers and insurance industry representatives.

Prior to retiring from the Senate in 2012 after two terms, Nelson served as Governor of Nebraska from 1990 to 1998. He also served as Executive Vice President and Chief of Staff for the NAIC from 1982 to 1985; Director of the Nebraska Department of Insurance from 1975 to 1976; and Executive Vice President and then President/CEO of the Central National Insurance Group from 1977 to 1981. Nelson replaces NAIC Acting CEO Andrew Beal, who stepped into the role after former CEO Dr. Therese M. Vaughan left the association in November.

Jim Donelon, NAIC President and Louisiana Insurance Commissioner, expressed enthusiasm about Nelson’s insurance regulatory background, saying “[A]s a former regulator and Executive Vice President of the NAIC, Senator Nelson has a keen understanding of the insurance marketplace, which will make him an effective advocate for the preservation of our state-based system of regulation.”

To see the NAIC’s press release announcing Nelson’s new position, click here.

After the Event Insurance--A Drink at the Last Chance Saloon

Wed, 23 Jan 2013 10:07:16 GMT

This is the first in a series of notes explaining a number of fundamental changes to the rules relating to funding of legal proceedings in England presently expected to come into force in April 2013. We will describe in later notes the new opportunities which will become available at that time.

This note describes a change that will eliminate a popular element of the present funding regime.

Please click here for a complete copy of this article.

Illinois Prohibits TPAs and UR Organizations from Performing Services Offshore

Wed, 23 Jan 2013 09:33:08 GMT

The Illinois Department of Insurance (“DOI”) issued Bulletin 2012-12 (“Bulletin”) on December 20, 2012, prohibiting the use of offshore third party administrators (“TPAs”) and utilization review organizations (“UR Organizations”) in connection with insurance contracts and healthcare plans covering Illinois residents. The DOI issued the Bulletin in response to the concerns that offshoring TPA or UR Organization functions may make it difficult for the DOI to access books and records kept on file in a foreign jurisdiction concerning Illinois business (for example, the DOI may need access to these records in connection with its company examination). This is in line with the provisions of the Illinois Insurance Law requiring that the DOI be provided with convenient and free access at all reasonable hours to all books, records, documents, and papers relating to the business, performance, operations and affairs of the company in question. Furthermore, the Bulletin expressly provides that maintaining records on a domestically located server will not satisfy the requirement to give the DOI free and convenient access to the documents, as onsite observation and interviewing of those who prepare the documents is often necessary to ensure the authenticity and integrity of the materials.

Please click here for a copy of the Bulletin.

Rhode Island Proposes to Amend its Life Insurance and Annuities Replacement Rule

Tue, 22 Jan 2013 12:09:46 GMT

Rhode Island proposes to amend Insurance Regulation 29 (the “Regulation”) governing the activities of insurers and insurance producers with respect to the replacement of existing life insurance and annuity products by adding a new section to the Regulation on “twisting” and “churning” practices (the “Proposed Rule”). The purpose of the amendment is to expand upon and clarify, with respect to replacements, the prohibition against “twisting” and “churning” set forth in Section 27-29-4.7 of the Rhode Island Insurance Law governing unfair methods of competition.

Section 27-29-4.7 of the Rhode Island Insurance Law defines “twisting” as the practice of “[k]nowingly making any misleading representations or incomplete or fraudulent comparisons or fraudulent material omissions of or with respect to any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance in another insurer.” “Churning” is defined as “[t]he practice whereby policy values in an existing life insurance policy or annuity contract . . . are directly or indirectly used to purchase another insurance policy or annuity contract with that same insurer for the purpose of earning additional premiums, fees, commissions, or other compensation” without a reasonable basis for believing the replacement is in the interest of the policyholder, where the transaction is fraudulent or misleading, where the applicant was not informed of the cost of replacing the exiting policy (e.g., reduction in the policy’s cash value), or about key differences between the existing and replacing policy, and the impact of such differences (e.g., that the policy will not be paid-up, or that additional premiums will be due or that a new contestable period will apply). With respect to “churning,” Section 27-29-4.7 requires that insurers disclose to applicants at the time of the offer the manner in which the policy or contract values of a previously issued policy or contract will be used to purchase a replacing or additional policy or contract with the same insurer. Additionally, it requires that insurers adopt written procedures sufficient to reasonably avoid “twisting” and “churning.”

The Proposed Rule expands upon and clarifies, with respect to replacements, the concepts of “twisting” and “churning” set forth in Section 27-29-4.7 by specifically prohibiting “[a]ny sale or replacement of a life insurance policy that involves fraud, deception or misrepresentation” regardless of whether it falls within Section 27-29-4.7 of the Rhode Island Insurance Law. The Proposed Rule further provides that: (i) the replacements of policies that constitute “twisting” or “churning” are in violation of Section 27-29-4.7; (ii) insurers to which the replacement regulation applies must adopt written procedures as required by Section 27-29-4.7 no later than July 1, 2013; and (iii) the fact that written procedures have not been finalized does not alter the requirement that sales must not constitute “twisting” or “churning.” The Proposed Rule also sets forth various clarifications of the terms used in Section 27-29-4.7, including defining “paid-up policy”, and specifying disclosure timing.

Click here for a copy of the Proposed Rule.

Panama Announces Foreign Reinsurer Registration Requirements

Tue, 22 Jan 2013 09:53:44 GMT

Panama's Insurance Superintendency has announced the creation of a new obligatory register for all foreign reinsurers and reinsurance brokers wishing to do business in the country.

Panama's new Insurance Law, which was passed in April 2012, provided for the creation of a foreign reinsurers' register but the Insurance Superintendency did not announce the requirements for joining the register until publication of a new regulation on December 28, 2012. Foreign reinsurers and reinsurance brokers now have until April 3, 2013, to become registered, a date which marks one year since the Insurance Law 2012 came into force. Local cedants will be prohibited from signing contracts with reinsurers and/or from using reinsurance brokers that are not on the register after that date.

The requirements for foreign reinsurers include providing an international risk rating report, a letter from the home regulator, copies of recent audited accounts and a check payable to the Insurance Superintendency together with a formal written application. The regulation also requires appointment of a resident representative domiciled in Panama. The requirements for foreign reinsurance brokers include a letter from the home regulator and a copy of the broker's E&O policy evidencing cover for operations in Panama.

If you require further information on this or any other Latin America insurance topic, please submit your query via the 'Email the Editor' button.

UK: FSA Publishes Guidance on the Risks to Customers From Financial Incentives

Tue, 22 Jan 2013 09:36:51 GMT

Final guidance aimed at stopping financial firms from running incentive schemes that encourage mis-selling was published by the Financial Services Authority (FSA) on 16 January 2013.

A review on the issue, which was published by the FSA in September 2012, examined the use of sales incentives and applied to insurers, banks, building societies and investment firms. Feedback on the proposed guidance was requested and the final guidelines, entitled 'Risks to customers from financial incentives', provide clarity on some of the issues raised by respondents as well as presenting further examples of good and bad practice.

The guidelines focus specifically on areas such as how incentive schemes may encourage people to mis-sell, how easy it is to understand the schemes, whether firms monitor their sales staff adequately, and whether sales managers may encounter a conflict of interest between earning a bonus and ensuring that staff behaviour meets expectations. The FSA's managing director Martin Wheatley, said that "finalising this guidance is important because it gives financial firms a clear idea of what we expect from them and how they should manage their incentive schemes. It also marks a key step in changing the culture of viewing consumers as a sales target to somebody to serve".

The new guidelines will apply to all firms that deal with consumers and offer incentive schemes for their staff. The FSA has said that it will continue its ongoing review of sales incentives and will put measures in place in order to check whether firms are complying with the guidance.

A copy of the final guidance can be viewed here.

UK: Court of Appeal Upholds Standard Life's £96m "Mitigation Costs" Victory Over Insurers

Tue, 22 Jan 2013 09:27:40 GMT

Ace European Groups & Ors v Standard Life Assurance Ltd [2012] EWCA Civ 1713 concerned an appeal against a decision of the Commercial Court that Standard Life's cash injection into its Pension Sterling Fund constituted an insured "mitigation cost" under the policy and that no apportionment of costs was required. Please see our previous blog on the Commercial Court's decision here.

The main ground of appeal was that Standard Life was not entitled to recover the full amount of the cash injection because there should have been an apportionment of the uninsured costs of reducing brand damage and the insured costs of avoiding third party claims.

Lord Justice Tomlinson, who delivered the leading judgment, rejected this argument as a matter of construction and held that it was "inconsistent with the clear language of the policy" that the ancillary objective of avoiding brand damage should prevent the insurers from paying out the full amount that they had promised to pay for costs incurred in avoiding third party claims.

Tomlinson LJ did not agree that apportionment, having its origins in sue and labour provisions of marine contracts, could be applied beyond the scope of marine property insurance and found the principle to be "unworkable in the field of liability insurance."

