HB Litigation Conferences Presents: Reinsurance Outlook …litigationconferences.com/wp-content/uploads/2010/02/00_all... · HB Litigation Conferences Presents: Reinsurance Outlook

HB Litigation Conferences Presents:

Reinsurance Outlook 2010February 9, 2010 | 30 Rockefeller Plaza, 36th Floor, New YorkConference Chairs: Scott Birrell, Esq., Vice President and Associate General Counsel, Travelers, Hartford, CT John Finnegan, Esq., Chadbourne & Parke, LLP, New York Wendy Shapss, CPA, CFE, Senior Managing Director, FTI Consulting, Inc., New York

8:00 Registration & Continental Breakfast

8:45 Welcome and Introductory Remarks

9:00 Dealing with Major Recurring Issues •Productv.OperationsClaims•NetRetainedLinesProvision•Warranties•Allocation•Aggregation•LateNotice•LegallyObligatedToPay•ChallengesToUnderwritingProcess•FollowTheFortunesModerator: Kenneth Levine, Esq., Nelson Levine deLuca & Horst, Blue Bell, PAJessica Pardi, Esq., Morris Manning & Martin, LLP, Atlanta Benjamin Gonson, Esq., Nicoletti Gonson Spinner Owen LLP, New York

10:00 Reinsurance Audits – A Cedent and Reinsurer View •Interpretingtheaccesstorecordsclause•Preparingforareinsuranceclaimaudit•Preparingforatransactionalaudit•Lessonslearnedandthevalueofauditsforbothcompanies Richard Hershman, Senior Managing Director, Leader of Insurance Services, FTI Consulting, Inc., New York John O’Connor, Senior Vice President and Head of Claims, Endurance Services Limited, New York

11:00 Morning Break

11:15 Preserving Privileges: Ethical Issues Confronting Reinsurers, Insurers, Policyholders & Counsel (ABA Model Rule 1.6) •HowToDistinguishBetween“Defense”Communicationsand“Coverage”Communications•HowCoverageDenialsOrReservationsOfRightsAffectPrivileges•HowPresenceOfMultipleInsuredsWithConflictingInterestsCouldAffectPrivileges•HowInsuranceCompaniesCanEvaluateCoverageClaimsWithoutWaivingPrivileges•CommunicationsBetweenInsurerandReinsurer:AreTheyPrivilegedStephen Weisbrod, Esq., Gilbert LLP, Washington, DC Robert Van Kirk, Esq., Williams & Connolly LLP, Washington, DC Bryce Friedman, Esq., Simpson Thacher & Bartlett LLP, New York John Finnegan, Esq., Chadbourne & Parke LLP, New York

12:15 Networking Luncheon Sponsored by FTI Consulting, Inc.

1:15 Climate Change: Reinsurance Risks & Opportunities •TheImportanceoftheInsuranceAssetInTheProcessOfAcceleratingDeliveryofNewTechnologyToMarketToCombatClimateChange Lewis Rothstein, PhD, Principal Scientist, WeatherPredict Consulting, Inc., and Professor of Oceanography, University of Rhode Island Graduate School of Oceanography, Narragansett, RI Chris Walker, Chief Executive Officer, The Carbon Trust, New York Michael Cohen, Vice President, Government Affairs, Ren Re, Washington, DC

2:00 Global Financial Crisis/Madoff Scandal: Reinsurance Implications •EvolutionoftheU.S.SubprimeLendingCrisisIntoAWorldwideFinancialCrisis•ImpactToDateOnTheReinsuranceIndustry•ClaimTrendsToDate•IncreasedCedingCompanySecurityRequirements•U.S.LegislativeReactions•OutlookForReinsurers Peter Chaffetz, Esq., Chaffetz Lindsey LLP, New York John Green, Partner-in-Charge, Insurance Industry Group, Marcum LLP, Melville, NY

3:00 Afternoon Break

3:15 Not Knowing What’s Next: Are Reinsurance Wordings Ready for the Era of the “Black Swan”? •Are“100yearevents”(socalled“BlackSwans”)occurringmorefrequentlythatanticipated?•Eitherway,doyourcurrentwordingsadequatelyaddressuncertainfutureevents?Carey Child, Esq., Chadbourne & Parke LLP, Washington, DC Reka Koerner, Senior Vice President, Legal, Swiss Reinsurance America Corporation, Armonk, NY

4:00 Resolution Without Arbitration/Decreasing Cost of Arbitration •HandlingResolutionWithRun-offCompanies•ImportanceofSecurity•AvoidingMotionsToVacate•Consolidation•SummaryJudgmentModerator: Scott Birrell, Esq., Vice President and Associate General Counsel, Travelers, Hartford, CT William Goldsmith, Esq., Assistant General Counsel, American International Group Ltd., New York Jonathan Rosen, Arbitration, Mediation and Expert Witness Services, New York William Perry, Esq., Chadbourne & Parke LLP, Washington, DC

5:00 Networking Reception

Dealing with Dealing with Major Recurring IssuesMajor Recurring Issues

Kenneth LevineKenneth Levine Nelson Levine de Luca & Horst, Blue Bell, PANelson Levine de Luca & Horst, Blue Bell, PA

Jessica Jessica PardiPardi Morris Manning & Martin, LLP, Atlanta, GAMorris Manning & Martin, LLP, Atlanta, GA

Benjamin Benjamin GonsonGonson NicolettiNicoletti GonsonGonson Spinner & Owen LLP, New York, NYSpinner & Owen LLP, New York, NY

Follow the Settlements

An Historical Overview and Discussion of Recent

Developments

Jessica F. Pardi, Esq. Morris, Manning & Martin, LLP

1600 Atlanta Financial Center 3343 Peachtree Road, NE Atlanta, GA 30326-1044

(404) 504-7662 [email protected]

A. Statement of the rule: A contractual obligation by the reinsurer to indemnify the ceding company for claim payments or settlements it makes under its policy provided the payment is not fraudulent, made in bad faith or otherwise ex gratia.

B. “Follow the Settlements” is meant to be narrower in scope than “Follow the Fortunes.”

C. Purpose of Follow the Settlements:

1. To prevent second-guessing by the reinsurer;

2. To avoid litigation of coverage disputes; and

3. To promote good faith settlements.

FOLLOW THE SETTLEMENTS

SAMPLE CLAUSES

“Reinsurer agrees to abide by the loss settlements of the reinsured.”

To this may be added a notice provision mandating the reinsured notify the reinsurer of claims to which the reinsurance applies [or may apply or likely will apply] and an opportunity for the reinsurer to associate in the defense and/or settlement of the claim [typically at the reinsurer’s expense].

The “Honorable Undertaking” clause in an arbitration provision may also contain language regarding follow the settlements:

“The Treaty(ies) shall be construed as an honorable undertaking between the parties hereto not to be defeated by technical legal constructions, it is the intention of the Treaty(ies) that the fortunes of the reinsurer shall follow the fortunes of the reinsured.”

Should Follow the Settlements be implied in reinsurance contracts?

International Surplus Lines Ins. Co. v. Certain Underwriters & Underwriting Syndicates at Lloyd’s of London, 868 F.Supp. 917 (S.D. Ohio 1994) (follow the settlements implied into all reinsurance contracts).

necessary to preserve the cedant-reinsurer relationship

maximize coverage

overruled by American Ins. Co. v. Am Re-Ins. Co., 2006 U.S. Dist. LEXIS 95801 (N.D. Cal. Nov. 27, 2006).

Aetna Cas. & Surety Co. v. Home Ins. Co., 882 F.Supp. 1328, 1348-51 (S.D.N.Y. 1995) (implying follow the settlements into reinsurance contract based upon custom and practice).

Eight years later, the Second Circuit, in British Int’l. Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78 (2nd Cir. 2003), strictly limited “custom and practice” evidence. This strict standard would not have allowed the evidence in Aetna v. Home.

The majority of courts no longer imply follow the settlements into reinsurance contracts. See e.g. The Am. Ins. Co. v. Am. Re-Ins. Co., 2006 U.S. Dist. LEXIS 95801 (N.D. Cal. Nov. 27, 2006) (tracing the history of implying follow the settlements and refusing to do so); Employer Reins. Corp. v. Laurier Indem. Co., 2007 U.S. Dist. LEXIS 45670 (M.D. Fla. June 25, 2007) (the absence of a follow the settlements clause does not create an ambiguity permitting parole evidence regarding custom and usage).

When can reinsurers avoid following the settlements of the cedant?

1. Fraud

2. Bad faith

a) Includes improper claims handling and “manifest manipulation” of allocations

b) Typically a high standard requiring at least gross negligence or recklessness

3. Ex gratia payments

4. Differing scopes of insurance and reinsurance, i.e., the coverage is not “back to back”

Importance of “governing law” clause

ALLOCATION

“Allocation” refers to the assignment of losses by an insurer to particular policy periods, categories of losses and/or number of occurrences.

The seminal case applying follow the settlements to allocations is Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 9 F.Supp. 2d 49 (D. Mass. 1998) aff’d 217 F.3d 33 (1st Cir. 2000) (follow the settlements requires reinsurer to follow the reinsured’s good faith and reasonable allocation of settlement dollars between different policies and sites).

“[The reinsurer] attempts to avoid the effect of the “follow the settlements” doctrine by arguing that what it is challenging is the good faith of the allocation, rather than of the settlement. This is a distinction without a difference. . . .”

ALLOCATION (Cont’d)

Seven Provinces is followed by two cases involving large payments to Owens Corning Fiberglas for asbestos liabilities:

1. North River Ins. Co. v. ACE Am. Reins. Co., 2002 U.S. Dist. LEXIS 5536 (S.D.N.Y. Mar. 29, 2002) aff’d in part, vacated in part, remanded by, 361 F.3d 134 (2nd Cir. 2004) (reinsurers not allowed to second- guess allocations among policies and layers).

2. Travelers Cas. & Sur. Co. v. Gerling Global Reins. Corp. of Am., 285 F.Supp. 2d 200 (D. Conn. 2003), rev’d, 419 F.3d 181 (2nd Cir. 2005) (reinsurer obligated to abide by insurer’s determination of number of occurrences even though number was not determined as part of settlement with insured).

Treatment of Allocations Under Treaty As Opposed to Facultative

Reinsurance

Facultative reinsurance typically is governed by a one or two page, standard form with coverage terms following the underlying policy. Here a cedant’s allocations generally must be followed if they are reasonable and in good faith and the coverage is arguably within the policy.

Treaty reinsurance typically involves a detailed contract with its own coverage terms pertaining to numerous and varied underlying policies. Here, the treaty’s terms generally govern whether the allocation is followed.


Reinsurance (Cont’d)FACULTATIVE REINSURANCE

Some courts examining good faith and reasonableness of allocations involving facultative reinsurance have created a high standard for a reinsurer to challenge a cedant’s settlement allocation. National Union Fire Ins. Co. v. Am. Reins. Co., 441 F.Supp. 2d 646 (S.D.N.Y. 2006) (even indifference to proper allocation does not rise to the necessary showing of “extraordinary bad faith”).


Reinsurance (Cont’d)

Suter v. Gen. Acc. Ins. Co., 2006 U.S. Dist. LEXIS 51853 (D.N.J. July 17, 2006) vacated by Goldman v. General Acc. Ins. Co., 2007 U.S. Dist. LEXIS 70406 (D.N.J. May 24, 2007) (“Bad faith in this context amounts to a showing of gross negligence, recklessness or a showing that the settlement was not even arguably within the scope of the reinsurance coverage”).

Some rulings have favored reinsurers:

Allstate Ins. Co. v. Am. Home Assurance Co., 837 N.Y.S. 2d 138 (N.Y. App. Div. 2007) (reinsurer not required to follow reinsurance loss allocations that are unreasonable). The Court held as follows:


Reinsurance (Cont’d)[North River and Travelers] do not require a reinsurer, under the follow-the- fortunes doctrine, to accept the reinsured’s post-settlement loss allocation even if that allocation is contrary to the reinsured’s pre-allocation position and treatment of the loss allocation issue with its own insured, i.e., its treatment of deductibles. While the cases unequivocally hold that the doctrine extends to a post-settlement allocation despite ‘an inconsistency between that allocation and the [reinsured’s] pre-settlement assessments of risk,’ it applies only ‘as long as the allocation meets the typical follow-the- settlements requirements, i.e., is in good faith, reasonable, and within the applicable policies.’ Here, unlike North River, the inconsistency is not between defendant’s post-settlement allocation and its pre-settlement assessments of the risk, but between its pre-settlement allocation of loss with its insured (UTC) and its post-settlement allocation with its reinsurer.


Reinsurance (Cont’d)TREATY REINSURANCE

Follow the Settlements as applied to allocations under treaty insurance typically relies on analysis of the terms of the treaty.

In Travelers v. Lloyds, the Supreme Court of New York held as follows:

“While a follow the fortunes clause in most reinsurance agreements leaves reinsurers little room to dispute the reinsured’s conduct of the case, we agree with the rationale of the . . . Second Circuit that such a clause does not alter the terms or override the language of reinsurance policies.”

