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Last Week in DC: The Healthcare Reform Debate – February 8, 2010

Mon, 08 Feb 2010 11:20:00 GMT

As the White House and Congress focused their attention on the release of President Obama’s FY 2011 Budget and the new jobs agenda, healthcare reform efforts took a back seat last week. Despite the priority shift, off the record chatter and closed door meetings continued, as speculation grew over if and how Democrats would be able to revive their stalled priority in the coming months.

RECONCILIATION REMAINS IN PLAY:

With the swearing in of Senator Scott Brown (R-MA) as the chamber’s 41st Republican, Senate Democrats officially ceded their 60 vote supermajority on Thursday. While no formal announcements were made on healthcare reform last week, the newly cemented political reality in the Senate serves as a reminder that the budget reconciliation process could well be employed if a comprehensive healthcare reform bill is to have any chance of reaching the President’s desk this year.

As previously reported, resorting to reconciliation will allow Democrats to move legislation through the Senate under a complex procedural maneuver that requires only 51 votes for passage, as opposed to the ordinarily necessary 60 votes that Senate Majority Leader Harry Reid (D-NV) no longer has. Under this strategy, the House and Senate could agree to a series of changes to the Senate’s already approved healthcare bill (H.R. 3590) and package them into a legislative vehicle that would move through both chambers under reconciliation rules. These guaranteed changes would then give skeptical House Democrats the comfort they need to pass H.R. 3590 as is and send it directly to President Obama, knowing that sufficient changes will be enacted via the reconciliation process.

Specific details are anything but certain and the White House has not taken an official position, but several recent reports have indicated that President Obama is privately pressing House and Senate leaders to complete action on healthcare reform by using this controversial tactic.

SMALLER BILLS ON DECK IN THE HOUSE:

As Democratic leaders continue to wrangle over a course of action on large-scale reform, the House will begin to move forward on its latest strategy – moving a series of smaller, popular healthcare measures in a piecemeal fashion. House Speaker Nancy Pelosi (D-CA) will bring up the first of such efforts this week, and will presumably continue the process following the week-long President’s Day recess that begins on Friday.

The proposed legislation set for floor consideration will remove longstanding antitrust exemptions for health insurance companies – a provision that was included in the House’s original healthcare reform bill (H.R. 3962). The measure aims to bar the health insurance industry from price fixing and setting their own markets without being investigated, and the bill’s sponsors – two Democrats who may face difficult reelection races in November – referred to their legislation as a “common priority.”

NEXT STEPS:

Some reports have suggested that major decisions on healthcare reform could come as early as this week, though the Senate’s preoccupation with yet to be finalized job creation legislation indicates otherwise. Additionally, even the President admitted - in a statement that conflicted with his earlier push toward completion - that comprehensive healthcare reform legislation may never find its way out of Congress and to his desk. Nevertheless, we continue to monitor multiple sources of information as official discussions move forward and speculation continues on this fickle, complex process.

The Healthcare Reform Legislation ultimately adopted may affect many segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries when it becomes final.

UK: Financial Services Authority Issues Client Money and Asset Report

Mon, 08 Feb 2010 11:16:00 GMT

The difficult market conditions and the consequent increased chance of insolvency of regulated entities prompted the Financial Services Authority (FSA) to carry out firm visits over the last 6 months to a range of investment and insurance broker firms to assess their compliance with the client money rules contained in the Client Asset Sourcebook (CASS) of the FSA Handbook. Following these visits, the FSA published a report entitled "Client Money and Asset Report" on 19 January identifying a number of failings in firms' compliance with CASS (the Report). The FSA believes that the failings identified at these firms is indicative of weaknesses across the market. Weak areas discovered for insurance intermediaries include (amongst others): unclear allocation of duties amongst senior management and lack of senior level responsibility, inconsistency between Terms of Business Agreements and client money calculations, unallocated cash and legacy balances not being reduced promptly enough, firms being overly reliant on CASS audit reports rather than performing their own assurance checks and the review and sign off processes for client money calculations not always evidenced. As a result, the FSA has initiated remedial work in a number of firms and intends to raise the level of awareness across the market on compliance with CASS.

In line with its findings and its stated low tolerance for CASS compliance failures, the FSA intends to work on the following throughout 2010:

Increasing firm visits including both generic CASS visits and specialist thematic CASS visits, exercising regulatory intervention where it finds CASS failings and producing a further report of the findings later in 2010.
Improving the standards of CASS audits. The FSA proposes referring cases where it has concerns about the audit report to the professional standards section of the Institute of Chartered Accountants in England and Wales.
Reintroduce client money reporting with an interim solution by mid 2010 and the final solution being implemented in 2011.
Work closely with HM Treasury to publish a consultation paper on amendments to the CASS rules in the first quarter of 2010, addressing the failings raised by the Lehman case (see blog here [http://www.insurereinsure.com/BlogHome.aspx?entry=2124]). Other amendments are proposed to improve Handbook guidance for CASS auditors.

The FSA has concluded that there is still a significant amount of work for firms to do in order to ensure clients' money and assets are adequately protected and that firms comply with Principle 10 (which states that a firm must protect clients' assets when it is responsible for them.) However, during visits the FSA took regulatory action ranging from private warnings through to a ban on taking new business, demonstrating that infringement of the CASS rules will not be tolerated. For full details of the Report, please click here.

EU/UK: The Committee of European Insurance and Occupational Pensions Supervisors and the Swiss Insurance Supervisor Agree to Enhance Supervisory Cooperation

Mon, 08 Feb 2010 11:10:00 GMT

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has recently announced that it has agreed to further enhance supervisory cooperation with the Swiss insurance supervisor, the Swiss Financial Market Supervisory Authority (FINMA). To access the CEIOPS and FINMA press releases, please click here and here.

Previously, all CEIOPS members had signed a multilateral memorandum of understanding (Memorandum) with FINMA's predecessor, the Swiss Federal Office of Private Insurance (FOPI). This Memorandum facilitated the exchange of information. To view the Memorandum, please click here.

CEIOPS members have now agreed to recognise FINMA as the legal successor of FOPI and to consider FINMA as a current signatory of the Memorandum. CEIOPS has published a note setting out the full details of this supervisory cooperation. To access the note, please click here.

During 2009, CEIOPS' equivalence subcommittee also carried out an equivalence assessment of the supervisory regime applicable in Switzerland to reinsurers, based on criteria produced and published by CEIOPS. The aim of this assessment was to establish whether the Swiss regime could be considered equivalent to that applying to EU reinsurers under the current Reinsurance Directive (Directive (EC) 2005/6800).

CEIOPS members concluded that FINMA’s supervision of reinsurers is equivalent to that applying to EU reinsurers under the Reinsurance Directive, although CEIOPS stated that the equivalence assessment is without prejudice to the separate equivalence assessment that will be required under the Solvency II Directive. To access CEIOPS findings, please click here.

To view previous blogs relating to CEIOPS and Solvency II, please click here and here.

Connecticut Jury Awards $14.7 Million Against Insurer for Violation of Unfair Trade Practices Act in Auto Body Shop Class Action Lawsuit; Continued Vitality of “Cigarette Rule” at Issue

Mon, 08 Feb 2010 10:55:00 GMT

In a class action lawsuit brought by various auto body shops and the Auto Body Association of Connecticut, a Connecticut jury recently rendered a $14.7 million verdict against an insurance company for allegedly violating the Connecticut Unfair Trade Practices Act, Conn. Gen. Stat. §42-110a et seq. (“CUTPA”). Artie’s Auto Body et al. v. Hartford Fire Ins. Co., FST-CV03-0196141-S (Conn. Super. Nov. 17, 2009). The jury’s verdict was rendered after the trial court charged the jury on all three prongs of the “Cigarette Rule,” despite uncertainty regarding the continued vitality of all three prongs.

The plaintiffs reportedly alleged that the defendant insurer violated CUTPA by steering automobile policyholders to use insurer-approved repair shops, forcing those approved shops to charge below-market labor rates in exchange for a steady volume of work, and pressuring appraisers into accepting monetary limits imposed by the insurer for specific repairs. After a four-week trial, the jury returned a $14.7 million verdict against the insurer on the plaintiffs’ CUTPA claim.

Pursuant to CUTPA, which provides that “[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce,” it was also “the intent of the legislature that in construing subsection (a) of this section, the commissioner and the courts of this state shall be guided by interpretations given by the Federal Trade Commission and the federal courts to Section 5(a)(1) of the Federal Trade Commission Act (15 USC 45(a)(1)), as from time to time amended.” Accordingly, Connecticut courts previously adopted the federal “Cigarette Rule,” which rule originally provided that a plaintiff prove that (1) the act or practice offends public policy as it has been established by statutes, the common law or other established concept of unfairness; (2) the act or practice is immoral, unethical, oppressive or unscrupulous; or (3) the act or practice causes substantial injury to consumers, competitors or other business persons. In 1984, the FTC narrowed the rule to concentrate on the third (“substantial injury”) prong.

The insurer reportedly requested that the court charge the jury on the third prong only, pursuant to the FTC’s 1984 narrowing of the rule. In a September 2009 ruling, the trial court reportedly explained that “[t]wice in 2005 the Connecticut Supreme Court acknowledged awareness of the 1984 FTC policy statement and the question presented as to the continued vitality of the Cigarette Rule, but . . . until such time as the appellate courts or the legislature speak to the contrary, this court is bound to apply the Cigarette Rule.” Accordingly, the court charged the jury on all three prongs of the Cigarette Rule. The jury reportedly rejected the plaintiff’s third-prong steering claim, finding that there was no substantial injury, and found that CUTPA was violated based on the plaintiffs’ satisfaction of the first prong of the Cigarette Rule on the basis that the insurer’s appraisers were not fair and impartial.

The parties have filed post-trial motions, which are currently pending before the trial court. Reportedly, if the insurer’s post-trial motions are unsuccessful, it will appeal, and the continued vitality of the Cigarette Rule is expected to be at the heart of the appeal.

It has also been reported that the plaintiffs are planning to seek injunctive relief by asking the court to change the insurer’s appraisal practices. Reportedly, any such changes could possibly apply to other insurance companies as well as the defendant insurer.

Please continue to check here for future updates.

UK: Anti-Suit Injunctions

Mon, 08 Feb 2010 10:53:00 GMT

Shashoua and another v. Sharma [2010] EWCA Civ 15 concerned an application to the Court of Appeal by Sharma for permission to appeal a procedural aspect of the High Court's decision in (1) Roger Shashoua (2) Rodemadan Holdings Ltd (3) Stancroft Trust Ltd v Mukesh Sharma [2009] EWHC 957 (Comm) (previously blogged here).

Sharma sought permision to appeal for clarification as to whether an anti-suit injunction preventing Sharma from commencing proceedings in India also applied automatically so as to prevent Sharma from defending enforcement proceedings likely to be brought in India, or whether Sharma was able to apply for the English court's permission to defend any enforcement proceedings. The Court of Appeal found that this procedural issue was not subject to the precedent set in the case of C v D [2007] EWCA Civ 1282 or any other precedent and therefore granted Sharma permission to appeal the High Court's decision for a clarification of the application of the anti-suit injunction.

Broad New FTC Guidelines for Endorsements and Testimonials Create Risks for Manufacturers, Advertisers, Bloggers and Others

Mon, 08 Feb 2010 10:51:00 GMT

New revised Federal Trade Commission (FTC) guidelines for advertisements containing endorsements or testimonials focus attention on “new media” as an advertising venue. The guidelines require transparency and disclosure of any material relationship between the manufacturer and the endorser or poster. Postings on a wiki, blog, social network, chat room or other internet site may be considered endorsement/testimonial advertising regardless of who makes the posting. The guidelines make clear that the same rules apply to “new media” as well as to TV, radio and print ads.

To read more, please click here.

SEC Tightens Custodial and Audit Requirements for Registered Investment Advisers who Control Client Assets

Mon, 08 Feb 2010 10:45:00 GMT

If you are a registered investment adviser who – directly or indirectly – has authority to obtain possession of client funds or securities (“custody”), the SEC has increased your compliance burden beginning March 12, 2010.

It is now harder for registered advisers to avoid being deemed to have custody of advisory assets controlled by affiliated companies or funds.

Registered advisers with custody must, with several exceptions, begin having surprise annual audits of the custody assets before year-end.

To read more, please click here.

Connecticut Superior Court Held that Insurer Was Not Required to Provide Underinsured Motorist Coverage for Insured’s Family Member

Fri, 05 Feb 2010 15:53:00 GMT

A Connecticut Superior Court recently awarded summary judgment in favor of an insurer on the basis that an insured’s family member who resides in the insured’s household is not entitled to underinsured motorist benefits if they are similarly not entitled to liability coverage under the family member’s policy. Paliuis v. Safeco Ins. Co., CV-07-5006377 (Conn. Super. Nov. 20, 2009).

The plaintiff was injured as a pedestrian when he was struck by an underinsured motor vehicle. The plaintiff collected $25,000 from the torfeasor’s insurer. The plaintiff, who owned his own car, then collected $75,000 in underinsured motorist benefits from his own automobile insurer. Thereafter, the plaintiff, who resided with his daughter at the time of his injuries, sought additional underinsured motorist benefits from his daughter’s insurance carrier. The daughter’s insurer denied plaintiff’s request for benefits because he was not an insured or, more specifically, a “family member” under that policy, and the plaintiff commenced this lawsuit against his daughter’s insurer.

The insurer moved for summary judgment. The plaintiff conceded that there were no issues of fact, and conceded that he was not entitled to liability coverage under his daughter’s policy. Rather, the plaintiff argued that it was against public policy for his daughter’s insurer to deny him underinsured motorist benefits.

The court granted summary judgment in favor of the insurer. The court held, as an initial matter, that the plaintiff was permissibly not covered for purposes of liability. Specifically, the court reasoned that the plaintiff did not qualify for liability coverage under the language of his daughter’s policy because (1) he was neither a named insured nor a “family member” under the policy, the definition of which excludes family members “who own[] an auto not insured under this policy, when not occupying an auto insured under this policy,” (2) the plaintiff was not operating his daughter’s car, and (3) neither the daughter nor anyone who qualified as a “family member” incurred any legal liability for which the plaintiff might be held responsible. According to the court, the plaintiff failed to meet any of the criteria to qualify as an “insured.” The court then concluded that, because the plaintiff was “permissibly not covered for liability, public policy did not require that he be provided underinsured motorist coverage.”

A copy of the opinion is available here.

Connecticut Trial Court Holds That “General Business Practice” Element of an Unfair Settlement Practice Claim Requires Multiple Acts of Misconduct Against Multiple Insureds

Fri, 05 Feb 2010 15:47:00 GMT

A Connecticut trial court recently held that the “general business practice” element of an unfair settlement practice claim under the Connecticut Unfair Insurance Practices Act, Conn. Gen. Stat. §38a-816(6) (“CUIPA”) requires that a plaintiff prove multiple unfair practices by an insurer against more than one insured. Dynamic Electrical Contractors, Inc. v. Southport Contracting, Inc. et al., No. CV-07-5006557, 48 Conn. L. Rptr. No. 17, 600 (September 22, 2009).

This lawsuit results from an underlying dispute between the plaintiff (a subcontractor), and a general contractor, for work completed by the plaintiff but not paid for in full by the general contractor. The court summarized the plaintiff’s complaint as alleging that the defendant insurer was the issuer of a performance bond and a surety bond to the general contractor, as well as various payment bonds insuring payment to subcontractors of the general contractor for payment of labor, materials and equipment furnished for use in the performance of the parties’ construction contract. After the general contractor did not render full payment to the plaintiff, the plaintiff, who claims to be a third-party beneficiary under those policies, made a single demand to the insurer for payments due for its several claims under the various policies. Thereafter the plaintiff brought this lawsuit against the insurer alleging, among other things, a violation of CUIPA as a result of the insurer’s alleged unfair settlement practices.

The insurer moved to strike plaintiff’s CUIPA count on the basis that the plaintiff did not satisfy the statutory requirement that the alleged unfair claim settlement practices be committed or performed “with such frequency as to indicate a general business practice.” In response, the plaintiff argued that it had alleged facts sufficient to satisfy the “general business practice” element of CUIPA because the complaint alleged facts involving four insurance policies and claims submitted under each policy.

The court agreed with the insurer and struck the plaintiff’s CUIPA count. The court reasoned that, “[i]n requiring proof that the insurer has engaged in unfair claim settlement practices ‘with such frequency as to indicate a general business practice,’ the legislature has manifested a clear intent to exempt from coverage under CUIPA isolated instances of insurer misconduct.” The court continued that the plaintiff’s allegations were limited to how the insurer treated the plaintiff’s claims. Despite the fact that the plaintiff alleged claims against four insurance policies, which factual scenario the court noted was different from cases where a plaintiff alleges that an insurer committed several unfair settlement practices against a plaintiff under only one policy of insurance, the court nevertheless held that “the very notion of a ‘general business practice’ would seem to imply that wrongs against more insureds than a particular plaintiff need be proven.” Accordingly, the court struck the CUIPA count because “appropriate factual allegations have not been alleged as to claims involving insureds other than the plaintiff.”

EAPD Complimentary Webinar: Local Issue / National Challenge: March 1 Massachusetts Data Security Requirements (February 11, 2010)

Fri, 05 Feb 2010 15:13:00 GMT

The Privacy and Data Protection Group of Edwards Angell Palmer & Dodge is holding a 60 minute complimentary webinar entitled "Local Issue/National Challenge: March 1 Massachusetts Data Security Requirements" on February 11, 2010 at 12:00 p.m.

This webinar will address the Massachusetts Security Regulation in view of its looming March 1, 2010 deadline. The Massachusetts requirements, which apply to the personal information of Massachusetts residents, have had nationwide implications for companies with Massachusetts customers or employees, and for vendors that provide services to those companies.

For further information on content and speakers and to register online for this webinar please click here.

PLUS D&O Symposium Day 2: Afternoon Session II

Fri, 05 Feb 2010 15:01:00 GMT

This session's panel provided insight into the policyholder's expectations with regard to the scope of coverage being purchased and claims handling. The panel discussed in detail what policyholders expect from their brokers and their insurers at the procurement stage, including during coverage negotiations and setting the broker's fee, and also in the event of a claim.

According to the panel, the most frustrating issues facing policyholders today are as follows: brokers "over-promising" what terms they can obtain and creating unreasonable expectations; the use of irrelevant benchmarks by brokers; and the unjustified "shaving of limits" by insurers. The panel also indicated that policyholders tend to see the value in placing coverage with insurers that have responded to covered claims in the past, but indicated that putting a number on that value is not always easy to do.

In addition to an insurer's financial strength, the panel was in agreement that an insurer's proven capability to manage complex, high-exposure claims also is a primary consideration that is taken into account when the company is weighing its renewal options. The panel also provided insight as to how brokers, risk managers and coverage counsel each play a significant role in developing the policyholder's insurance program. The panelists noted that communication at every level of the process is critical to providing the policyholder with the protection it needs and making sure that the policyholder understands what is and is not covered under its policies.

PLUS D&O Symposium Day 2: Afternoon Session I

Fri, 05 Feb 2010 14:58:00 GMT

This session’s panelists discussed the Canadian D&O industry. The panel provided an in-depth discussion of the Canadian judicial system, Canadian procedure for certifying class actions, and Canadian securities law.

Specifically, the panelists discussed trends in the filings of securities class actions in Canadian courts and recent case law affecting the rights of plaintiffs bringing securities class actions. The panelists focused on comparing certain substantive differences in Canadian and American law governing securities class actions, including: (1) caps that apply to limit the liability of Canadian directors and officers in certain contexts; (2) the ability of Canadian investors to obtain discovery before substantive motions to dismiss; and, (3) the ability of plaintiffs to force defendants to produce their D&O policies at the outset of litigation.

Panelists also discussed the impact of Bill 198, which became effective in December 2005, and which provides for regulation of securities in the province of Ontario (this bill is sometimes referred to as the Canadian Sarbanes Oxley Act). Bill 198 introduced a statutory and secondary market civil liability regime in Ontario law. In this regard, the panelists discussed the well-publicized IMAX decisions of the Ontario Superior Court of Justice, issued in December 2009, which are the first decisions to test certain key aspects of Bill 198.