The court also rejected the subsidiary ground of appeal concerning windfall. The appellants submitted that 36% of the cash injection had been paid to customers who would not have had any claim because no misrepresentation had been made to them. Tomlinson LJ described this argument as "quite hopeless" because the cash injection was indivisible and could not be reduced if it were to fulfil its purpose of reinstating the Fund to its original value.

This decision confirms that the principle of apportionment will not apply in the field of liability insurance. The decision can be read in full here.

UK: Commercial Court Refuses Insurers Permission to Amend Pleadings on Grounds of Non-Disclosure

Tue, 22 Jan 2013 09:22:03 GMT

In Quadra Commodities S.A. v Ergo Versicherung AG & Ors [2012] EWHC 2687 (Comm) the Commercial Court refused the defendant cargo insurers leave to amend their Defence and submit a Counterclaim in respect of alleged non-disclosure on the claimants' part.

The cargo insurance claim, due to be heard in January 2013, concerned a shipment of soybeans that suffered heat damage during storage in warehouses in Indonesia.

The defendants alleged that the claimants failed to make several disclosures including their knowledge that the warehouses were owned by the buyers of the cargo and were in a dirty condition.

The judge found the defendants' submissions concerning non-disclosure to be untenable and accordingly rejected the defendants' application.

This decision should serve as a warning to insurers that they should consider all possible defences at the outset as the courts may not entertain subsequent applications to amend their pleadings.

Reactions Award Marks Impressive Year for Edwards Wildman

Tue, 22 Jan 2013 09:11:02 GMT

Edwards Wildman finished a strong year of recognition in 2012, highlighted by its ranking as the #1 law firm in the US in Reactions’ annual survey of insurance law firms. The firm garnered the top spot on the strength of top rankings in the categories of “Regulation” and “Insolvency,” as well as a third-place ranking in “Litigation.” In the London market, Edwards Wildman was named the best Litigation practice, and the firm took the second spot for “Reinsurance.”

“Competition is always fierce amid law firms in the US insurance market,” the publication said in the article accompanying the survey results. “This year, Edwards Wildman has triumphed against its rivals, also picking up the top place in the table for regulatory advice.”

Also in 2012, Legal Week presented the firm with its “London Office of the Year” award at the publication’s British Legal Awards 2012. This was the third time that a UK legal publication short-listed Edwards Wildman’s London office for a prestigious award in 2012. In December, Edwards Wildman once again earned a spot in the BTI Client Service A-Team list. Finally, Dow Jones recognized Edwards Wildman in May as a top 10 firm for private equity and venture capital deals.

The award streak continued into the new year when the firm received the “Outstanding Entertainment & Media Law Firm Award” from the Association of Media & Entertainment Counsel (AMEC) at the organization’s eighth annual Counsel of the Year Awards on January 11, 2013. AMEC recognized the firm's achievements in serving as outside counsel for major studios, TV and cable networks, consumer products companies, and book and interactive game and media publishers.

Michigan Insurance Regulator Elevated to Cabinet-Level Department

Fri, 18 Jan 2013 12:52:37 GMT

Pursuant to Executive Order 2013-1, dated January 16, 2013, Michigan Governor Rick Snyder has created a new cabinet-level department of the state government, the Department of Insurance and Financial Services (the “New Department”). Governor Snyder's executive order becomes effective in 60 days. The New Department will replace the existing state insurance regulator, the Office of Financial and Insurance Regulation (“OFIR”), which operated under the aegis of the Department of Licensing and Regulatory Affairs. The Detroit Free Press reports that Kevin Clinton, who serves as the commissioner of the OFIR, will become the director of the New Department, but will have to be approved by the Michigan Senate.

The executive order maintains all currently effective OFIR regulations, bulletins and orders, and transfers all records, personnel and property of the OFIR to the New Department. According to the Governor’s Office, elevation of the OFIR to departmental status is intended to “provide a focal point of consumer protection, enable efficient and effective regulation, and position the insurance and financial services sector for economic growth.” The New Department has been further justified by the importance of the insurance and financial service industries in Michigan’s economy. According to the Governor’s Office:

these industries directly employ over 150,000 Michigan residents and account for more than $9 billion of annual payroll;
Michigan is home to over 300 state banks and credit unions and 149 insurance companies;
Michigan serves as a port of entry and chief U.S. regulator for five Canadian insurance companies; and
nearly 1,500 out-of-state insurance companies do business in Michigan.

New HIPAA Regulations Released

Fri, 18 Jan 2013 10:23:18 GMT

On January 17, 2013, the U.S. Department of Health and Human Services released final regulations implementing changes to HIPAA mandated by the HITECH Act, as well as updated regulations under the Genetic Information Nondiscrimination Act. This major rulemaking package includes changes to the HIPAA privacy rule, information security rule, data breach notification rule and enforcement rule. The regulation is effective on March 26, 2013, with a compliance date of September 23, 2013 for both covered entities and business associates.

Features of the regulations include: implementation of the increased penalties required by HITECH, with additional guidance on the impact of intent on penalty amounts; changes to the requirements for a covered entity's Notice of Privacy Practices; changes to the rules for marketing using PHI and restrictions on the sale of PHI; replacement of the "risk of harm" test in the data breach rule with an objective test for breach notification; and implementation of the HITECH Act's business associate requirements, to name just a few. Based on the rule's introductory summary, covered entities and business associates are going to be kept busy complying with the rule's new requirements.

Edwards Wildman Palmer is in the process of analyzing this comprehensive (and lengthy) rule. We will be following up soon with additional blog posts and advisories analyzing the key provisions and changes. In the interim, if you have immediate questions, please contact your Edwards Wildman attorney, or any of the attorneys listed on this page.

UK: FSA Issues Consultation Papers and Guidance on Proposed Changes to Regulatory System

Wed, 16 Jan 2013 08:35:28 GMT

The Financial Services Authority (FSA) recently published a series of papers relating to the proposed changes to the regulatory requirements needed to create the new rulebooks and policies for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Although the current FSA Handbook will be adopted by the FCA and the PRA, certain amendments need to be made to reflect the additional powers afforded to the new regulators by the Financial Services and Markets Act 2000 (FSMA). These new rulebooks will come into effect when the new regulators acquire their legal powers, which is currently scheduled to happen on 1 April 2013.

The papers, released in December 2012, comprise a consultation paper on decision-making procedures and penalties policies (CP 12/37), a consultation paper on the proposed statutory enforcement policies and procedures (CP 12/39), and further information on the transition towards the PRA.

The Financial Services Bill: implementing markets powers, decision-making procedures and penalties policies: CP 12/37

CP 12/37 is primarily consulting on the changes needed to certain parts of the FCA’s new Handbook and includes proposed amendments to the Listing Rules sourcebook, the Disclosure and Transparency Rules sourcebook, the Recognised Investment Exchanges and Recognised Clearing House sourcebook, and the Decision Procedure and Penalties Manual.

Of particular interest from an enforcement perspective are the proposed amendments to the Decision Procedure and Penalties Manual. The amendments include a draft statement of the procedure the FCA intends to follow when publishing information about the matter to which a warning notice relates. It also confirms that the FCA will have to consult with those persons to whom the warning notice is given before the notice is made public, with recipients to be given seven days to respond. The FCA will not publish any notice if it believes that to do so to would be unfair to the person in respect of whom action has been taken, or where it would be prejudicial to the interests of consumers or the stability of the UK financial system.

The deadline for responses to CP 12/37 is 1 February 2013.

The PRA's approach to enforcement: consultation on proposed statutory statements of policy and procedure: CP 12/39

CP 12/39 is a joint consultation between the FSA and the Bank of England in which the PRA's proposed statutory enforcement policies and procedures are considered. The proposed policies required by the amended FSMA include, amongst others, a statement of the PRA's proposed policy on the imposition and amount of penalties under FSMA, a statement of the PRA's proposed policy on the imposition and period of suspensions or restrictions under FSMA, and a statement of the PRA's proposed policy on the publication of disciplinary and other enforcement actions.

These statements will replace existing FSA material, namely those currently included in the Decision Procedure and Penalties Manual, which will not be adopted by the PRA.

Responses to the consultation should be submitted by 28 February 2013.

Further information on the transition towards the PRA

The FSA issued further information regarding the transition towards the PRA on 17 December 2012. The letter, written by Andrew Bailey, the Managing Director of the Prudential Business Unit, provides detail on what firms need to do in order to be ready for the 'legal cutover' on 1 April 2013.

The introduction of the new regulators and the powers that come with them is driven by a need to bring increased transparency to the enforcement process. The proposals, however, have been subject to criticism, with some firms voicing concerns over the lack of guidance to clarify the regulators' policy intentions.

A further update from the FSA is expected in early 2013.

A copy of consultation papers CP12/37 and CP12/39 can be viewed here and here, and the FSA's information pack on the transition towards the PRA can be viewed here.