“To hold that these ‘follow the fortunes’ clauses supplant the definition of ‘disaster and/or casualty’ in the reinsurance treaties and allow Travelers to recover under its single allocation theory would effectively negate the phrase. The practical result of such an application would be that a reinsurance contract interpreted under New York law that contains a ‘follow the fortunes’ clause would bind a reinsurer to indemnify a reinsured whenever it paid a claim, regardless of the contractual language defining loss.” Travelers Cas. & Sur. Co. v. Lloyd’s, 760 N.E.2d 319 (N.Y. 2001); see also Hartford Acc. & Indem. Co. v. ACE, 2005 Conn. Super. LEXIS 3576 (Dec. 14, 2005).

RECENT DEVELOPMENTS

An insurer cannot use a declaratory judgment action to test the application of Follow the Settlements prior to paying a claim. The Tall Tree Ins. Co. v. Munich Reins. Am., Inc., 2008 U.S. Dist. LEXIS 60499 (N.D. Cal. July 29, 2008).

Commutations and contingent liabilities allocated to reinsurer based upon actuarial studies are losses covered under the reinsurance treaties. Global Reins. Corp. of Am. v. Argonaut Ins. Co., 2009 U.S. Dist. LEXIS 37460 (S.D.N.Y. March 23, 2009).

“Follow the fortunes” applies only to reinsurance contracts. Idaho Counties Risk Mgmt Program Underwriters v. Northland Ins. Cos., 205 P.3d 1220 (Idaho 2009).

RECENT DEVELOPMENTS (Cont’d)

Differences in governing law between and among insurance and reinsurance contracts may result in paid claims for which there is no reinsurance despite a follow the settlements clause. Wasa v. Lexington [2009] UKL 40 (July 30, 2009).

Follow the fortunes cannot be used to expand reinsurance coverage to renewals. Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., Slip Copy, 2010 U.S. Dist. LEXIS 426 (D.Ct., January 6, 2010).

LATE NOTICELATE NOTICE

Benjamin Benjamin GonsonGonson NicolettiNicoletti GonsonGonson Spinner Owen LLP, New York, NYSpinner Owen LLP, New York, NY

THE PROMPT NOTICE REQUIREMENTTHE PROMPT NOTICE REQUIREMENT

-- IN ALL FACULATIVE CERTIFICATESIN ALL FACULATIVE CERTIFICATES

-- IN MOST EXCESS OF LOSS TREATIESIN MOST EXCESS OF LOSS TREATIES

-- PERMITS REINSURERS TO RESERVE PERMITS REINSURERS TO RESERVE PROPERLY; TO ADJUST PREMIUMS AND TO PROPERLY; TO ADJUST PREMIUMS AND TO DECIDE WHETHER TO ASSOCIATE IN DECIDE WHETHER TO ASSOCIATE IN HANDLING OF CLAIMHANDLING OF CLAIM

WHEN IS NOTICE LATE ?WHEN IS NOTICE LATE ?

-- PROMPT NOTICE TYPICALLY REQUIRED PROMPT NOTICE TYPICALLY REQUIRED WHEN CLAIM APPEARS LIKELY TO INVOLVE WHEN CLAIM APPEARS LIKELY TO INVOLVE THE REINSURANCE OR WHEN RESERVES SET THE REINSURANCE OR WHEN RESERVES SET BY CEDENT REACH 50% OF RETENTIONBY CEDENT REACH 50% OF RETENTION

-- WHEN IS CLAIM LIKELY TO INVOLVE THE WHEN IS CLAIM LIKELY TO INVOLVE THE REINSURANCE REINSURANCE –– OBJECTIVE VS. SUBJECTIVE OBJECTIVE VS. SUBJECTIVE TESTTEST

-- PROMPT NOTICE SOMETIMES REQUIRED PROMPT NOTICE SOMETIMES REQUIRED FOR SPECIFIC TYPES OF INJURIESFOR SPECIFIC TYPES OF INJURIES

PREJUDICE REQUIREMENTPREJUDICE REQUIREMENT

-- UNDER NEW YORK LAW, REINSURER UNDER NEW YORK LAW, REINSURER REQUIRED TO SHOW REQUIRED TO SHOW ““TANGIBLE ECONOMIC TANGIBLE ECONOMIC INJURYINJURY”” TO PREVAIL ON LATE NOTICE TO PREVAIL ON LATE NOTICE GROUNDSGROUNDS

-- PREJUDICE IS REQUIRED IN ALMOST EVERY PREJUDICE IS REQUIRED IN ALMOST EVERY STATE THAT HAS ADDRESSED SUBJECTSTATE THAT HAS ADDRESSED SUBJECT

-- PREJUDICE NOT REQUIRED IF NOTICE IS A PREJUDICE NOT REQUIRED IF NOTICE IS A CONDITION PRECEDENT CONDITION PRECEDENT -- MUST BE CLEARLY MUST BE CLEARLY STATED IN CERTIFICATE / TREATYSTATED IN CERTIFICATE / TREATY

WHAT IS PREJUDICE?WHAT IS PREJUDICE?

-- ECONOMIC INJURY DUE TO LOW ECONOMIC INJURY DUE TO LOW COMMUTATIONS WITH RETROCESSIONAIRESCOMMUTATIONS WITH RETROCESSIONAIRES

-- TAX RAMFICATIONSTAX RAMFICATIONS

-- IMPACT OF LATE NOTICE ON SUBSEQUENT IMPACT OF LATE NOTICE ON SUBSEQUENT RENEWALS RENEWALS

-- ARBITRATION VS. LITIGATION ARBITRATION VS. LITIGATION –– EQUITY AND EQUITY AND CUSTOM & PRACTICE (DAMAGES)CUSTOM & PRACTICE (DAMAGES)

WHAT IS PREJUDICE ? WHAT IS PREJUDICE ? (cont(cont’’d)d)

-- INABILITY TO ASSOCIATE IN HANDLING OF INABILITY TO ASSOCIATE IN HANDLING OF CLAIM IS NOT ENOUGH AS REINSURER MUST CLAIM IS NOT ENOUGH AS REINSURER MUST SHOW IT HAS PRACTICE OF ASSOCIATING SHOW IT HAS PRACTICE OF ASSOCIATING AND IT WOULD HAVE MADE A DIFFERENCEAND IT WOULD HAVE MADE A DIFFERENCE

--RETROCESSIONAIRES CLAIMING LATE RETROCESSIONAIRES CLAIMING LATE NOTICE NOT ENOUGHNOTICE NOT ENOUGH---- ANY TYPE OF TANGIBLE ECONOMIC INJURY ANY TYPE OF TANGIBLE ECONOMIC INJURY SHOULD SUFFICESHOULD SUFFICE

BAD FAITH AS EXCEPTIONBAD FAITH AS EXCEPTIONFOR PREJUDICEFOR PREJUDICE

-- GROSS NEGLIGENCE OR RECKLESSNESSGROSS NEGLIGENCE OR RECKLESSNESS

-- FAILURE TO IMPLEMENT ROUTINE FAILURE TO IMPLEMENT ROUTINE CONTROLS TO ENSURE NOTICECONTROLS TO ENSURE NOTICE

-- WILL CEDENTWILL CEDENT’’S COMPUTER SYSTEM S COMPUTER SYSTEM ENSURE THAT REINSURERS RECEIVE TIMELY ENSURE THAT REINSURERS RECEIVE TIMELY NOTICE ?NOTICE ?

-- CEDENTCEDENT’’S GUIDELINES REGARDING S GUIDELINES REGARDING PROVIDING NOTICE PROVIDING NOTICE

RESCISSIONRESCISSION

Benjamin Benjamin GonsonGonson NicolettiNicoletti GonsonGonson Spinner & Owen, New York, NYSpinner & Owen, New York, NY

ELEMENTS OF RESCISSION ELEMENTS OF RESCISSION

REINSURER MUST PROVE:REINSURER MUST PROVE:

-- A NONA NON--DISCLOSURE OR DISCLOSURE OR MISREPRESENTATION OF FACT(S) OCCURRED MISREPRESENTATION OF FACT(S) OCCURRED (INNOCENT VS. INTENTIONAL)(INNOCENT VS. INTENTIONAL)

-- THE NONTHE NON--DISCLOSED OR MISREPRESENTED DISCLOSED OR MISREPRESENTED FACT(S) WAS MATERIALFACT(S) WAS MATERIAL

-- REINSURER JUSTIFIABLY RELIED ON THE REINSURER JUSTIFIABLY RELIED ON THE NONNON--DISCLOSED OR MISREPRESENTED DISCLOSED OR MISREPRESENTED FACTS FACTS

DUTY OF UTMOST GOOD FAITHDUTY OF UTMOST GOOD FAITH

-- REQUIRES CEDENT TO DISCLOSE ALL REQUIRES CEDENT TO DISCLOSE ALL FACTS OF WHICH IT IS AWARE THAT FACTS OF WHICH IT IS AWARE THAT MATERIALLY AFFECT THE RISK, AND OF MATERIALLY AFFECT THE RISK, AND OF WHICH THE REINSURER HAS NO REASON TO WHICH THE REINSURER HAS NO REASON TO BE AWARE BE AWARE

-- IF CEDENT IS AWARE OF FACTS THAT IF CEDENT IS AWARE OF FACTS THAT WOULD INFLUENCE DECISION OF REINSURER WOULD INFLUENCE DECISION OF REINSURER TO ACCEPT RISK, THOSE FACTS MUST BE TO ACCEPT RISK, THOSE FACTS MUST BE DISCLOSED DISCLOSED

DUTY OF UTMOST GOOD FAITH (contDUTY OF UTMOST GOOD FAITH (cont’’d):d):

-- NO DUTY TO DISCLOSE STANDARD TERMS NO DUTY TO DISCLOSE STANDARD TERMS THAT REINSURER OUGHT TO BE AWARE OFTHAT REINSURER OUGHT TO BE AWARE OF

-- IF MATERIAL FACTS HAVE BEEN PROVIDED IF MATERIAL FACTS HAVE BEEN PROVIDED BUT THEY ARE UNCLEAR, DUTY IS ON THE BUT THEY ARE UNCLEAR, DUTY IS ON THE REINSURER TO ASK FURTHER QUESTIONSREINSURER TO ASK FURTHER QUESTIONS

MATERIALITY MATERIALITY

-- MATERIAL IF REINSURER WOULD NOT HAVE MATERIAL IF REINSURER WOULD NOT HAVE ISSUED POLICY OR PAID HIGHER PREMIUM ISSUED POLICY OR PAID HIGHER PREMIUM

-- OBJECTIVE STANDARD OBJECTIVE STANDARD –– WHETHER WHETHER REASONABLE CEDENT SHOULD HAVE REASONABLE CEDENT SHOULD HAVE BELIEVED FACT WAS MATERIAL TO BELIEVED FACT WAS MATERIAL TO REINSURER REINSURER

-- IF CEDENT ON NOTICE THAT REINSURER IF CEDENT ON NOTICE THAT REINSURER CONSIDERS CERTAIN INFO IMPORTANT, CONSIDERS CERTAIN INFO IMPORTANT, THOSE FACTS ARE PER SE MATERIALTHOSE FACTS ARE PER SE MATERIAL

JUSTIFIABLE RELIANCE JUSTIFIABLE RELIANCE

-- REINSURER MUST SHOW IT RELIED UPON REINSURER MUST SHOW IT RELIED UPON MISREPRESENTATION OR NONMISREPRESENTATION OR NON--DISCLOSURE DISCLOSURE IN ACCEPTING RISKIN ACCEPTING RISK

-- REINSURERREINSURER’’S RELIANCE MUST BE S RELIANCE MUST BE REASONABLEREASONABLE

-- RELIANCE DEPENDS UPON NUMBER OF RELIANCE DEPENDS UPON NUMBER OF FACTORS, INCLUDING: PARTIESFACTORS, INCLUDING: PARTIES’’ PAST PAST DEALINGS, RELATIVE SOPHISTICATION AND DEALINGS, RELATIVE SOPHISTICATION AND AVENUES AVAILABLE TO REINSURER FOR AVENUES AVAILABLE TO REINSURER FOR DISCOVERING TRUTH.DISCOVERING TRUTH.