PLUS D&O Symposium Day 2: Luncheon Speaker Kenneth Feinberg

Fri, 05 Feb 2010 14:57:00 GMT

During a candid discussion about his role as the federal government's compensation czar, keynote speaker Kenneth Feinberg described his role in setting executive compensation for institutions that received substantial TARP funds. Though Mr. Feinberg agrees that, to an extent, his work is a "sideshow," he made a compelling case that the true impact of his work has less to do with the companies that are subject to his mandate and more to do with those entities that voluntarily adopt his approach to executive compensation. According to Mr. Feinberg, companies have already taken note and are following course. He attributes this effect to two considerations: political cover and the anticipation of litigation arising from claims of excessive compensation.

As an aside, Mr. Feinberg explained that the most frequently used argument he hears in response to his suggestions - that the employee is irreplaceable and the company will not be able to function if he/she leaves - falls on deaf ears for two reasons: (1) the so-called "irreplaceable" employees already have left; and (2) he is skeptical that, given the state they are in, the companies have so many irreplaceable employees. Mr. Feinberg did say that the companies he is working with have been very cooperative and that he finds himself speaking with the, and not to them.

PLUS D&O Symposium Day 2: Morning Session II

Fri, 05 Feb 2010 14:55:00 GMT

This session's panel began by discussing the role of brokers and the rising use of external legal consultants by insureds. Panel members mostly agreed that the added use of these legal consultants, so long as the relationships among the all parties involved are managed correctly, are beneficial to ensure that insureds maximize their coverage.

One panelist noted that as prices are driven down, there are opportunities for additional premium by expanding coverage. One particular issue discussed by the panel was coverage for SEC (and other governmental) investigations. The panel noted that current D&O policies cover SEC investigations upon the insured's receipt of formal orders of investigation, but oftentimes the insured must respond to SEC requests for information (and even subpoenas) long before they receive such formal orders. The panel members that represent insureds noted that they have begun to seeking coverage from insurers without the need for the insured to receive formal orders of investigation before defense costs are covered.

The panel members that represent insureds raised an issue with respect to the increasing practice of including "exclusions" in insuring agreement definitions. For example, insuring agreements providing what does not constitute loss. These panel members stated that it is a concern for insureds, because it is their burden of proof to demonstrate that a claim falls within the insuring agreement. The panelists that represent insurers noted that these definitions have been revised to address the issue of insurers being forced to defend claims that were never intended to be covered.

One topic that entire panel agreed on was the need to draft and finalize endorsements prior to binding policies to avoid potential miscommunications about what was agreed to or negotiated between the parties.

PLUS D&O Symposium Day 2: Morning Session I

Fri, 05 Feb 2010 14:53:00 GMT

The central theme of this panel was that derivative litigations provide a fertile area, which can be expected to continue to grow and take on lives of their own.

Derivative claims are claims brought on behalf of the company, for harm caused to the company, and any damages awarded go to the company (as opposed to a class action in which the class is the recipient of any recovery). Derivative suits must overcome two key procedural hurdles. First, the plaintiff must be a shareholder continuously from the time of the alleged conduct until the end of the lawsuit, and if the plaintiff sells his or her shares prior to trial, he or she no longer has standing. Second, the plaintiff must show that his or her demand on the board to take corrective action would be futile. According to the panel, this hurdle is extremely difficult to show in most cases, and requires the plaintiff to show either that the majority of the board is conflicted or that the board is dominated by one member who is conflicted.

Another difficulty posed by derivative litigations is the inability to conduct discovery prior to surpassing the demand futility hurdle. The panelists suggested that statutes, such as Delaware §220 can be useful tools to allow the plaintiff to serve targeted discovery (books and records) to obtain enough documents to survive a motion to dismiss. According to one panelist, although this has become a popular method of obtaining discovery, the plaintiff must demonstrate that he or she has a proper purpose for obtaining such discovery.

The panel also addressed special litigation committees ("SLC"), which a corporation can appoint at any time to investigate allegations brought and recommend how the corporation should respond to suits. If called upon, the SLC must persuade a judge that: (1) the members are independent; (2) they acted in good faith; and (3) that they had good reasons for their determination. The panelists explained that the Oracle case recently showed that showing independence of the members is not necessarily a slam-dunk.

Furthermore, the panelists suggested that the deference once given to SLCs has been somewhat reduced by recent decisions which called into question whether the SLC’s original recommendations to the company as to whether it was in the company's best interests to pursue the claims alleged were, in fact, independent or in good faith.

The panel did note that the protections afforded by the business judgment rule and good faith defenses are alive and well, as shown by the recent Citigroup and Dow Chemical cases.

In closing, the panel suggested that the old days of wrapping derivative claims into class action settlements is over because derivative claims have taken on a life of their own. They suggested that more and more derivative claims would be filed in the coming year.

PLUS D&O Symposium: Afternoon Session II

Thu, 04 Feb 2010 13:02:00 GMT

During the second afternoon session of the first day of the PLUS D&O Symposium, the panelists discussed the complex underwriting issues that arise when the company to be insured is insolvent, in bankruptcy, or close to bankruptcy. The panelists discussed the following topics and provided the following insights:

Bankruptcies have been on the rise in 2008 and 2009 (there were 49% more bankruptcies in 2008 than 2007, and 52% more bankruptcies in 2009 than 2008).
When a company is in bankruptcy, it is at increased risk of being named in a securities class action. In 2008, a company in bankruptcy had a 77% chance of being named in a securities class action, whereas companies not in bankruptcy only had a 2% chance of being named in such a suit.
The panel provided an overview of the legal and regulatory schemes governing the bankruptcy of companies, including the particularities of bankruptcies of banks. The panel noted that much of the case law arising out of the savings and loan crisis of the 1980’s is instructive to coverage issues involving bankrupt banks today, including the following issues:
- Regulatory Exclusion: a number of courts upheld this exclusion and it could apply today to exclude coverage.
- Insured v. Insured Exclusion: many decisions have addressed whether various key players in the bankruptcy setting (i.e., trustees, regulators, etc.) are Insureds for purposes of triggering this exclusion.
- Bankruptcy/insolvency exclusion: a number of decisions have upheld this exclusion.
- Definition of Claim: is a Cease and Desist Order a “Claim”? (The case law on this point may be of limited utility given the evolution of the definition of Claim in D&O policies) .
The panel listed certain key provisions that policyholders should insist upon when negotiating the terms of their D&O policies, including:
- “Waiver of stay” provisions, which certain bankruptcy courts will recognize and which increase the chance that individual directors will be able to access policy proceeds.
- “Order of Payments” provisions that specify that the policy must pay Side A claims before Side B or Side C claims.
- A definition of Insured that includes the debtor in possession to ensure that bankruptcy coverage is available after the company enters bankruptcy.
- Carve-outs to the Insured v. Insured exclusion to ensure that claims brought by the debtor in possession, trustee, etc., are not excluded.
- A definition of Claim that includes administrative and regulatory proceedings.
- A Side A retention of $0 (or a limited amount).
- A provision requiring interim funding or advancement of defense fees.
Finally, the panelists discussed strategies directors and officers might employ to ensure that they have adequate insurance coverage when the company is close to, but not yet, in bankruptcy. The panel noted that it appears that deciding to strip entity coverage from an existing D&O policy could raise a number of bankruptcy issues, particularly where the directors making the decision to do so would potentially personally benefit from this action. An alternative strategy is to purchase Side A coverage, although this may be difficult or expensive where the company is close to bankruptcy.

UK: The Financial Services Authority Publishes Factsheet for Insurers Providing Flood Insurance

Thu, 04 Feb 2010 12:54:00 GMT

The Financial Services Authority (the FSA) has recently published a factsheet for general insurance providers entitled "Climate change thematic review: flooding – do your customers know what they are covered for?". The factsheet has been published following an FSA review of whether general insurers are giving customers clear and accurate information about their cover. The scope of the review was limited to general insurers who provide buildings and contents cover for personal homes and was itself prompted following two major flood incidents in the UK in 2007 and 2009.

The factsheet sets out the FSA's findings and further action that the regulator expects general insurers to take. In particular, the FSA highlighted the importance of:

using clear and unambiguous language; and
the need to highlight the significance of allowing a policy to lapse.

The FSA provided examples of unclear policy wordings which included the use of the words "vicinity" and "locality" when referring to distances from rivers. It also noted the use of the term "property in the open" in exclusions which did not make clear whether the items being referred to were temporarily or permanently outside.

The FSA highlighted that some customers with properties in areas of significant flood risk benefit from an Association of British Insurers statement of principles which guarantees flood cover to such properties (subject to certain conditions) until 30 June 2013. The FSA found that such customers were not being given sufficient information about the implications of allowing their existing policy (benefiting from this guarantee) to lapse.

The FSA has stated that it expects general insurers to take the following actions:

review the wording used in the questions asked to determine customers' eligibility for cover (eg in call centre scripts, online questionnaires or equivalent) and, in policy terms and conditions, to ensure that the wording is clear and unambiguous;
ensure that, at renewal, flood-affected customers are made aware of the risks of allowing a policy to lapse;
update their FSA supervisors on any actions taken by them in the light of the FSA factsheet.

To view the FSA factsheet, please click here.

UK: High Court Finds that Claim is Excluded as a Result of Director's Aiding and Abetting

Thu, 04 Feb 2010 08:35:00 GMT

In the case of Goldsmith Williams v Travelers Insurance Company Limited [2010] EWHC 26, Mr Justice Wyn Williams considered the question of whether a company had acted fraudulently. Goldsmith Williams brought a claim against Travelers Insurance Company Limited using the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act). Under the 1930 Act, a person who has an ascertained claim against an insured but insolvent person may bring that claim directly against the insurers on risk. In this case, Goldsmith Williams had obtained judgment against the insured but, when claiming under the 1930 Act, Travelers defended itself by claiming that the claim was excluded from the policy.

Joshua & Usman Legal Services Limited (JULS) was a company involved in the giving of legal advice. Its two directors were Mr Atkapakpa and Ms Usman both of whom were solicitors. It was agreed between the parties to the current case that Mr Atkapakpa had committed several acts of mortgage fraud in which he not only obtained mortgages through fraudulent statements but then also stole the money. The question before the court was whether JULS itself had acted fraudulently or dishonestly as the Travelers policy excluded liability for such acts. Extensive evidence was put before the court that Ms Usman, the only other director of the company, was aware that Mr Atkapakpa had engaged in mortgage fraud previously. The court found that she had committed a fraudulent act by witnessing Mr Atikpakpa's signature and certifying a copy of his passport which allowed him to commit the mortgage fraud in question. In relation to another later theft of mortgage funds by Mr Atkapakpa, it was found that he could not have committed the crime without Ms Usman condoning the course of conduct. As a result of these findings, Mr Justice Wyn Williams found that Travelers was not liable under the 1930 Act as the loss was excluded from the policy in question.

This case usefully leads one through a proper application of the 1930 Act. It also acts as a stark reminder that, with the requisite background knowledge, small acts such as witnessing a signature or certifying a document could amount to aiding and abetting a crime. In addition, any claim brought against a company or partnership as a result of those acts may be excluded from the company's insurance cover.

Italy: Italian Government and EU are Named as Defendants in Eternit Asbestos Proceeding

Thu, 04 Feb 2010 08:33:00 GMT

The criminal proceedings in Turin against the former heads of asbestos giant Eternit (as previously reported here) have taken a new turn. A civil case has been linked to the criminal trial and both the European Union (EU) and the Italian Government have been named as civil defendants. It has been reported that 4,000 people have asked to join the case as plaintiffs, and 3,000 people are due to give evidence. At a hearing at the end of January 2010, the judge heard evidence regarding the suitability of the parties as defendants. The Italian Government argued that it was Eternit's responsibility to protect its employees not the state. Counsel for the EU argued that the EU had issued appropriate directives and that any proceedings brought against the EU must be done so in the European Court of Justice. The judge has now adjourned the hearing until 8 February 2010.

The criminal proceedings against Stephan Schmidheiney (the owner of Eternit) and Baron Louis de Cartier de Marchienne (the former managing director of Eternit) were brought in relation to Eternit's activities at four Italian asbestos-cement plants. The accused are charged with creating an environmental hazard and wilfully disregarding safety regulations at those plants; actions which allegedly resulted in thousands of asbestos related deaths.

UK: High Court Rules That any Issue Covered by a Tribunal's Terms of Reference Cannot be Adjudicated in a Subsequent Arbitration

Thu, 04 Feb 2010 08:30:00 GMT

In LIDL v Just Fitness Ltd [2010] EWHC 39 (Ch) the Court was asked to decide whether an arbitrator had jurisdiction to determine a particular issue in a dispute, which was alleged to have been addressed in a previous arbitration.

The dispute concerned the refusal of the landlord (LIDL) to grant consent for the assignment of a lease held by the tenant (JF). The parties entered into arbitration, and LIDL obtained an award that the refusal was reasonable. JF then commenced a second arbitration, raising the issue that there had been a delay in the landlord serving written notice of its decision not to consent to the assignment.

In Conquer v Boot [1928] 2 KB 336 it was established that a claimant cannot proceed against a defendant on the same issue in a dispute more than once. This case was upheld by Purser & Co (Hillingdon) Ltd v Jackson and another [1971] 1 QB 166 in the context of arbitration, providing that if an issue falls within the terms of reference of a tribunal, the claimant is estopped from proceeding on that issue in a subsequent arbitration. The issue before Judge Frances Kirkham was whether this decision would also apply to an arbitration under the Arbitration Act 1996.

The Judge concluded that the dispute referred to the first arbitrator comprised both the unreasonable withholding of consent, and the delay issues. No agreement had been made retaining the rights of JF to raise the delay issue in subsequent proceedings. Therefore, the second arbitrator did not have jurisdiction to decide the question of delay, as that issue had already been referred to the first arbitrator.

Even though the first arbitrator did not make a decision in relation to the issue of delay, that issue was raised and an adjudication was made. Accordingly JF was estopped from proceeding with that issue in a subsequent arbitration.

PLUS D&O Symposium: Afternoon Session I

Thu, 04 Feb 2010 08:28:00 GMT

The third panel of the first day of the PLUS D&O Symposium focused on current issues surrounding Excess and Side A insurance policies. The panel, which consisted of brokers, underwriters and counsel for policyholders, discussed the following topics:

Exhaustion: The viability of so-called "limits shaving" deals has been tested in recent years by such decisions as Comerica and HLTH, in which courts have prohibited insureds from "gap filling" in order to access the limits of their excess policies. One panelist stated that in the context of purchasing D&O insurance, he generally advises his public company clients to request that excess insurers include explicit language in their policies that allows the insured to engage in limits shavings deals. According to this panelist, limits shavings deals provide the insured with some flexibility in settling an underlying lawsuit where coverage issues exist.
Uniformity of policy language throughout the tower: the broker panelists generally favored uniformity in policy language in each of the excess policies. Where the policy wording varies among the excess policies, insureds often face difficulties in adjusting complex claims.
Types of Side A policies: the panelists also discussed the relative strengths and weaknesses of the variants of Side A policies. One panelist stated that "broad form" Side A policies are critical because they provide "sleep insurance" for directors by covering a broad range of risks that may not be covered by the underlying policies. The panelists also discussed the growing popularity of Independent Directors Liability ("IDL") policies, which generally provide separate Side A limits to independent directors that cannot be accessed by the officers and inside directors. According to some of the panelists, this type of product is critical for independent directors, whose compensation is minimal compared to the risk of loss of personal assets in the context of securities litigation.

PLUS D&O Symposium: Morning Session II

Wed, 03 Feb 2010 15:32:00 GMT

During the second morning session at the PLUS D&O Symposium, the panelists discussed the role of mediation in D&O claims resolution and the kinds of recurring issues that arise in the mediation context, as well as the best ways that these problems can be avoided or overcome. Of note, the panelists discussed the following:

Over the years, the mediation process has changed and become more complex.

Now the industry sees claims that involve class actions, derivative actions, ERISA actions as well as opt-outs, all of which impact the amount of available insurance proceeds.
Institutional plaintiffs now play an active role in cases, often seeking larger settlements and corporate governance changes which can be costly.
There is often a significant amount of tension between numerous parties. Besides tension between the plaintiff and insured defendant, there can be tension between the insured and its insurers as well as amongst the insurers on the tower themselves.
The increase in the number of insured entities who have filed for bankruptcy or who have become insolvent also complicates matters, especially where officers and directors are named as defendants and the company can no longer indemnify them. One panelist noted that they have seen an increase in insureds looking to their Side-A policy for coverage.

The panelists all seemed to agree that better planning before the mediation, including increased communication between the parties involved in a mediation, will ensure a more productive mediation.
The panel also suggested that brokers should continue to educate their clients, the insureds, as to what is covered under the insured's insurance policies and what limitations exist.
Finally, the panel also discussed the benefit of having some cases tried to verdict - case law helps us learn what truly is a good case and what the potential risk of trying a case could be.

PLUS D&O Symposium: Morning Session I

Wed, 03 Feb 2010 15:24:00 GMT

During a discussion on the state of securities litigation, a panel comprised of prominent securities litigators discussed trends in securities class actions and legislation that is on the horizon. Though the panel disagreed on whether the SEC would become more or less active under the new administration, they generally agreed that state Attorneys General likely would continue to take an active role in investigations. The panelists discussed different circumstances that, over time, have made securities class actions more difficult to resolve at an early stage in the litigation, including the introduction of institutional plaintiffs and the development of insurance coverage law. Two panelists predicted that upcoming Supreme Court decisions concerning investors' access to the courts would likely have a signficant impact on securities litigation, and two other panelists predicted that lawsuits filed abroad would be an emerging issue to watch. The panel also discussed issues that arise when there is a "mismatch" between the responsible persons and the persons with deep pockets who are in a position to fund a settlement, with two panelists opining that legislation addressing those issues (e.g. joint and several liabilty) would likely come to the forefront in the near future.

Live Blogging from the PLUS D&O Symposium: Luncheon with Rudy Giuliani

Wed, 03 Feb 2010 15:22:00 GMT

This afternoon, Rudy Giuliani, the former mayor of New York City, gave the keynote address at the 2010 PLUS D&O Symposium. Giuliani addressed enterprise risk oversight, crisis planning, and counseling corporations on managing risks. Giuliani gave his thoughts on topics ranging from how the United States can better protect itself from terrorist attacks, and how the U.S. government can weather the current financial storm caused, in part, by reckless subprime lending. Giuliani critiqued proposed plans to limit executive compensation and to increase the capital gains tax rate. Giuliani also stressed the need for the U.S government to increase security efforts to help prevent a terrorist attack.

Proposed Financial Crisis Responsibility Fee Could Affect Large Insurers

Wed, 03 Feb 2010 15:20:00 GMT

President Obama’s proposed Financial Crisis Responsibility Fee, which he unveiled last month, has been included in the 2011 budget proposal released on Monday, February 1, 2010.

The proposed fee is projected to raise up to $117 billion in order to repay the projected cost of the Troubled Asset Relief Program (TARP). It would apply to financial firms that own over $50 billion in consolidated assets and either (a) owned insured depository institutions or securities broker-dealers as of January 14, 2010, or (b) become one of these types of firms after January 14, 2010. These companies would be assessed at approximately 0.15% of covered liabilities per year.

If enacted, the fee would go into effect on June 30, 2010 and remain in place for at least ten years.

To view the Department of Treasury Fact Sheet, click here.

To view the 2011 Budget Proposal, click here.

Obama Proposes Budget That Would End Foreign Reinsurer Tax Advantages

Wed, 03 Feb 2010 13:06:00 GMT

President Barack Obama’s recently released proposed Budget of the U.S. Government for the Fiscal Year 2011 (the “Proposed 2011 Budget”) would disallow the deduction for excess non-taxed reinsurance premiums paid to foreign affiliates by a U.S. insurance company. The Proposed 2011 Budget projects that this disallowance would result in tax receipts of $22 million in 2011, and totaling $223 million over the next five years.

The current deductions allow a ceding U.S. insurer to reduce its U.S. taxable income, while at the same time an affiliated foreign reinsurer located in certain jurisdictions does not have to pay U.S. taxes on the premium income generated from the ceded policies. Thus, the total U.S. taxes paid by the ceding insurer and affiliated foreign reinsurer are reduced while keeping all of the risk within the affiliated companies.

As we have previously noted in our blog posts on this topic here, here and here, proponents for the elimination of this deduction contend that offshore companies are provided an unfair tax advantage and that the lack of equal footing results in the migration of capital abroad. Opponents of the elimination of this deduction argue that elimination is akin to a protectionist tariff and although U.S.-based reinsurers would sell more reinsurance, much reinsurance would simply vanish due to increased rates and reduced coverage.

The Proposed 2011 Budget and any enacting legislation must still be approved by Congress. We will continue to monitor this topic and will provide updates on InsureReinsure.com.