Healthcare Update: New ACOs Approved; More States Receive Approval for Exchanges

Tue, 15 Jan 2013 12:19:44 GMT

NEW ACOs APPROVED
On January 10, the U.S. Department of Health & Human Services (HHS) announced that it had approved 106 new accountable care organizations (ACOs), bringing the total approved to 259 thus far. An HHS official had predicted in November that the number of ACOs might double in January. ACOs contract with Medicare to provide coordinated care to Medicare beneficiaries under the Medicare Shared Savings Program, established under the Patient Protection and Affordable Care Act (PPACA).

ACOs that satisfy certain prescribed quality criteria and reduce healthcare costs for their patient populations will be entitled to share in the savings realized by the Medicare program. About 4 million Medicare beneficiaries are now potentially covered by ACOs, according to HHS Secretary Kathleen Sebelius. Many other “ACO-like” organizations have also been formed, often in conjunction with health insurance companies, to coordinate care to non-Medicare patient populations. A further discussion of ACOs may be found here.

ACOs have now been approved in most U.S. states, plus the District of Columbia and Puerto Rico. The newly approved ACOs are mostly located in the Northeastern U.S. (particularly Massachusetts and Connecticut), the Florida/Georgia area, California, and Texas.

MORE STATES RECEIVE APPROVAL FOR EXCHANGES
On January 3, HHS Secretary Sebelius announced that eight more states had been conditionally approved to operate health insurance exchanges, either by themselves or in partnership with the federal government. This brings the total number of approvals thus far to 19 states, plus the District of Columbia. Other states still have until February 15, 2013 to elect to operate State Partnership Exchanges. Residents of any state that chooses not to operate its own exchange, either alone or in partnership with the federal government, will be able to purchase insurance on a “federally facilitated exchange” beginning October 1, 2013. PPACA requires that an exchange of one type or another be operating in every state as of January 1, 2014.

NEXT STEPS
Edwards Wildman’s Healthcare Practice Group will continue to monitor healthcare news from Capitol Hill, CMS, HHS, and other federal and state agencies and courts, and will bring you timely updates as new developments occur.

* Chris Finney Commentary: UK: Fresh Thinking From the FSA About With-Profits Insurance in the Mutuals Sector

Mon, 14 Jan 2013 10:43:57 GMT

The FSA and the mutuals sector have been struggling for almost a decade to resolve the tensions that arise when a mutual's declining with-profits business effectively forces it into run-off and the full distribution of its with-profits fund - unless it can find a fair way of holding back part of the fund to support the development of other types of business.

On 19 December 2012, the FSA published fresh proposals that will allow mutuals to resolve these tensions in a way that's fair to their with-profits policyholders, and their other members.

Under the FSA's proposals, a mutual with a single with-profits fund will be able to:

undertake an appropriate exercise to fairly separate that fund into a "mutual members' fund" and a (narrower) "with-profits fund"; and
apply for a rule modification that (if granted) will allow or require the firm to apply the Treating With-Profits Policyholders Fairly rules (COBS 20) to the narrow "with-profits fund", but not the mutual members' fund sitting alongside it.

When that's done, the narrow with-profits fund will be run-off and distributed in the usual way; and the firm will be able to use its mutual members' fund to support new business.

For some mutuals, this will be ideal. They'll be able to complete a separation exercise that works in their particular circumstances and stay in business after they've run-off their with-profits fund. But for others, it will be so complex, time consuming and expensive (*) that it will be impossible to take advantage of the new opportunities. These proposals will therefore be welcomed many in the mutuals sector - although they may still seek to persuade the FSA to materially lighten the load. But this is unlikely to be the end of this particular road.

The FSA's consultation period closes on 19 March 2013. It's currently expected that the new arrangements will be available to mutual with-profits insurers from mid to late summer.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

* A firm seeking to take advantage of the FSA's proposals will need to:

persuade the FSA that what it proposes to do is fair, it's not a reattribution and that run-off wouldn't be a better choice for its members;
obtain an independent assessment, which explains how its proposals will affect its policyholders and members;
demonstrate that its policyholders will not be worse off than equivalent with-profits policyholders in a proprietary with-profits fund;
ensure that its with-profits policyholders and other members will be appropriately engaged in the process and kept informed throughout;
choose and implement an appropriate separation process;
persuade the FSA that the rule modification tests have been met, and that it can and should grant the rule modification required to allow the firm to apply COBS 20 to the narrow with-profits fund, but not the members' fund sitting alongside it.

First Circuit: Arbitration Decision Bars Insured From Litigating Coverage Issues

Mon, 14 Jan 2013 09:45:47 GMT

In a recent decision, the U.S. Court of Appeals for the First Circuit held that the doctrine of issue preclusion barred an insured from litigating the applicability of an insurance policy exclusion where an arbitration panel had previously addressed a related, but not identical, question of law. The case is Manganella v. Evanston Insurance Company, No. 12-1137. A copy of the decision is available here.

The dispute arose in the context of the sale of clothing retailer Jasmine Company, Inc. (“Jasmine”) to Lerner New York, Inc. (“Lerner”). As part of the sale, Jasmine’s president, who was to retain his position for three years, agreed to adhere to Lerner’s corporate Code of Conduct. The Code of Conduct prohibited sexual harassment, among other things. A subsequent investigation conducted by Lerner unearthed charges of sexual harassment against Jasmine’s president by several former employees. As a result of the allegations, Lerner invoked an arbitration clause in the parties’ stock purchase agreement. Finding in favor of Lerner, the arbitration panel determined that the president had sexually propositioned several female employees in willful violation of Lerner’s corporate Code of Conduct.

Shortly before the arbitration concluded, one of Jasmine’s former employees filed a charge of discrimination against Jasmine’s president with the Massachusetts Commission Against Discrimination (MCAD). The president thereafter notified Jasmine’s insurer, Evanston Insurance Company, which had issued an Employment Practices Liability Insurance Policy to Jasmine on a claims-made basis. Evanston denied coverage for the claim on the ground that the alleged harassment occurred before the policy’s retroactive date, precluding coverage. The insurer also advised its insured that coverage was precluded by an exclusion in the policy that barred coverage for claims based on conduct committed with “wanton, willful, reckless or intentional disregard of any law” that is the foundation for the claim.

Jasmine’s president thereafter brought a declaratory judgment action against Evanston seeking a declaration that the insurer was required to defend and indemnify him against the former employee’s MCAD charge. The district court concluded that the conduct described in the MCAD charge fell within the policy’s exclusion, and that the arbitration panel’s determination that president had harassed Lerner’s employees in willful violation of Lerner’s Code of Conduct also established that, for purposes of the exclusion in the Evanston policy, he acted with “wanton . . . disregard” of Massachusetts law prohibiting sexual harassment. Affirming the district court, the First Circuit determined that Lerner’s corporate policy and Massachusetts state law concerning sexual harassment were substantially similar, and therefore, sexually harassing conduct committed in violation of Lerner’s Code of Conduct would necessarily show a reckless disregard for whether that conduct was lawful. The First Circuit accordingly held that the doctrine of issue preclusion barred the insured from relitigating the issue of whether the policy’s exclusion precluded coverage for the allegations in the MCAD charge, and affirmed the lower court’s grant of summary judgment in favor of the insurer.

Edwards Wildman Team Gets Big Coverage Win in TCPA Violation Case

Mon, 14 Jan 2013 09:19:17 GMT

An Edwards Wildman team led by Steve Prignano (Providence), Josh Broudy (Hartford) and David Sigmon (New York) obtained summary judgment for our client National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”) in a case involving coverage claims brought by Payless Shoe Source, Inc. (“Payless”). On January 4, 2013, a Kansas federal judge tossed out those claims against National Union, which stemmed from Telephone Consumer Protection Act (“TCPA”) class actions, stating that the policies contained clear and unambiguous exclusions that applied in the case.

The underlying class actions alleged that Payless violated the TCPA and related state statutes by making unsolicited phone calls to consumers, leaving them pre-recorded telephone messages and by sending thousands of unauthorized text message advertisements to consumers’ cell phones through third-party marketers and automatic dialing systems. Payless was seeking approximately $10.8 million in coverage, which the Edwards Wildman team knocked out on the basis of a violation of communication statutes exclusion contained in the policies.

Among other points of contention in the case, the court rejected Payless’s argument that the exclusion should be narrowly construed to apply only when there is a finally-adjudicated violation or liability. Since the underlying class actions settled without an admission of liability, Payless argued that the exclusion could not be triggered. The court noted, however, that nothing in the exclusion required a formal adjudication and that it was sufficient if the liability arose from statutory violations. The underlying plaintiffs “alleged precisely such statutory violations, and liability arose from those violations,” the court stated. The court further rejected Payless’s attempt to contrast the subject exclusion with other exclusions in the National Union policies and underlying primary policy which excluded liability for actual or alleged claims, holding that, among other things, the language of unambiguous exclusions should be considered separately without resort to “broader principles of construction.”

The court also pointed out that under Kansas law there is a duty to defend only if there is a “potential for [insurer] liability under the policy.” As the court noted, had the underlying plaintiffs secured a judgment against Payless for statutory violations of the TCPA, such judgments “would have necessarily brought the liability within [the] statutory communications exclusion.” Likewise, the court rejected Payless’s reliance upon a provision that National Union would defend “groundless, false, or fraudulent” suits, finding that this promise only extended to coverage to which the National Union policies applied.