WAIVER OR RATIFICATIONWAIVER OR RATIFICATIONOF RIGHT TO RESCIND OF RIGHT TO RESCIND

-- RENEWAL OF CONTRACT WITH KNOWLEDGE RENEWAL OF CONTRACT WITH KNOWLEDGE OF PRIOR NONOF PRIOR NON--DISCLOSURE OR DISCLOSURE OR MISREPESENTATION OPERATES AS WAIVERMISREPESENTATION OPERATES AS WAIVER

-- RATIFICATION OCCURS WHEN PARTY RATIFICATION OCCURS WHEN PARTY ACCEPTS BENEFITS FLOWING FROM ACCEPTS BENEFITS FLOWING FROM CONTRACT, OR REMAINS SILENT, OR CONTRACT, OR REMAINS SILENT, OR ACQUIESCES IN CONTRACT FOR ANY ACQUIESCES IN CONTRACT FOR ANY CONSIDERABLE LENGTH OF TIME AFTER CONSIDERABLE LENGTH OF TIME AFTER HAVING OPPORTUNITY TO VOID CONTRACTHAVING OPPORTUNITY TO VOID CONTRACT

WAIVER OR RATIFICATIONWAIVER OR RATIFICATIONOF RIGHT TO RESCIND (contOF RIGHT TO RESCIND (cont’’d) d)

-- DELAY IN RESCINDING WILL NOT DELAY IN RESCINDING WILL NOT CONSTITUTE RATIFICATION IF REINSURER CONSTITUTE RATIFICATION IF REINSURER ENGAGED IN REASONABLE INVESTIGATION ENGAGED IN REASONABLE INVESTIGATION OR NOT IN FULL KNOWLEDGE OF RELEVANT OR NOT IN FULL KNOWLEDGE OF RELEVANT FACTSFACTS

-- PREJUDICE TO THE CEDENT FROM THE PREJUDICE TO THE CEDENT FROM THE DELAY COULD BE A FACTOR, ESPECIALLY IN DELAY COULD BE A FACTOR, ESPECIALLY IN ARBITRATIONARBITRATION

Dealing with Dealing with Major Recurring IssuesMajor Recurring Issues

Kenneth LevineKenneth Levine Nelson Levine de Luca & Horst, Blue Bell, PANelson Levine de Luca & Horst, Blue Bell, PA

Jessica Jessica PardiPardi Morris Manning & Martin, LLP, Atlanta, GAMorris Manning & Martin, LLP, Atlanta, GA

Benjamin Benjamin GonsonGonson NicolettiNicoletti GonsonGonson Spinner Owen LLP, New York, NYSpinner Owen LLP, New York, NY

LATE NOTICE OUTLINE

1. PROMPT NOTICE REQUIREMENT

IN ALL FACULATIVE CERTIFICATES IN MOST EXCESS OF LOSS TREATIES PERMITS REINSURER TO RESERVE PROPERLY, TO ADJUST

PREMIUMS AND TO DECIDE WHETHER TO ASSOCIATE IN HANDLING OF CLAIM

NICOLETTI GONSON SPINNER & OWEN LLP

LATE NOTICE OUTLINE

2. WHEN IS NOTICE LATE ?

PROMPT NOTICE TYPICALLY REQUIRED WHEN CLAIM

APPEARS LIKELY TO INVOLVE THE REINSURANCE OR WHEN RESERVES SET BY THE CEDENT REACH 50% OF THE RETENTION

WHEN IS A CLAIM LIKELY TO INVOLVE THE

REINSURANCE – OBJECTIVE VS. SUBJECTIVE TEST

PROMPT NOTICE SOMETIMES REQUIRED FOR SPECIFIC TYPES OF INJURIES


LATE NOTICE OUTLINE

3. PREJUDICE REQUIREMENT

UNDER NEW YORK LAW, REINSURER REQUIRED TO SHOW “TANGIBLE ECONOMIC INJURY” TO PREVAIL ON LATE NOTICE GROUNDS

PREJUDICE IS REQUIRED IN ALMOST EVERY STATE THAT

HAS ADDRESSED THE SUBJECT PREJUDICE NOT REQUIRED IF NOTICE IS A CONDITION

PRECEDENT - MUST BE CLEARLY STATED


LATE NOTICE OUTLINE

4. WHAT IS PREJUDICE?

INABILITY TO ASSOCIATE IN HANDLING OF CLAIM IS NOT ENOUGH – TO SUCCEED, REINSURER MUST SHOW IT HAS PRACTICE OF ASSOCIATING AND IT WOULD HAVE MADE A DIFFERENCE

RETROCESSIONAIRES CLAIMING LATE NOTICE NOT

ENOUGH ANY TYPE OF TANGIBLE ECONOMIC INJURY SHOULD

SUFFICE ECONOMIC INJURY DUE TO LOW COMMUTATION

AMOUNTS WITH RETROCESSIONAIRES TAX RAMFICATIONS IMPACT OF LATE NOTICE ON SUBSEQUENT RENEWALS ARBITRATION VS. LITIGATION – EQUITY AND CUSTOM &

PRACTICE (DAMAGES)



LATE NOTICE OUTLINE

5. BAD FAITH AS AN EXECPTION FOR PREJUDICE

GROSS NEGLIGENCE OR RECKLESSNESS IS BAD FAITH FAILURE TO IMPLEMENT ROUTINE CONTROLS TO ENSURE

NOTICE EQUALS BAD FAITH IF CEDENT USES COMPUTER SYSTEM, WILL IT ENSURE

THAT REINSURERS RECEIVE TIMELY NOTICE (WHAT IF CERTAIN REINSURERS REQUIRE MORE CONTROL IN HANDLING OF CLAIM, SUCH AS PRE-APPROVAL FOR SETTLEMENTS THAT COULD INVOLVE THE REINSURANCE)

CEDENT’S GUIDELINES REGARDING PROVIDING NOTICE

RECISSION OUTLINE

1. ELEMENTS OF RESCISSION REINSURER MUST PROVE THAT: A NON-DISCLOSURE OR MISREPRESENTATION OF FACT(S)

OCCURRED (INNOCENT VS. INTENTIONAL) THE NON-DISCLOSED OR MISREPRESENTED FACT(S) WAS

MATERIAL IT JUSTIFIABLY RELIED ON THE NON-DISCLOSED OR

MISREPRESENTED FACTS


RESCISSION OUTLINE

2. DUTY OF UTMOST GOOD FAITH

REQUIRES CEDENT TO DISCLOSE ALL FACTS THAT MATERIALLY AFFECT THE RISK, OF WHICH IT IS AWARE, AND OF WHICH THE REINSUER HAS NO REASON TO BE AWARE

IF CEDENT IS AWARE OF FACTS THAT WOULD INFLUENCE

DECISION OF REINSURER TO ACCEPT RISK, THOSE FACTS MUST BE DISCLOSED

NO DUTY TO DISCLOSE STANDARD TERMS THAT

REINSURER OUGHT TO BE AWARE OF IF MATERIAL FACTS HAVE BEEN PROVIDED BUT THEY

ARE UNCLEAR, DUTY IS ON THE REINSURER TO ASK FURTHER QUESTIONS


RESCISSION OUTLINE

3. MATERIALITY

FACT IS MATERIAL IF THE REINSURER WOULD EITHER

HAVE NOT ISSUED THE POLICY OR CHARGED A HIGHER PREMIUM

OBJECTIVE STANDARD – WHETHER A REASONABLE

CEDENT SHOULD HAVE BELIEVED THE FACT WAS MATERIAL TO THE REINSURER

IF CEDENT ON NOTICE THAT REINSURER CONSIDERS

CERTAIN INFORMATION IMPORTANT, THOSE FACTS ARE PER SE MATERIAL


RESCISSION OUTLINE

4. JUSTIFIABLE RELIANCE REINSURER MUST SHOW THAT IT RELIED UPON THE

MISREPRESENTATION OR NON-DISCLOSURE IN ACCEPTING THE RISK

REINSURER’S RELIANCE MUST BE REASONABLE RELIANCE DEPENDS UPON A NUMBER OF FACTORS,

INCLUDING THE PARTIES PAST DEALINGS, THEIR RELATIVE SOPHISTICATION AND THE AVENUES AVAILABLE TO REINSURER FOR DISCOVERING THE TRUTH



RESCISSION OUTLINE

5. WAIVER OR RATIFICATION OF RIGHT TO RESCIND

RENEWAL OF CONTRACT WITH KNOWLEDGE OF THE PRIOR NON-DISCLOSURE OR MISREPESENTATION OPERATES AS A WAIVER

RATIFICATION OCCURS WHEN PARTY ACCEPTS BENEFITS

FLOWING FROM CONTRACT, OR REMAINS SILENT, OR ACQUIESCES IN CONTRACT, FOR ANY CONSIDERABLE LENGTH OF TIME AFTER HAVING OPPORTUNITY TO VOID CONTRACT

DELAY IN RESCINDING WILL NOT CONSTITUTE

RATIFICATION IF REINSURER ENGAGED IN REASONABLE INVESTIGATION OR NOT IN FULL KNOWLEDGE OF RELEVANT FACTS

PREJUDICE TO THE CEDENT FROM THE DELAY COULD BE

A FACTOR, ESPECIALLY IN ARBITRATION

DEALING WITH MAJOR RECURRING ISSUES

Reinsurance Outlook 2010 Conference 30 Rockefeller Plaza, NY, NY

February 9, 2010 Kenneth Levine, Esquire, Moderator Nelson Levine de Luca & Horst 518 Township Line Rd., Ste 300 Blue Bell, PA 19422 215.358.5170 www.nldhlaw.com Jessica Pardi, Esquire Morris, Manning & Martin, LLP 1600 Atlanta Financial Center, 3343 Peachtree Rd., NE Atlanta, GA 30326-1044 404.504.7662 www.mmmlaw.com Ben Gonson, Esquire Nicoletti Gonson Spinner & Owen, LLP 555 Fifth Avenue, 8th Floor New York, NY 10017 (212) 730-7750 www.nicolettilaw.com

REINSURANCE OUTLOOK 2010

DEALING WITH MAJOR RECURRING ISSUES

I. PRODUCTS vs. OPERATIONS CLAIMS - LOSS OCCURRENCES - AGGREGATION OF CLAIMS Property and Casualty Excess of Loss Reinsurance agreements often define “Loss Occurrence” differently for products liability-based claims as opposed to claims arising out of “operations.” This can often affect aggregation analysis. By way of example, one such agreement read:

LOSS OCCURRENCE Part I – As respects Policies written on an occurrence basis: … any accident or occurrence or series of accidents or occurrences arising out of any one event and happening within the term and scope of this Agreement…” including A. As respects Products Bodily Injury and Products Property Damage Liability, injuries to all persons and all damage to property of others occurring during a Policy Period and proceeding from or traceable to the same causative agency shall be deemed to arise out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date of the Policy Period. For the purposes of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy Period. C. As respects Property Damage Liability (other than Automobile and Products), said term shall also, subject to Provisions 1. and 2. below, be understood to mean loss or losses caused by a series of operations, events, or occurrences arising out of operations at one specific site and which cannot be attributed to any single one of such operations, events or occurrences, but rather to the cumulative effect of the same. In assessing each and every Loss Occurrence within the foregoing definition, it is understood that: 1. the series of operations, events or occurrences shall not extend over

a period longer than 12 consecutive months; and 2. The Company may elect the date on which the period of not

exceeding 12 consecutive months shall be deemed to have commenced.

In the event that the series of operations, events or occurrences extend over a period longer than 12 consecutive months, then each consecutive

period of 12 months … shall form the basis of claim under this Agreement.

There are an unlimited number of facts and circumstances that could give rise to a dispute as to whether the “Loss Occurrence” analysis should be undertaken under either or both such standards. There are a number of recent cases that – albeit scattered in facts and resolution – provide guidance as to the trends in this complex and disjointed area of reinsurance law. - - a recent New York state court reinsurance decision supported the limitation of environmental “loss occurrences” (despite company-wide and multiple locality operations) to a “specific site.” Argonaut Ins. Co. v. Travelers Ins. Co., 6 Misc.3d 1006(A), 800 N.Y.S.2d 342 (N.Y.Sup., January 5, 2005). - - a Delaware appellate court decision from earlier this year in a decision resolving excess insurer coverage in a products liability context demonstrated the trend towards treating liabilities incurred by manufacturers as arising from a single occurrence despite failures at numerous locations. E.I. du Pont de Nemours & Co. v. Stonewall Ins. Co., 2009 WL 1915212 (Del. Super., January 12, 2009) (overcoming the “single premises location” wording in the excess policy’s definition of “occurrence”) - - the Supreme Court of Connecticut recently delved into many aspects of these issues in Hartford Acc. and Indemn. Co. v. ACE American Reinsurance Co., 284 Conn. 744, 936 A.2d 224 (2007). There, the Reinsured brought an action against Reinsurers for declaratory judgment on its right to recover for numerous losses paid on claims against an asbestos products manufacturer. Reinsurers counterclaimed for declaratory judgment that the numerous claims could not be aggregated as one accident. The court held that the specific “common cause” provision of the Hartford/ACE reinsurance treaty was ambiguous as to whether the Reinsured incurred losses by reason of any one accident, and that such ambiguity in the treaty raised factual issues precluding summary judgment. The decision reads like a treatise on the “products” v. “operations” issue. Nonetheless, the history of this issue is greatly tainted by the variety of policy and agreement wordings referenced in various decisions, as well as the variety of underlying facts and circumstances. - - In Travelers Casualty & Surety Co. v. Certain Underwriters at Lloyd's of London, 96 N.Y.2d 583, 760 N.E.2d 319, 734 N.Y.S.2d 531 (2001), the New York Court of Appeals construed a reinsurance agreement provision defining “disaster and/or casualty” as

each and every accident, occurrence and/or causative incident, it being further understood that all loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin and/or being traceable to the same

act, omission, error and/or mistake shall be considered as having resulted from a single accident, occurrence and/or causative incident.

Travelers had separate coverage litigations paid two corporations for claims against them arising from pollution at numerous hazardous waste sites that they had operated for decades. Travelers then sought reimbursement from the defendant Reinsurers claiming that all of the claims against each separate corporation could be aggregated because the waste sites “shared a ‘common origin,’ namely, a managerial failure ... in the implementation and enforcement of [the corporations'] company-wide environmental policy.” Id., at 592, 734 N.Y.S.2d 531, 760 N.E.2d 319. The Court of Appeals concluded that because the word “series” implied a spatial or temporal relationship between the members of the series, the events at the separate waste sites were not a “series of accidents” and could not be aggregated for purposes of reinsurance. Id., at 594, 734 N.Y.S.2d 531, 760 N.E.2d 319.