UK: Financial Services Authority Seeks Clarification on Co-Operation with Overseas Regulators

Wed, 03 Feb 2010 10:28:00 GMT

On Tuesday 2 February 2010, the Financial Services Authority (FSA) went to the Court of Appeal to seek clarification regarding its obligation to co-operate with the Securities and Exchange Commission (SEC). This comes as a result of a High Court judgment last year in favour of two companies which said that the FSA had overstepped its powers by carrying out a request from the SEC to recover certain documents. The decision by the Court should help to clarify the extent of the FSA’s powers in assisting an overseas regulator.

We will keep you updated on any developments here at www.insurereinsure.com.

Connecticut Appellate Court: Traffic Cop Not “Occupying” a Covered Vehicle at Time Struck is Limited to Workers’ Compensation Benefits

Wed, 03 Feb 2010 08:12:00 GMT

The Connecticut Appellate Court recently affirmed a trial court decision barring a police officer from recovering underinsured motorist benefits because he was not “occupying” a covered motor vehicle at the time he was injured and, consequently, is limited to his workers’ compensation remedy by the exclusivity provision contained in Conn. Gen. Stat. § 31-284 (a). Ludemann v. Specialty National Ins. Co., AC 30156 (Conn.App., Oct. 20, 2009) affirming 46 Conn. L. Rptr. 147 (Conn. Super., July 11, 2008).

Insured was employed as a town police officer and, while directing traffic, was struck and injured by a motorist. The Insured received workers’ compensation benefits for his injuries and exhausted the coverage of the motorist’s liability insurance. Thereafter, he sought to recover underinsured motorist benefits from the town’s insurer (the “Insurer”). The Insurer denied the Insured’s claim because, at the time he was injured, he was not “occupying” his police cruiser for purposes of Conn. Gen. Stat. § 38a-336 (f), which provides that, “[n]otwithstanding subsection (a) of section 31-284, an employee of a named insured injured while occupying a covered motor vehicle in the course of employment shall be covered” by the town’s underinsured motorist coverage. Conn. Gen. Stat. § 31-284 provides for the exclusivity of workers’ compensation benefits.

An arbitration panel agreed with the insurer. The Insured filed an application to vacate the arbitration award with the court, which was denied. Citing Gomes v. Massachusetts Bay Ins. Co., 87 Conn.App. 416 (2005), the trial court found that the Insured was barred under Conn. Gen. Stat. § 38a-336 (f) from recovering underinsured motorist benefits because he was not occupying a covered motor vehicle at the time he was injured. Consequently, he was limited to his workers’ compensation remedy by the exclusivity provision contained in Conn. Gen. Stat. § 31-284 (a). In response to the Insured’s argument that Connecticut’s strong public policy directs that uninsured motorist coverage be provided to insureds when they are not occupants of insured vehicles as well as when they are, the trial court found that, while this policy is significant, the legislature specifically enacted § 38a-336 (f) to address the interplay between uninsured/underinsured motorist benefits and the exclusivity of workers’ compensation.

The Insured also argued that he was a third-party beneficiary of the insurance agreement between his employer and the Insurer and, as such, fell within an exception to the exclusivity provision of workers’ compensation for “agreements” between an employee and employer entitling them to additional compensation. The trial court disagreed, finding that to hold otherwise as the Insured maintained would render § 38a-336 (f) meaningless.

Next, the Insured argued that he was “occupying” the vehicle, under an expansive definition of that term, because he left the lights flashing and was in proximity to the vehicle at the time he was struck. The trial court, however, found in accordance with Gomes that “occupying” requires physical contact with the vehicle.

On appeal, the Appellate Court affirmed and adopted the reasoning of the trial court.

For a complete copy of the opinion, please click here.

UK: FSA Consults on Effective Corporate Governance

Tue, 02 Feb 2010 15:32:00 GMT

On 28 January 2010 the FSA issued a consultation paper on effective governance, focusing on significant influence controlled functions and Sir David Walker's review of corporate governance in banks and other financial firms.

The FSA's proposals will establish a revised framework of classification of significant influence controlled functions. One proposal is the sub-division of the NED (non-executive director) governing function by adding sub-categories for the chairman, senior independent director, chairman of the risk committee, chairman of the audit committee and chairman of the remuneration committee. The proposals will also create a new function for individuals within an unregulated parent entity who exercise significant influence over the regulated entity. The FSA has also reversed a previous consolidation of the three systems and controls functions (finance, risk and internal audit) so that each becomes a separate function once more.

The FSA intends to transition individuals who are currently approved as NEDs or under the combined systems and control function by asking firms to complete a notification form. This notification will not trigger a fresh assessment of the competence of the individual unless an individual who currently holds a governing function is required to apply for approval to hold one of the new systems and control functions.

The consultation paper also contains some helpful information on the FSA's approved person and significant influence function interview process.

The consultation paper can be found by clicking here. Responses should reach the FSA by 28 April 2010.

Ninth Circuit: Automobile Insurer Did Not Engage in Bad Faith by Refusing to Pre-Authorize Treatment Under PIP Coverage

Tue, 02 Feb 2010 15:29:00 GMT

In Sadler v. State Farm Mutual Automobile Insurance Company, No. 08-35859 (9th Cir. Nov. 4, 2009), the insureds sued their insurer for bad faith, among other claims, arising from their insurer’s refusal to pre-authorize surgery under the personal injury protection (“PIP”) provision of the automobile insurance policy. The insured alleged that she sustained harm by awaiting the outcome of the independent medical examination (“IME”) ordered by the insurer before proceeding with treatment, including the loss of her job.

The district court concluded that the insurer did not have a duty to pre-approve the insured’s surgery under the PIP provision of her policy because the PIP provision does not require pre-approval for medical treatment, explicitly allows the insurer to obtain an IME, and indicates that payment is to be made as medical expenses are incurred. In affirming the district court, the Court of Appeals noted that no Washington State law recognizes an implied duty on the part of an insurer to pre-authorize treatment under PIP. Because the Insurer did not have a duty to pre-approve the Insured’s treatment, it would not be responsible for the harm flowing from the Insured’s decision to await the outcome of the IME before proceeding with treatment.

With respect to the Insured’s claim that the Insurer acted in bad faith by requesting and then delaying an IME, the district court and the Court of Appeals found that, in addition to having a contractual right to obtain an IME, the uncontroverted evidence showed that the Insurer requested the IME immediately upon learning of the Insured’s request for surgery. Absent evidence that the Insurer’s handling of the IME was atypical, contrary to law, or otherwise “unreasonable, unfounded or frivolous,” the Insurer could not be liable for bad faith.

For a complete copy of the opinion, please click here.

Ohio District Court Holds Supplier of Defective Materials is Not a Subcontractor For Purposes of Exception to “Your Work” Exclusion

Tue, 02 Feb 2010 15:22:00 GMT

In Mosser Constr. Inc. v. Travelers Indem. Co., Civil Action No. 3:08CV2363 (N.D. Ohio Oct. 26, 2009) (Zouhary, J.), an Ohio District Court was confronted with the question of whether a company that supplied crushed stone backfill to a general contractor is a “subcontractor” within the meaning of the insurance policy, or merely a “material supplier.” In granting the Insured’s motion for summary judgment, the Court held that the provider of crushed stone was not a “subcontractor” within the exception to the “your work” exclusion.

The General Contractor was retained by the City of Port Clinton, Ohio (“City”) to build a wastewater treatment facility. When cracks began to form in the completed facility, the City sued the General Contractor for damages. It was determined that the source of the cracks was defective structural backfill beneath and around the foundation of the building that was supplied to the General Contractor. The General Contractor’s insurer declined to defend or indemnify it relying on the “Your Work” exclusion within the policy, which excluded property damage arising out of the General Contractor’s own work. The “Your Work” exclusion, however, contained an exception for work performed on the General Contractor’s behalf by a subcontractor. The policy did not define subcontractor. The General Contractor maintained that the supplier of the backfill was a subcontractor and, therefore, fell within the exception to the “Your Work” exclusion. The Insurer contended that it was a material supplier and that the exception to the exclusion did not apply.

The Court looked to federal cases interpreting the Miller Act (the “Act”), 40 U.S.C. § 3131, which protects those who have a contractual agreement with the prime contractor or a subcontractor on a federal project. The Act does not protect those supplying labor or materials to a material supplier. The Court examined factors indicative of a subcontractor relationship and a material supplier relationship. Guided by these factors, the Court found that the backfill supplier was a “material supplier,” and, as such, outside the exception to the “Your Work” exclusion.

Because the Court concluded that the Insurer had no duty to defend, the Court held that it would not be liable for bad faith.

For a complete copy of the opinion, please click here.

HK: Enforceability of Hong Kong Arbitral Awards in Mainland China

Tue, 02 Feb 2010 15:16:00 GMT

The Supreme People’s Court of the People’s Republic of China recently issued a letter on 30 December 2009 to all Higher People’s Courts in mainland China confirming that ad hoc arbitral awards made in Hong Kong and those arbitral awards made in Hong Kong by the International Court of Arbitration of the International Chamber of Commerce and other foreign arbitration institutions are enforceable in mainland China in accordance with the Arrangement concerning Mutual Enforcement of Arbitral Awards between mainland China and the Hong Kong Special Administrative Region signed in 1999 (the "Arrangement").

As long as these Hong Kong arbitral awards do not fall within Article 7 of the Arrangement, they will be enforceable in mainland China in a similar manner to arbitral awards made overseas in any New York Convention contracting country. Article 7 of the Arrangement largely reproduces the grounds for resisting the enforcement of awards set out in Article V of the New York Convention.

In light of this confirmation by the PRC Supreme People's Court, we anticipate that Hong Kong may become an increasingly popular forum for arbitration especially if the dispute involves any China element.

UK: Scottish Court of Session reverses Lord Glennie's controversial judgment in the Scottish Lion case

Mon, 01 Feb 2010 15:05:00 GMT

Scottish Lion appealed against a judgment delivered by Lord Glennie in which the petition for the proposed scheme of arrangement was dismissed (see our previous blog entries http://www.insurereinsure.com/BlogHome.aspx?entry=1910 and http://www.insurereinsure.com/BlogHome.aspx?entry=1985).

The principal issue to be determined by the Inner House of the Court of Session was whether Lord Glennie was correct to hold that even if the statutory majorities had been obtained, a proposer of a solvent scheme of arrangement still had to be able to demonstrate that there was a "problem" requiring a solution or to produce evidence as to why the scheme in question had advantages for the creditors of the company, rather than merely being in the interests of the shareholders.

In allowing the appeal and overturning Lord Glennie's judgment, the Court made clear that there was nothing in the Companies Act 2006, or any of its predecessors, that suggested that a solvent scheme ought to be dealt with any differently from an insolvent scheme. Rather, the solvency of a company was simply a factor to be taken into account when exercising the Court's discretion as to whether to sanction a scheme. Importantly, it was also held that the existence of a "problem" was not a precondition to the sanctioning of a scheme, although it could be a factor in favour of doing so.

The appeal was granted and Lord Glennie's decision to dismiss the petition was reversed. The case was remitted to Lord Glennie for a full hearing on whether to sanction the scheme. This hearing will also address the remaining issues regarding whether the statutory majorities were properly achieved at the creditors' meetings.

This decision will give comfort to those who feared that Lord Glennie's decision had threatened the continuing use of solvent schemes of arrangement. However, it remains to be seen whether the Scottish Lion scheme will in fact be sanctioned when the case comes before the Lord Ordinary at the sanction stage.

Last Week in DC: The Healthcare Reform Debate – February 1, 2010

Mon, 01 Feb 2010 09:58:00 GMT

Healthcare reform efforts remained in flux last week, as President Obama sought to repackage his party’s priorities in the wake of the shocking Republican victory in Massachusetts on January 19. Nevertheless, House and Senate leaders continued discussions on how to revive the stalled debate, though a specific path forward is anything but certain.

STATE OF THE UNION:

On Wednesday, the President’s State of the Union address provided a convenient platform from which to introduce a recalibrated agenda. As expected, he spent the majority of his address focused on the ailing economy, calling job creation his “number one focus in 2010.”

President Obama highlighted numerous economic and fiscal proposals aimed at saving and creating jobs while focusing on assistance to small businesses and the middle class. For example, he strongly urged Congress to pass a second jobs bill – an effort that the House approved in December and that the Senate is currently crafting.

In addition, the President stressed the need to act on a package of bills that would assist small businesses by taking unused financial bailout funds and directing them to community banks that would make loans to small businesses, and by enacting a tax credit for small businesses to hire workers. He also vowed to reduce the federal deficit by freezing domestic discretionary spending and through the creation of a deficit reduction commission whose recommendations would be presented to Congress for approval.

Despite the fact that the recent Senate election put a damper on many of Democrats’ top priorities, the President also renewed his call to see Congress complete action on a comprehensive healthcare bill – though it by no means received top billing in his remarks and he did not offer a specific path forward on the beleaguered, politically sensitive issue.

MANY OPTIONS, NO CONSENSUS:

Democratic leaders met privately last week to discuss the options their party now has in moving forward on healthcare legislation. Strategies remain widely varied, ranging from a small, piecemeal approach to the revival of a comprehensive bill via the budget reconciliation process.

Even in the face of an increasingly grim outlook, House Speaker Nancy Pelosi (D-CA) renewed her Chamber’s commitment to a comprehensive bill on Thursday. In reference to the completion of the stalled legislation, the Speaker resolutely stated, “We’ll go through the gate. If the gate is closed, we’ll go over the fence. If the fence is too high, we’ll pole vault in. If that doesn’t work, we’ll parachute in. But we’re going to get healthcare reform passed for the American people.”

Despite this bold determination, the Speaker admitted that the House may have to start on a smaller scale. She announced that House Democrats will work to bring “sidebar” issues to the floor prior to the upcoming President’s Day recess, though she declined to elaborate on what issues would be included and whether the effort would consist of one piece of legislation or a package of bills.

Across the Capitol, Senate Majority Leader Harry Reid (D-NV) huddled with key Democrats on Thursday afternoon to map out their preferred strategy. The Majority Leader repeated his intention to revive healthcare reform efforts, though he admitted that Democrats have many potential procedural hurdles in their path.

Majority Leader Reid and other top Senate Democrats appear to be gravitating toward a strategy first unveiled immediately after the Massachusetts election in which the House would approve the Senate-passed bill (H.R. 3590) without any changes, sending it directly to the President’s desk and negating the need for another 60-vote victory in a Senate that will soon have only 59 Democrats. At the same time, the House and Senate would then need to employ the complicated and controversial budget reconciliation process in order to enact a package of amendments to the Senate bill that would only require 51 votes to pass the Senate and would alleviate current House concerns with H.R. 3590.

Though seemingly straightforward, the success of this scenario depends on a number of factors, including the complex rules that do not allow for policy provisions unrelated to revenues and entitlement program spending to be included in the reconciliation process. In addition, Democrats would have to contend with timing issues, given that the authority to use reconciliation is contained in the current FY 2010 budget, which will be supplanted by the FY 2011 budget, due in the spring. Finally, the fact that House Democrats are largely skeptical of such an approach must not be overlooked.

NEXT STEPS:

House and Senate leaders alike have hinted that some decisions may be made and action may occur before Congress breaks for its weeklong President’s Day recess in mid-February, though details are vague and the situation remains fluid. We continue to follow this process closely and will provide updates as notable developments occur.

The Healthcare Reform Legislation that is ultimately adopted will affect all segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries when it becomes final.

REMINDER: Re Under 40s Next Event -- "Preserving Liquid Assets" Lecture and Wine Tasting

Mon, 01 Feb 2010 09:17:00 GMT

Join the U.S. Reinsurance Under 40s Group's at their next event, "Preserving Liquid Assets" Lecture and Wine Tasting, on February 10 at the offices of Edwards Angell Palmer & Dodge in New York. The event will include an engaging lecture by Katja Zigerlig, AVP, Fine Art, Wine & Jewelry Insurance of Chartis Private Client Group, and a tasting of Spanish red wines. Ms. Zigerling will discuss the key components of investment wine's value - the grapes, key regions and marketplace for investment grade wines, and she will address the unique perils affecting the value and condition of wine and the cornerstones of preserving wine assets through inventory management, appropriate storage and a risk management plan.

For more information about the event, click here.

Please send an email with your contact information to events@reunder40s.org so the Re Under 40s reserve a spot for you at the event. See you there.

House Financial Services Committee Hearing Schedule - February 2010

Mon, 01 Feb 2010 08:53:00 GMT

As you know, Congress and the Obama administration have placed significant focus this year upon reform of the financial services industry. This reform - and accompanying oversight - includes the insurance industry, and in fact (as is apparent from recent media coverage) particular emphasis is being placed on insurance firms in the larger reform and oversight effort. As part of our continuing effort to keep you abreast of developments in this area, the Public Policy & Government Relations Department at EAPD is distributing the February schedule for the House Financial Services Committee. This committee, under the Chairmanship of Rep. Barney Frank (D-MA), has been active in attempting to facilitate passage of financial reform legislation, and in oversight pursuant thereto. Please contact either Teddy Eynon (teynon@eapdlaw.com) or Mark Heilbrun (mheilbrun@eapdlaw.com), partners in the Public Policy & Government Relations Department, if you have any questions or concerns about the Financial Services Committee actions, or about the reform and oversight effort more generally.

February 2010

Week of February 1 to 5
Thursday, 4, 10:00 a.m. -- Domestic Monetary Policy Subcommittee -- General Fed Policy
Friday, 5, 10:00 a.m. -- Joint Full Committee Hearing with Small Business Committee -- Bank Lending/Commercial Real Estate

Week of February 8 to 12
Tuesday, 9, 2:00 p.m. -- Capital Markets Subcommittee -- Job Preservation and Creation
Wednesday, 10, 10:00 a.m. -- Full Committee -- Fed Liquidity Program
Thursday, 11, 10:00 a.m. -- Full Committee -- Economic Views

Week of February 15 to 19
Recess—No Committee Activities Scheduled

Week of February 22 to 26
Tuesday, 23, 2:00 p.m. -- Full Committee -- TARP
Wednesday, 24, 10:00 a.m. -- Full Committee -- Humphrey-Hawkins
Thursday, 25, 10:00 a.m. -- Full Committee -- Treasury
Thursday, 25, 2:00 p.m. -- Full Committee -- Treasury

Rating Agencies Dismissed from Section 11 Mortgage-Backed Securities Class Action

Mon, 01 Feb 2010 08:35:00 GMT

In a significant ruling with potentially wide-reaching implications, Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York dismissed the Securities Act of 1933 causes of action (Sections 11, 12, and 15) against McGraw Hill and Moody's (the "Rating Agencies") in In re: Lehman Brother Mortgage Backed Securities Litigation. A copy of the ruling, which occurred at the close of oral argument on January 26, 2010, can be found on page 26 of the transcript of the oral argument.

While the exact grounds for the ruling will not be provided until Judge Kaplan issues a written opinion, it appears that Judge Kaplan based his ruling on the fact that the Rating Agencies were not "underwriters" under Section 11(a)(5) or "sellers" under Section 12. In particular, Judge Kaplan appeared to discount the plaintiffs' argument that the registration statement failed to disclose the fact that issuers regularly engaged in rate-shopping and that the Rating Agencies routinely helped issuers structure offerings of mortgage-backed securities with an eye toward achieving the highest credit ratings. Further, Judge Kaplan rejected the plaintiffs' contention that the Rating Agencies were "controlling persons" under Section 15 of the Securities Act. Here, the plaintiffs argued that the Rating Agencies were control persons of the issuing trusts because they helped to structure the offerings.

Depending on the precise grounds for the dismissal provided in the forthcoming written opinion, this ruling could have wide-ranging implications for the significant number of mortgage-backed securities class actions that are currently pending against the Rating Agencies in which the prevailing theory of liability is that the Rating Agencies acted as underwriters.

UK: Incorporation of Arbitration Clauses by General Words

Mon, 01 Feb 2010 08:25:00 GMT

Habas Sinai Ve Tibbi Gazlar Isthisal Endustri As ("Habas") v Sometal S.A.L. [2010] EWHC 29 (Comm) concerned an application to set aside an interim final award on jurisdiction and costs made by an arbitral tribunal by which the tribunal accepted jurisdiction to entertain a claim made by Sometal S.A.L. for breach of contract.

The issues before the High Court were (1) whether general words in a contract are sufficient to incorporate terms from previous contracts, and (2) if general words are sufficient, whether the words of incorporation were effective in this instance.