Lastly, the court rejected Payless’s arguments that National Union should defend it because the underlying class plaintiffs “might have” brought claims for common law invasion of privacy, which would not have implicated the violation of communication statutes exclusion. Noting that the underlying plaintiffs never actually asserted any common law privacy claims, and their complaints presented no factual allegations supporting such claims, the court held that the claims were properly viewed as purely statutory in nature, thereby triggering the exclusion.

The Memorandum and Order from the District of Kansas can be found here.

California Governments Launch Libor Litigation

Mon, 14 Jan 2013 09:03:28 GMT

A recent development in what some have characterized as the largest financial scandal in the history of the market emerged this week when five civil lawsuits were filed in California federal courts involving claims that numerous banks manipulated the Libor interest rates for profit. While the Libor scandal itself may be old news—official governmental and regulatory investigations into the claims of fraudulent rate inflation and deflation were already underway, and public knowledge, in early 2012—the complaints filed by Burlingame-based Cotchett, Pitre & McCarthy LLP on behalf of local municipalities, including San Diego and San Mateo counties, the cities of Richmond and Riverside and the East Bay Municipal Utility District, suggest that the scandal is far from over.

This new rash of litigation alleges that Bank of America Corp., JP Morgan Chase & Co., HSBC Holdings PLC, Deutsche Bank AG and 18 other financial institutions were involved in, and conspired to, knowingly providing false Libor rates and places millions (if not billions) of dollars at issue. More specifically, the plaintiff municipalities claim they purchased bonds to finance various projects between 2005 and 2010 and were paying a fixed interest rate on said bonds to the banks. The crux of the complaints is that the return rates the municipalities received were either inflated or suppressed through manipulation of the Libor by the defendant banks. The specific actions are as follows:

City of Richmond et al. Bank of America Corp., et al., 13-cv-00106 (N.D. Cal. filed Jan. 9, 2013);
City of Riverside et al. v. Bank of America Corp., et. al., 13-cv-00062 (C.D. Cal. filed Jan. 9, 2013);
East Bay Municipal Utility Dist. v. Bank of America Corp., et al., 13-cv-00109 (N.D. Cal. filed Jan. 9, 2013);
County of San Diego et al. v. Bank of America Corp., et al., 13-cv-00048 (S.D. Cal. filed Jan. 9, 2013);
County of San Mateo et al. v. Bank of America Corp., et al., 13-cv-00108 (N.D. Cal. filed Jan. 9, 2013).

Notably, these actions, which were all filed on January 9, 2013, surfaced just one day before reports from London that the Royal Bank of Scotland is expecting to face several hundreds of millions of dollars in fines from U.S. and U.K. authorities for its role in the Libor scandal. Last July, Barclays Bank was fined $200 million by the Commodity Futures Trading Commission, $160 million by the United States Department of Justice and £59.5 million by the Financial Services Authority for attempted manipulation of the Libor and Euribor rates. Then, in December, Swiss bank, UBS was fined a total of $1.5 billion by US, UK and Swiss regulators for their involvement in rate-rigging. As other criminal investigations proceed in the U.S. it appears more hefty fines levied against the banks is imminent and many suspect that a new breed of class actions will be born.

* Chris Finney Commentary: EU: Solvency 1½ to be Implemented on 1 January 2014

Fri, 11 Jan 2013 10:25:39 GMT

Although there's a strong sense in the London Market that Solvency II has almost gone away, 2013 already looks as if it will generate a large amount of Solvency II implementation work:

1)    The Long-Term Guarantee Assessment: in July 2012, the trilogue parties (the European Parliament, the Council of Europe, and the European Commission) asked the European Insurance and Occupational Pensions Authority (EIOPA) to assess the potential impact of the Long-Term Guarantee Package (LTGP) on policyholders and firms, before they decide what type of LTGP they will include in Omnibus II (if any). EIOPA's Long-Term Guarantee Assessment (LTGA) begins on 28 January 2013. Participating firms will be asked to submit their results to national supervisors before the end of March 2013; and EIOPA's Report will be available in June 2013.

EIOPA hasn't published its terms of references for the Assessment, but it's widely thought that it will include the counter-cyclical premium; the matching adjustment; the extrapolation of the risk-free rate; and transitional measures. Nor has EIOPA published the whole of the technical specifications firms will be expected to use when they prepare their Assessment Returns. (Part 1 of the technical specifications were published on 18 October; and materially revised and republished on 21 December 2012; but Part 2 - which will include the LTGP specifications - is still not available.) Further, it's not yet clear which firms will be invited - or required - to participate, and whether the invitation will be at the national regulators' discretion, or not. The biggest practical concern for most participating firms is that the LTGA coincides with the preparation of their year-end regulatory returns, making it difficult (at best) to prepare a second set of returns for EIOPA.

Part 1 of the technical specifications is available here; and EIOPA's press statement on the LTGP Assessment is available here.

2)    Finalising Omnibus II, and bringing it into force: When EIOPA's Report has been finalised, the trilogue parties will meet to negotiate and agree the final text of Omnibus II. But Omnibus II will only be made when it's adopted by the European Parliament and Council. The European Parliament has "pencilled in" its Omnibus II plenary vote for 10 June 2013, but it seems likely that this will slip to July or September (allowing for the summer recess). When Omnibus II's been made and finally comes into force, EIOPA will be able to release its draft Technical Standards and Guidelines for what's likely to be an abridged Consultation period. We anticipate that Consultation will begin before the end of the year. If it does, Solvency II's Pillar 1 could be in force in 2015.

3)    Implementing Solvency 1½: in the meantime, EIOPA has said that it would like to see most of Pillar 2, and some of Pillar 3 in force from 1 January 2014. To enable that to happen, it's proposing to issue "comply or explain" Guidelines for consultation in March or April 2013. These Guidelines will be addressed to the supervisory authorities of the European Member States. These authorities will be "expected to ensure that insurance and reinsurance undertakings have in place an effective system of governance which provides for sound and prudent management of the [firm] and an effective risk management system including a forward looking assessment of the [firm's] own risks (based on the ORSA principles)". National competent authorities will also be expected to review and evaluate firms' systems, and work closely with them on their internal models - especially as the internal model framework continues to evolve.

The Commission's Guidelines Consultation will be open for 6 weeks. The European Member States will be expected to comply with them from 1 January 2014, or explain why they're not. EIOPA will publish the Member States' explanations on its website in due course.

Although this piecemeal approach will not be welcomed by everyone, it does at least allow firms that have invested heavily in Solvency II to see a return on some of their work. As one might expect, the UK's FSA already looks as if it's ahead of the game, and that will also be helpful to some especially if it means they can use (eg) their internal model to calculate their capital requirements, instead of having to double run them with the ICAS regime. Germany, France, the Netherlands, Luxembourg and Malta are likely to follow suit.

In the circumstances, and although Solvency II clearly withered on the vine last year, green shoots are already beginning to appear.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

* Chris Finney Commentary: UK: How "Final" is a "Final and Binding" Decision from the Financial Ombudsman Service?

Thu, 10 Jan 2013 13:02:50 GMT

At its most basic, the Financial Ombudsman Service (FOS) is there to resolve disputes between consumers and financial services providers. If an "eligible complainant" makes an "eligible complaint", the FOS will consider the complaint and make a determination. If the complainant accepts the FOS' determination, "it is binding ... and final" (see section 228(5) of the Financial Services and Markets Act 2000). It's also enforceable in the Courts.

This works especially well for consumers with complaints that fall within the FOS' "Award Limit" of £150,000 because it's quick; it could also be risk and cost free.

But what happens if the FOS makes an award of £150,000, finds the complaint is worth more, and recommends a payment of (say) £500,000?

Until 19 December 2012, it was generally thought that if the consumer accepted the FOS' award, the firm could be compelled to pay £150,000, but no more. For that reason, consumers with larger complaints either (i) issued proceedings to recover the whole of the value of their claim; or (ii) asked the FOS to determine their complaint and, if the FOS recommended a payment in excess of £150,000 but the firm declined to pay any more, rejected the FOS' determination (to avoid being bound by it) and issued proceedings instead.

That made sense: it was consistent with the Act ("binding...and final") and the decision in Andrews -v- SBJ Benefit Consultants, where the High Court found that if a complainant accepted the FOS' determination, he couldn't issue proceedings in the hope of recovering any more.

On 19 December 2012, the High Court handed down its decision in Clark -v- In Focus Asset Management & Tax Solutions Limited, and turned the earlier thinking on its head.

Andrews and Clark turned on the "doctrine of merger": "...a person who has obtained a final judgment in a tribunal of competent jurisdiction is precluded from later recovering in court a second judgment for the same relief in respect of the same subject matter" (per Cranston J, at paragraph 23 of the decision in Clark).