There remains a rather unsettled issue in this area, that being whether premises operations claims that do not come within the products hazard provision of an underlying asbestos liability insurance policy (because they arose before the product had been relinquished by the insured) can nevertheless come within a reinsurance treaty's common cause provision because they “arose out of products.” Certain recent cases have attempted to deal with this issue: - - the New York Court of Appeals in Frontier Insulation Contractors, Inc. v. Merchants Mutual Ins. Co., 91 N.Y.2d 169, 690 N.E.2d 866, 667 N.Y.S.2d 982 (1997), provided some guidance on the issue. The case involved a coverage dispute between an asbestos insulation contractor and its insurers involving multiple asbestos related personal injury claims. The insurers contended that all of the claims fell within the policies' exclusions for products hazards. The court redirected the focus: “it is not simply whether an insured's product caused the loss at issue, but rather is dependent on the location of the accident and the possession of the product.... [The insurers'] argument fails to appreciate that an exclusion for product hazards governs only one subset of product liability claims.” Id., at 175-76, 667 N.Y.S.2d 982, 690 N.E.2d 866. The court concluded that the insurers would be relieved of their duty to defend the claims only if they established both that the claims fell squarely within the products hazard provisions (that the claims arose away from the insured's premises) and after possession of the asbestos had been relinquished. The court in Frontier Insulation Contractors, Inc., implicitly recognized that, although product hazard claims and operations claims are mutually exclusive, some operations claims may “arise out of products.” - - in Commercial Union Ins. Co. v. Porter Hayden Co., 116 Md.App. 605, 692-93, 698 A.2d 1167 (1996) , cert. denied, 348 Md. 205, 703 A.2d 147 (1997) the Maryland state court found that liability for injuries resulting from exposure to asbestos products could arise under the “operations” clause if exposure occurred before product was relinquished by insured.

- - the court in Continental Casualty Co. v. Employers Ins. Co. of Wausau, 16 Misc.3d 223, 230-31, 839 N.Y.S.2d 403 (2007) noted in a reinsurance context that the “products hazard” provision covers risks due to defective products that have been put into stream of commerce while premises/operations provision covers “risks that arise due to injuries from the defective product at the insured's premises or while the work with the product is still in progress.” - - the Supreme Court of Connecticut also addressed this issue in Hartford Acc. and Indemn. Co. v. ACE American Reinsurance Co., 284 Conn. 744, 936 A.2d 224 (2007), noting that products hazard claims constitute only a subset of claims that can be said to “arise from products.” The court acknowledged though that there was a close linguistic similarity between the language of the reinsurance treaty's “common cause” provision and the “products hazard” provision of the underlying policies – and that such connection suggested some correspondence in meaning between the two provisions. It concluded though that the “arising out of products” portion of the “common cause” provision in the reinsurance treaty was ambiguous as to whether it refers to liability arising out of the “products hazard” provision of the underlying liability policies or, instead, refers to any claim arising from a product, regardless of whether the manufacturer had relinquished physical possession of the product at the time that liability was incurred. The court determined in turn that the meaning of the provision must be determined by the finder of fact on remand. II. NET RETAINED LINES PROVISION

An excess of loss reinsurance agreement’s Net Retained Lines clause compels a Reinsured to “tap” other reinsurances first so that the treaty only protects the net excess loss, operating as protection only after proportional treaty or facultative cessions. In turn, the excess of loss reinsurance applies only to those losses that apply to the ceding insurer's net retentions. The excess of loss contract does not apply to losses otherwise covered by other reinsurance or above the insured's net retention, whether collectible or not, as well as net of salvages and all other recoveries due the Reinsured.

By way of example, one such agreement read, in part:

NET RETAINED LINES This Agreement shall protect only that portion of any insurance or reinsurance which the Reinsured, acting in accordance with its established practices at the time of the commencement of this Agreement, retains net for its own account. The Reinsurer's liability hereunder shall not be increased due to any error or omission which results in the Reinsured's net retention being larger than it would normally have been nor by the Reinsured's failure to reinsure and maintain reinsurance in accordance with its established practice as aforesaid, nor by the inability of the

Reinsured to collect from any other Reinsurers any amounts which may have become due from them for any reason whatsoever.

There are no known reported US decisions that address any issues arising from such concept or such applicable provisions.

There is a distinction between “Net Retained Lines” and “Net Loss Retention” that should be noted. “Net Loss Retention” is the amount of loss which a Reinsured keeps for its own account and does not pass on to another Reinsurer. In excess of loss reinsurance, the term "first loss retention" is sometimes used. A further discussion of Net Loss Retention is contained in the Warranties section immediately below. III. WARRANTIES

Certain provisions in reinsurance agreements may be construed as “warranties” or “conditions precedent” - obligations that the Cedent must meet before it may recover under the agreement.

A. NET LOSS RETENTION WARRANTY The most discussed such warranty is the Net Loss Retention Warranty.

In Stonewall Ins. Co. v. Fortress Reinsurers Managers, Inc., 83 N.C.App. 263,

350 S.E.2d 131 (1986), disc. rev. denied, 319 N.C. 410, 354 S.E.2d 728 (1987), the court construed a facultative reinsurance contract containing the following “net loss retention” language:

The company warrants to retain for its own account the amount of liability specified in Item 3 [$500,000] unless otherwise provided herein, and the liability of the Reinsurer specified in Item 4 shall follow that of the Company, except as ... provided herein, and shall be subject in all respects to all the terms and conditions of the Company's policy.

The court in Stonewall Ins. Co. held that the Cedent was not entitled to recover under the reinsurance agreement because (a) compliance with the warranty / net loss retention provision was a condition precedent to the Reinsurer's liability; (b) the Cedent had breached the warranty by ceding part of its retention to treaty Reinsurers; and (c) the Reinsurer had not waived the warranty and was not estopped from relying on its breach.

Similarly, in Fortress Re, Inc. v. Jefferson Insurance Company of New York, 465 F.Supp. 333 (E.D.N.C.1978), aff'd, 628 F.2d 860 (4th Cir.1980), the federal district court opined that “In the absence of any evidence as to the intent of the parties as to the meaning of the language in the [net loss] retention clause, a retention warranty was breached by the Reinsured company when it retained for its own account only a portion of the risk and reinsured the remainder in a reinsurance treaty with another reinsurance

company. Compliance with the retention warranty was a condition precedent to the Reinsured’s recovery. A North Carolina federal court reached the same conclusion based upon the exact same retention warranty language in Penn Re, Inc. v. Stonewall Ins. Co., 708 F.Supp. 123 (E.D.N.C., 1988), aff’d 894 F.2d 402.

In Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 217 F.3d 33 (1st Cir. (Mass.) July 6, 2000), a district court struggled to address the meaning of a net retention provision in a facultative reinsurance certificate. Although the policy called for the Reinsurer’s liability to be “proportionally reduced” to the extent that the Reinsured retained less than 50% of the risk, it permitted the Reinsured to obtain “general excess loss or excess catastrophe reinsurance” without violating the net retention requirement.

The parties acknowledged that “general excess loss or excess catastrophe reinsurance” were not common terms in the industry. The facultative reinsurance certificate was therefore deemed ambiguous as to whether quota share treaty reinsurance could cover Cedent’s share of the risk of loss or if it would violate the net retention requirement and entitle the Reinsurer to a reduction in its obligation. The district court considered extrinsic evidence to determine what the parties meant by the phrase “general excess loss or excess catastrophe reinsurance.” Evidence of the parties' actual intent was unavailable, but each side proffered an insurance expert who testified to what the terms must have meant in light of industry practice. The Reinsurer’s expert argued that the phrase “general excess loss or excess catastrophe reinsurance” was probably meant to prohibit the Reinsured from using quota share treaty reinsurance and to permit only the use of additional “excess loss” or “excess catastrophe” cover. Reinsured’s expert took the opposite view of the policy language and explained that (1) industry custom long has permitted treaty reinsurance on a risk insured by a facultative certificate absent unequivocal language to the contrary; (2) because the facultative certificate only imposed a net retention requirement “on the identical subject matter and risk and in identically the same proportion,” it did not preclude the use of a qualitatively different kind of additional coverage such as quota share treaty insurance; and (3) while the contract was ambiguous, it probably was meant to authorize “general” as well as “excess of loss” reinsurance - in which case the use of quota share treaty reinsurance would have been permissible without triggering a reduction in coverage. The district court found this latter opinion to be a more credible interpretation of the relevant language, emphasizing the expert’s more extensive experience in the reinsurance industry, his testimony’s consistency on direct and cross-examination, and his more comprehensive reasoning. The Court of Appeals found no basis to reverse this conclusion. Nonetheless, this decision demonstrates the importance of well written policy language in the warranty context, as well as others.

Similarly, in Penn Re, Inc. v. Stonewall Ins. Co., 708 F.Supp. 123 (E.D. N.C., Dec. 16, 1988) and Stonewall Ins. Co. v. Fortress Reinsurers Managers, Inc., 83 N.C.App. 263, 350 S.E.2d 131 (N.C. App., Nov. 18, 1986), the court reviewing the same facts noted how the Reinsured had violated its warranty (deemed a condition precedent)

where a facultative reinsurance certificate with a net retention warranty clause required retention of $500,000 of the risk for “its own account.” The Reinsured asserted that the clause was susceptible to interpretations other than a literal promise that it would not cede any portion of this sum to another carrier; that it was understood as a custom and practice in the reinsurance industry that the term, “for its own account,” permits the reinsurance of the retention by treaty reinsurance; and that the cession of $450,000 of the stated retention to another Reinsurer had been accomplished by treaty reinsurance. The court noted that the warranty was a condition precedent to liability; that it had been breached by the purchase of other treaty reinsurance.

B. UNDERWRITING WARRANTIES “Warranties” can also be used in reinsurance agreements to limit a Reinsurer’s

exposure to certain types of losses that would otherwise be covered under the reinsurance agreement. This is done by having the Reinsured “warrant” the limited coverage scope or amounts of its underlying insurance policies.

In the recent decision, Princeton Ins. Co. v. Converium Reinsurance (North

America) Inc., 2009 WL 2915092 (3d Cir., September 14, 2009), summary judgment was granted to the Cedent and against the Reinsurer where a warranty in the reinsurance agreement purported to limit the Reinsurer's exposure from Employer Liability claims to set limits. The underlying insurance policy appeared to comply with the warranty provision on its face, but the limitation that it imposed was prohibited under New York's Insurance Law. The Cedent and Reinsurer were thus exposed to far more risk than anticipated. The appellate court held that the wording of the agreement in this warranty was ambiguous and vacated the trial court’s summary judgment ruling – leaving the matter to be decided as a factual issue of broader contract interpretation.

As in the Princeton Ins. Co. matter, other courts have held that if Reinsurers want

warranties or other assurances, they should be explicit as to their parameters. For example, in PXRE Reinsurance Co. v. Lumbermens Mut. Cas. Co., 330 F.Supp.2d 981 (N. D. Ill., Aug. 10, 2004), an Aggregate Excess of Loss Retrocessional Reinsurance Agreement contained a warranty negation clause that read in part:

This Stop Loss Cover … constitute the entire agreement between the parties … and supersede all prior and contemporaneous agreements, understandings, negotiations, and discussions, … and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into this Stop Loss Cover … except as specifically set forth or contemplated herein.

The court rejected the Retrocessionaire’s assertion that uberrimae fidae (“utmost good faith” responsibility) operated as a powerful public policy doctrine that trumped any express boundaries the parties elected to circumscribe their contractual relationship, and that certain false assurances had been made by the Retrocedent that should have negated

the retrocession. The court read the no warranties provision literally, and foreclosed any argument of implied warranty via “uberrimae fidae.” These and other such decisions demonstrate the important need to explicitly and clearly include all guarantees or warranties expected by parties into their reinsurance agreements.