There had been 14 previous contracts made between Habas and Sometal S.A.L. - 3 were prepared by Habas and the other 11 by Sometal S.A.L. or by their agent's, Metkim. The contracts prepared by Metkim set out terms relating to material, quantity, price and shipment and either provided that "the rest will be agreed mutually", "the rest will be as per previous contracts" or that "all the rest will be same as our previous contracts". Although the contract on which Sometal S.A.L. relied on did not contain a 'London arbitration clause' governing jurisdiction, it incorporated the term, "all the rest will be same as our previous contracts".

In making the distinction between the incorporation of terms in 'single contract' cases (contracts made between the same parties) and the incorporation of terms in 'two-contract' cases (contracts made between different parties) the High Court found that in single contracts, which the contract in question was, "general words of incorporation are capable of incorporating terms which include an arbitration clause without specifically referring to it". With regard to the second issue, the High Court found that when the parties referred to "all the rest" being the same there was no reason why this excluded previous contracts which incorporated the 'London arbitration clause'. For this reason the High Court found that the 'London arbitration clause' had been incorporated into the contract Sometal S.A.L. relied on and dismissed the application.

HK: Tightened Requirements on the Sale of ILAS products

Mon, 01 Feb 2010 08:10:00 GMT

In September 2009, the Hong Kong Life Insurance Council (HKLIC) introduced a set of new requirements in relation to the sale of Investment-linked Assurance Scheme (ILAS) products. These include the implementation of (i) an enhanced Financial Needs Analysis, a Risk Profile Questionnaire, an Applicant Declaration and a Suitability Check; and (ii) post-sale controls. In particular, from 1 January 2010, life insurers are required to complete and make audio recordings of post-sales telephone calls with customers before the expiry of the relevant cooling-off period.

In addition, life insurers are required to implement (by 1 February 2010) the 21 days’ cooling-off period which gives purchasers of new life insurance policies an opportunity to reconsider their decision to purchase a life insurance product which is a long term commitment. In this connection, the HKLIC has also promulgated a Code of Practice for Life Insurance Replacement which will come into effect on 1 February 2010.

Furthermore, a revised Code of Practice for the Administration of Insurance Agents (with related Guidance Notes) has been introduced by the HKLIC and will come into force on 1 March 2010.

These enhanced self-regulatory requirements are intended by the HKLIC to ensure that customers purchase insurance products that are suitable for them and consistent with their needs and risk appetite.

UK: Court of Appeal Overturns Recent Judgment on ‘Inherent Vice’

Fri, 29 Jan 2010 13:41:00 GMT

In Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad [2009] EWCA Civ 1398, the Court of Appeal overturned the first instance judgment of the Commercial Court (previously reported here), and found that the cause of the loss was not ‘inherent vice’ (a risk excluded under the claimant insured’s ‘all risks’ policy) but ‘perils of the sea’, a covered risk.

The insured’s claim was for the loss it incurred when three legs from one of its oil rigs fell off whilst being towed from Texas to Malaysia. The insurer claimed the loss of the legs was due to inherent vice, whilst the insured submitted that the immediate cause of loss was a leg-breaking wave (a peril of the sea). The insured accepted that the weather experienced during the tow was within the range that could reasonably have been contemplated.

The Court at first instance said that the test for inherent vice was whether the cause of the loss was an inability to withstand the ordinary incidents of the voyage, including the weather reasonably expected. On appeal, the test was narrowed. The Court considered the test to be not whether the weather could reasonably be anticipated, but whether it would be bound to occur as a usual incident of the type of voyage being undertaken.

On the facts before the court, the damage was found to have been caused by the perils of the sea, not inherent vice, and was, as a result, not excluded under the insurance.

The court conducted a detailed examination of previous cases and provided useful commentary on the principle of inherent vice. Our full analysis of the court’s decision will be set out in our March issue of Insurance & Reinsurance Review.

Brazilian Government Considers "Privatization" of Dominant Government-Controlled Reinsurer IRB Brasil Re

Fri, 29 Jan 2010 12:31:00 GMT

The Brazilian federal government has reportedly decided to reduce its control of the nation's former reinsurance monopoly holder, IRB Brasil Re, in a move that some are referring to somewhat misleadingly as "privatization" of the entity. The government would reportedly maintain significant control of the entity through a "golden share" arrangement, but would reduce its equity position in the entity below the majority ownership that it currently maintains.

Under the reported plan, however, the federal government's majority interest in IRB Re Brasil would be transferred to the Banco do Brasil, which is also federally-owned. It is not at all clear that the private interest in the entity, currently at 41% split among a number of private insurance companies, would change at all, though there is some discussion in media reports of "greater private participation" in the entity in IRB Re Brasil in the future.

If you would be interested in learning more about the Brazilian or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Latin American Regional Premiums Grow 7.4%

Fri, 29 Jan 2010 12:30:00 GMT

According to a report released recently by Fundacion Mapfre, total premiums for Latin America as a whole grew by 7.4% when comparing the first half of 2009 to the first half of 2008. Regional premiums for the first half of 2009 reportedly totaled US$ 49.9 billion (35.8 billion Euros).

The Latin American non-life sector grew 13.2% half year over half year to 23.7 billion Euros, paced by growth in the health, fire and workers' compensation lines. Auto insurance premiums grew by only .7% for the same period, while life insurance premiums were down 2.4% due to disruptions in the Argentine pension market, slower expansion in many jurisdictions and negative growth in Chile, Mexico and Puerto Rico.

If you would be interested in learning more about other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

EU: European Commission Publishes Report on Tying and Other Potentially Unfair Commercial Practices in Retail Financial Services

Fri, 29 Jan 2010 12:23:00 GMT

On 15 January 2010, the Internal Market Directorate General of the European Commission published for consultation a paper by the Centre for European Policy Studies entitled "Tying and other potentially unfair commercial practices in the retail financial service sector". The 416 page paper sets out the findings of a study which itself arose from a declaration in the Commission's 2007 Communication on A Single Market for 21st Century Europe that it wished to "do away with anticompetitive product tying" to empower consumers and thus promote the development of a single European market for financial services. The announcement of the study was picked up in the Commission's 2007 White Paper on the Integration of EU Mortgage Credit Markets, which referred to the proposed investigation of "tying and other unfair practices". Concerns over tying were also noted in the Commission's 2007 report on DG Competition's retail banking sector inquiry.

The paper concludes that cross-selling practices (including tying, defined as selling two or more products together in a package when at least one of the products is not sold separately) and conditional sales are widespread in the EU. Concerns are raised over a range of practices, including tying mortgages with life insurance, consumer loans with current accounts and consumer loans with payment protection insurance or life insurance. Concerns are also raised over the cross-selling of insurance products, including life insurance, home insurance, PPI, health/disability insurance and motor insurance, to borrowers, which the authors view as unfair in 90.5% of cases. The paper suggests that such practices can be harmful to consumers and small and medium sized enterprises, as they reduce customer mobility and price transparency and hence reduce the comparability of providers on the market. Perhaps most importantly, the paper details significant divergence in regulatory approaches between Member States and concludes that "the current fragmentation of legal systems has an obvious impact on the Internal Market and on the efficiency of individual national markets". It also claims that this has resulted in limited consumer confidence in the field of financial services in the 27 EU Member States.

The key question is whether the paper will remain simply a repository of information and broad assertions, or whether it will ultimately lead to new regulation. The Commission's consultation document raises a number of options, including EU-wide legislation in the context of the review of the Unfair Commercial Practices Directive. While enthusiasm for the promotion of cross-border retail financial services may have waned in the wake of the financial crisis, it clearly remains on the Commission's agenda. Interested stakeholders are invited to submit their responses to the paper by 14 April 2010.

To view the paper, please click here.

Guidance on submitting a response is available by clicking here.

UK: Revised Estimate Says Asbestos-related Liability will Cost UK Insurers Over £11bn by 2050

Fri, 29 Jan 2010 12:20:00 GMT

The UK's Asbestos Working Party (AWP) has published its revised projection of the cost to employers' liability insurers of the UK's asbestos liability problem. The AWP has modelled "alternative scenarios" that suggest the cost of future claims will be between about £5 billion and over £20 billion for the period 2009 to 2050. Within that range, the most likely cost is stated to be £11.3 billion. The AWP's previous estimate was £4.7 billion, given in 2004.

The report, stressing the uncertainty inherent in the projections, states that there is insufficient evidence on which to base a single best estimate of the future cost and sets out "a range of best estimates".

The vast majority of the cost (over 90%) is attributable to future claims from victims of mesothelioma. The AWP has relied upon revised modelling indicating an increase in the likely UK death rate for mesothelioma; that rate is among the worst in the world. However, the main factor in the significant increase in the projected cost is a material change in the proportion of mesothelioma deaths that result in a claim being passed to insurers. Since 2003, that rate has nearly doubled - now 61% of deaths produce a claim on insurance.

The projection does not include any amount in respect of pleural plaques. This condition is not actionable in England and Wales; Scotland has enacted legislation to reinstate the right to compensation.

HK: Hong Kong Life Insurance Council Elected a New Chairman

Fri, 29 Jan 2010 12:17:00 GMT

The Hong Kong Federation of Insurers (HKFI) announced on 6 January 2010 that Mr Alex W Y Chu, Chief Executive of HSBC Life (International) Limited, has been unanimously elected Chairman of the Life Insurance Council to fill the vacancy arising from the death of Mr K.Y. To.

Mr Chu is currently the Chairman of the Life Insurance Council, the Retirement Schemes Working Group and the Task Force on the Race Discrimination Ordinance and a member of the HKFI Governing Committee, the Task Force on Disclosure of Intermediaries' Remuneration and the Task Force on Healthcare Reform. Mr Chu has also been the Honorary Secretary of the Insurance Claims Complaints Bureau since 2007. In addition, Mr Chu is a member of the Mandatory Provident Fund Schemes Operation Review Committee and Guidelines Committee. He also serves on the Insurance Intermediaries Quality Assurance Scheme Steering Committee under the Hong Kong Insurance Authority (HKIA).

The Life Insurance Council currently represents 44 life insurance companies in Hong Kong and works closely with the HKIA in promoting and perfecting the life insurance industry's self-regulatory regime with the aim of improving the professionalism of and strengthening public confidence in the insurance industry.

January 28, 2010: Data Privacy Day

Thu, 28 Jan 2010 19:15:00 GMT

January 28, 2010, was International Data Privacy Day – an annual event intended to raise awareness of data privacy and to promote data privacy education. National and state governments, corporations such as Intel and Google, and institutions including universities observed the occasion. (In Europe, the event is known as “Data Protection Day”).

In the United States and Canada, observation of Data Privacy Day is coordinated by The Privacy Projects, a nonprofit think tank and research organization.

To learn more about Data Privacy Day, please click here.

UK: Confederation of British Industry and PricewaterhouseCoopers Publish Report on the Future of the Financial Services Industry

Thu, 28 Jan 2010 12:32:00 GMT

On the 20th anniversary of the Confederation of British Industry and PricewaterhouseCoopers Financial Services Survey, twenty leading figures from across the financial services industry have given their views in a report entitled "20/20 Vision - The Future of Financial Services" (the Report). The Report provides a review of the industry over the last twenty years, as well as views on where the industry is going and the challenges it will face over the next twenty years.

In particular, the Report looked at the following issues:

The future shape of the financial services industry;
Customers and products;
Government intervention and regulation; and
UK competitiveness and London as a leading financial centre.

According to those interviewed for the Report, London's position as a leading financial services centre has not been dented by the financial crisis. However, the risk of unilateral regulatory action in the UK and the economic shift towards the East pose two very serious threats. The Report found that the competitiveness of the UK's financial services sector is more likely to be undermined by the uncertainty surrounding future regulation of the industry, than by further aftershocks from the recent crisis. There was widespread consensus in the Report that the only real long-term solution to the crisis will come from coordinated global action.

In relation to the insurance sector, the Report predicted that insurance will see further consolidation, though concerns were raised about "regulatory overkill". Mark Hodges, Chief Executive of Aviva UK, stated that "There is a fear in the insurance sector that we're being swept along on a tide of banking regulation, so we're advocating proportionality and recognition of the difference between banks and insurers". Tim Breedon, Chief Executive of Legal & General, noted that "Insurers aren't banks".

To view the Report, please click here.

To view the CBI press release, please click here.

UK: Data Breaches to Incur up to £500,000 Penalty

Thu, 28 Jan 2010 12:28:00 GMT

In our January 2010 Client Advisory (see the Client Advisory here) we wrote that, pending the outcome of a recent Ministry of Justice consultation, the Information Commissioner's Office (the ICO) may be given increased statutory powers to impose fines. In a press release on 12 January 2010, the ICO confirmed this power is expected to come into force on 6 April 2010. The penalties for serious breaches of the Data Protection Act 1998 (the DPA) will be as high as £500,000. The ICO has produced statutory guidance outlining how it proposes to use this new power.

The ICO considers the new power essential to its enforcement strategy and a powerful deterrent to organisations contravening, overlooking or being merely careless with data protection compliance. The power to impose a monetary penalty notice is designed to deal with serious breaches of the DPA and is part of the ICO's overall regulatory toolkit. It is important to note that the Information Commissioner will take a pragmatic and proportionate approach to issuing an organisation with a monetary penalty. Factors will be taken into account (including an organisation's financial resources, sector, size and the severity of the data breach) to ensure that undue financial hardship is not imposed on an organisation. Additionally, prompt payment, within 28 days of the penalty notice, will lead to a 20 per cent reduction in such a penalty.

For a data breach to attract a monetary penalty the Information Commissioner must be satisfied that there has been a serious breach that was likely to cause damage or distress (not just financial), it was either deliberate or negligent ( i.e. the data controller must have known that there was a risk that a contravention would occur) and the organisation failed to take reasonable steps to prevent it. Therefore, organisations must be aware that where they have been advised to put data protection policies in place and have subsequently failed to do so, they will be liable for a financial penalty. Similarly, if an organisation collects data for one purpose and deliberately uses it for another this will also incur a financial penalty.

To see the ICO's press release, please click here.

To sSee the ICO's guidance, please click here.

UK: Shadow Treasury Minister Speaks on Conservative White Paper

Thu, 28 Jan 2010 12:19:00 GMT

On 25 January 2010, Mark Hoban MP, Shadow Treasury Minister, spoke at a British Insurance Law Association seminar hosted at Lloyd's and attended by a number of EAPD lawyers. Mr Hoban spoke on the Conservative Party White Paper, published on 20 July 2009, entitled "From Crisis to Confidence: Plan for Sound Banking" with a particular focus on the White Paper's relevance to the insurance sector. The White Paper sets out the Conservatives' plans for the regulation of the financial services industry, should they win the next UK general election, which will take place on or before 3 June this year.

According to the White Paper, the Conservatives consider that the current tripartite regulatory regime has inherent structural weaknesses, including that no single body has both the responsibility for macro-prudential regulation (ie maintenance of financial stability in the economy) and the powers to achieve it. In addition, the Conservatives consider that the Financial Services Authority's (FSA) current dual mandate, covering both prudential and conduct of business regulation, has been a failure, with the FSA being overly focussed on conduct of business at the expense of prudential regulation.

Mr Hoban highlighted the Conservatives' plans to give the Bank of England responsibility for macro-prudential regulation and also for micro-prudential regulation of systemically important institutions, such as banks, building societies and insurance companies. Such micro-prudential regulation is currently within the remit of the FSA. The remaining powers of the FSA would be taken over by a new regulator, the Consumer Protection Agency (CPA), whose focus would be on conduct of business issues and who would also act as a consumer champion.

It is apparent from the White Paper and Mr Hoban's response to questions from the floor that a challenge in establishing such a regulatory regime would lie in the detail. For example, setting the dividing line between whether certain matters are prudential or conduct of business regulation and setting the dividing line between the micro-prudential supervisory roles of the Bank of England and the CPA. In particular, the White Paper does not confirm whether insurance intermediaries would be subject to prudential regulation by the Bank of England or the CPA, although Mr Hoban indicated that it was likely to be the latter.

Mr Hoban stated that the overall aim of the reforms was to ensure that the financial services sector was "valued and valuable".

For a previous blog post covering the FSA's response to the White Paper, please click here.

To view the White Paper, please click here.

Indiana District Court Holds No Underinsured Motorist Coverage for at Fault Driver

Wed, 27 Jan 2010 15:36:00 GMT

An Indiana District Court recently granted summary judgment in favor of an insurer that was charged with breach of the insurance contract and bad faith for denying underinsured motorist benefits to its insured who was found at fault for causing a collision. Barton v. Safeco Insurance Company of Illinois, No. 2:08-CV-206 (N.D.IN Oct. 29, 2009). For a copy of the opinion, please click here.

The Insured was involved in an automobile accident when she attempted to make a left turn and struck a vehicle in the opposite lane that was attempting to make a right hand turn. The Insured and the other driver each gave conflicting accounts of who was at fault. The Insured was trapped in her vehicle following the collision and, as a result, was unable to provide information on the accident scene, such as the location of the vehicles after the collision. The police report and testimony from the responding officer indicated that the Insured’s vehicle was entirely in the wrong lane of traffic at its final resting point.

The Insured submitted a claim for underinsured motorist benefits to her Insurer, which was denied. The Insured commenced suit against her Insurer charging it with breach of contract and bad faith and the Insurer moved for summary judgment. In opposition to the Insurer’s motion for summary judgment, the Insured submitted an expert witness report which concluded that the other driver was at fault for causing the collision. The Insurer moved to strike the report on the basis that it was based on unreliable methodology or no methodology at all. The Insurer reportedly contended that the report was based on assumptions that, in at least one instance, were incorrect based on the Insured’s own deposition transcript, and that the opinions expressed in the report were not based on “expertise, scientific analysis, calculations, computer software, scientific methodologies or any other specialized knowledge.” The court agreed and struck the expert report from the record. Absent the expert report, the undisputed evidence reportedly demonstrated that the Insured’s vehicle had crossed the center line. Finding no evidence to demonstrate that the Insurer breached its contract in denying uninsured motorists benefits, the court granted summary judgment to the Insurer on all of the Insured’s claims.

California Court Refuses to Extend Coverage for Fire Intentionally Set by Child Under Homeowner’s Policy

Wed, 27 Jan 2010 15:32:00 GMT

Recently, a California Appeals Court denied coverage under a homeowner’s policy for damages caused by a fire intentionally set by the insureds’ son. In Century Nat’l Ins. Co. v. Garcia, No. B209616, (Cal. App., 2d Dist. Dec. 2, 2009), an appeals court held that the policy’s exclusion for willful acts of “any” insured precluded coverage, even for innocent co-insureds, such as the plaintiffs.

In Garcia, Plaintiffs were named insureds under a fire insurance policy. In May 2007, a fire occurred at the insureds’ home and the couple filed a claim shortly thereafter. The insurance adjuster that inspected the premises suspected arson and the insurer retained a fire investigator who determined that the fire started in the bedroom of the insureds’ son. The investigation revealed that the fire was intentionally set.

At the time of the fire, the Plaintiffs were insured under a policy that excluded coverage for “Intentional Loss,” defined as any loss arising out of any act committed by or at the direction of any insured having the intent to cause a loss.” The policy also excluded coverage for losses caused by “Dishonesty, Fraud, or Criminal Conduct of any Insured.” The policy defined “Insured” to include “relatives if permanent residents of the residence premises.”

The insurer commenced a declaratory judgment action seeking a declaration that it had no duty to pay the insureds’ claim because the loss resulted from the intentional or criminal acts of an insured. The insureds cross-claimed for breach of contract, breach of the covenant of good faith and fair dealing, and reformation. They alleged that their son was not a named insured on the policy and did not have an insurable interest in the property (although they conceded he was their son and lived at the property at the time of the loss). The insureds also alleged that the policy’s definition of intentional loss violated California Insurance Code § 2071 because the policy used the words “any insured” rather than “the insured,” and thus effectively denied them insurance coverage.

The trial court entered judgment in favor of the insurer on the cross-claim finding that: (1) the policy defined “any insured” to include relatives of the homeowners; (2) courts generally interpret policies which exclude coverage for criminal and intentional acts to exclude coverage of innocent co-insureds; and (3) California’s public policy of denying coverage for willful wrongs is embodied in the insurance statutes. The court entered judgment on the cross-complaint and the insurer dismissed its complaint.

On appeal, the insureds argued that the policy violated §§ 533 and 2071 of the California Insurance Code, which they argued required policy language to refer to “the insured,” not “any insured.” The insureds argued that because they were innocent co-insureds, they were entitled to indemnity since they played no role in their son’s conduct. In affirming the trial court, the Appellate Court determined that the policy language precluded recovery and that the policy language was not prohibited by the Insurance Code.