In Andrews, the Court found that when the complainant accepted the FOS' award, he obtained "a final judgment in a tribunal of competent jurisdiction". He couldn't therefore ask for a second judgment from the Courts.

In Clark, the Court found that the FOS was not a "tribunal", and that when a complainant accepted an award of £150,000 which included a recommendation that the firm should pay more, that was not a "final judgment", it was merely the end of the FOS process. The complainant could therefore accept the FOS' determination, bank the firm's payment of £150,000, and ask the Court to order more.

This necessarily creates uncertainty for firms which can only be resolved by Parliament or the Court of Appeal. (It's not yet clear whether In Focus Asset Management & Tax Solutions Limited will appeal.) In the meantime, there are a number of reasons for supposing that Andrews is more likely to prevail than Clark. However, that outcome cannot be guaranteed. Firms should therefore consider using other appropriate ways of mitigating their "doctrine of merger" and other risks until the issue is resolved one way or the other.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

Insurance & Reinsurance Review - January 2013

Wed, 09 Jan 2013 14:05:38 GMT

Edwards Wildman Palmer's Insurance and Reinsurance Department recently published its latest Newsletter, Insurance & Reinsurance Review - January 2013, which contains eight articles about various topics in the insurance and reinsurance industry. Please click on the links below to read each article and if you would like to be added to the mailing list to receive the next edition of the Insurance and Reinsurance Review, please email us at InsureReinsure@edwardswildman.com. To view the entire Insurance & Reinsurance Review - January 2013, please click here.

IN THIS ISSUE

When Sandy Became a Superstorm But Not a Hurricane: The Effect on Deductibles
by Laurie Kamaiko and Jim Killelea

‘Boilerplate’ Clause Causes Problems for Egyptian Ship Owner
By David Kendall and Ajita Shah

Take Control of Litigation with Early Case Assessments
By Stephen Prignano and Matthew Murphy

A Regulatory Coup for Gibraltarian Insurance Business as the English High Court Sanctions the First Part VII Transfer into the UK
By Chris Finney and Joanne Elieli

Reinsurance is No Exception: A Case of Staying and Not Following
By Mark Everiss, Sam Tacey and Joanne Elieli

Virginia Supreme Court Construes Four Exclusions as Barring Coverage in First-Party Chinese Drywall Claim
By John David Dickenson and Matthew Criscuolo

Time is Money: Aviation Insurers Look to the Sky as ECJ Opens the Door to Delayed Flight Claims
By Stephen Ixer

Industry Presence

The Edwards Wildman INSURANCE AND REINSURANCE REVIEW is GOING ELECTRONIC in March 2013

Over the past sixteen years, it has given us great satisfaction to see a copy of the Insurance and Reinsurance Review on your desks when we have visited you at your offices. We enjoy hearing your positive comments on our articles when we see you at conferences and other industry events. We are gratified when you request that we provide an in-house seminar based on a topic that you’ve read about in the latest edition. After such a good, long run, we have decided, in step with the times, to deliver the Review by e-mail only. The January 2013 edition will be the last hard copy issue, although we will be issuing an “annual wrap-up” in hard copy in January 2014.

Therefore, please send your email address to eadorno@edwardswildman.com so that there will be no interruption in providing you with the in-depth analysis of today’s industry issues you have come to value.

UK: FSA Announces Study of Add-on General Insurance Products

Tue, 08 Jan 2013 10:20:19 GMT

On 19 December 2012, the Financial Services Authority (FSA) announced its plan to undertake a study into general insurance products sold as add-ons. Insurance add-ons are often sold with other, larger purchases, such as a car, a holiday or an electronic device.

The FSA previously highlighted this market as one of concern in its Retail Conduct Risk Outlook 2012 report (RCRO) and, in preparation for the transition to the Financial Conduct Authority (FCA), is now developing its approach to competition by conducting research. The study therefore intends to examine whether there are "common features of the add-on markets that weaken competition and drive poor consumer outcomes".

Although the regulator has not yet defined what exactly will be analysed under the term 'add-on', it has said that it will focus on all of "the relevant markets" and will take account of both firms' and consumers' behaviour. It is possible that insurers and brokers could also come under scrutiny by the FSA, as the announcement cites the RCRO, in which the way general insurance brokers sold add-ons is criticised for being "not easy for customers to understand". Add-ons are labelled an 'emerging risk' in the RCRO, and the FSA warns that some firms might "incentivise staff to pressure sell or to automatically include the add-on without explaining the cover properly or that it is optional". Whether or not enforcement action will be generated against individual firms should the FSA not be satisfied with the study's findings remains to be determined.

The FSA will aim to complete its study by the third quarter of 2013, with the results published shortly afterwards. Any subsequent proposals for intervention will be handled by the FCA.

The move by the FSA comes as a fresh regulatory probe, on top of the Competition Commission's investigation into the supply and acquisition of private motor insurance in the UK (previously blogged here).

A copy of the FSA's statement can be viewed here.

New York Amends Holding Company Regulations

Fri, 04 Jan 2013 15:45:04 GMT

Last month, the New York Department of Financial Services (“DFS”) published notice in the New York State Register that it would be adopting several amendments to its holding company regulations. The DFS stated that the purpose of the amendments is to bring New York regulation in conformance with the National Association of Insurance Commissioners (“NAIC”) 2010 model Insurance Holding Company System Regulatory Act in order to ensure that New York maintains its NAIC accreditation status. The Proposed Third Amendment to 11 NYCRR 80-1 (Insurance Regulation 52) (the “Amendments”) will, among other things, require that:

The board of directors to certify in the annual registration statement (Form HC 1) that it oversees corporate governance and internal controls, and that the regulated insurer’s officers or senior management have approved, implemented and continue to maintain and monitor corporate governance and internal control procedures.
Every regulated insurer submit a list that identifies each unauthorized insurer in the holding company system and to file a copy of the unauthorized insurer’s most recent annual statement if the annual statement is not available electronically from the NAIC.
Reinsurance agreements involving the regulated insurer be filed for prior approval only when the premium or change in liabilities equals or exceeds 5% of surplus to policyholders, unless other specified circumstances are not met.
Any management agreements, service contracts, tax allocation agreements, guarantees or cost-sharing arrangements involving the regulated insurer be filed for prior approval.
A holding company seeking to divest its controlling interest in a regulated insurer must file prior notice with the DFS unless an application for approval of the acquisition (Form A) is being filed.

Click here to view a complete copy of the Amendments, which will be effective 60 days after Notice of Adoption is published in the New York State Register. The comment period closes on February 9, 2013.

UK: Valiant Appeal in Loss of Hire Case Dismissed

Thu, 03 Jan 2013 11:59:40 GMT

The Court of Appeal in Valiant Insurance Co v (1) Sealion Shipping Ltd (2) Toisa Horizon Inc [2012] EWCA Civ 1625 has affirmed the High Court's first instance decision that the insureds (the Respondents) were entitled to an indemnity under a loss of hire marine insurance policy issued by Valiant, the Appellant. The policy entitled the insureds to $70,000 per day, plus interest, for a maximum of thirty days in excess of twenty-one days.

Following a breakdown of its port motor during a long-term charterparty (the first occurrence), the insured vessel commenced a period of off-hire lasting eighty-two days. While the two motors on the port and starboard sides of the vessel were removed for repairs, the Respondents undertook maintenance work on an unused cooler which could not be easily accessed with the motors in place. During this maintenance work, a hydraulics failure occurred (the Second Occurrence), requiring the dry-docking of the vessel and further repairs. The Respondents used the occasion of the vessel's dry-docking to undertake various works already scheduled for later that year. The starboard motor broke down, requiring further repairs (the third occurrence) before the vessel could be restored to the charterers.

Valiant argued that the Second Occurrence had broken the chain of causation and the indemnity payable should therefore be reduced accordingly. Lord Justice Gross in the Court of Appeal said the question was fact-sensitive, and that the reasonableness of undertaking the work which led to the Second Occurrence and the works' close relationship to the Respondents' efforts to mitigate, told strongly against any suggestion that the Second Occurrence broke the chain of causation.

He rejected Valiant's submission that separate excess periods of twenty-one days should be applied to each occurrence, noting that the policy wording did not permit or oblige him to do so.

Valiant submitted that no loss of hire had been suffered by the Respondents in respect of the Second Occurrence as they had undertaken their own work (thus saving time and earning capacity later), and that any decision in favour of the Respondents conferred a windfall. Gross LJ disagreed and said for this point to succeed, he would have to read into the policy a requirement for the Respondents to give credit for time saved later. He said there was no warrant for reading any such term into the policy.

To view the judgment in full, click here.

UK: FSA Continues Charge Against Mis-selling of PPI

Thu, 03 Jan 2013 09:16:10 GMT

In Ollerenshaw and Reeh v the Financial Services Authority (the FSA), former directors of the Black and White Group Limited (in liquidation) (B&W), challenged decisions of the FSA in a reference to the Upper Tribunal.