IV. ALLOCATION

Any discussion as to allocation these days ties ever so closely into a discussion as to the “Follow the Fortunes” doctrine – as most of the recent cases of such reinsurance doctrine deal with post-settlement allocations. These require that the allocation must be reasonable, in good faith and within the coverage provided by the reinsurance agreement. V. “LEGALLY OBLIGATED TO PAY”

A Reinsurer's obligations under an agreement with respect to the amounts incurred by the Cedent in connection with the underlying loss are not always clear or easy to discern. Most reinsurance agreements contain a clause limiting exposure to underlying payments made that the Reinsured was “legally obligated to pay.” This is in contrast to explicit or implied “follow the settlement” provisions. Additionally, time-wise, when a Reinsurer may be held liable to make payments (when the Cedent becomes obligated to pay, or when the Cedent has actually made payment) remains unclear under the law. In The Tall Tree Ins. Co. v. Munich Re, 2008 WL 2950098 (N.D. Cal., July 29, 2008), a federal court in California held that it was premature to decide the validity of reinsurance claims until the reinsured carrier had paid a claim that its insured had submitted or may in the future submit, or until a determination is otherwise made that the reinsured carrier “is obligated to pay any such claim.” Otherwise, the Reinsurer would not be in a position to decide if the Reinsured had paid a claim in good faith. In American Motorists Ins. v. American Re, 2007 WL 4197427 (N.D.Cal., Nov. 21, 2007), after a court determined that a “follow the settlements” provision was not included in a reinsurance agreement (and would not be implied as well), it held that the Reinsured bore the burden of establishing that the underlying claim settlement was covered by its obligations under the underlying policy. While it acknowledged that the agreement unambiguously provided the Reinsured the right to settle claims, it held that a “triable question of fact exists regarding whether the … claim was covered by the [policy, and that] Plaintiff bears the burden of establishing that it was liable for the … claim based on the [underlying policy].” Similarly, in The American Ins. Co. v. American Re, 2006 WL 3412079 (N.D.Cal., Nov. 27, 2006), after a California federal court refused to read an implied

“follow the fortunes” or “follow the settlements” provision into a reinsurance agreement, the court found that American Re may assert defenses that would have been available to the Reinsurer against the insured at the time of settlement as it only agreed to reinsure for losses or damages which the Cedent was legally obligated to pay on the underlying insurance policies. As both of the underlying excess policies at issue provided insurance in excess of $25 million of underlying insurance, the court held that there would be no obligation to pay reinsurance on the excess policies if and until the underlying insurance policies were exhausted. The court also found that there was a genuine issue of material fact as to whether the Reinsured could have prevailed on the validity and scope of an asbestosis exclusion in its liability policy. In North River Ins. Co. v. Ace American Reinsurance Co., 361 F.3d 134 (2d Cir. 2004), the Reinsurer took an aggressive stance that the Reinsured’s' settlement of its obligations to its insured asbestos manufacturer took into consideration its “risk of loss,” outside and above its layers of coverage reinsured by this Reinsurer and therefore the settlement was outside the definition of loss that this Reinsured was “legally obligated to pay.” The court held that the Reinsured's allocation of settlement loss, as opposed to “risk of loss,” to Reinsurer was within definition of “loss” covered by reinsurance contract. The fact that the Reinsured had considered the risk of loss to layers of coverage above Reinsurer's layer in settling its obligations to its insured asbestos manufacturer for underlying claims against such insured did not impact on Reinsurer's obligation to indemnify Reinsured for actual loss incurred under reinsurance contract. There will always be tension between the concepts of “follow the fortunes” / “follow the settlements” and the provision that requires the Reinsurer to only indemnify for monies that the Reinsured was “legally obligated to pay.” It will always be resolved by a balancing of these issues based upon the wording of the agreements, the relationship between the parties, and the underlying facts and circumstances. VI. LATE NOTICE

There are a number of legal decisions that have addressed the material effect of untimely notice as to reinsurance claims. Some of the following recent cases shed light of the recent court trends as to such issue.

In AIU Ins. Co. v. TIG Ins. Co., 2008 WL 5062030 (S.D.N.Y., Nov. 25, 2008), the

court addressed the issue in the context of an attorney client waiver dispute. New York law has historically strictly construed timely notice provisions in (direct) insurance policies. The federal court here noted, though, that by contrast, in a reinsurance contract, a contractual duty to give prompt notice “is not a condition precedent to coverage absent clear language to the contrary.” This was a direct application of an earlier New York state court decision in Unigard Sec. Ins. Co. v. N. River Ins. Co., 79 N.Y.2d 576, 582, 594 N.E.2d 571, 574, 584 N.Y.S.2d 290, 293 (1992). The court held that the “prompt-notice” clause in the subject reinsurance contract was not a condition precedent because

there was no express language in the contract indicating the parties' intent that this clause operate as such.

In another recent decision from a New York federal court, Global Reinsurance

Corp. v. Argonaut Ins. Co., 548 F.Supp.2d 104 (S.D.N.Y., April 28, 2008) the court noted that under New York law a reinsurance company may only avoid its obligation to pay claims for which it received late notice (1) if there is an express provision in the treaty making timely notice a condition precedent or (2) it can demonstrate that it was prejudiced by such late notice. The court in Global Reinsurance found support for this in another classic Unigard Sec. Ins. Co. late notice precedent (Unigard Sec. Ins. Co., Inc. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993).

These recent New York decisions are a bit unique though, as this issue (prompt

notice to a Reinsurer) has been very poorly developed. In fact, a recent federal court decision out of Florida, Employer Reinsurance Corp. v. Laurier Indem. Co., 2007 WL 1831775 (M.D. Fla., June 25, 2007) noted that “Georgia reinsurance law is practically non-existent with regard to the issue of timeliness of notice.” The court went on to review the issue by relying almost entirely on Georgia law in the context of excess insurance policies and notice provisions therein. The language of the subject notice provision controlled the decision, as it required the Reinsured to give prompt notice when “in the judgment of the [Reinsured],” it might result in a claim for indemnity under the reinsurance agreement. In turn, under this policy wording the time of notice was a subjective question of judgment and the Reinsured was “deemed to have provided sufficient notice as long as it used due diligence and took appropriate steps to make an informed judgment regarding the nature and amount of the claim.”

Despite these New York decisions requiring wording as to “condition precedent”

status, or demonstrable prejudice, the court in Allstate Ins. Co. v. Employers Reinsurance Corp., 441 F.Supp.2d 865 (N.D. Ill., Mar. 18, 2005) viewed the issue differently. In the face of some extensive untimely notice as to many reinsurance claims arising from underlying PIP claims, the court held that the law in Illinois is clear that a notice requirement, such as the one contained in the subject reinsurance treaty, was in fact a condition precedent to coverage. Consequently, when the Reinsured failed to comply with the notice requirement, the Reinsurer could deny liability, regardless of whether it has been prejudiced by the delay. The court did note that the United State Court of Appeals for the Seventh Circuit had interpreted Illinois law to distinguish between notice clauses that required parties to give “prompt” or “immediate” notice, as in the subject reinsurance treaty here, and those that require parties to give notice “as soon as practicable,” or “reasonable” notice. In this regard, in cases where the contract between the parties requires only reasonable notice, prejudice was a factor to be considered in assessing the reasonableness of notice. The problem with the court’s analysis though is that it was convinced that the Reinsurer had in fact been prejudiced, so the legal banter as to criteria seems superfluous (“The prejudice in this case, however, is clear: with regard to the seven claims that Allstate failed to report until after the Treaty was implicated, ERC had no opportunity to build adequate reserves to pay these claims or plan for its financial obligations.”)

As with so many of these reinsurance issues, a great deal of the interpretation and application will depend on the wording of the agreement prompt notice language, as well as the nature of the underlying loss.

“Late Notice” Presentation Outline Prepared and Presented by Ben Gonson, Esquire Nicoletti Gonson Spinner & Owen, LLP 555 Fifth Avenue, 8th Floor, New York, NY 10017 (212) 730-7750 www.nicolettilaw.com 1. Prompt Notice. Prompt notice requirements are typically seen in all

Facultative Certificates and in most Excess of Loss Treaties. These permit Reinsurers to properly reserve, to adjust premiums, and to decide whether to associate in handling claims.

2. When is Notice Late? Prompt notice is typically required when the claim

appears likely to involve the reinsurance or when reserves set by the Cedent reach 50% of the retention. When a claim is likely to involve the reinsurance is sometimes viewed as a subjective test and sometimes as an objective one. The “promptness” of the notice is sometimes based upon specific types of injuries.

3. Prejudice. Under New York Law, a Reinsurer is required to show “tangible

economic injury” to prevail on Late Notice defense. In re Liquidation of Midland Ins. Co., 18 Misc.3d 1117(A), 856 N.Y.S.2d 498 (N.Y. Sup., Jan. 14, 2008); Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1068 (2d Cir.1993). Prejudice is required in almost every state that has similarly addressed the subject. Most courts agree, though, that prejudice would not be required if prompt notice had been clearly stated to form a condition precedent in the reinsurance agreement

4. What Amounts to “Prejudice”? a. Inability to associate in handling claims is probably not in and of itself enough

to prevail unless reinsurer can demonstrate that it has a practice of associating on claims handling and it would have made a difference if it had;

b. Retrocessionaire claiming late notice is probably not enough; c. Any “tangible economic injury” should suffice, including:

i. Economic injury due to low commutation amounts received from Retrocessionaires should suffice;

ii. Tax Ramifications; iii. Impact on Subsequent Renewals

5. “Bad Faith” Conduct May Act as Exception to Prejudice. “Bad faith” in

this context equates to “gross negligence” or “recklessness.” It may be met by a failure to implement routine controls to ensure notice. This raises the issue as to a Cedent’s guidelines regarding Prompt Notice. For example, if a Cedent uses a computer system, does it ensure that Reinsurers will receive timely notice (what if certain Reinsurers

require greater control in claim handling, such as pre-approval for settlements that could involve reinsurance coverage). These all become factors.

VII. RESCISSION

“Rescission” Presentation Outline Prepared and Presented by Ben Gonson, Esquire Nicoletti Gonson Spinner & Owen, LLP 555 Fifth Avenue, 8th Floor, New York, NY 10017 (212) 730-7750 www.nicolettilaw.com

1. Elements of Rescission. A Reinsurer must prove: (1) a non-disclosure or

misrepresentation of fact(s) occurred (innocent or intentional); (2) the non-disclosed or misrepresented fact(s) was material; and (3) it justifiably relied on the non-disclosed or misrepresented facts. 2. Duty of Utmost Good Faith. This duty requires Cedent to disclose all facts that materially affect the risk of which it is aware, and of which the Reinsurer has no reason to be aware. If the Cedent is aware of facts that would influence decision of the Reinsurer to accept the risk, those facts must be disclosed. There is no duty to disclose standard terms of which Reinsurer should be aware. If material facts have been provided but they are unclear, the duty probably falls on the Reinsurer to ask further questions.

3. Materiality. Facts are “material” if the Reinsurer either would not have issued the policy or would have charged a higher premium. This is an objective standard; that being whether a reasonable Cedent should have believed the fact to be material to the Reinsurer. If a Cedent is on notice that a Reinsurer considers certain information important, those facts arguably become per se “material.”

4. Justifiable Reliance. A Reinsurer must show that it relied upon the misrepresentation or non-disclosure in accepting the risk, and that such reliance was reasonable. Reliance depends upon a number of factors, including the parties’ past dealings, their relative sophistication and the avenues available for the Reinsurer to discover or know the truth.

5. Waiver or Ratification of Right to Rescind. A renewal of the contract with knowledge of the prior non-disclosure or misrepresentation will usually operate as a waiver. “Ratification” occurs when a party accepts benefits flowing from a contract, or remains silent and/or acquiesces in a contract, for any considerable length of time after having an opportunity to void the contract. Delay in rescinding probably will not in and of itself constitute “ratification” if the Reinsurer engaged in reasonable investigation and/or did not have full knowledge of true material facts. Prejudice to the Cedent from such a delay could be a factor, especially in arbitration.

VIII. FOLLOW THE SETTLEMENTS

“Follow the Settlements” Presentation Outline Prepared and Presented by Jessica Pardi, Esquire Morris, Manning & Martin, LLP 1600 Atlanta Financial Center, 3343 Peachtree Rd., NE Atlanta, GA 30326-1044 404.504.7662 [email protected] www.mmmlaw.com

A. Generally The “Follow the Settlements” doctrine is a contractual obligation by a reinsurer to

indemnify a reinsured for claim payments or settlements made to its underlying insured provided the payment is not fraudulent, made in bad faith or otherwise ex gratia. This principle is meant to be narrower in scope than “Follow the Fortunes.” The purposes of the “Follow the Settlements” doctrine are: (1) to prevent second-guessing by the reinsurer; (2) to avoid re-litigation of coverage disputes; and (3) to promote good faith settlements.

A simple example of a clause enunciating such doctrine in a reinsurance agreement is: “Reinsurer agrees to abide by the loss settlements of the Reinsured.” To this may be added a notice provision mandating that the reinsured notify the reinsurer of claims to which the reinsurance applies (or may apply or likely will apply) and an opportunity for the reinsurer to associate in the defense and/or settlement of the underlying claim (typically at the reinsurer’s expense).

Similarly, the “Honorable Undertaking” clause in arbitration agreements may also contain language regarding follow the settlements such as the following: “The Treaty(ies) shall be construed as an honorable undertaking between the parties hereto, not to be defeated by technical legal constructions. It is the intention of the Treaty(ies) that the fortunes of the Reinsurer shall follow the fortunes of the Reinsured.” B. Implied “Follow the Settlements” in Reinsurance Agreements

A number of reported decisions have addressed whether or not the “follow the settlements” doctrine is implied in all reinsurance agreements.

In International Surplus Lines Ins. Co. v. Certain Underwriters & Underwriting

Syndicates at Lloyd’s of London, 868 F.Supp. 917 (S.D. Ohio 1994), the court held that the “follow the settlements” doctrine was implied into all reinsurance contracts. The court found that it was implicit because it was necessary to preserve the cedent-reinsurer relationship, and to maximize coverage. Shortly thereafter, the court in Aetna Cas. & Surety Co. v. Home Ins. Co., 882 F.Supp. 1328 (S.D.N.Y. 1995) found that “follow the

settlements” was implied in a reinsurance contract based upon parol evidence as to custom and practice in the industry.