In reviewing the question of whether an innocent co-insured is entitled to coverage under a policy exclusion, the Court relied on Fire Ins. Exch. v. Altieri, 235 Cal. App. 1352 (1991) which held that where the policy exclusion language referred to “the insured,” coverage would be extended to co-insureds. That Court also determined, however, that where the policy exclusion language referred to “an insured,” or “any insured,” coverage would not be extended to innocent co-insureds. The Court also cited Watts v. Farmers Ins. Exch., 98 Cal. App. 4th (2002), which held that an innocent co-insured may recover his or her percentage share of the property unless the policy contains language excluding that possibility. Watts explained the basis for the distinction between “the insured” and “any insured by noting that, generally, where a policy precludes recovery as a result of fraud on the part of “the” insured, the recovery is precluded only as to the insured who committed the fraud and the innocent co-insured is allowed to recover. Conversely, where the policy precludes recovery as a result of fraud on the part of “any” insured, the effect of the fraudulent acts of one insured precludes recovery as to all insureds, even innocent co-insureds.

The Court held that the policy did not provide coverage since: (1) the policy defined insured as a relative of the named insured; (2) the policy excluded coverage for intentional loss; and (3) the Insureds admitted that their son’s conduct was intentional.

The Court also rejected the insureds’ argument that the policy language violated §§ 533 and 2071 of the Insurance Code. The Court concluded that the policy complied with § 2071 because the addition of the provision at issue was not inconsistent with the fire coverage of the standard form policy, which does not address intentional acts. Concerning § 533, the Court determined that this section does not govern mandatory requirements for policy language, but rather provides the basis for exclusion of coverage. The Court thus determined that the policy could, consistent with § 533, exclude coverage for willful acts of “any” insured.

For a complete copy of the opinion, please click here.

Tenth Circuit Holds Demand Sent to Former Partner of Insured Law Firm Triggered Notice Provision of Claims Made and Reported Policy

Wed, 27 Jan 2010 15:26:00 GMT

The Tenth Circuit recently held that a law firm was not entitled to coverage from its malpractice insurer because a former partner of the firm had received a demand, unbeknownst to the firm, prior to the policy period. Berry & Murphy, P.C., et al. v. Carolina Casualty Insurance Company, No. 09-1004 (10th Cir. Nov. 12, 2009).

While a partner with the insured firm, a lawyer filed a complaint on behalf of a couple involved in a personal injury action. The lawyer moved to withdraw from representation of the couple around the same time the lawyer left the insured firm. The court granted the lawyer’s motion to withdraw, and shortly thereafter the judge granted a motion to dismiss the personal injury action for failure to prosecute. The couple obtained a new attorney, who was able to get the court to reconsider the motion to dismiss. After the couple failed to meet discovery deadlines, however, the judge granted a renewed motion to dismiss with prejudice.

Shortly after taking over the case, the couple’s new attorney sent a letter to the former lawyer alleging that he had mishandled the couple’s case and advising him to alert his malpractice carrier (the “Demand Letter”). The former lawyer notified his malpractice carrier, but never forwarded the Demand Letter on to his prior firm. The first time that the insured firm learned of the couple’s claim was when the couple filed a complaint against the lawyer and the firm (over a year after the couple’s new attorney had sent the demand letter to their prior lawyer).

The insured firm provided notice of the complaint to its malpractice insurer on the day that it accepted service. The insurer denied coverage based on the fact that the demand letter was sent to the lawyer, a prior partner of the insured firm, prior to the inception of the insurance policy. Accordingly, the insurer argued that a claim was first made against an insured prior to the inception date of the policy, and therefore fell outside the claims-made coverage provided.

The policy issued to the insured firm provided that “a Claim shall be deemed to have been made at the time notice of the Claim is first received by any Insured.” “Insured” was defined, in relevant part, as “any individual … who was a partner … of the Named Insured or Predecessor Firm, but solely while acting within the scope of their duties on behalf of the Named Insured or Predecessor Firm.” The policy also provided that “all Claims based upon or arising out of the same Wrongful Acts … shall be considered a single Claim.”

The Tenth Circuit, applying Colorado law, determined that the demand letter and the complaint filed by the couple constituted a single claim because the allegations in both arose out of the same or related alleged wrongful acts by the prior partner.

Furthermore, the majority of the court found that the prior partner was an Insured under the policy for both coverage and notice purposes. In doing so, the majority noted that the policy does not differentiate between who is an Insured for purposes of coverage and who is an Insured for purposes of notice. The majority found that under the policy, “Insured” should include “an individual after he has left the law firm if the claim involves that individual’s acts or omissions that occurred while at the law firm.” Although the lawyer was no longer a partner of the insured firm when he received the Demand Letter, the majority held that he was an Insured under the policy because the allegations of the Demand Letter involved his alleged acts while at the insured firm.

The dissent argued that although the prior partner was an Insured for purposes of coverage (because the alleged actions occurred when he was a partner there), he was not an Insured for purposes of notice. The dissent noted that the definition of “Insured” states that an individual is only an Insured “while acting within the scope of their duties on behalf of the Named Insured.” According to the dissent, the lawyer was not acting in the scope of his duties for the insured firm when he received the Demand Letter, and therefore he was not an Insured under the notice provision of the policy.

A copy of the opinion is available here.

Florida Court Affirms That Insurer of Physician Is Not Obligated to Indemnify Based Upon Applicability of Business Liability Policy’s Professional Services Exclusion

Wed, 27 Jan 2010 15:21:00 GMT

The District Court of Appeal of the State of Florida (the “Appeals Court”) recently affirmed the trial court’s determination that a doctor’s business owner insurer was not obligated to indemnify the doctor for a wrongful death suit that resulted, in part, from the mis-filing of laboratory results by the doctor’s assistant, although it did have a duty to defend. The Estate of Steven Adam Tinervin v. Nationwide Mutual Insurance Company, No. 4D08-2151 (Florida District Court of Appeal, Fourth District, November 25, 2009). Click here for a copy of the court’s opinion.

The insured, a pediatrician, employed his wife as his only assistant. Her duties included the filing of lab reports in patient’s charts and providing them to the doctor to review. One of the insured’s patients had outside lab work done. Although the lab work was sent to the insured’s office, he claimed that the first time that he saw the results of the lab work was three months later. The insured opined that if he had seen the report earlier, he would have taken different actions in the patient’s treatment. The patient died the next month.

After being sued for wrongful death by the estate of the deceased patient, the insured sought coverage under his business owner’s policy. The business owner’s policy covered “those sums that the insured [became] legally obligated to pay as damages because of ‘bodily injury.’” Both the pediatrician and his assistant were insureds under the policy. The policy, however, contained an exclusion for bodily injury due to rendering or failure to render professional services. Accordingly, the insurer denied coverage pursuant to the professional services exclusion.

After the insureds settled the underlying wrongful death suit and assigned their claims against the insurer to the decedent’s estate, the estate brought suit against the insurer. The trial court conducted a non-jury trial and determined that the insurer had a duty to defend the wrongful death claims, but that there was no duty to indemnify due to the professional services exclusion.

The Appeals Court held that the policy language was unambiguous and “clearly exclude[d] coverage for claims ‘arising out of’ the providing or failing to provide professional services and claims ‘due to’ the rendering or failing to render any professional service.” The Appeals Court noted that in determining whether an act results from a professional service, the court must focus on the particular act in question, rather than the character of the individual who performed the act. The Appeals Court noted that even if an individual is not a professional, certain duties, when delegated to that individual, bring him or her within the definition of professional. Further, it agreed with a finding that the employee was a medical assistant as defined by Florida statute, and her duties included rendering of professional services. Accordingly, because the assistant’s duties were an “intricate part” of the medical services provided by the doctor, the Appeals Court agreed that the professional services exclusion applied and the insurer was not obligated to indemnify the insured.

The Appeals Court, however, also affirmed the trial court’s determination that the insurer was obligated to defend the insured. The underlying complaint asserted a “non-professional” negligence claim against the assistant for “clerical mistakes” and general negligence in the performance of “her non-professional office duties” and it was only after “the facts were flushed out in discovery” that it was found that there was no duty to indemnify. Accordingly, the Appeals Court affirmed that the insurer was obligated to defend the insureds.

New York Insurance Exchange Working Groups Formed

Wed, 27 Jan 2010 08:34:00 GMT

This updates our January 7, 2010 posting.

According to media reports, following meetings with insurance executives from over 50 companies, the New York Insurance Department has selected Special Counsel Maria Filipakis to supervise the reopening of the New York Insurance Exchange (the “Exchange”). Attorney Filipakis will be responsible for coordinating and managing seven different working groups that will focus on the following issues: (i) regulatory oversight; (ii) capitalization; (iii) operations; (iv) markets; (v) tax issues; (vi) multi-state issues; and (vii) government relations. Proposals from each working group are to be finalized by mid-April, after which the working groups will meet together to plan the next steps for reviving the Exchange.

We will continue to monitor these developments and provide updates at InsureReinsure.com.

Chaucer Latest Lloyd's Entity to Consider New Domicile

Tue, 26 Jan 2010 15:56:00 GMT

In an interview with Bloomberg, Chaucer's chief executive officer Bob Stuchbery has indicated that Chaucer will consider redomiciliation out of the UK this year, noting that he would much prefer that Chaucer remained in the UK under a more competitive corporation tax environment. Since 2006, a string of listed Lloyd's holding companies have left the UK: Omega, Hiscox, Kiln and Hardy moved to Bermuda, Brit to the Netherlands and Beazley has moved its incorporation to Jersey but its tax residence to Ireland.

Meanwhile, ACE moved its holding company from the Cayman Islands to Switzerland in 2008, while XL is moving its holding company from the Cayman Islands to Ireland. Willis moved its listed parent company from Bermuda to Ireland at the end of 2009. Swiss Re and Zurich have moved business out of FSA regulated subsidiaries into Luxembourg and Irish regulated companies.

Bucking the trend, Amlin emphasises its UK domiciled status on its website home page and, following discussions with HM Revenue and Customs, RSA chose to remain domiciled in the UK although it is to set up a reinsurance company in Ireland to reinsure all of its non-UK risks. Chubb and XL have transferred business out of Belgium and Ireland, respectively, to UK subsidiaries.

It is apparent that among the redomiciliations there is no one jurisdiction to suit all groups or purposes. Although lower corporate tax rates combined with double taxation treaties are a key reason in some cases, regulatory consolidation and capital efficiency appear to be important factors in relation to operating company moves and no single jurisdiction appears to satisfy all of those reasons. However, for UK resident companies, the result of the UK general election (likely to be on 6 May this year) and the implementation of Solvency II at the end of 2012, may trigger a re-evaluation of the situation.

UK: The Financial Services Authority Publishes Independent Review of Financial Promotions Compliance

Tue, 26 Jan 2010 15:51:00 GMT

The Financial Services Authority (FSA) has recently published the results of an independent review of firms' compliance with its financial promotions requirements (the Review). The Review examined a sample of press, magazine and internet promotions.

In relation to insurance promotions in the press, the Review concluded that the prominence of key information could still be improved. One particular issue that was highlighted was the lack of clarity surrounding administration fees which can have a significant impact on the competitiveness of a customer's premium.

The Review also found, in relation to insurance promotions on the internet, that some websites were using indicative insurance quotes which were not accurately substantiated with the relevant information. The Review noted that several websites made claims "guaranteeing" that they were able to offer the cheapest cover, without any kind of substantiation.

Overall the Review concluded that there was a high level of compliance with the financial promotion rules. It did not identify any significant concerns relating to particular products or any systematic breaches by particular firms. The FSA highlighted that financial promotions should comply with the FSA's rules on a "stand-alone" basis, without relying on subsequent promotions or pre-sale systems to complete compliance.

The FSA has stated that it will be taking further actions including:

maintaining routine monitoring of press promotions;
carrying out a thematic review of internet advertising in 2010; and
taking robust supervisory action against non-compliant internet promotions.

Please click here to view the results of the Review.

To review previous blogs relating to online sales of insurance policies, please click here and here.

Connecticut Proposes New Regulation to Protect Seniors

Mon, 25 Jan 2010 15:21:00 GMT

The Connecticut Insurance Department issued a proposed regulation (the “Proposed Regulation”) relating to use of senior-specific certifications and professional designations in the sale of life insurance and annuities. The Proposed Regulation aims protect seniors from abusive sales practices and fraud and is based on the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities (the “Model”).

The prohibited use of senior-specific designations includes, but is not limited to, the following:

1.      Use of a certification or professional designation by a producer who has not actually earned or is otherwise ineligible to use such certification or designation;

2.      Use of a nonexistent or self-conferred certification or professional designation;

3.      Use of a certification or professional designation that indicates or implies a level of occupational qualifications obtained through education, training or experience that the insurance producer using the certification or designation does not have; and

4.      Use of a certification or professional designation that was obtained from a certifying or designating organization that

a.       Is primarily engaged in the business of instruction in sales or marketing;

b.      Does not have reasonable standards or procedures for assuring the competency of its certificants or designees; Does not have reasonable standards or procedures for monitoring and disciplining its certificants or designees for improper or unethical conduct; or

c.       Does not have reasonable continuing education requirements for its certificants or designees in order to maintain the certificate or designation.

Connecticut is accepting comment with respect to the Proposed Regulation within thirty days following publication in the Connecticut Law Journal. It is expected that the Proposed Regulation will be published on January 26, 2010.

Click here for a copy of the Notice of Intent to Amend Regulation which includes the text of the Proposed Regulation.

If you would like EAPD to assist you with preparing and submitting comments regarding the Proposed Regulation, please click the “Email the Editor” button on the tope left of this page and provide your contact information for follow-up by an EAPD attorney.

Last Week in DC: The Healthcare Reform Debate – January 25, 2010

Mon, 25 Jan 2010 10:44:00 GMT

Last Tuesday’s stunning Republican victory in Massachusetts left the future of healthcare reform legislation uncertain, at best. After the game-changing Senate special election, Democrats spent the week assessing the damage and working to figure out a path forward on their top legislative priority.

A REFERENDUM ON HEALTHCARE REFORM?

Earlier this month, Republican Scott Brown’s campaign to fill the Senate seat of the late Edward M. Kennedy (D-MA) was seen as a long shot in a state that had not elected a Republican to the U.S. Senate in nearly 40 years. However, a well-run campaign and a late surge of momentum allowed Brown to pull off the unthinkable when he handily defeated his opponent, state Attorney General Martha Coakley, in Tuesday’s special election.

The results – which gleeful Republicans immediately hailed as a referendum on Democrats’ ongoing efforts to enact comprehensive healthcare reform legislation – robbed the Democratic caucus of the 60 vote supermajority it has needed to pass any healthcare bill. As the crucial 41st Republican vote, Brown dissolved Democrats’ filibuster-proof majority and threw their agenda into an unexpected state of disarray.

Though Democrats were quick to counter that the election results were not so much a referendum on healthcare as a general expression of dissatisfaction with the nation’s economy and unemployment numbers, as the week progressed they appeared to heed the special election’s warning to slow down on healthcare reform. From President Obama to House and Senate leaders to rank-and-file moderates and liberals, Democrats cited the need to let the dust settle and calmly reassess public opinion and their options for moving forward on the hot-button legislative issue.

NEW OPTIONS

Before Brown’s victory, Democratic leaders were holed up behind closed doors, hammering out a compromise between the House healthcare reform bill (H.R. 3962) and the Senate bill (H.R. 3590). Given that any compromise bill would have to return to the Senate for final approval before reaching President Obama’s desk, Tuesday’s loss of the 60th Democratic vote effectively closed the door on those negotiations.

Once the President and other key Democrats made clear that they will not try to ram a compromise bill through the Senate before Senator-elect Brown is seated, the majority party appeared to have several options at its disposal in order to complete work on healthcare reform in the coming weeks.

In the first widely-discussed plan, the House would pass the Senate bill without any changes, negating the need for another Senate vote and sending it directly to President Obama's desk. Congressional leaders could then package agreed-upon changes to the Senate bill into another bill and pass that using the budget reconciliation process – a procedural maneuver that only requires 51 votes for Senate passage. While initially viewed as the best option by many Democrats, on Thursday House Speaker Nancy Pelosi (D-CA) stated that she did not have the 218 votes within her caucus to pass the Senate legislation as is, due to widespread and varied opposition to specific provisions in H.R. 3590.

By the end of the week, momentum appeared to be gathering for a scaled back approach. Speaker Pelosi stressed the possibility that the House could move on a less comprehensive healthcare bill containing the more politically popular portions of its original bill. Rank-and-file Democrats conveyed a similar message, citing a piecemeal approach that could include provisions such as accountability for private insurance companies, a so-called “bill of rights” for patients, and medical malpractice reform.

WHAT’S NEXT?

Congress and the nation will hear from President Obama this Wednesday evening during his widely anticipated State of the Union address. Originally the goal date for completion of healthcare reform legislation, the address will now serve as a chance for the President to recalibrate his agenda and retool his message to the American public – an effort that is largely expected to focus on jobs and the economy. In addition, the President will likely lay out a scaled back healthcare agenda that could incorporate measures he pressed for late last week, including steps to decrease healthcare costs, insurance buying pools and not allowing insurers to deny coverage due to pre-existing conditions.

Meanwhile, House and Senate leaders will continue to seek a new path forward on healthcare, in an effort to salvage at least some part of the legislative priority they spent an overwhelming amount of time and political capital on throughout the past year.

At this point, healthcare reform’s end game is anything but clear, and we will continue to monitor this extremely volatile situation and bring you timely and relevant updates as new developments occur.

UK: ABI Position Paper on Executive Remuneration

Mon, 25 Jan 2010 10:38:00 GMT

The Association of British Insurers (ABI) has published a paper on executive remuneration, to help remuneration committees understand how shareholders expect companies to apply the ABI's influential guidelines on executive remuneration in the current economic climate. The principal points of the paper are:

Remuneration committees should be accountable to shareholders for their decisions, particularly where they involve discretion. The ABI encourages open, honest and constructive dialogue rather than a compliance based approach to remuneration guidelines. Increased transparency should result in a better understanding of remuneration policies and should help avoid unnecessary confrontation.
Remuneration structures that seek to promote tax efficiency should not increase the company's tax bill or other additional costs. Remuneration committees should be alive to the reputational risk of such schemes.
In order to avoid windfall gains, share or option grants should be scaled back after a substantial fall in share price.
Annual bonuses should reward contributions to business over and above the level expected for salary. They should be clearly linked to business targets, ideally through key performance indicators. The payment of annual bonuses is discouraged if the business has suffered an exceptionally negative event, even if some specific targets have been met.
Retention awards to main board directors rarely work and indicate poor planning by the remuneration committee. Retention concerns alone are not sufficient to increase remuneration. Such awards may be appropriate where new teams are brought in to turn around companies but the remuneration committee should justify them.

For a copy of the Executive Remuneration - ABI Guidelines on Policies and Practices click here. To see the full detail of the ABI's position paper click here.

New Jersey Enacts Amendment - Producers Must Notify Insurance Commissioner of FINRA and Other Disciplinary Actions

Mon, 25 Jan 2010 10:33:00 GMT

An amendment was signed into law on January 17, 2010 which requires insurance producers to notify the Commissioner of the New Jersey Department of Banking and Insurance of disciplinary actions taken against them by the Financial Industry Regulatory Authority (FINRA) or other similar non-governmental regulatory authorities that have statutory authority to create and enforce industry standards of conduct. Specifically, producers must notify the Commissioner within 30 days of any disciplinary action taken, or of the final disposition of any formal disciplinary proceeding initiated.

Failure to comply with the new notification requirements authorizes the Commissioner to temporarily suspend a producer’s license. After notice and the opportunity for a hearing, the Commissioner may also impose a penalty of up to $10,000 for a producer’s first violation of the notification requirements, and up to $100,000 for a producer’s third violation.

To view the amendment, click here. To view the Senate Commerce Committee’s statement regarding the amendment, click here.

Connecticut Appellate Court Affirms Summary Judgment Holding that Insurer Had No Duty to Defend or Indemnify its Insured in Negligence Claim Brought by Stabbing Victim

Mon, 25 Jan 2010 10:18:00 GMT

The Connecticut Appellate Court recently affirmed a trial court’s summary judgment holding that an insurance company had no duty to defend or indemnify its insured in a negligence action brought by a women who was stabbed twenty-four times by the insured. The court’s decision was based on the fact that the phrase “physical abuse” contained in a homeowner’s policy exclusion was not ambiguous and did not contain an implicit intentionality requirement, and thus the exclusion applied. Merrimack Mut. Fire Ins. Co. v. Ramsey, 117 Conn.App. 769 (2009). A copy of the decision is available here.