B&W specialised in arranging mortgages and associated insurance, including Payment Protection Insurance (PPI), using a panel of between 20 and 25 mortgage lenders. PPI accounted for 20 to 25% of B&W's revenue. One of B&W's panel lenders, Money Partners, had granted B&W a significant loan facility. Following a visit of B&W in October 2005, the FSA raised concerns regarding B&W's corporate governance practice and regulatory compliance. An FSA investigation found that B&W's advisers were being pressurised to sell products provided by Money Partners and to sell PPI without regard to the suitability of the product. An incentive scheme where cash prizes were awarded to advisers for PPI sales was also found to be higher than that for other sales.

By Decision Notices issued to Mr Ollerenshaw and Mr Reeh in August 2010, the FSA imposed prohibition orders prohibiting both individuals from performing regulated activities on the grounds that neither was a "fit and proper person". In addition to the prohibition orders, both individuals received a financial penalty.

Having reviewed the evidence and mitigating circumstances before him, His Honour Judge Mackie varied the Decision Notices as to penalty. A prohibition order was made against Mr Ollerenshaw but not against Mr Reeh and the financial penalty imposed on both individuals was reduced.

The case reminds regulated firms that good corporate governance and regulatory compliance remains a key target for the FSA and firms must take care to ensure that customers are treated fairly.

To view the Tribunal's decision, please click here and to view the FSA's press release, please click here.

Healthcare Update: Fiscal Cliff Deal Includes Temporary “Doc Fix” for 2013

Thu, 03 Jan 2013 08:03:44 GMT

As all are aware, on New Year’s Day, the Senate and the House of Representatives approved a bill to avert the so-called fiscal cliff. The “American Taxpayer Relief Act of 2012” includes the latest in a series of one-year patches to prevent major cuts in physician Medicare fees. The proposed Medicare Physician Fee Schedule for calendar year 2013 had called for an overall 26.5% reduction in payment rates for physicians, nurse practitioners and physical therapists. President Obama hailed the bill and said that he would sign it into law.

Fee Schedule payments are determined by a Sustainable Growth Rate (SGR) formula that was adopted in the Balanced Budget Act of 1997, which the Centers for Medicare & Medicaid Services (CMS) is required to follow. The payment cuts were avoided this time largely by offsetting reductions in payments to acute care hospitals and for end-stage renal disease care, among numerous other things. Hospitals that treat a “disproportionate share” of uninsured and Medicaid patients will be particularly hard-hit by the reductions. Fee Schedule payment rates will now be frozen at their current levels through December 31, 2013.

Many healthcare organizations, including the American Medical Association, Medical Group Management Association and American Hospital Association, have urged Congress to find a permanent solution to the annual SGR problem, but a permanent fix is expected to cost the government $300 billion. In a statement, AMA President Jeremy Lazarus said, “This last-minute action on the part of Congress is a clear example of how the Medicare program is increasingly unreliable for physicians and patients. This instability stalls progress in moving Medicare toward new healthcare delivery models that can improve value for patients through better care coordination.”

The one-year “doc fix” is estimated to cost the federal government $25.2 billion, of which $19.6 billion is expected to be offset by recovering past overpayments to hospitals ($10.5 billion), reducing payments for drugs for dialysis ($4.9 billion), and reducing Medicaid Disproportionate Share Hospital (DSH) payments ($4.2 billion). In a statement, Chip Kahn, President of the Federation of American Hospitals, complained that the cuts “rob hospital Peter to pay for fiscal cliff Paul.”

The new bill postpones for 60 days, but does not eliminate, the “sequestration” cuts to discretionary government spending that would reduce Medicare payments by 2%. It also extends certain Medicare programs, payment adjustments and exceptions through June 30 or December 31, 2013.

The bill does not provide for payment cuts for Medicare or Medicaid home health care services, or for the imposition of home health co-pays. Medicare payments for home health agencies would have been subject to 2% cuts annually for 10 years had the fiscal cliff not been averted. Various home health co-pay options had been considered, ranging from $100 to 600 per 60-day episode of care.

NEXT STEPS

Edwards Wildman’s Healthcare Practice Group will continue to monitor healthcare news from Capitol Hill, CMS, HHS, and other federal and state agencies and courts, and will bring you timely updates as new developments occur.

UK: Law Commissions Publish Responses to Second Consultation Paper

Wed, 02 Jan 2013 10:50:33 GMT

We have previously reported on the Joint Review of Insurance Contract Law Reform being undertaken by the Law Commission and Scottish Law Commission (the Commissions) (see our previous blog here). The Commissions' second consultation paper, Post Contract Duties and other Issues, sought responses to, amongst other things, the issues of (i) Damages for Late Payment; and (ii) Insurers' Remedies for Fraudulent Claims.

The Commissions have recently published the responses that it received in relation to these issues.

Damages for Late Payment

The current position in English law is that an insured is not entitled to damages for any loss suffered as a result of the insurer's delay in settling a valid claim.

In the Consultation Paper, the Commissions proposed that an insurer who unreasonably delays or wrongfully repudiates a claim should be liable to pay damages according to normal contract law principles i.e. for proven and foreseeable losses. The Commissions also proposed that a definition of reasonable time should be flexible and take into account market practice and the type, nature, and size of the claim. As regards business insurance, the Commissions proposed that parties should continue to have freedom to contract therefore an insurer would be entitled to contractually limit or exclude its liability to pay damages for late payment provided that the insurer had acted in good faith.

A significant number of respondents agreed that insurers should be under a contractual obligation to pay claims within a reasonable time (87% of those respondents who answered the question) and that an insurer who fails to meet that obligation should be liable to pay damages for foreseeable losses that follow (81% of those respondents who answered the question). Although the general responses to the two questions show broad support for these reforms, responses by the insurance industry showed less support with only 78% of insurers/insurance organisations agreeing that insurers should be under a contractual obligation to pay claims within a reasonable time and only 57% agreeing that an insurer should be liable to pay damages.

Insurers unanimously agreed that an insurer should be able to contractually exclude or limit its liability to pay damages for late payment of a valid claim although a number suggested that use of such an exclusion would likely be rare. However, half of the respondents from the insurance industry agreed that such an exclusion of liability should only be exercisable where the insurer had acted in good faith.

Insurers' Remedies for Fraudulent Claims

The Commissions have previously highlighted the confused state of the law following an insured committing an act of fraud. The Commissions proposed that fraud should invalidate the contract from the date of the fraudulent act (leaving the insurer to pay any earlier valid claims but not any later claims).

The respondents largely agreed with the Commissions that a policyholder who commits a fraud should:

(1) forfeit the whole claim to which the fraud relates (92% of respondents);

(2) forfeit any claim where the loss arises after the date of the fraud (75%); and

(3) be entitled to be paid for previous valid claims which arose before the fraud took place (94%).

There was also overwhelming support that insurers be able to add to the statutory remedies for fraudulent claims through express contractual terms.

To view the Responses in full, please click here.

Banks vs. Insurers: Systemic Risk Comparison; A Study Prepared by The Geneva Association

Thu, 27 Dec 2012 14:54:58 GMT

During the Geneva Association’s Insurance and Finance Conference held on December 11, 2012, the Association presented the results of its benchmarking study comparing 28 global systemically important banks to 28 of the largest global insurers, applying the criteria established by the international Financial Stability Board (FSB) for designation of global systemically important insurers (G-SIIs). The report was issued in anticipation of the FSB’s designation of G-SIIs, which is expected in early 2013. Despite long-standing concerns over uniform application of criteria across the banking and insurance industries – in particular, the notion that insurers carry less systemic risk – this is the first study of its kind. The study analyzes 17 indicators that are comparable among insurers and banks. Highlights from this study are listed below:

Insurers are significantly smaller than banks in most of the 17 indicators.
Insurers match assets with liabilities and are thus less exposed than banks to the systemic risk of maturity transformation (borrowing short to lend long) and carry substantially lower positions in derivatives.
Significantly smaller amounts of short-term funding show that insurers are much less interconnected with the financial system than banks.

For a list of the banks and insurers used for this study, and to see more details regarding the analyses and results, click here for a copy of the report.

* Chris Finney Commentary: UK: FCA: Peer-to-Peer Lending Will be Regulated (Honest )

Fri, 21 Dec 2012 09:56:19 GMT

UK Peer-to-Peer lending (or P2P lending) began in 2005.

The idea's straightforward enough: a commercial organisation hosts an online P2P lending platform. Borrowers use the platform to pitch for loans, and lenders use it to choose which loans to make or invest in.

P2P lending has grown significantly in the last 5 years. The banks have been less willing and less able to lend, and P2P lending has expanded to fill some of the gap. This has led to calls for regulation, and some of those calls are from the P2P sector itself: if the industry is regulated, it will feel safer, and people will be more likely to use it to borrow and invest. It's no surprise then, that the Peer-to-Peer Finance Policy Summit held in London on 7 December 2012 was tagged: "The Role of UK and EU Regulation in the Growth of Alternative Finance for Consumers and Small Businesses", and attracted speakers and delegates from the government, the FSA, the European Commission and the Federation of Small Businesses.