Eight years later, the United States Court of Appeals for the Second Circuit, in British Int’l. Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78 (2d Cir. 2003), strictly limited “custom and usage” parol evidence in such instances (requiring that only evidence establishing that the allegedly implied provision was fixed and invariable throughout the entire industry in question). This strict evidentiary standard precluded the evidence employed in Aetna v. Home, and “follow the fortunes” (in that instance) was not implied into the agreement.

The majority of courts no longer imply “follow the settlements” into reinsurance contracts. See, e.g., The Am. Ins. Co. v. Am. Re-Ins. Co., 2006 U.S. Dist. LEXIS 95801 (N.D. Cal., Nov. 27, 2006) (tracing the history of the implication of “follow the settlements” and refusing to do so); Employer Reins. Corp. v. Laurier Indem. Co., 2007 U.S. Dist. LEXIS 45670 (M.D. Fla., June 25, 2007) (absence of “follow the settlements” clause does not create ambiguity permitting parol evidence regarding custom and usage).

C. Avoiding “Following the Settlements” of the Cedent “Follow the settlements” provisions generally do not apply in the following

instances: 1. Fraud; 2. Bad Faith, including “manifest manipulation” of allocations and improper

claims handling requiring at least gross negligence or recklessness; 3. Ex gratia payments; and 4. Differences of scope between the underlying insurance and the reinsurance

coverage, i.e., it is not “back to back.” The agreement’s “governing law” clause can have a significant impact on this issue.

D. Allocation

“Allocation” is the assignment of losses by an insurer to particular policy periods, categories of losses and/or numbers of occurrences. The most oft-cited decision applying “follow the settlements” to an underlying carrier’s allocations is Commercial Union Ins. Co. v. Seven Provinces Ins. Co., Ltd., 9 F.Supp. 2d 49 (D. Mass. 1998) aff’d 217 F.3d 33 (1st Cir. 2000) (“follow the settlements” requires reinsurer to follow its reinsured’s good faith and reasonable allocation of settlement dollars between different policies and sites). The court noted that the reinsurer “attempt[ed] to avoid the effect of the ‘follow the settlements’ doctrine by arguing that what it is challenging is the good faith [basis for] the allocation, rather than of the settlement. This is a distinction without a difference. . . .”

Seven Provinces was followed by two cases involving large payments to Owens Corning Fiberglas arising from asbestos liabilities. In North River Ins. Co. v. ACE Am. Reins. Co., 2002 U.S. Dist. LEXIS 5536 (S.D.N.Y. Mar. 29, 2002) aff’d in part, vacated

in part and remanded by 361 F.3d 134 (2d Cir. 2004) (reinsurers not allowed to second-guess allocations among policies and layers). Similarly, in Travelers Cas. & Sur. Co. v. Gerling Global Reins. Corp. of Am., 285 F.Supp. 2d 200 (D. Conn. 2003) rev’d 419 F.3d 181 (2nd Cir. 2005), the court also held that the reinsurer was obligated to accept and abide by the reinsured’s underlying determination as to the number of occurrences even though the number was not determined as part of its settlement with the underlying insured.

E. Treatment of Allocations under Facultative vs. Treaty Reinsurance

Facultative reinsurance is often comprised of only a short, standardized form with coverage terms following the underlying policy. In such context a Cedent’s allocations generally must be followed if they are reasonable, made in good faith, and the coverage is arguably within the policy. Conversely, treaty reinsurance usually involves a detailed contract with its own coverage terms pertaining to numerous and varied underlying policies, and the treaty’s terms often govern whether the allocation must be followed.

1. Facultative Reinsurance

Some courts reviewing facultative reinsurance contracts have created a high standard for a reinsurer to challenge a cedent’s settlement allocation. See, e.g., National Union Fire Ins. Co. v. Am. Reins. Co., 441 F.Supp. 2d 646 (S.D.N.Y. 2006) (indifference to proper allocation does not rise to necessary showing of “extraordinary bad faith”); Suter v. Gen. Acc. Ins. Co., 2006 U.S. Dist. LEXIS 51853 (D.N.J. July 17, 2006) vacated by stipulation in Goldman v. General Acc. Ins. Co., 2007 U.S. Dist. LEXIS 70406 (D.N.J. May 24, 2007) (bad faith in this context must amount to showing of gross negligence, recklessness or that settlement was not even arguably within the scope of reinsurance coverage).

The decision of the court in Allstate Ins. Co. v. Am. Home Assurance Co., 837

N.Y.S. 2d 138 (N.Y. App. Div. 2007) was far more favorable to reinsurers, who were not required by the court to follow reinsurance loss allocations that were unreasonable. The court held that although precedents have unequivocally held post-settlement allocations are binding even in the face of “an inconsistency between that allocation and the [Reinsured’s] pre-settlement assessments of risk,” such doctrine applies only “as long as the allocation meets the typical ‘follow the settlements’ requirements, i.e., is in good faith, reasonable, and within the applicable policies.” In Allstate, unlike North River, supra, the reinsured aggressively asserted the maximum number of occurrences of loss at each site to minimize its pre-settlement allocation of loss with its insured and then completely changed its position and asserted a one-occurrence-per-site allocation in post-settlement allocations with its reinsurer.

2. Treaty Reinsurance

“Follow the Settlements,” as applied to allocations under treaty insurance,

typically relies on analysis of the terms of the treaty.

In Travelers Cas. & Sur. Co. v. Lloyd’s, 760 N.E.2d 319 (N.Y. 2001), the

Supreme Court of New York held: “While a follow the fortunes clause in most reinsurance agreements leaves Reinsurers little room to dispute the Reinsured’s conduct in the case, we agree with the rationale of the . . . Second Circuit that such a clause does not alter the terms or override the language of reinsurance policies.”

The court continued: “To hold that these ‘follow the fortunes’ clauses supplant the definition of ‘disaster and/or casualty’ in the reinsurance treaties and allow Travelers to recover under its single allocation theory would effectively negate the phrase. The practical result of such an application would be that a reinsurance contract interpreted under New York law that contains a ‘follow the fortunes’ clause would bind a Reinsurer to indemnify a Reinsured whenever it paid a claim, regardless of the contractual language defining loss.” Travelers Cas. & Sur. Co. v. Lloyd’s, 760 N.E.2d 319 (N.Y. 2001); see also Hartford Acc. & Indem. Co. v. ACE, 2005 Conn. Super. LEXIS 3576 (Dec. 14, 2005).

F. Recent Developments

- An insurer cannot use a declaratory judgment action to test the application of “follow the settlements” prior to paying a claim. The Tall Tree Ins. Co. v. Munich Reins. Am., Inc., 2008 U.S. Dist. LEXIS 60499 (N.D. Cal. July 29, 2008).

- Commutations and contingent liabilities allocated to a reinsurer based upon actuarial studies are losses covered under the reinsurance treaties. Global Reins. Corp. of Am. v. Argonaut Ins. Co., 2009 U.S. Dist. LEXIS 37460 (S.D.N.Y. March 23, 2009).

- “Follow the fortunes” applies to only reinsurance contracts. Idaho Counties Risk Mgmt Program Underwriters v. Northland Ins. Cos., 205 P.3d 1220 (Idaho 2009).

- Differences in governing law between and among insurance and reinsurance contracts may result in paid claims for which there is no reinsurance despite a “follow the settlements” clause. Wasa v. Lexington [2009] UKL 40 (July 30, 2009).

- “Follow the settlements” cannot be used to expand reinsurance coverage to reimbursements for losses arising from “renewals” of underlying policies beyond the scope of the reinsurance contract (despite risk of such exposure to the underlying carrier). Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., Slip Copy, 2010 U.S. Dist. LEXIS 426 (D.Conn., January 6, 2010).

Kenneth Levine, Esquire, Moderator Nelson Levine de Luca & Horst 518 Township Line Rd., Ste 300 Blue Bell, PA 19422 215.358.5170 www.nldhlaw.com Jessica Pardi, Esquire Morris, Manning & Martin, LLP 1600 Atlanta Financial Center, 3343 Peachtree Rd., NE Atlanta, GA 30326-1044 404.504.7662 [email protected] www.mmmlaw.com Ben Gonson, Esquire Nicoletti Gonson Spinner & Owen, LLP 555 Fifth Avenue, 8th Floor New York, NY 10017 (212) 730-7750 www.nicolettilaw.com February 9, 2010

Presented by:Richard Hershman, Senior Managing Director, Leader of Insurance Services, FTI Consulting, Inc., New York

John O’Connor, Senior Vice President, Head of Claims, Endurance Reinsurance of America, New York

Reinsurance Audits –

A Cedent and Reinsurer View

February 9, 2010

Audit “Triggers”

Why are audits conducted?

2

Audit “Triggers”

3

Routine or ongoing relationship audits

Disputes

Breach of representations (e.g., lines of business, years covered, writings volume)

Reinsurance coverage

Accuracy of cessions

Transactions

Commutations

Portfolio transfers

Acquisitions

Accounting audits

In the course of an annual financial statement audit

Accounting compliance (e.g., FAS 113 -

risk transfer)

Regulatory examinations (i.e., SEC finite risk)

Parties Involved in an Audit

4

What parties/entities are involved in an audit?

Parties Involved in an Audit

5

Internal parties (e.g., internal audit, reinsurance claims audit specialists)

Reinsurers party to the agreement (e.g., joint audits)

Regulators (e.g., state examinations)

External consultants (e.g., reinsurance audit specialists, public accounting firms*)

*Note: CPAs are required to adhere to the audit requirements set

forth by the AICPA. One resource specific to insurance companies is the ‘AICPA Audit and Accounting Guide for Property and Liability Insurance Entities.’

Additionally, the SOP titled ‘Auditing Property and Liability Reinsurance’

(1982, AICPA Reinsurance Auditing and Accounting Task Force ), provides further guidance.

Audit Areas

6

What are the different types of audits?

Audit Areas

7

Underwriting audit

To ensure the cedent is abiding by represented underwriting guidelines.

Claims audit

To verify that the cedent is properly and accurately reporting claims.

Collateral audit

To ensure the cedent has sufficient assets that are segregated as or are available for collateral.

Full contract audit (includes all areas above)

Case specific audits

The Access to Records Clause

8

What are common issues related to obtaining access to a cedent’s records?


9

“The Reinsurer or its designated representatives shall have free access at any reasonable time to all records of the Company which pertain in any way to this reinsurance.”

“The Reinsurer shall be afforded the opportunity, at its own expense, to appoint a duly accredited representative of its own choice to assess the Company’s claims and claims procedures and to report to the Reinsurer the results of such review accordingly.”

(Brokers and Reinsurance Markets Association)


10

Purpose:

To identify unreported losses and verify the accuracy of the cedent’s reserves.

To ensure that the cedent is ceding losses and calculating reinsurance premium in accordance with the reinsurance agreement.

To assess the cedent’s practices and competence in terms of underwriting, claims handling and reporting.


11

This clause is one of the most important contract rights the reinsurer has in a ceding agreement.

Industry debate is ongoing over what level of access reinsurer should have to the cedant’s privileged files.

Vague clauses may lead to disagreements between the cedent and reinsurer in the future.

Cedent and reinsurer should work to set detailed terms within the contract to avoid future disputes.

Also may consider including a provision for an independent third party to make all decisions if the parties disagree.

Focus Point: The Claims Audit Process

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A walk-through of the claims audit process and components.

Claims Audits -

Overview

13

A significant portion of the Claims Department’s time is spent conducting on-site audits of potential or existing clients. Claims audits support underwriting, actuarial and corporate goals through the meaningful review and analysis of ceding company claim operations and files. In conjunction with audits performed

by the Underwriting and Actuarial Departments, the claims audit enables the Company to evaluate our exposures in a more complete manner.

Claims Audits -

Overview

14

Proper evaluation of reported claims and the validity of their reported reserves is crucial to the continued success of the reinsurer. Identifying potential unreported claims exposures and establishing additional case reserves (ACR’s), on both reported and unreported claims if necessary, is fundamental to quality claim management. Proper auditing provides numerous insights into the claims-related risks that might be present under a reinsurance agreement. Claim audits continue to be a key component in the underwriting decision process.

Audit Protocol

15

Audits are typically initiated in three ways:

Directly from the underwriter

Broker –

Notification of a pre-scheduled group audit of the reinsurers

Claims Department of reinsurer

Types of Audits:

Pre Quote

Existing Client –

IBNR / ACR Review

Run-off

Schedule of Audits:

Plan early in year

Leave room in schedule for Pre Quote / Due Diligence reviews

Audits in Fourth Quarter?

Audit Guidelines

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Proper management of the claims audit process will reflect adherence to the following basic standards:

Regular review of your claims database

and underwriting

information in addition to discussions with underwriters and actuaries to assure the review of all necessary accounts start at year-end with account review by staff.

Timely scheduling of claim reviews

to provide information in

advance of renewals.

Audit Guidelines

17

Proper management of the claims audit process will reflect adherence to the following basic standards:

Early contact with the broker and ceding company

for detailed

loss runs to assure the availability of a meaningful sample of claim files for review at the audit. The requested information in a loss run should consider factors including the type of treaty (Quota Share, Excess of Loss), the treaty attachment point, type of claims covered under the treaty, and unreported losses below the retention to capture unreported exposures. In addition, on pre-quote reviews and treaties with a short period of company participation, the loss run request should include a request for claims predating the reinsurer’s participation to evaluate reserve and handling procedures on more developed claim files.