According to the opinion, a man (the “insured”) was involved in a romantic relationship with a woman who the insured visited as an invited guest in her apartment. The opinion states that, without provocation, the insured began stabbing himself and the woman with a kitchen knife, stabbing the woman (“stabbing victim”) a total of twenty-four times with two knives, and causing her injury. At the time the incident occurred, the man was insured under a homeowner’s policy issued by the plaintiff insurance company to the insured’s parents.

According to the opinion, the stabbing victim filed a negligence action against the insured and alleged in her complaint that the insured suffered from a variety of mental and psychiatric disorders, and at no time during the stabbing did he have an understanding of the nature or wrongfulness of his conduct or intend to cause her bodily injury. The plaintiff insurance company filed a declaratory judgment action seeking a declaration that it had no obligation to defend or to indemnify the insured from claims arising from the stabbing victim’s negligence action. The insurer moved for and was awarded summary judgment by the trial court.

The stabbing victim appealed, arguing that the trial court misinterpreted an exclusion in the insured’s homeowner’s policy and improperly granted the insurer’s motion for summary judgment. Specifically, the stabbing victim argued that the exclusion for bodily injury “[a]rising out of sexual molestation, corporal punishment or physical or mental abuse” was ambiguous, and that the undefined term “physical abuse” contained an implicit intentionality requirement. The stabbing victim argued that the trial court improperly failed to consider the insured’s intent when it determined that the exclusion applied, and further argued that the exclusion did not preclude coverage for the victim’s injuries because the insured “did not intend or expect to harm her when he stabbed her twenty-four times with two knives,” as the court summarized.

The Appellate Court concluded that the stabbing victim’s reading of the policy was “plainly unreasonable” because the “exclusion expressly exempts coverage for bodily injury arising out of physical abuse” and “[n]owhere does it provide that a consideration of the abuser’s intent is required.” The Appellate Court further based its decision on the fact that “the policy contains a separate exclusion that applies specifically to intentional acts” and, “[w]hen both exclusions are read together, it is clear that [the physical abuse] exclusion … does not require a consideration of the insured’s intent.” Finally, the Appellate Court concluded that “[t]he only plausible interpretation of the [insured’s] insurance policy is the natural and ordinary one accorded to it by the court in its well reasoned decision.”

Connecticut Appellate Court Holds Substantial Factor Test Remains Unchanged in Workers’ Compensation Cases

Fri, 22 Jan 2010 11:36:00 GMT

The Connecticut Appellate Court recently held that the “substantial factor test” for causation remains unchanged and that traditional causation rules apply to workers’ compensation cases. Marjorie Voronuk v. Electric Boat Corporation, et al., No. AC 29589 (Conn.App. Dec.1, 2009).

The widow of a deceased employee brought a claim for survivor benefits after her husband passed away. A physician for the plaintiff concluded that her husband’s lung disease, which was caused by asbestosis, was a contributory factor in the condition which ultimately caused his death. The workers’ compensation commissioner, however, denied the plaintiff’s claim for survivor benefits, finding that although her husband’s death was caused, in part, by his exposure to asbestos, his resulting asbestosis was not “a substantial and/or significant contributing factor to his death.” The commissioner’s finding was upheld by the workers’ compensation review board.

On appeal, plaintiff maintained that the commissioner improperly applied the substantial factor test and abused his discretion. First, plaintiff maintained that after the Supreme Court’s holding in Birnie v. Electric Boat Corp., 288 Conn. 392, 953 A.2d 28 (2008), the substantial factor causation standard in workers’ compensation cases requires that the employment or the risks incidental to employment, contribute to the development of the injury in more than a de minimis way. Plaintiff argued that, under this test, once the commissioner found that her husband’s exposure to asbestos was a cause in his death, the only means to defeat it as a substantial factor in causing his death was for the commissioner to find that it was a trivial or de minimis cause. The Appellate Court disagreed, finding that the plaintiff’s argument would remove from the commissioner the discretion to deny the plaintiff’s claim. As such, the Court held that the board did not improperly find that the commissioner retained his discretion to conclude that a cause of the decedent’s death was not, as a matter of law, a “substantial contributing factor” in his death.

Plaintiff also maintained that the commissioner abused his discretion in concluding that workplace exposure to asbestos was not a substantial factor in causing her husband’s death. Essentially, plaintiff argued that because the commissioner discussed in his conclusion that “no physician or medical report opined that this exposure and resulting asbestosis was a substantial and/or significant contributing factor to his death,” that the commissioner improperly looked for a “magic word,” such as “substantial” or “significant,” which was missing from her expert’s report. The Appellate Court, however, found that the commissioner’s conclusion could reasonably be interpreted to mean that plaintiff failed to carry her burden of proving that exposure to asbestos was a substantial contributing factor in decedent’s death, and that the record before the commissioner supported this finding.

For a complete copy of the opinion, please click here.

Kentucky Law is Found Ambiguous by Federal District Court as to Whether Agents Can be Sued for Bad Faith and Thus Joinder of Agent Allowed Even Though Destroys Diversity

Fri, 22 Jan 2010 10:54:00 GMT

In North American Specialty Insurance Co. v. John Paul Pucek, et al., Docket No. 5:09-CV-49 (JMH) (E.D.KY Nov. 4, 2009), the owners of a thoroughbred horse purchased an equine mortality insurance policy. During the policy period, the horse sustained an injury that ultimately resulted in the horse being euthanized. The Owners submitted a claim for benefits under the policy, which was denied by the Insurer. As a result, the Owners commenced a lawsuit in the state court against the Insurer and its Agent (who also served as the managing underwriter of the policy), alleging breach of contract and bad faith, among other claims. The Insurer removed the action to federal court on the basis of diversity jurisdiction. Although the Agent was non-diverse from the Owners, the Insurer asserted that the Owners fraudulently joined the Agent solely to destroy diversity. Owners moved to remand.

Analyzing whether a non-diverse party is fraudulently joined requires an examination of whether the non-moving party has a colorable basis for the claims against the non-diverse party. Thus, the court examined whether the Owners asserted a viable claim against the Agent. Owners asserted common law and statutory bad faith claims against the Agent for unfair claims settlement practices. However, Kentucky law is unclear as to whether bad faith claims can be asserted against agents. The Kentucky Supreme Court previously held that “self-insured or uninsured persons and entities are not subject to the Unfair Claims Settlement Practices Act and the common law tort of bad faith, because both apply only to persons or entities engaged in the business of insurance.” Davidson v. Am. Freightways, Inc., 25 S.W.3d 94 (Ky. 2000) (emphasis added).

Davidson contained a discussion of Kentucky insurance regulations, noting their application to insurance companies and their agents. Dicta within the opinion suggested that bad faith claims could lie against agents of insurers. The District Court observed that since Davidson, no appellate court had decided the issue of whether claims of bad faith can lie against insurance agents, and trial courts come down on both sides of the debate. Concluding that Kentucky’s bad faith law was ambiguous, the District Court resolved that ambiguity in favor of the Owners, as the non-removing party, holding that they plead at least a plausible claim for bad faith against the Agent and, therefore, joinder was not fraudulent. The District Court granted the Owners’ motion to remand.

For a complete copy of the opinion, please click here.

Ecuador: Regulator Finds That Seventeen Insurers Must Return A Total of US$ 19.4 Million In Compulsory Auto Premiums; Insurers Begin Making Payments and Seeking Clarity

Fri, 22 Jan 2010 09:57:00 GMT

Gloria Sabando, Ecuador’s Superintendent of Banking and Insurance, recently announced that the seventeen (17) companies that operate in the country’s mandatory auto coverage market (SOAT--Seguro Obligatorio de Accidentes y Transito) must return US$ 19.4 million in premium to their customers, representing a 30% credit against “excessive” premiums charged in 2009. Ms. Sabando also stated that the reimbursement should occur the moment that the SOAT coverage is renewed in 2010. The announcement impacts the following companies: AIG, Alianza, Bolivar, Cervantes, Colonial, Constitucion, Coopseguros, Interoceanica, Latina, Olympus, Oriente, Panamericana, Rocafuerte, Sucre, Sweaden, Unidos y Vaz Seguros.

Despite significant dismay over the decree among local companies, insurers have little ability to challenge the pronouncement and have already begun making arrangements to comply with the reimbursement requirement. Several local executives have publicly criticized the concept of basing such a decision upon accident results for a single year, and have questioned the political motives underlying the decree. Corposoat, an organization representing Ecuador’s compulsory auto carriers has filed an appeal with the Superintendency, seeking reconsideration of the requirement and clarity as to how the SOAT system will function going forward. According to Patricio Salas, manager of Corposoat, the main goal of the appeal is to ensure that the SOAT program is regulated in a balanced and reasonable manner.

If you would be interested in learning more about the Ecuadorian or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

District Court Denies Motion to Stay, Holds That Potential for Unnecessary Arbitration-Related Expenses Does Not Constitute Irreparable Harm or Clear Hardship

Fri, 22 Jan 2010 09:52:00 GMT

Plaintiff B.D. Cooke & Partners Limited, as Assignee of Citizens Casualty Company of New York (in Liquidation) (“Cooke”), filed a lawsuit against defendant Certain Underwriters at Lloyd’s, London (“Underwriters”). Underwriters moved to compel arbitration, which was granted by the U.S. District Court for the Southern District of New York. Cooke then filed a motion for reconsideration of the District Court’s Order.

Soon thereafter, Cooke proposed that the parties move forward with the arbitration and exchange the names of potential arbitrator candidates. Underwriters refused, arguing that it would be more cost-effective to wait until the court determined the motion for reconsideration before proceeding with the arbitration. Underwriters then moved to stay the arbitration on the grounds that it would suffer harm by incurring unnecessary expenses if the arbitration progressed and Cooke’s motion for reconsideration was ultimately granted.

The court began its analysis by noting that motions to stay an arbitration pending the outcome of a related action are generally denied unless “equities tip decisively in the direction of a stay,” such as where the moving party would suffer irreparable harm or clear hardship if the stay is not granted. However, the court found that the expenses Underwriters might incur in proceeding with the arbitration did not satisfy this threshold. Thus, the court held that Cooke’s interest in moving forward to resolve the dispute outweighed the alleged harm Underwriters would sustain if Cooke’s motion for reconsideration was ultimately granted, and denied Underwriters' motion to stay.

Click here to review a copy of the District Court’s decision, captioned B.D. Cooke & Partners Limited, as Assignee of Citizens Casualty Company of New York (in liqudation) v. Certain Underwriters at Lloyd’s, London, No. 08-cv-3435 (S.D.N.Y. 2009).

Free Webinar: ¿Seguro? Opportunities and Risks for (Re)Insurers in Latin America in 2010 and Beyond

Fri, 22 Jan 2010 09:43:00 GMT

The Insurance and Reinsurance Department of Edwards Angell Palmer & Dodge is holding a 60 minute complimentary webinar entitled "¿Seguro? Opportunities and Risks for (Re)Insurers in Latin America in 2010 and Beyond" on Tuesday, February 23, 2010 at 10:00 am (EST).

Amid solid growth rates in the face of global economic crisis, international interest in the Latin American insurance and reinsurance markets is at an all-time high. Just as most Latin American markets have better weathered the downturn, so they are expected to rebound more quickly. As always, however, significant pitfalls remain for the unwary market entrant. As home, local and international privacy and anti-corruption laws combine with local regulatory schemes to complicate market entry and competition, local knowledge and experience combined with regional and global expertise becomes invaluable.

John P. Dearie, Jr. and M. Machua Millett of Edwards Angell Palmer & Dodge's Insurance and Reinsurance Department will present the latest in our series of industry webinars. They will discuss current conditions, trends and predictions for the Latin American (re)insurance markets and risks posed to international (re)insurers by local and international laws and regulatory schemes.

Please click here to register for this webinar.

Please click here for a copy of the webinar invitation.

Supreme Court of Canada Considers the Meaning of 'Accident' Under a Group Policy

Fri, 22 Jan 2010 09:38:00 GMT

In the case of Co-operators Life Insurance v Gibbens, 2009 SCC 59, the insured contracted herpes through unprotected sex and, as a result, developed transverse myelitis, a rare complication of herpes, which left him paralysed from the waist down. The insured was a party to a group insurance policy that provided cover for accidental bodily injuries under which he attempted to make a claim for his injury.

The relevant question before the Canadian Supreme Court was whether the insured's injury was the result of an accident. The court found that the word 'accident' was an ordinary word and should therefore be interpreted as it would be understood by the average person. It also found that when interpreting insurance contracts the court must avoid unrealistic results which would not have been contemplated by the parties when they entered into the agreement. As a result, the court concluded that, under the terms of the insurance policy, the insurers would not have envisaged that the policy would cover all loss or bodily injury. The court also found that, in most cases, a naturally occurring injury did not constitute an accident. Therefore, as the insured contracted herpes in the natural way and his injury was the result of that natural transmission the injury could not be said to be an accident. Consequently, the insured was not entitled to an indemnity under the terms of the insurance.

This decision makes it clear that accidental insurance policies will not provide cover for the majority of disease claims which should, instead, be covered by comprehensive health policies. With the rise of SARS and hospital super bugs, similar claims under accident policies may increase. Following this judgment, insurers will now have a useful tool in fighting such claims.

New Jersey Governor Appoints Insurance Commissioner

Thu, 21 Jan 2010 13:06:00 GMT

On January 15, 2010, New Jersey Governor-elect Chris Christie announced that Tom Considine will be the new Commissioner of the New Jersey Department of Banking and Insurance (“DOBI”). Mr. Considine is currently the vice president and government relations counsel for MetLife, a position he rose to since he started at MetLife in 1993. At MetLife, Mr. Considine handles state government relations and public policy issues for financial services, auto and home companies nationwide. He received his law degree from Seton Hall University School of Law, and has also served on the Board of Directors of the National Organization of Life and Health Insurance Guaranty Associations as well as the Life and Health Insurance Guaranty Association in New Jersey.

Mr. Considine replaces Neil N. Jasey as Commissioner of the DOBI. Mr. Jasey has served as the Commissioner since July 2009.

President Obama Announces New Proposal on Bank Limits

Thu, 21 Jan 2010 13:03:00 GMT

On Thursday morning, President Obama unveiled a proposal that takes aim at the size of the nation’s major financial institutions and seeks to limit the proprietary trading and other risks taken by such institutions. The President was joined by former Federal Reserve Chairman and head of the Economic Recovery Advisory Board, Paul Volcker, who has long pushed for more robust financial overhaul provisions such as those included in today’s announcement.

The new plan – which would bar banks from owning, investing in or sponsoring a hedge fund or a private equity fund, or proprietary trading operations unrelated to customer service – will likely be included in the larger financial regulatory reform effort currently making its way through Congress. In addition, the President requested limits on financial industry consolidation and that broader limits be placed on the “excessive growth of the market share of liabilities at the largest financial firms.”

The timing of the announcement comes one week after the Administration’s proposal to impose a new fee on financial institutions to recoup Troubled Asset Relief Program (TARP) dollars, and seeks to take some attention off of the floundering healthcare reform debate in the wake of Tuesday’s stunning special election upset in Massachusetts. It also indicates the White House’s renewed focus on the larger issue of financial regulatory reform as it works to reframe its agenda and regain control of the political debate.

We will continue to monitor these and other important financial issues and provide updates on InsureReinsure.com.

UK: Insurers Face More Noise-Induced Hearing Loss Claims Following Court of Appeal Decision

Thu, 21 Jan 2010 09:38:00 GMT

Insurers may see increased exposure on employers' liability policies in 2010, particularly related to noise-related personal injuries, as the effects of the so-called textile deafness test litigation are felt in the industry.

In Baker v Quantum Clothing Group [2009] EWCA Civ 499 the Court of Appeal held that an employer's liability for noise-induced hearing loss could arise 12 years earlier than had previously been thought. Further, the Court held that the burden of proof fell on the employer to show that they had taken all reasonably practicable steps to ensure workplace safety, an element of the decision that could have wider ramifications beyond deafness claims.

In Baker, seven out of several hundred claims for noise induced hearing loss were selected to be litigated in the High Court in Nottingham. Most of the original claimants had worked in the Midlands' knitting and hosiery industries. They contended that liability arose under common law and under s.29(1) of the Factories Act 1961, which imposes a duty to provide a safe place of work. The trial judge held that noise levels below 85 dBA were not actionable and levels of between 85 and 90 dBA were not unsafe either under common law or under the section 29 duty with regard to the safety standards of the day. Six of the seven claims were dismissed because claimants failed to establish either hearing loss or exposure to noise levels of 85 dBA or above. The remaining claim, that of Stephanie Baker, was dismissed because of failure to establish breach of duty at both common law and under s.29.

Mrs Baker's appeal was allowed by the Court of Appeal. Smith LJ, who gave the lead judgment, said the duty under s.29 to provide a safe place of work was absolute, subject to the defence of reasonable practicability, which must be pleaded and supported by evidence. She held that if workplace safety was to be judged objectively, it could not depend on what society at that time considered to be acceptable or safe. What was reasonably practicable should not depend on consideration of an acceptable risk that justified inaction; it should depend on the quantum of risk posed balanced against the disadvantage of eliminating that risk (eg with ear protection, which in this case would have been an easy remedy). This meant that modern day standards regarding noise levels (imposed by statute in 1990) were deemed to be applicable from 1978 onwards. This is because the Department of Employment Code of Practice 1972 should have made employers aware of the problem of noise by 1973, and then safety standards published in 1976 would have made it possible to assess the quantum of the risk and subsequently establish controls.

For insurers defending such claims, it is important that reasonable practicability should be pleaded in a defence or referred to when denying liability under an employers' liability policy. The employer must do what is reasonably practicable and, importantly, has the burden of showing why any action that would minimise the risk is not reasonably practicable. This does not mean that an unforeseeable risk should be protected against as reasonable foresight will still help decide whether the duty has been discharged. Further, the judgment will only apply to claimants whose symptoms appeared within the limitation period and prove causation. In this case six of the seven claimants failed to pass this first hurdle.

The respondents in the case have been given permission to appeal to the Supreme Court and the hearing is expected to take place sometime this year. We will keep you updated on any developments here on www.insurereinsure.com.

United States Federal Trade Commission Lowers Pre-Merger Filing Thresholds

Thu, 21 Jan 2010 09:35:00 GMT

Each year the FTC is required by statute to adjust the thresholds for Hart-Scott Rodino pre-merger filings. HSR filings and consequent regulatory approval of the transaction are required prior to closing a transaction involving the acquisition of assets (including exclusive licenses) or securities that meets the operative thresholds. The new thresholds announced this week by the FTC will apply to any transactions closed on or after February 18, 2010. The thresholds are revised annually based on the change in GNP. Given the decline in GNP last year, the thresholds have been downwardly adjusted for the first time in history. The key new thresholds are as follows:

Size of the transaction: $63.4 million (down from $65.2 million)
Size of the parties: $12.7 million and $126.9 (down from $13 million and $130.3 million) except in deals valued over $253.7, where no size of the parties threshold applies.
Filing fees (one fee per transaction typically paid by the buyer):
- $45,000 for deals between $63.4 and $126.9 million
- $125,000 for deals between $126.9 and $630.8 million
- $280,000 for deals above $630.8 million

Finally, a quick reminder that most foreign countries also have merger control requirements. If a proposed transaction involves entities with significant operations or annual revenue outside of the United States, an analysis should be conducted to ensure that no foreign filing requirements apply.

If you would be interested in learning more about the ramifications of the threshold adjustments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

International Development Bank Grants US$ 3.3 Million Loan for Expansion of Microinsurance in Latin America

Wed, 20 Jan 2010 12:10:00 GMT

The International Development Bank recently approved a US$ 3.3 million loan to the Federacion Interamericana de Expresas de Seguros (FIDES) to increase the use of microinsurance in Latin America. Ten companies will participate in the project with the goal of designing and commercializing life, casualty and health microinsurance products.

Of the total amount of the loan, one sixth will be dedicated to Mexico, where researchers have posited that the potential market for microinsurance is some 60 million people.

If you would be interested in learning more about the Mexican and/or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Ninth Circuit Confirms Arbitration Award, Holds that Panel’s Ex Parte Meeting with Certain Expert Witnesses did not Justify Vacatur

Wed, 20 Jan 2010 12:08:00 GMT

Petitioner United States Life Insurance Company (“U.S. Life”) reinsured workers’ compensation policies issued by five insurers domiciled in California (collectively, “SNICIL”). The five insurers later declared insolvency, and the California Insurance Commissioner became SNICIL’s statutory liquidator. A dispute arose between the parties, and U.S. Life demanded arbitration.