During the conference, the organisers published an open letter from the P2P finance industry to UK and EU policy makers repeating their call for regulation: "it is unrealistic to assume new business models will thrive without regulatory change to make it easier to launch peer-to-peer finance platforms and reassure potential savers, investors, borrowers and entrepreneurs that these marketplaces are a responsible and legitimate means of fundraising" (the letter is available here).

And the UK government finally seems to be listening - it's been widely reported that:

the FCA will regulate P2P lending from April 2014, when it assumes responsibility for "other types of consumer credit" (a rather worrying assertion - but let's keep an open mind for now);
the Financial Services Bill will be amended to make this possible (note "possible" - perhaps suggesting the FCA will have the power to regulate, but not an obligation to do so); and
the Treasury will publish a consultation paper which describes its proposals for FCA regulation of P2P platforms in January 2013.

These are promising developments, but similar commitments about the regulation of payday lenders weren't entirely borne out in practice (see my recent blog here). P2P lenders, borrowers and hosts should therefore wait for the detail before preparing for regulation. They may also need to be careful what they wish for - if the FCA is required to regulate, there are good reasons to suppose that it will be intrusive and that, if it is, it may stymie a fledging industry, rather than nourish it and help it grow.

In the meantime, and perhaps as a gesture of good faith, on 12 December 2012, Vince Cable (Secretary of State for Business, Innovation and Skills) told the ABI's Investment Conference in London that the Government "is looking to invest more than £50m" in small businesses through P2P lending platforms, debt funds and asset finance suppliers. This funding will be made available over the next two years on a leveraged basis, so that for every £1 the government invests, the private sector will invest at least another £1. Mr Cable also announced the first successful bidders for a share of this funding: Funding Circle and Zopa (which are P2P lending platforms), Boost&Co (a private equity backed bespoke loan provider) and Credit Asset Management (a finance provider to the professional services sector). When and how this commitment will be honoured is not yet clear - it depends on commercial negotiations and parliamentary scrutiny - but the details should be available "in the next few weeks".

These are the best of times and the worst of times for the government to tackle such an important set of issues. I'll blog again as the details begin to emerge.

Chris Finney
Partner
Edwards Wildman Palmer UK LLP
Email: cfinney@edwardswildman.com
Direct: +44 (0) 207 556 4626

EU: ECJ Confirms Compensation Payments for Delayed Passengers

Fri, 21 Dec 2012 09:45:25 GMT

The European Court of Justice (ECJ) has confirmed that airlines should pay compensation to passengers who are subject to long delays, giving them the same rights as those who are denied boarding or whose flights are cancelled.

In TUI Travel and Others v Civil Aviation Authority (C-629/10), the ECJ confirmed its previous decision in Sturgeon and Others [2009] which extended compensation to delayed passengers on the basis of the principle of equal treatment. As a result, delays of three hours or more to the scheduled arrival time will entitle passengers to monetary compensation from their airline according to the fixed amounts set out under Articles 5 to 7 of Regulation (EC) 261/2004 (the Regulation).

Answering questions referred by the English High Court, the ECJ held that loss of time constitutes an inconvenience which is covered by the Regulation and as such requires compensation. This interpretation is not inconsistent with the Montreal Convention, the ECJ held. It also confirmed that it would breach the EU principle of equal treatment if there were no such obligation to compensate.

Despite submissions from airlines that the obligation to compensate delayed passengers would cause them a heavy financial burden, the ECJ pointed to the defence set out in the Regulation that there would be no obligation if the delay is caused by "extraordinary circumstances which could not have been avoided even if all reasonable measures had been taken, that is, circumstances which are beyond the air carrier's actual control." The ECJ therefore concluded that the financial consequences would not be too great for airlines.

A more detailed review of this case and its implications for the airlines industry will be published in January 2013 in our Insurance and Reinsurance Review.

California Court Finds for Insurer in Service Fee Case

Fri, 21 Dec 2012 09:40:27 GMT

The California Court of Appeal recently affirmed dismissal of a class action suit alleging that an insurer had unlawfully charged service fees to policyholders who paid for their insurance in monthly installments. A copy of the opinion, rendered in the matter styled In re Insurance Installment Fee Cases, No. D057138 (Calif. App., 4th Dist., Div. 1), is available here.

The service fee, which ranged from $1 to $3 per month, was intended to cover the insurer’s billing and collection costs. The policyholders alleged, however, that the service fee was already built into the price that the insurer charged for its policies, with the result being that the class members were charged twice for billing and collection costs. The policyholders further alleged that the monthly service fees were not specified on the subject policies’ declarations pages, as was allegedly required for monies that were properly characterized as an additional premium rather than a service fee.

The trial and appellate courts were unmoved by the policyholders’ allegations. The appellate panel found that the service fees were not illegal additional premiums, but instead simply costs charged for the convenience of paying monthly. The court further observed that the subject policies did not provide policyholders with the option of payment premiums in installments, but rather required payment in full at the beginning of the policy periods; in light of this determination, the insurer did not breach the insurance contracts by granting policyholders the option of paying in monthly installments, subject to their agreement to pay the service fees.

Of note, the insurer itself also partially appealed from the otherwise favorable trial court ruling because it believed that the trial court erred in ordering it to bear the significant costs “of providing notice to putative class-member policyholders that plaintiffs sought discovery of their contact information and service charge payment information.” The appellate panel agreed with the insurer, holding that these costs are the plaintiffs’ responsibility. The cost issue was remanded for a determination as to the reasonableness of the amount that the insurer claimed to have incurred.

Newest LIBOR Manipulation Settlement by UBS Could Change Landscape for LIBOR Plaintiffs in MDL and Other Suits

Fri, 21 Dec 2012 09:29:38 GMT

Making headlines around the world this week, UBS has agreed to pay approximately $1.5 billion in fines and disgorgements to regulators in the United States (including the Commodities Futures Trading Commission and the Department of Justice); the United Kingdom’s Financial Services Authority; and Switzerland’s FINMA, to resolve investigations into the bank’s alleged manipulation of the LIBOR interest rate. UBS’s wholly-owned Japanese subsidiary has agreed to plead guilty to one count of felony wire fraud as well.

The FSA has issued a final notice stating that UBS employees made nearly 2,000 requests to manipulate the LIBOR rate submitted for Japanese yen and other currencies between 2005 and 2010. This notice states further that more than 1,000 of these requests were made to 11 brokers at six firms in an often successful attempt to manipulate the rates reported by other banks.

According to the DOJ, as a result of their positions as intermediaries, the brokers had relationships with traders and LIBOR submitters at other banks and had knowledge of money market activity. It apparently is common for LIBOR submitters to collect information from these brokers regarding the availability and price of cash in the money markets, and this information can influence the banks’ LIBOR submissions. The UBS traders repeatedly colluded with the brokers “by asking them to disseminate false market information to Yen LIBOR submitters at other Contributor Panel banks. In this way, recipients of such misinformation could be influenced, often unwittingly, to contribute YEN LIBOR submissions that benefited UBS Yen derivatives traders’ positions.” One UBS manager later estimated that this scheme was successful 50-60% of the time during one six-month period when it was used every day. In some other instances, the brokers were asked to communicate directly with traders at other banks and ask them to set their LIBOR rates in a way that would benefit UBS.

Further, the FSA notice states that UBS did in fact collude with other banks, stating specifically that “UBS’s misconduct extended beyond UBS’s own internal submission processes to sustained and repeated attempts to influence the submissions of other banks, acting in collusion with panel banks and brokers at a number of different firms.” The DOJ’s statement of facts concisely states that: “[w]hen UBS derivatives traders influenced the submissions of other Contributor Panel banks…the manipulation of those submissions affected the fixed benchmark rates on various occasions” leading to “a significant positive impact on the profitability of a trader’s trading portfolio, and a correspondingly negative impact on their counterparties’ trading positions.”

These new disclosures could have a significant impact on the ongoing LIBOR civil litigation, particularly the MDL complaints which are currently subject to a motion to dismiss before Judge Naomi Reice Buchwald in the Southern District of New York. For example, in those cases, the plaintiffs have alleged antitrust violations, but defendants argued that “the mere opportunity to conspire does not by itself support the inference that such an illegal combination actually occurred.” In their view, because LIBOR submissions were published daily, the process allowed for conduct where the defendants adjusted their submissions in line with one another without any conspiracy, and the plaintiffs could allege “at most parallel conduct.” Now that major regulators have released evidence of actual collusion by UBS, this argument may fall apart.

In addition, the defendants have argued that the plaintiffs cannot prove loss causation, now directly contradicted by the DOJ’s conclusion of significant positive and negative impact on trading positions.

These developments could mean several things for the ongoing litigation in the SDNY. First, the plaintiffs likely will seek to file supplemental papers citing these new disclosures in support of their legal position. Second, UBS, if not the other defendant banks, may be motivated to settle early. Third, the interbank brokers will likely be the next round of defendants facing complaints connected to this scandal. At the very least, oral argument on these motions will be highly important to their outcome. We will be monitoring the cases very closely.