One of the issues in the arbitration concerned SNICIL’s claims handling. After both parties submitted competing expert opinions on the issue, the arbitration panel advised that it would retain two workers’ compensation claims-handling experts to review the claims at issue (the “Reviewers”). The panel and the parties then exchanged correspondence and developed the following protocol governing the review process. First, the Reviewers examined a large sample of claim files selected by the panel. Next, the Reviewers met with the panel, ex parte, for three days, and then provided their conclusions in writing to the panel and the parties. The parties then submitted briefs responding to the Reviewers’ findings, after which a two-day hearing was held during which the parties examined the Reviewers, under oath. Last, the parties submitted post-hearing briefs to the panel concerning the issue.

The Panel ultimately issued a final award in SNICIL’s favor. U.S. Life moved to vacate the Panel’s award on the grounds that the panel was guilty of misconduct and exceeded its powers under the Federal Arbitration Act ("FAA"). SNICIL cross-moved to confirm. The U.S. District Court for the Central District of California ruled in SNICIL’s favor, confirming the award. U.S. Life then appealed to the U.S. Court of Appeals for the Ninth Circuit.

The Ninth Circuit affirmed the District Court’s decision on three bases. First, the court found that the Panel was not guilty of misconduct under Section 10(a)(3) of the FAA, because it did not refuse to hear evidence that was “pertinent and material” to the issues in the underlying arbitration. Although the parties were not allowed to participate in the panel’s ex parte meeting with the Reviewers, or question them about that meeting, the parties were permitted to examine the Reviewers’ written conclusions, question them about their qualifications and conclusions at a hearing and submit both pre-hearing and post-hearing briefs.

Next, the Court ruled that the panel’s decision to hold an ex parte meeting with the Reviewers did not constitute “misbehavior” under Section 10(a)(3). The Court noted that although the parties did not specifically permit the Panel to conduct the ex parte meeting, they conferred broad authority on the Panel at the outset of the arbitration to adopt certain processes and procedures to resolve the issues in the dispute.

Last, the Court found that the panel did not exceed its powers under Section 10(a)(4) of the FAA by requiring U.S. Life to pay SNICIL the investment income earned on the monies owed to SNICIL under the Reinsurance Agreement. The Court noted that the panel was empowered to make such a ruling, as the parties had provided the Panel with authority to award “such other and further relief” as the Panel deemed just and proper.

Click here to review a copy of the Ninth Circuit’s decision, captioned United States Life Ins. Co. v. Superior National Ins. Co., et al., No. 07-55938 (9th Cir., Jan. 4, 2010).

Pennsylvania Superior Court Finds a Concurrent-Cause Exclusion to be Unenforceable in Connection with Hurricane-Related Water Damage

Wed, 20 Jan 2010 11:28:00 GMT

The Superior Court of Pennsylvania recently found a concurrent-cause exclusion in an all-risks insurance policy to be unenforceable in a case involving hurricane damage to an insured’s business premises and inventory caused by sewer and drain backup followed by flooding. Bishops, Inc. v. Penn National Ins., Case Nos. 2275 WDA 2007, 35 WDA 2008 (Pa. Super. Nov. 24, 2009). Click here for a copy of the Court’s decision.

The insured, Bishops, Inc., sought insurance coverage under an all-risks insurance policy issued by Penn National Insurance for damages to its business premises and inventory caused by Hurricane Ivan-related water damage. The water damage was caused by sewer and drain backup followed by extensive flooding. The all-risks policy contained a concurrent-cause exclusion which excluded coverage for damage caused by water including flooding and water that backs up or overflows from a sewer or drain, “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” At issue is the relationship between the concurrent-cause exclusion and an endorsement purchased by Bishops, the Penn Pac Endorsement, that specifically added coverage up to $5,000 for loss or damage caused by backup from a sewer or drain.

Penn National denied coverage for a majority of Bishops’ damages based on the concurrent-cause exclusion. In response, Bishops argued that coverage exists pursuant to the Penn Pac Endorsement which specifically added coverage for the back up of sewers and drains. Nevertheless, Penn National continued to take the position that there was no coverage because Bishops’ damages were caused jointly by sewer backup and flooding, and that regardless of the Penn Pac Endorsement’s addition of coverage for sewer backup, the concurrent-cause exclusion excluded coverage for loss contributed to by flooding, as was the case with Bishops’ claim.

Bishops filed a declaratory judgment action against Penn National asserting that the Penn Pac Endorsement provided an affirmative grant of coverage for the losses it sustained, rendering the concurrent-cause exclusion unenforceable. Penn National filed a partial motion for summary judgment asking the court to enforce the concurrent-cause exclusion. Bishops filed a cross-motion asking the court to find that its damages are subject to coverage under the Penn Pac Endorsement and further that because sewer and drain back up qualifies as a covered cause of loss, coverage was not limited to coverage under the Penn Pac Endorsement and in fact Bishops is entitled to coverage under its Business Income (and Extra Expense) Coverage Form up to the policy limits of $600,000. The trial court determined that Bishops is entitled to coverage under the Penn Pac Endorsement up to $5,000. Ultimately, the trial court denied Bishops’ request for coverage under the Business Income (and Extra Expense) Coverage Form up to the policy limits of $600,000. Both Bishops and Penn National appealed the decisions.

In finding for Bishops, the Superior Court noted that the concurrent-cause exclusion and the Penn Pac Endorsement provisions are ambiguous when considered together “to the extent that they fail to provide a clear indication of the continuing role of the concurrent causation language” after the addition of coverage under the endorsement. Accordingly, in construing the provisions in favor of the insured, the Superior Court held that the concurrent-cause exclusion was unenforceable. In addition, the Superior Court determined that because sewer and drain backup is a covered cause of loss, coverage is available to Bishops under the Business Income (and Extra Expense) Coverage Form.

D&O Update: Court Addresses Coverage for Legal Costs Incurred by a Special Litigation Committee

Wed, 20 Jan 2010 11:22:00 GMT

On December 30, 2009, the United States District Court for the Southern District of New York in MBIA, Inc. v. Federal Ins. Co. et al., Civ. No. 08cv4313 (S.D.N.Y. Dec. 30, 2009), held that, in certain instances, legal costs incurred by a special litigation committee in connection with a shareholder derivative litigation may be covered under a D&O policy.

There are several significant implications of the MBIA decision, which are discussed in detail below.

Please click here to read more.

Federal Court Vacates Arbitration Award, Finding That Panel’s Award was Completely Irrational and the Panel Exceeded Its Powers by Unilaterally Removing Provision from Reinsurance Agreement

Wed, 20 Jan 2010 08:18:00 GMT

PMA Capital Insurance Company (“PMA”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”) entered into a reinsurance agreement that contained, among other things, a “deficit carry forward” provision. A dispute arose between the parties concerning the validity and scope of this provision, which was submitted to arbitration. After a full hearing on the merits, the Panel issued a one-page award in favor of Platinum, which stated that the “deficit carry forward” provision was “eliminated” from the reinsurance agreement, and ordered PMA to pay $6 million pursuant to that provision. The Panel’s Award did not state any reason or explanation for its decision.

PMA moved to vacate or, in the alternative, modify the award on the grounds that the Panel’s decision was contrary to both the relief sought by the parties in the arbitration and the plain language of the reinsurance agreement. The U.S. District Court for the Eastern District of Pennsylvania granted PMA’s motion to vacate on two bases. First, the Court found that the award was not rationally derived from the reinsurance agreement, because the Panel “wrote out” a key provision in that agreement without any explanation. The Court noted that the “honorable engagement clause” in the reinsurance agreement, though providing the Panel with broad discretion to order certain remedies they deemed appropriate, and allowing it to abstain from following the strict rules of law, did not give the Panel authority to re-write the contract.

Moreover, the Court found that the award could not be rationally derived from the parties’ submissions, because neither party asked for the Panel to eliminate the “deficit carry forward” provision, or argued that any money was currently due under that provision. Accordingly, applying the standard set forth by Section 10(a)(4) of the Federal Arbitration, the Court held that the award was “completely irrational” and should be vacated.

Click here to review the District Court’s decision, captioned PMA Capital Ins. Co., et al. v. Platinum Underwriters Bermuda, Ltd., No. 09-84 (E.D. Pa 2009).

Second Circuit Court of Appeals Affirmed Summary Judgment For Insurer Ordering Rescission of a Life Insurance Policy Due to Material Misrepresentations in the Application

Tue, 19 Jan 2010 13:16:00 GMT

The Second Circuit Court of Appeals recently affirmed a United States District Court for the District of Connecticut’s judgment awarding summary judgment for an insurer seeking to rescind a life insurance policy on the basis that the policy application contained material misrepresentations of fact. Northwestern Mut. Life Ins. Co. v. Gil, 09-cv-0948; 09-cv-0959 (2nd Cir. Nov. 3, 2009), affirming Northwestern Mut. Life Inis. Co. v. Gil, 07-cv-00303 (D. Conn. Feb. 5, 2009).

The defendant insurer issued a $15 million life insurance policy to the decedent. According to the district court’s decision, after the decedent’s death, the insurer learned of numerous material misrepresentations of fact contained in the policy application, and gave notice to the administrator of decedent’s estate that the insurer sought rescission of the life insurance policy. The insurer brought a lawsuit in district court in Connecticut to enforce the equitable remedy of rescission. The insurer moved for summary judgment on its rescission claim, arguing that it was entitled to summary judgment because the decedent made material misrepresentations in his medical questionnaire submitted with his policy application. The estate argued against summary judgment.

The district court rejected the estate’s argument that the policy should not be rescinded because, even if the application contained material misrepresentations of fact, they were not attributable to the decedent and were filled in by his agent. The district court held that, even assuming arguendo that the decedent had no knowledge of any misstatements at the time he signed the applications, the insurer would still be entitled to rescind the policy because the decedent ratified the false statements.

The court also rejected the estate’s argument that the policy should not be rescinded because the material misrepresentations were not material to the cause of the decedent’s death, which was homicide. The district court held that Connecticut state court precedent is clear that matters of special inquiry requiring a “yes” or “no” answer are “conclusively deemed material” and therefore the decedent’s misstatements are grounds for rescission.

Finally, the district court rejected the estate’s argument that the insurer had notice through its agent of the falsity of the decedent’s statements and therefore did not rely upon them. The district court reasoned that the insurer “had no way of learning of the falsity of [decedent’s] statements because [decedent] concealed his medical and psychiatric history from every person with a duty to report to” the insurer. Accordingly, the district court held that the insurer was not charged with knowledge of the falsity of the statements and rescission must be granted.
On appeal, the Second Circuit Court of Appeals affirmed summary judgment in favor of the insurer “for substantially the reasons stated in the district court’s opinion.”

A copy of the Second Circuit opinion is available here, and a copy of the district court opinion is available here.

Connecticut Federal Court Awarded Summary Judgment for Insurer Due to “Use” Exclusion of Rental Car Supplemental Liability Insurance Policy

Tue, 19 Jan 2010 13:11:00 GMT

The United States District Court for the District of Connecticut recently awarded summary judgment in favor of an insurer holding that the insurer had no duty to defend or indemnify the insureds under a rental car’s supplemental liability insurance policy due to the “use” exclusion. Empire Fire & Marine Ins. Co. v. Lang et al., 3:07cv1325 (D. Conn. September 15, 2009).

A father rented a vehicle and listed his daughter as an additional driver. The daughter, while intoxicated, was involved in an automobile accident with another vehicle. The injured party in that other vehicle filed the underlying lawsuit against the father, daughter, and rental car company. The father and daughter sought coverage under the supplemental liability insurance purchased with the rental vehicle. The insurer filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify the father and daughter in the underlying lawsuit. The insurer then moved for summary judgment based on the intoxication exclusion and the use exclusion of the supplemental liability insurance policy. The district court held that the insurer has no duty to defend nor indemnify either the father or the daughter in the underlying lawsuit under the “use” exclusion.

The district court held that the intoxication exclusion was ambiguous with regard to the father and must therefore be construed against the insurer. Specifically, the policy states that insurance does not apply to “[l]loss arising out of an ‘accident’ which occurs while the ‘insured’ is under the influence of alcohol.” Because the daughter was not the only insured, and because the father, arguably the primary insured, was not under the influence of alcohol when the accident occurred, the exclusion does not bar coverage of the father for loss arising out of the accident between the daughter and the underlying plaintiff.

The court also held, however, that the “use” exclusion of the policy clearly and unambiguously barred coverage for losses arising out of the use of the rental vehicle while the daughter was impaired from the use of alcohol, which included all loss arising out of the accident at issue in the underlying lawsuit. Specifically, under the “use” exclusion, the policy excluded coverage for “[l]oss arising out of the use of a ‘rental vehicle’ when such use is in violation of the terms and conditions of the ‘rental agreement.’” The rental agreement provides that the rental vehicle “shall not be used…in any illegal or reckless manner…[and] shall not be driven by any person impaired by the use of alcohol.” The court held that because the underlying complaint alleges, and the parties agree, that the daughter was driving under the influence of alcohol when the accident occurred, such use of the vehicle was prohibited by the express terms of the rental agreement and thus the “use” exclusion applied and all losses arising from the use of the rental vehicle while the daughter was impaired by the use of alcohol are excluded from coverage under the policy. The court further held that the “use” exclusion precluded coverage for both the daughter and the father.

A copy of the decision is available here.

Interim Maryland Insurance Commissioner Named

Tue, 19 Jan 2010 13:07:00 GMT

Last week Maryland Governor Martin O’Malley announced that Elizabeth “Beth” Sammis has been appointed as Interim Commissioner of the Maryland Insurance Administration (“MIA”). Ms. Sammis will replace Ralph S. Tyler, who announced that he would step down from his position as Maryland Insurance Commissioner to accept the position of Chief Legal Counsel to the federal Food and Drug Administration effective January 8, 2010.

Since 2007, Ms. Sammis has served as Deputy Commissioner for the MIA focusing on legislative and regulatory policy, with an emphasis on health insurance. Prior to her appointment as Deputy Commissioner, Ms. Sammis served as Vice President of Government Affairs for United Healthcare for the Mid-Atlantic region and as Senior Vice-President of Corporate Communications and External Affairs for Mid-Atlantic Medical Services Inc.

Click here to view the official press release.

UK: British Insurance Brokers' Association Launches 2010 Manifesto

Tue, 19 Jan 2010 13:04:00 GMT

On 11 January 2010, the British Insurance Brokers' Association (BIBA) launched its 2010 manifesto.

BIBA's key focus in 2010 will be on the changing environment that brokers operate within, particularly the potential change of Government and regulatory structure that any new Government may implement.

The manifesto sets out four priority issues which will be the focus of BIBA's lobbying for 2010. The first, "Suitable insurance, internet sales and signposting", focuses on ensuring that individuals and businesses have access to suitable insurance cover and professional advice about insurance needs and on trade practices in internet sales. "Driving change" focuses on changing certain aspects of trade practice, tax and insurance law to ensure the global competitiveness of the industry. "Regulation and consumer protection" focuses on working to achieve better regulation. Finally, "The UK and Europe" focuses on promoting the interests and importance of London and the UK at UK and European government level.

The full manifesto can be viewed by clicking here.

Last Week in DC: The Healthcare Reform Debate – January 19, 2010

Tue, 19 Jan 2010 10:30:00 GMT

The House returned to session last week, as intense negotiations continued behind the scenes on an agreement that will reconcile the differences between the House- and Senate-passed healthcare reform bills. On Thursday, a compromise was reached on one of the Senate bill’s more controversial provisions, smoothing a possible path toward a final agreement in the coming weeks.

MARATHON NEGOTIATING SESSIONS YIELD PROGRESS:

Congressional leaders huddled at the White House with President Obama and Administration officials throughout the week, working for hours on end to find common ground on the remaining differences between the House and Senate healthcare reform bills (H.R. 3962 and H.R. 3590, respectively). Negotiations have reportedly ranged from revenue raising provisions to the scope and structure of health insurance “exchanges” that would serve as a marketplace where individuals and certain businesses could shop for coverage.

In addition to House and Senate leaders, key union officials were also on hand for the lengthy negotiations over the Senate bill’s tax on so-called “Cadillac” health insurance plans. The White House has made clear it prefers the Senate’s excise tax as a revenue raiser as opposed to the House bill’s surtax on wealthy Americans, though the Senate provision has been met with fierce resistance from organized labor due to the impact it would have on workers whose collective bargaining agreements often forgo higher wages in exchange for top-of-the-line health insurance plans.

The agreement reached between Democrats and union leaders on Thursday includes a higher cost threshold before the new excise tax kicks in – a provision that is set to begin in 2013. In addition, the health plans of union workers under collective bargaining agreements as well as all state and local government workers would be exempt from the tax until 2018. Further, dental and vision plans would not count toward the excise tax threshold, and factors such as high-cost geographic areas, age and gender would also receive exemptions.

The excise tax agreement will yield an estimated $60 billion less than the original Senate bill, leaving lawmakers to make up the lost revenue elsewhere. It has been reported that pharmaceutical companies, hospitals and/or medical device makers may be asked to accept additional fees or reimbursement cuts, and an adjustment to the Medicare payroll tax increase on wealthier seniors could also be considered.

THE MASSACHUSETTS FACTOR:

The uptick in urgency over the past week to complete a final agreement on healthcare reform can be attributed at least in part to the special election to fill Massachusetts’ vacant Senate seat. A non-issue just a month ago, the campaign leading up to today’s special election has recently grown much closer than expected in a state that has long been a Democratic stronghold. Should Republican candidate Scott Brown defeat Democrat Martha Coakley, Democrats would then control just 59 seats in the Senate – one vote shy of the number needed to prevent a Republican-led filibuster of a final healthcare reform bill.

NEXT STEPS:

This week, all eyes will be on today’s Massachusetts special election, and Democratic leaders will continue to work to secure votes for a final healthcare reform bill and discuss outstanding issues that will not affect the final cost of the bill, such as language to prevent federal funding for abortion as well as restrictions that would impact illegal immigrants. In addition, Democrats will await cost estimates from the Congressional Budget Office – an occurrence that, if positive, could pave the way for final votes in the House and Senate in the coming weeks. While no longer a hard deadline, leaders still share the goal of sending a final bill to the President before his upcoming State of the Union address on January 27.

The Healthcare Reform Legislation that is ultimately adopted will affect all segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries when it becomes final.

Bermuda: Bermuda Monetary Authority Publishes its 2010 Business Plan

Tue, 19 Jan 2010 10:27:00 GMT

On 14 January 2010 the Bermuda Monetary Authority (BMA) presented its regulatory framework Business Plan for the year ahead at its Annual General Meeting.

In a bid to increase transparency at the BMA, the Annual General Meeting was an opportunity for stakeholders in the public and private sector to discuss the Business Plan with the BMA's management.

The Business Plan outlines the BMA's strategies and work plan for 2010. It focuses on four key areas: preparing for insurance regulatory equivalence; building on effective resources for supervisory programmes; regime changes in the aftermath of the global financial crisis; and further emphasis on consumer protection.

Over the last year, the BMA has undertaken an aggressive policy programme towards enhancing Bermuda's regulatory framework and the 2010 Business Plan reiterates this focus. It sets out an assertive agenda for regulatory advancement and highlights the importance of continuing the momentum of market change. The Business Plan is intended to send out a strong message in the aftermath of the international financial crisis that Bermuda's regulatory framework is robust, flexible and ready for what lies ahead.

A copy of the Business Plan can be found on the BMA's website by clicking here.

Foreign Reinsurers Receive Greater Access To Brazilian Market

Fri, 15 Jan 2010 15:37:00 GMT

As of Sunday January 17, 2010, foreign reinsurers will be permitted access to a larger portion of the Brazilian reinsurance market as local reinsurers' right of first refusal will be reduced from 60% of risks in the market to only 40%. The change is triggered by the passage of three years since the enactment of Supplemental Law 126, which first opened the Brazilian reinsurance market to foreign competition. It represents a major step in the gradual opening of the Brazilian reinsurance market.

Among the issues to watch in regard to this fundamental change in the market (more than half of risk was previously subject to the right of first refusal as opposed to less than half as of January 17), is the effect upon the profitability and competitiveness of IRB Re-Brasil and the other local reinsurers. While the last numbers released indicated that IRB Re-Brasil (the government-owned former market monopoly holder) still held nearly 80% of the market's reinsurance, its profitability has taken a major hit over the last year as it has sought to compete with foreign companies.