The FSA final notice can be found here; the DOJ’s statement of facts can be found here; and the CFTC’s order can be found here.

UK: High Court Rules in Relation to Basis of the Contract Clause

Thu, 20 Dec 2012 10:30:07 GMT

In Genesis Housing Association Ltd v Liberty Syndicate Management [2012] EWHC 3105 (TCC) Mr Justice Akenhead held that Genesis was in breach of warranty for failing correctly to identify the builder of a construction project in a proposal form which contained a basis of the contract clause.

Paddington Churches Housing Association, part of the Genesis Housing Association Ltd Group (Genesis) (the claimants) entered into an agreement with a company called Time and Tide Bedford Ltd (T&T) to lease and refurbish certain property in Bedford for the purpose of providing affordable housing once the renovations were complete. As part of the arrangement, T&T were to approach MD Insurance Services (MD), who administered policies underwritten by Liberty Syndicate (the Defendant) to obtain insurance for the building and against T&T's insolvency.

This insurance was obtained and a proposal form was filled out by MD during a meeting with T&T (acting as agent for Genesis). That form contained a basis of the contract clause. The cover which was provided included cover protecting against insolvency of the builder of the project but the insurance proposal form wrongly identified the builder as Time & Tide Construction Ltd (a T&T group company)(T&T Construction) instead of T&T. In the event, much, if not all of the work was sub-contracted to another building firm by T&T. Subsequently, the subcontractor became insolvent, which led to administrators being appointed in respect of T&T and T&T Construction, with the aim of rescuing the companies as going concerns. In the event, that aim was not achieved, and T&T and T&T Construction were dissolved in 2010.

The principal issue to be decided was whether there had been a breach of warranty by Genesis in relation to the identity of the building contractor; part of that issue involved a consideration of whether the warranties in the proposal form were absolute warranties to the truth of the statements, or whether the statements were only warranted as true to the best of the proposer's knowledge and belief.

Akenhead J held that it was well established that basis of the contract clauses were enforceable and not contrary to public policy. He went on to state that there had been a clear error when the proposal form had been filled out, in that the builder was wrongly (but innocently) identified as T&T Construction, rather than T&T. However, although the error was innocent, Akenhead J held that at the time of signing the form, the statement that T&T Construction was to be the builder was clearly not true to the best of Genesis' knowledge and belief. Therefore, there had been a breach of warranty by Genesis such that it had no right to claim under the insurance.

This case illustrates the power of basis of the contract clauses and emphasises the care which should be taken when completing proposal forms which contain such a clause.

UK: Court Proceedings Stayed in Turville v Chartis

Wed, 19 Dec 2012 10:51:16 GMT

In Turville Heath Inc v Chartis Insurance UK Limited [2012] EWHC 3019 (TCC), Mr Justice Edwards-Stuart in the High Court refused the defendant's application for a stay of proceedings under s. 9 of the Arbitration Act 1996 (Arbitration Act) but granted a stay using the court's inherent jurisdiction under s. 49 of the Senior Courts Act 1981 (SCA).

The parties had agreed that any disputes about the amount to be paid under the policy for agreed claims would be settled according to the following clause, headed 'Arbitration':

"If you and we fail to agree on the amount of loss, either party may make a written demand that each selects an independent appraiser....[who] will select an arbitrator...The independent appraisers will then appraise the loss and submit any differences to the arbitrator. A decision in writing agreed to by the two appraisers or either appraiser and the arbitrator will be binding. Each appraiser will be paid by the party that has selected the appraiser. Expenses will be allocated at the discretion of the arbitrator."

Edwards-Stuart J rejected the Claimant's assertion that there were more issues in dispute than merely the amount to be paid out, reminding the parties that "English law does not give an insured a separate and discrete entitlement to damages for an insurer's failure to pay, or to pay the correct amount, under a policy". The issue therefore was whether the clause above was a '"true arbitration clause within the meaning of the Act", and if it was found not to be a true arbitration clause, whether the court should grant a stay of proceedings pursuant to its inherent jurisdiction under s. 49 SCA.

Edwards-Stuart J said that the optional nature of the 'arbitration' process described in the above clause did not prevent it being an arbitration clause, as suggested by the Claimants. However, the fact that any decision made by the arbitrator must be agreed by one or other of the independent assessors did hinder it, as he said "a sole arbitrator must be able and competent to make his own independent decision on all the matters put before him." He concluded that the clause was not an arbitration clause within the meaning of the Arbitration Act 1996, and the application under s. 9 of the Arbitration Act 1996 therefore failed.

A stay under the inherent jurisdiction of the court was granted. Edwards-Stuart J said that the parties had already entered into and invested considerable sums of money in the process without protest and that there were therefore broad case management considerations pointing in favour of allowing it to continue. Noting that the Claimant had unilaterally dispensed with the process and started the present proceedings, the judge pointed out the difference between a situation where the contractual mechanism for dispute resolution had broken down and one where a party simply refused to operate it.

UK: Court of Appeal Finds Conditions in a Legal Expenses Insurance Contract to be in Breach of Regulations

Wed, 19 Dec 2012 08:12:54 GMT

In (1) Christine Brown-Quinn (2) Webster Dixon LLP & Ors v (1) Equity Syndicate Management Ltd (2) Motorplus Ltd [2012] EWCA Civ 1633, the Court of Appeal held that conditions in a legal expenses insurance contract were in breach of the Insurance Companies (Legal Expenses Insurance) Regulations 1990 reg.6 (the Regulations).

The appeal dealt with the question of whether an insured had the freedom to choose one's own lawyer under a legal expenses insurance contract. The insured (Brown-Quinn) had instructed legal counsel who were not on the appellant insurer's (Equity) panel of solicitors. As such, Equity refused to cover any of the legal expenses incurred by Brown-Quinn on the basis that the hourly rate charged by the instructed firm exceeded Equity's designated 'non-panel rate'. The conditions within the insurance contract, which sought to restrict Brown-Quinn's choice of legal representative, were examined in light of the Regulations. Regulation 6 in particular provided that:

"(1) Where under a legal expenses insurance contract recourse is had to a lawyer... to defend, represent or serve the interests of the insured in any inquiry or proceedings, the insured shall be free to choose that lawyer.
(2) The insured shall also be free to choose a lawyer... to serve his interests whenever a conflict of interests arises.
(3) The above rights shall be expressly recognised in the policy."

The Court of Appeal found that a refusal to accept the appointment of an insured's law firm of choice on the grounds that it would only be accepted if it charged no more than the non-panel rates was clearly contrary to the Regulations. It was additionally held that although Equity could limit the costs for which it was liable to Brown-Quinn to their non-panel rates, it could do so only on the proviso that Brown-Quinn's freedom of choice, as guaranteed by Council Directive 87/344/EEC, was not "rendered meaningless". The submission, made and subsequently rejected at first instance, that Brown-Quinn's right to choose her own lawyer could only be exercised once and no more was not pursued before the Court of Appeal.

Lord Justice Longmore condemned the conduct of Equity and described the insurer as "exhibit[ing] an insouciance to its obligations under the Directive and the Regulations which leaves one quite breathless". He went on to say that it is unacceptable that, despite the warning shot delivered to legal expenses insurers by the court in Sarwar v Alam [2002] 1 WLR 125, insurers, such as Equity, should continue to issue policies which clearly do not comply with the Regulations.

A copy of the full judgment in this case can be viewed here.

UK: Competition Commission Publishes Timetable for Private Motor Insurance Investigation

Wed, 19 Dec 2012 08:00:59 GMT

The Competition Commission (CC) has released an issues statement and timetable for its market investigation into the supply and acquisition of private motor insurance (PMI) in the United Kingdom. The CC investigation will seek to establish whether any features of the PMI market have the effect of preventing, restricting or distorting competition within that market. The CC has extensive powers to impose remedies, where necessary to address its concerns.

The Office of Fair Trading (OFT) referred the PMI market to the CC in September 2012, following a public consultation process and market study (the Study). The Study gave the OFT reasonable grounds to believe that certain features of the PMI market had a negative effect on competition, thereby justifying a reference to the CC for an in-depth investigation.

The CC's issues statement identifies eleven issues on which it will focus its investigation. These reflect the complexity of the PMI sector and include the following areas:

concerns arising from the separation of cost liability and cost control;
issues arising from information asymmetries and lack of alignment of interests between consumers and post-accident service providers;
the high level of concentration in certain market segments, such as drivers in Northern Ireland, young drivers and elderly drivers, and possible barriers to entering those sectors;
whether the four largest price comparison websites have market power;
product complexity and pricing; and
relationships between insurers, on the one hand, and insurers, price comparison websites or parts suppliers, on the other.

The issues statement does not indicate that any competition concerns have yet been identified. Those wishing to submit evidence on the issue must do so in writing by 9 January 2013. The relevant contact details for submitting evidence can be found here. The CC is due to publish its final report by 27 September 2014.