For our further coverage of the Brazilian insurance and reinsurance market, please click here.

If you would be interested in learning more about the Brazilian and/or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

UK: Jackson LJ's Review of Litigation Costs Criticizes ATE Insurance

Fri, 15 Jan 2010 10:47:00 GMT

In Lord Justice Jackson's final report on his year-long review into costs he has recommended that after-the-event (ATE) insurance premiums should no longer be recoverable from unsuccessful opponents in civil litigation.

In his much-awaited report on costs in civil litigation, published on 14 January, Jackson LJ said ATE insurance premiums were a major contributor to disproportionate costs and so should cease to be recoverable. If this recommendation were implemented, it would mean an end to successful litigants recovering all of their costs. He also said success fees paid under conditional fee agreements should not be recoverable for the same reason.

Jackson LJ said increased use of before-the-event (BTE) insurance and qualified one way costs shifting would help remove the need for ATE insurance. BTE insurance could be promoted by encouraging people to take out legal expenses insurance, perhaps bundled together with household insurance. Under one way costs shifting, claimants would not be required to pay the defendant's costs if the claim were unsuccessful, but the defendant would have to pay the claimant's costs if it were successful.

To offset the effects for claimants, Jackson LJ said that general damages for personal injuries and other civil wrongs should be increased by 10%.

Other recommendations that could affect insurers include extending fixed costs and streamlining process and procedure in lower value claims, both of which would save costs for insurers. With regards to large commercial litigation in the Commercial Court, Jackson LJ said feedback was generally positive. However, he recommended some changes to the disclosure process, the use of lists of issues as a case management tool and docketing of cases to judges.

The UK Government has said it will consider Jackson LJ's recommendations. The full 557-page final report can be seen here.

Reports – Minimal Insurance Coverage for Damages from Haitian Earthquake

Fri, 15 Jan 2010 10:41:00 GMT

While the amount of damages and casualties from Tuesday’s magnitude-7 earthquake in Haiti continue to escalate, various reports have indicated that very little of this damage will be covered by insurance. This is because Haiti is the poorest country and one of the smallest insurance markets in the Western Hemisphere.

Current predictions are that the insured losses from the earthquake will be significantly less than the $40 billion in claims arising from Hurricane Katrina, which was the insurance industry’s most costly natural disaster. Rather, the total losses are expected to be in the low single-digit billions of dollars, only a portion of which will be covered by insurance. Haiti’s main catastrophe insurer the Caribbean Catastrophe Risk Insurance Facility, a regional fund administered by Caribbean governments, will provide approximately $8 million but there is expected to be little recovery from private insurance. There are only a few Haitian insurance companies, most of which have low levels of capital and do not generally purchase reinsurance. Therefore, most of the funds needed to aid in Haiti’s recovery will have to come from international aid.

For updated information regarding the earthquake and the amount of losses, click here.

Latin America Update: Growth Numbers and Predictions for Chile, Ecuador, Uruguay and Venezuela

Thu, 14 Jan 2010 13:34:00 GMT

Chile

The Chilean Insurance Association recently released predictions that the country’s insurance market will grow by 3.7% in 2010 and 6.7% in 2011. In particular, Jorge Claude, the president of the association, reportedly stated that the group expects life insurance premiums to grow 2.9% in 2010 and 5.8% in 2011. Such growth would be in contrast to recent results in the Chilean insurance market, which saw a decline in total premiums in 2009. Mr. Claude reportedly stated that the insurance market predictions are based in part upon expectations that the Chilean economy as a whole will experience a recovery in 2010 and 2011.

Ecuador

The Ecuadorian insurance market reportedly experienced an 11.0% growth in total premiums and a 7.2% growth in activity when comparing October 2009 to October 2008. Colonial maintained the largest share of the market as of October (14%), followed by Equinoccial (9%), AIG (5%), Latina (5%), Sucre (5%), Condor (4%), Panamericana (4%), Bolivar (3%), Atlas (3%) and Ecuasuiza (3%).

Uruguay

Total net premiums for the Uruguayan insurance market reportedly grew 9.6% when comparing September 2009 to September 2008. For the twelve month period ending September 2009, the market reportedly grew by 6.5%.

Venezuela

Total premiums for the Venezuelan market reportedly grew by 44% when comparing December 2008 to 2007. The lines with the greatest growth were pensions (300%), credit and guaranty (64.4%), life (48.7%) and auto (20.6%).

If you would be interested in learning more about the Chilean, Ecuadorian, Uruguayan, Venezuelan and/or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Circular Letter Regarding Contract Certainty Issued for Comment by the New York Insurance Department

Thu, 14 Jan 2010 10:17:00 GMT

The New York Insurance Department (the “Department”) recently issued a draft Supplement No. 1 to Circular Letter No. 20 (2008) (“CL No. 20”) regarding insurance contract certainty for property/casualty insurance policies and reinsurance contracts. The Department is requesting comments on its draft by January 22, 2010.

As previously discussed, the Department issued CL No. 20 on October 16, 2008, as a response to the potential for increased legal risks and complex litigation for insureds, insurers, reinsurers and producers when terms and conditions remain uncertain after policy inception.

CL No. 20 advised insurers and producers doing business in the State of New York that they should, no more than one year from the date of CL No. 20, develop and implement practices to assure that policy documentation is delivered to the insured before, at, or promptly after inception. CL No. 20 also stated that any principles and practices established to ensure contract certainty must comply with all existing statutory or regulatory provisions concerning the content, timing, or delivery of insurance policies. The purpose of Supplement No. 1 is to provide further guidance in response to industry inquiries posed to the Department regarding CL No. 20.

The following are the key points covered in Supplement No. 1:

Definition of Promptly: To deliver the policy documentation “promptly” after inception is generally interpreted to mean within 30 business days and any extensions beyond that should be carefully documented by insurers with good cause for such delay.
Allocation of 30-Day Time Period: When a producer intermediates a transaction, the insurer generally should endeavor to deliver policy terms and conditions to the producer within 18 business days post-inception to enable the producer to do its part to implement the processes necessary to check the terms and conditions for accuracy, advise the policyholder, and to interface further with the insurer. The broker then would generally have 12 business days to deliver the contract to the policyholder. Should these frames conflict with the some provision of the New York Insurance Law or Insurance Regulations, the latter provision will control.
Required Policy Documentation: The Department will use the principles and standards of contract certainty as established in the U.K. and Bermuda as a guide for what sort of policy documentation is necessary for contract certainty (to the extent that they are not inconsistent with the New York Insurance Law or Insurance Regulation). In accordance with those codes of practice, “policy documentation” for purposes of contract certainty should contain all the agreed terms of the contract, and may include an insurance policy, binder of insurance, schedule of cover, signed contract wording, or a complete slip. Documentation of a reinsurance contract can be evidenced by a binder, cover note, or similar documents, provided that it reflects all agreed terms and conditions to which the reinsurers have agreed.
Enforcement: The Department will focus its enforcement resources on policies issued to: (i) large commercial insureds, written on a standard or manuscript basis; (ii) the special risk market, written pursuant to New York Insurance Law Article 63; (iii) policyholders in the excess line market; and (iv) other insurers via reinsurance. In the latter half of 2010, the Department may issue letters of inquiry to licensees aimed at gathering information regarding how, and to what extent, licensees have developed and implemented practices to assure that contract certainty is routinely achieved.

If you would like EAPD to assist you with preparing and submitting comments regarding Supplement No. 1, please click the “Email the Editor” button on the tope left of this page and provide your contact information for follow-up by an EAPD attorney.

NAMIC Issues Letter to NAIC Noting Its Observations on Current Controversy Surrounding Climate Change Science

Thu, 14 Jan 2010 09:45:00 GMT

The New York Times is reporting on a January 8, 2010, letter from NAMIC to the NAIC responding to the request by the Climate Change and Global Warming Task force for comments on issues concerning the proposed Insurer Climate Risk Disclosure Survey. A copy of the article and letter can be found here.

The letter remarks on the recent unauthorized release of e-mails containing correspondence between climate change research scientists, which revealed issues concerning the science behind the conclusions about global warming. The letter states that the release of the e-mails, “makes clear that insurers, regulators, and anyone else with a serious interest in climate change cannot afford the luxury of simply assuming that the ‘reports and studies’ [. . .] present an accurate and unbiased picture of what is known about climate change.” The NAMIC letter also states that “because serious questions have been raised about the integrity of contemporary climate science, it would be exceedingly risky for any insurance company to make important business decisions based on an uncritical acceptance of the dominant scientific paradigm on climate change.”

HK: Terminating Contracts with Insurance Agents

Thu, 14 Jan 2010 09:43:00 GMT

In the recent case of Leung Chee Kuen Carol Macrady v American International Assurance Co (Bermuda) Ltd [2009] HKEC 1826, the court was asked to consider whether the insurance company AIA had wrongfully terminated its relationship with the plaintiff.

The plaintiff joined AIA as an insurance agent in 2002 after signing a Letter of Understanding and a Career Representative's Contract with AIA (collectively the "Contract"). After considering the terms of the Contract, which expressly provided that they should not be construed to create an employment relationship whether expressly or implied between AIA and the plaintiff, the court held that there was no employment relationship between the plaintiff and AIA under the Contract or in reality. By wrongful termination, the plaintiff could only be referring to breach by wrongful repudiation of the Contract on the part of AIA.

AIA sought to rely on clause 25(c) of the Contract which entitled it to terminate the Contract without notice in the event of dishonesty and breach of good faith on the part of the plaintiff. On the balance of probabilities, the judge did not find the plaintiff to be dishonest and held that the Contract was not terminated in March 2003 as claimed by AIA. Nevertheless, the judge found that the Contract was subsequently validly terminated by AIA's letter of 23 April 2003, which gave the plaintiff 22 days' prior notice before the termination took effect on 15 May 2003.

The plaintiff then told the court that the Contract was expected to last for a term of three years and claimed that this early termination would cause her hardship since not only would she be deprived of the prospect of earning commission and bonus, but also she would be subject to a one-year trade restraint after the termination from approaching policyholders introduced by her to AIA. The court rejected this alleged hardship and held that whilst the enforceability of a restraint of trade clause may be subject to a reasonableness test, the enforcement of a contractual right to terminate does not become unreasonable because of the operation and effect of a restraint of trade clause upon termination.

This case reflects the trend in the UK that as long as the contractual arrangements are genuine, it will only be in very rare situations that an employment relationship would be implied by the court (see James v. Greenwich London Borough Council [2008] EWCA Civ 35). Furthermore, the court will be very reluctant to read employment law concepts (eg wrongful dismissal and restraint of trade) into contracts for services which are freely entered into between the parties.

UK: The Association of British Insurers Publishes Good Practice Guidance for the Online Sale of Insurance Policies

Wed, 13 Jan 2010 08:45:00 GMT

The good practice guidance, called "Ensuring Positive Customer Experiences of Buying Insurance Online", sets out high-level standards for insurance comparison websites, insurers and brokers selling general insurance, such as motor and home insurance, online. The guidance is in response to concerns that consumers have not always understood the terms of their insurance cover when buying policies online. In 2008, the Financial Services Authority carried out a review of insurance comparison websites to determine the extent to which such websites treat customers fairly and, in particular, whether the information which they provide to consumers is clear, fair and not misleading. The review found examples of good and poor practice. Please click here to view our previous blog on this topic. The good practice guidance aims to ensure that consumers buying insurance over the internet can better identify the most suitable policy for their needs.

The guidance has been developed by the Association of British Insurers (ABI), the British Insurers Brokers Association, Which? and various leading insurance comparison websites. Key issues covered by the guidance include:

Policy information
Add-ons
Excess levels
Referrals
Guaranteed prices
Accurate data
Total price disclosure

While the guidance is voluntary, the ABI will carry out regular reviews to establish how widely it is being implemented and to identify any other issues that may need to be incorporated into the guidance.

Please click here to view the guidance.

UK: Scottish Court Rejects Insurers' Challenge Over Compensation for Pleural Plaques

Wed, 13 Jan 2010 08:03:00 GMT

The Scottish Court has upheld legislation that maintains the right to compensation for pleural plaques sufferers in Scotland. In 2007, the House of Lords ruled that pleural plaques sufferers had no legal right to compensation as the "damage" was insufficient to be actionable in English law. Pleural plaques can develop after prolonged exposure to asbestos; however, they are generally a harmless scarring and do not lead to other, more serious, asbestos-related conditions. As we previously reported, the Scottish Parliament introduced legislation to overturn the effect of the House of Lords' decision in Scotland. The Damages (Asbestos-related Conditions) (Scotland) Act came into force in June 2009.

Insurers (Aviva, AXA, RSA and Zurich) challenged the Scottish Act, seeking judicial review on a number of grounds, based on the common law and Human Rights legislation. The Scottish Court of Session, by a judgment of Lord Emslie handed down on 8 January 2010, rejected all of the insurers' challenges. Those insurers have indicated that they are considering an appeal.

The Scottish court noted that the estimates for the cost of compensating pleural plaques sufferers in Scotland range from £100million to £8.6billion; the higher figure was the top of the range put forward by the UK Government in 2008.

The UK Government is currently considering whether to legislate to restore the right to compensation for pleural plaques in the rest of the UK. Observers have speculated that whether the right to compensation in Scotland is upheld is a relevant factor in this decision.

To view the judgment, please click here.

China: Draft Tentative Measures for the Administration of the Use of Insurance Funds

Wed, 13 Jan 2010 08:01:00 GMT

The China Insurance Regulatory Commission (CIRC) released on 25 December 2009 Draft Tentative Measures for the Administration of the Use of Insurance Funds (the "Draft Tentative Measures") for public consultation. This public consultation closed on 4 January 2010.

The purpose of the Draft Tentative Measures is to strengthen investment risk management control, according to CIRC.

Under the Draft Tentative Measures, insurance funds may be invested in bank deposits, bonds, securities, securities-linked funds and real estate. Nonetheless, the Draft Tentative Measures expressly state that insurance companies are prohibited from investing in ChiNext, which is a new stock market in Shenzhen established to provide growth enterprises with an avenue to raise capital. They also prohibit insurance companies from buying securities which are marked "Special Treatment" by the relevant stock exchanges. The Draft Tentative Measures further forbid insurance companies from investing in projects which do not comply with the State Industrial Policy (i.e. high energy consumption and high pollution projects) and projects which do not have steady cash flow returns.

A final version of the Tentative Measures is anticipated to come into force shortly.

UK: Employers' Liability Insurance Bureau Bill – 1st Reading in House of Commons

Wed, 13 Jan 2010 07:59:00 GMT

We reported here on the Employers' Liability Insurance Bureau Bill which is now progressing through the UK parliamentary process, having received its First Reading in the House of Commons on 6 January 2010. The Bill seeks to introduce an employers' liability insurance bureau which will compensate claimants where the employer does not have insurance or the insurance policy cannot be traced. The Bill will be published as a House of Commons Paper before receiving its Second Reading, provisionally scheduled for 5 February 2010, which will provide the first opportunity for MP debate.

White House to Propose Plan to Recoup Bailout Costs

Tue, 12 Jan 2010 14:35:00 GMT

When President Obama releases his FY 2011 budget proposal next month, included will be a mechanism to ensure the losses associated with the recent financial and auto industry bailout are recouped.

The Administration is refusing to confirm or deny rumors regarding specific provisions of a recoup plan, though it is being reported that at least a portion of bailout funds will be recovered via a new fee on major financial institutions. Consideration of such a fee comes at a time when the President and his advisors must deal with public outcry over large banks’ positive earnings and executive bonuses while the nation’s unemployment rate remains at 10 percent.

Though most large financial institutions have repaid the Troubled Asset Relief Program (TARP) funds they received, the financial bailout law gives Congress the ability to recoup any funds lost through the program. Such costs include those attributed to the bailout of the auto industry and American International Group Inc. (AIG), and the fact that both entities are still struggling makes them unlikely targets of new federal fees.

That leaves large financial institutions, though any such fee will likely be met with fierce resistance from the industry, members of which are already expressing the concern that new fees would inevitably be passed along to consumers and would decrease banks’ ability to lend.

Exact details will be released in the President’s upcoming budget, and we will continue to monitor this and other important financial issues and provide updates on InsureReinsure.com.

UK: Provision of Services Regulations 2009 Now in Force

Tue, 12 Jan 2010 12:20:00 GMT

On 28 December 2009, the Provision of Services Regulations 2009 (SI 2009/2999) (the Regulations) came into force. The Regulations govern, amongst other things, the information that service providers must give to clients and customers in the EU (for example, information on any registration or authorisation that the service provider holds) so as to ensure that they are able to make an informed decision when considering whether to use the service provider. Whilst the Regulations do not apply directly to the financial services sector they are still of interest to insurers.

In particular, it should be noted that other professional service providers (such as law and accountancy firms) must now provide their clients with the details of any professional liability insurance that the service provider is required to hold. This must include the contact details for the insurer and the territorial coverage of the policy.

Whilst the Regulations do not alter the legal relationship between the service provider's clients and its insurers and do not impose any obligations on the insurers, insurers may need to consider changes to policy wordings to allow disclosure of this information by service providers.

Vermont Licensed 39 Captives in 2009

Tue, 12 Jan 2010 09:15:00 GMT

The Vermont Department of Banking, Insurance, Securities and Health Care Administration reported it licensed 39 new captive insurance companies in 2009, bringing the total of number of Vermont licensed captives to 878. The new captives included 28 pure captives, 5 risk retention groups, 4 special purpose financial captives, 1 sponsored captive and 1 industrial insured captive and represented a broad range of industries, including healthcare, financial services and construction. The new Vermont captives formed in 2009 included Comcast, Morgan Stanley, Swiss Re, Turner Construction, Centra Health and Carilion Clinic.

Vermont is currently the largest captive domicile in the US and third largest in the world.

Click here to view the official press release.

New York Adopts Revisions to Regulation 118 governing Audited Financial Statements

Tue, 12 Jan 2010 09:10:00 GMT

On December 28, 2009, the New York Insurance Department (“NYID”) issued a Notice of Emergency adoption revising Regulation 118 to implement new audit and reporting standards on an emergency basis. The revised Regulation is modeled on the NAIC Financial Reporting Model Regulation which applies certain public company reporting standards set forth in the Sarbanes-Oxley Act of 2002, to insurers, fraternal benefit societies and managed care organizations.

Among other things, Regulation 118 requires:

Companies to annually file audited financial reports with the Superintendent;
Designation of an audit committee that is responsible for the appointment, compensation and oversight of the company’s auditor,
Designation of a qualified CPA to conduct the audit and notice to the Superintendent by March 1, 2010 of the name, address, telephone number and email address of such CPA,
Communication from the CPA stating whether the CPA has noted any unremediated material weakness in the company’s internal controls over its financial reporting during the audit; and
Companies with $500 million or more in direct and assumed premium to file a report with the Superintendent regarding its assessment of internal controls over financial reporting.

With respect to creation of an audit committee, Regulation 118 requires, based on the insurer’s premium volume, that the audit committees of some companies be comprised of a percentage of independent members. Companies meeting certain requirements may request an exemption from the Superintendent based on hardship. Companies which are compliant with Sarbanes-Oxley, or which are direct or indirect wholly-owned subsidiaries of Sarbanes-Oxley compliant companies are not subject to the audit committee requirements. Also, domestic life companies subject to New York Insurance Law Section 1202(b)(2) (imposing specific independence requirements for domestic life companies), and foreign or alien insurers which did not enter New York through an United States branch, are not subject to the audit committee requirements.

Regulation 118 went into effect upon publication in the State Register on December 29, 2009 and applies to the reporting period ending December 31, 2010.

Re Under 40s Next Event -- "Preserving Liquid Assets" Lecture and Wine Tasting

Tue, 12 Jan 2010 08:49:00 GMT

China: Insurance Institutions may Invest in Corporate Debentures

Tue, 12 Jan 2010 08:47:00 GMT

The China Insurance Regulatory Commission (CIRC), the insurance industry regulator in the People's Republic of China, issued a circular on 31 December 2009, permitting insurance institutions to invest in corporate debentures which are issued in the domestic inter-bank market provided that the corporate debentures satisfy the relevant applicable requirements and have a credit rating of AAA or a long-term credit rating equivalent to AAA assigned by domestic credit rating institutions.

Deadlines for Data Security Requirements

Mon, 11 Jan 2010 13:14:00 GMT

This advisory provides a brief summary of new data security requirements with effective and enforcement dates in early 2010 that will affect innumerable businesses. Please click here to read more.