Audit Preparation

18

Pre audit preparation

is essential to maximize the effectiveness of the

claims audit. The loss run should be reviewed to ensure that a record of notice is obtained on all claims falling within treaty reporting, and that the Company is current on ceded reserves. If a record of notice does not exist for claims that should have been reported to reinsurers, these claim files should be reviewed at the claims audit and it should be requested that these claims be reported to reinsurers during the claims audit. If the loss run reflects ceded reserve adjustments, these claim files should

be

reviewed at the claims audit and the ceded reserves should be adjusted after the amount is verified.

Audit Preparation

19

Proper claims file sample selection

is essential to maximize the

effectiveness of the claims audit. The selection of claim files on excess of loss treaties should include both reported and unreported claims. Review of reported claims should be limited to those files that are identified as requiring more information to fully assess Company exposure. There is no need to review a large number of reported claims that contain

sufficient information for us to fully assess reinsurer exposure

when the

claims notice is received through the broker. The focus of the file selection should be on identifying unreported exposures.

File Selection

20

The selection of claims for review on quota share business

should

consider different factors than the selection on excess of loss business. Since most quota share business attaches at dollar one, a broad cross section of claims reserved at various levels must be selected for review. The handling of more frequent, low-reserve losses on a quota share contract can make or break account profitability. In addition, it is important to ensure that bordereau reports capture subrogation and salvage on lines of business where applicable. On both excess of loss and quota share business where the company does not have a long history of participation, the claims files selection for the audit should include claims predating reinsurer participation to assure an appropriate reserve and handling evaluation on more developed claim files.

Points of Discussion

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Discussions at the review with senior claims management should take place to determine the claims handling and reserving philosophy with testing of those areas during the review. The reserving discussion should include the ceding company IBNR reserving philosophy as well as whether there are any case or issue specific IBNR reserves that could effect the reserve adequacy assessment.

Some questions may be prepared prior to the audit and sent to management. It may also sometimes be useful to request broker assistance in getting more ‘standard’

information.

Points of Discussion

22

Have a plan and know your issues and concerns before meeting with management. For example, don’t ask about reserve philosophy until after you have reviewed files.

Make sure you receive answers to all questions and items of concern.

Spend time with senior claims staff to learn how they manage their business and sit in the department, if possible.

Ask what information/reports they

use; what keeps them up at night?

Remember, the claims audit is not a simple grading system of your clients. The principal purpose of the audit is to build market intelligence.

Claim Audit Typical Standards

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EVALUATION OF MINIMUM STANDARDS GRADEClaim Management & StaffingCoverage Analysis & ApplicationClaim InvestigationReserving AdequacyClaim Settlement/ResolutionSubrogation/Contribution/RecoveryMgmt. of External Resources-Vendors/Litigation ExpenseSystems & ProtocolsReinsurance Interface/ReportingLiability Mgmt./UW Interface/Quality AssuranceOVERALL

GRADES CLAIM AUDIT GRADING KEY

4.0 Outstanding – This rating (rarely used) denotes something truly unique, warranting adoption by Company

3.0 Above Average – Denotes execution levels better than majority of companies; may also include better than average procedures.

2.0 Average – Most operations will receive this rating if both the procedures and the execution provide sufficient information for Company to perform as expected.

1.0 Below Average – Procedures at a level below what is necessary

0 Unacceptable – Company should consider business decision

Lessons Learned

24

An overview of real-life audit examples.

Lessons Learned

25

In an arbitrated dispute, the insurer was accused of misrepresentation, omission and breach of certain excess of loss contracts as it relates to the insurer’s retention

Identified methodologies to calculate a credit due back to the excess of loss reinsurer based on allegations

Analyzed available data and performed calculations to determine the credit

Prepared expert testimony of potential credit due back to excess of loss reinsurer

Lessons Learned

26

Acted as a Special Audit Master in a dispute between cedent

and assuming reinsurer.

Authority from panel to rule on audit procedures and scope

Audit conducted by outside reinsurance audit firm

Audit expedited and was ready for panel

JOINT DEFENSES, COMMON INTERESTS, AND ADVERSE INTERESTS

AMONG INSURERS, POLICYHOLDERS, AND CLAIMANTS

Stephen A. Weisbrod

Gilbert LLP

February 2, 2010

The relationships between insurers and policyholders do not always fit neatly into the

categories that most courts employ when sorting out who is or is not entitled to assert a common

interest or joint defense privilege. As a result, disputes often arise over the existence, nature, and

treatment of privileges that attach to communications between insurers and insureds. On the one

hand, in the context of insurance coverage for third-party liabilities, insurers and insureds

typically recognize that they share a common interest in defeating claims asserted against the

insureds by third parties. On the other hand, insurers and insureds may be adverse with respect

to coverage issues. The insurers and insureds typically pursue their common interests and their

adverse interests simultaneously, sometimes in separate proceedings, sometimes in the same

proceedings. And when coverage disputes arise, an insured may be aligned with the very

plaintiffs who are suing it. This article provides a general discussion of how some courts and

counsel have dealt with these difficult privilege issues.

Elements of Common Interest and Joint Defense Privileges

When analyzing questions relating to the common interest and joint defense privileges,

starting with basic principles can be helpful.

First, communications between an attorney and client are privileged, meaning that they

generally cannot be discovered by third parties; similarly, attorney work product that reflects an

1146395.3

attorney’s mental impressions generally cannot be discovered by third parties. See Hickman v.

Taylor, 329 U.S. 495 (1947).

Second, when an attorney or client knowingly divulges an attorney-client communication

to someone outside the attorney-client relationship, the privilege is generally waived. See, e.g.,

People v. Harris, 456 N.Y.S.2d 694, 697 (1982); Eisic Trading Corp. v. Somerset Marine, Inc.,

622 N.Y.S.2d 728, 728-29 (App. Div. 1st Dep’t 1995); Ciba-Geigy Corp. v. Sandoz Ltd., 916 F.

Supp. 404, 411 (D.N.J. 1995); In re Grand Jury Subpoena Served Upon Horowitz, 482 F.2d 72,

81 (2d Cir. 1973).

In an important sense, the common interest and joint defense privileges are not really

“privileges” at all. They are exceptions to the rule that ordinarily would require courts to find

waivers of privilege due to the sharing of communications with third parties. The common

interest and joint defense privileges enable a party to share privileged information with another

party that shares the same interests in litigation without waiving privilege. While some courts

and other observers have attempted to describe analytical differences between the common

interest and joint defense privileges, this article assumes, as many courts do, that the two are

largely interchangeable; the common interest privilege applies when two or more parties are

jointly participating in litigation, or jointly preparing to participate in potential litigation, and the

joint defense privilege applies when those parties are, or potentially would be, codefendants in

the litigation.

Different courts have developed different tests for deciding whether the common interest

or joint defense privileges apply. Unfortunately, some of the tests suffer from a rather circular

quality, leaving significant questions unanswered. For example, in one frequently cited decision,

In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120 (3d Cir. 1986), the Third

2

Circuit held that, “[i]n order to establish the existence of a joint defense privilege, the party

asserting the privilege must show that (1) the communications were made in the course of a joint

defense effort, (2) the statements were designed to further the effort, and (3) the privilege has not

been waived.” Id. at 126 (citation omitted). See also U.S. v. Schwimmer, 892 F.2d 237, 243 (2d

Cir. 1989); U.S. v. Bay State Ambulance & Hosp. Rental Serv., 874 F.2d 20, 28 (1st Cir. 1989);

Intex Rec. Corp. v. Team Worldwide Corp., 471 F. Supp. 2d 11, 15-16 (D.D.C. 2007);

Lectrolarm Custom Sys. v. Pelco Sales, Inc., 212 F.R.D. 567, 572 (E.D. Cal. 2002); Bairnco

Corp. Sec. Litig. v. Keene Corp., 148 F.R.D. 91, 102 (S.D.N.Y. 1993). While these judicial

precedents are helpful, when two parties are actually in the midst of communicating with each

other about their litigation strategies, they may have difficulty determining whether their

activities rise to the level of a “joint” litigation effort under these standards, or whether relevant

privileges have otherwise been “waived.”

Nature of the “Common” or “Joint” Interests

Plainly, for the common interest or joint defense privileges to apply, the parties engaging

in the allegedly privileged communications must have some sort of shared objective. Courts

have formulated different standards regarding the degree of similarity between the parties’

interests. Some courts have adopted language from Duplan Corp. v. Deering Milliken, Inc., 397

F. Supp. 1146, 1172 (D.S.C. 1974), which held that “the key consideration is that the nature of

the interest be identical, not similar, and be legal, not solely commercial.” Other courts have said

that “nearly identical” interests are sufficient. See U.S. v. Doe, 429 F.3d 450, 453 (3d Cir. 2005)

(“The common interest privilege allows for two clients to discuss their affairs with a lawyer,

protected by the attorney-client privilege, so long as they have an ‘identical (or nearly identical)

3

legal interest as opposed to a merely similar interest.’”) (quoting FDIC v. Ogden Corp., 202 F.3d

454, 461 (1st Cir. 2000)).

In In re Teleglobe Communications Corp., 493 F.3d 345 (3d Cir. 2007), the Third Circuit

suggested that the strictest version of the standard may be warranted when two or more clients

retain a single attorney, but a somewhat more relaxed standard may be appropriate when each

client is represented by separate counsel and those separate counsel each independently decide to

share information:

In particular, because co-clients agree to share all information related to the matter of common interest with each other and to employ the same attorney, their legal interests must be identical (or nearly so) in order that an attorney can represent them all with the candor, vigor, and loyalty that our ethics require. . . . In the community-of-interest [or common interest] context, on the other hand, because the clients have separate attorneys, courts can afford to relax the degree to which clients’ interests must converge without worrying that their attorneys’ ability to represent them zealously and single-mindedly will suffer.

Id. at 366 (internal citation omitted).

Another frequently disputed issue is whether the parties’ shared interests are “legal” or

merely “commercial.” See, e.g., SR Int’l Bus. Ins., Co. LTD. v. World Trade Ctr. Props., LLC,

No. 01 Civ. 9291(JSM), 2002 WL 1334821, at *4 (S.D.N.Y. June 19, 2002) (“a business strategy

which happens to include a concern about litigation is not a ground for invoking the common

interest rule”) (internal quotation omitted); In re Application of the Fed. Trade Commission for

an Order Compelling Avrett Free & Ginsberg to Comply with a Subpoena for Documentary

Material, No. M18-304(RJW), 2001 WL 396522, at *5 (S.D.N.Y. 2001) (holding that a business

strategy that includes a concern about litigation is not a basis for establishing a shared privilege).

To establish the applicability of a common interest privilege, therefore, it is important to

establish that the parties have not only a relationship that gives rise to a shared potential liability,

4

but also a common litigation objective that they are working cooperatively to achieve. See HSH

Nordbank AG N.Y. Branch v. Swerdlow, 259 F.R.D. 64, 73 (S.D.N.Y. 2009) (upholding

invocation of joint defense privilege where parties asserting privilege had common business

interests as well as common legal interests). Cf. Baxter Travenol Labs., Inc. v. Abbott Labs., No.

84 C 5103, 1987 WL 12919, at *2 (N.D. Ill. 1987) (noting the community of interest extends

only to the communications regarding the subject of the litigation, not to the communications

regarding the parties’ legal rights as between themselves).

In this regard, it is worth noting that many insurance companies attempt to protect

ordinary claims handling functions from scrutiny by using lawyers to perform them. Courts

consistently have held that an insurer’s use of a law firm to handle claims does not elevate

ordinary claims handling documents into attorney work product, and lawyers retained for such

purposes often are compelled to turn over the claims handling files that they prepare. See

Brooklyn Union Gas Co. v. American Home Assur. Co., 803 N.Y.S.2d 532, 534 (App. Div. 1st

Dep’t 2005) (holding that “[d]ocuments prepared in the ordinary course of an insurance

company’s investigation to determine whether to accept or reject coverage and to evaluate the

extent of a claimant’s loss are not privileged, and . . . . do not become privileged ‘merely because

an investigation was conducted by an attorney’”); Bombard v. Amica Mut. Ins. Co., 783

N.Y.S.2d 85, 86 (App. Div. 2d Dep’t. 2004) (holding that “[r]eports prepared by insurance

investigators, adjusters, or attorneys before the decision is made to pay or reject a claim are . . .

not privileged and are discoverable” because the “payment or rejection of claims is a part of the

regular business of an insurance company”); Amerisure Ins. Co. v. Laserage Tech. Corp., No.

96-cv-6313, 1998 WL 310750, at *1 (W.D.N.Y. Feb. 12, 1998) (noting that “to the extent that an

attorney acts as a claims adjuster, claims process supervisor, or claims investigation monitor, and

5

not as a legal advisor, the attorney-client privilege does not apply”); Arkwright Mut. Ins. Co. v.

Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. 90 Civ. 7811 (AGS), 1994 WL 510043, at *5

(S.D.N.Y. Sept. 16, 1994) (stating that an insurance company “may not insulate itself from

discovery by hiring an attorney to conduct ordinary claims investigation”); First Aviation Servs.,

Inc. v. Gulf Ins. Co., 205 F.R.D. 65, 69 (D. Conn. 2001) (holding that where the attorney acted as

a claims adjuster, the attorney was making a business decision and therefore all claim file

documents were ordered produced).

A related issue is whether the information purportedly subject to the joint defense

privilege was exchanged from client to client or from lawyer to lawyer. In Teleglobe

Communications, the Third Circuit suggested that communications between parties that bypass

the parties’ lawyers may not be privileged, even if the parties are part of the same “community of

interest.” Teleglobe Communications, 493 F.3d at 364. But see HSH Nordbank, 259 F.R.D. at

72 (holding that communications between one party’s counsel and business personnel from

another party fell “squarely within the common interest doctrine”). This point is important for

policyholders and insurers to keep in mind, and some modifications to commonplace insurance

industry and policyholder behaviors may be needed. Risk managers and claims handlers often

exchange information with little or no supervision from counsel, and in many cases they

communicate through insurance brokers. Such seemingly innocuous communications –

especially those in which third-party brokers participate – may put privileges at risk.

Written vs. Oral Agreements

Courts have held that both written and oral agreements to enter into a joint defense

arrangement are acceptable, but some courts prefer written agreements. See Lugosch v. Congel,

219 F.R.D. 220, 237 (N.D.N.Y. 2003), rev’d on other grounds, 435 F.3d 110 (2d Cir. 2006) (“It

6

is obviously prudent . . . to have a joint defense memorialized in writing. Too often the vagaries

of an oral agreement cloud and pollute the true intent of the parties . . .”). The District of

Columbia District Court recently stated that a written agreement “is the most effective method”

of establishing an agreement, though the court also said “an oral agreement whose existence,

terms and scope are proved by the party asserting it, may provide a basis for the requisite

showing.” Intex Rec. Corp., 471 F. Supp. 2d at 16.

A sample common interest and confidentiality agreement is appended to this article.

Application of Common Interest and Joint Privilege Principles in the Insurance Context

Litigation over the nature and extent of the common interests shared by insurers and

insureds can arise in at least two very different contexts. In litigation between an insured and a

third party, the third party may seek access to communications exchanged between the insured

and the insurer, and the third party may attempt to prove that otherwise applicable privileges

have been waived. In litigation between an insured and an insurer, by contrast, the party seeking

discovery may acknowledge that the information is privileged, but nevertheless may argue that

discovery should be allowed because the party seeking it is within the privilege, and that

disclosure of the material therefore would not operate as a waiver.

An example of the first type of case was Lectrolarm, 212 F.R.D. 567. The court held that

an insured’s disclosure of confidential information to its insurer during the defense of a patent

and trademark infringement suit did not waive the attorney-client or work product privileges

because the insurer and insured shared a common interest. The defendant’s insurer was paying

for part of the defendant’s defense and, even though the insurer had reserved its rights to deny

coverage, the court found the interests of the insurer and insured to be sufficiently aligned as to

7

justify application of the common interest privilege. Another court reached a similar result in

American Special Risk Ins. Co. v. The Greyhound Dial Corp., No. 90 Civ. 2066, 1995 WL

442151, at *2 (S.D.N.Y. July 26, 1995), finding that communications between the insured and

insurer regarding the defense of the claim were privileged, even though communications about

their disagreements on coverage issues were not.

While most courts have been reluctant to allow third-party plaintiffs to discover

communications between insurer and insured, there are exceptions. In Aiena v. Olsen, 194

F.R.D. 134 (S.D.N.Y. 2000), for example, the court allowed such discovery, explaining:

To begin with, the communications from the individual defendants and their counsel at issue here were not intended to persuade the carrier to retain counsel to defend them in this action. As noted above, the individual defendants maintain that the carrier’s patent conflict obliges it merely to pay for a defense by counsel already selected and controlled by the individual defendants. In consequence, the Court finds that the individual defendants have failed to establish that their advocacy of their position to the carrier was intended either to obtain legal advice or to convey information regarding the claim for the use of potential future defense counsel. Their communications simply are not the stuff of attorney-client privilege, even given the scope of the privilege as applied to communications between insureds and their liability insurers.

Id. at 136.

The Aiena decision appears to be atypical and may not even reflect the dominant view in

the jurisdiction in which it was issued, but the decision is cause for concern. Perhaps the Aiena

holding can be explained as nothing more than the result of a failure by the insureds to describe

to the court the cooperative relationship between insureds and insurers under the terms of the

insurance policy at issue. Many liability policies – including most excess general liability

policies, most directors and officers liability policies, and many errors and omissions policies –

do not require the insurers to defend the insureds. Instead, the policies require the insureds to

8

defend themselves and require the insurers to pay defense costs, settlements, and judgments.

Although the insurers do not control the defense under such policies, the insurers usually retain

other defense-related rights, such as the rights to insist on cooperation from the insureds (or to

“associate in the defense” of the insureds), to review defense charges for reasonableness, and to

evaluate proposed settlements (and refuse to pay unreasonable settlements). Thus, while the

insurers that issue such policies do not actually defend the underlying claims, they remain

involved in the defense, and their interests in the conduct of that defense are usually aligned with

those of their insureds.

It is possible that, had the Aiena court been presented with a record that fully set forth all

of these considerations, it would have ruled differently. In any event, taken to its extreme, the

reasoning in Aiena arguably would force insureds to choose between preserving their privileges

or fulfilling the defense-related obligations that insurers may contend they owe under their

insurance policies. Alternatively, to the extent that insurers or courts acknowledge that the

policies do not require insureds to jeopardize their defenses by waiving privileges – and most

(but not all) insurers acknowledge this – such reasoning potentially would force insurers to

choose between issuing this type of liability coverage or accepting much less information than

they often receive when monitoring and evaluating underlying claims and proposed settlements.

The Lectrolarm, American Special Risk Ins. Co., and Aiena cases involved discovery

requests by parties that were strangers to the insurance contracts at issue. When the dispute

involves only insurers and insureds, a different dynamic is evident. A good illustration of this

second type of case is Bovis Lend Lease, LMB, Inc. v. Seasons Contracting Corp., No. 00 Civ.

9212(DF), 2002 WL 31729693 (S.D.N.Y. Dec. 5, 2002). In that case, an insurer sought access

to documents used by the insured’s counsel in defending a personal injury suit. The court

9

allowed the insurer to access documents created before the insurer had denied coverage because

the insurer’s interests were not adverse to the insured’s at that time. The court noted that “under

the common interest rule . . . , an insurer aligned in interest with its insured may generally have

access to the insured’s privileged communications without breach of privilege.” Id. at *14. See

also Layton v. Liberty Mut. Fire Ins. Co., 98 F.R.D. 457, 457-58 (E.D. Pa. 1983) (holding insurer

must give policyholder documents prepared by legal counsel retained by insurer).

While policyholders may be able to obtain certain documents in their insurers’ possession

under this rationale, and insurers may be able to obtain certain documents in their policyholders’

possession under this rationale, reinsurers may be too far removed from the defense of the claims

to employ the same discovery rationale. In North River Insurance Co. v. Columbia Casualty

Co., No. 90 Civ. 2518(MJL), 1995 WL 5792, at *4-5 (S.D.N.Y. Jan. 5, 1995), for example, an

insurance company brought an action against its reinsurer to recover defense costs arising out of

losses for asbestos-related litigation. During the course of discovery, the reinsurer sought certain

confidential documents from the insurer that had been prepared during an alternative dispute

resolution proceeding (“ADR”) that had taken place in the course of the underlying asbestos-

related litigation and had been shared by North River and the policyholder. The reinsurer

claimed that it was entitled to the documents, even though they were privileged, because it

shared common legal interests with the insurer with respect to the asbestos claims. The court

concluded that the insurer and reinsurer did share some common commercial interests, but it

concluded that there were insufficient common legal interests to warrant application of the

common interest privilege. The court noted that the insurer and reinsurer were not represented

by the same counsel; the reinsurer did not contribute to the insurer’s legal expenses; the reinsurer

did not exercise any control over the insurer’s legal expenses or conduct during the ADR

10

proceeding; and they had not coordinated their legal strategy in any way. The court also noted

that the insurers’ and reinsurers’ interests had diverged over the course of the litigation.

Similarly, in American Re-Ins. Co. v. U.S. Fid. & Guar. Co., 40 A.D.3d 486, 491 (N.Y. App.

Div. 2007), a reinsurer sought confidential documents pertaining to an insurer’s participation in

the settlement of an underlying action, arguing that it was entitled to view the documents

pursuant to the common interest doctrine. The Court held that a reinsurer and insurer do not

share common interests similar to an insurer-insured relationship, and denied the reinsurer’s

request. (Notwithstanding such precedents, most policyholders will authorize their insurers to

share defense information with the insurers’ reinsurers, in their capacities as such, to the extent

that appropriate safeguards are taken to ensure that the information is shared only with those

reinsurers that have essentially the same interest in the outcome of the underlying claims that the

policyholder and insurer have.)

Common Interests Shared by Policyholders and the Plaintiffs Who Sue Them

Although policyholders and the plaintiffs who sue them are adverse on liability issues,

they may be aligned on coverage issues, just as the policyholders and the insurers may be

adverse on coverage issues. Plaintiffs and defendants often agree that, to the extent liability is

established, the insurer should cover it. In certain proceedings – such as bankruptcy proceedings

or direct action proceedings – these types of common interests can create unusual joint litigation

efforts, as policyholders and plaintiffs may be united in fighting insurers on some coverage

issues.

In bankruptcy proceedings, debtors have a statutory duty to share with their creditors

information relating to the debtors’ assets, and several courts have recognized that the common

interest privilege applies to communications between debtors and official creditors committees in

11

bankruptcy cases. Accordingly, when the debtor has significant insurance assets, creditor

representatives may receive detailed information from debtors regarding confidential insurance

matters with no waiver of applicable privileges. (In some cases, the confidential information is

shared among debtors and counsel for official court-approved creditors committees, but the

information is not shared with individual creditors or the lawyers representing them on their

individual claims.)

One of the leading cases in the area of bankruptcy-related common interest privileges

was Kaiser Steel Corp. v. Frates, 84 B.R. 202 (Bankr. D. Colo. 1988), in which the court upheld

the common interest privilege between the debtor and the official creditors committee. In that

case, a creditors committee and a debtor were both plaintiffs in an action stemming from a

leveraged buyout. In preparation for the litigation, the committee hired an accounting firm to

analyze the buyout. The committee later shared the analysis with the debtor. One of the issues

before the court was whether the document remained privileged despite the Committee’s

disclosure of the document to the debtor. The court concluded that the privilege had not been

waived. The court explained that the “Committee and the Debtor have common interests”

insofar as each “has an obligation to seek to maximize the assets in the Debtor’s estate.” Id. at

205. The court elaborated:

The Committee’s role cannot be achieved in a vacuum. It must have access to the Debtor’s records. Further, in order to properly foster negotiations over reorganization plans, the Debtor must be able to provide information to the Committee free of the risk that the Committee may be forced to disgorge such records and information to adverse third parties without the opportunity of the Debtor to preserve, if appropriate, any objections it may have to such disclosures.

12

Id. at 206. See also In re Mortgage & Realty Trust, 212 B.R. 649, 653 (Bankr. C.D. Cal. 1997)

(discussing important role that official committees play in bankruptcy reorganizations and the

need to provide committees with the debtor’s confidential information); U.S. Bank Nat. Ass’n v.

U.S. Timberlands Klamath Falls, L.L.C., C.A. No. 112-N, 2005 Del. Ch. LEXIS 95, at *9 (Del.

Ch. June 9, 2005) (holding that although trustee and noteholders had competing interests prior

to filing of lawsuit against third party, their interests were aligned thereafter, rendering their

communications after the filing of the lawsuit privileged and not discoverable).

In recent years, bankruptcy courts presiding over asbestos bankruptcy cases have applied

these common interest privilege principles specifically in the context of communications,

including insurance-related communications, among debtors, creditors committees, and court-

appointed representatives of future asbestos claimants. See, e.g., In re Federal-Mogul Global,

Inc., et al., Case No. 01-10578 (JKF) (Bankr. D. Del.) (Transcript of Hearing, February 26,

2007) at 58-59 (copy available from the author); In re Burns & Roe Enterprises, Inc., No 00-

41610(RG) (Bankr. D. N.J.) (Transcript of Hearing, Dec. 18, 2006) at 36-68 (copy available

from the author). To the extent that some of the information sought by a creditors committee or

future claimants representative bears on the defense of underlying claims, courts may issue

protective orders that allow counsel for the committee or future claimants representative to

review the documents but preclude the sharing of the documents with tort claimants or attorneys

representing them in their tort claims. See, e.g., Burns & Roe (Non-Waiver and Protective

Order, April 9, 2007) (copy available from the author).

Of course, the full value of a policyholder’s insurance coverage cannot be realized if the

insurance contract is breached and the insurer is relieved of its obligation to pay. Virtually all

insurance policies include cooperation clauses and other clauses bearing on the handling of

13

claims. Accordingly, while there are situations in which a policyholder and the claimants suing

it have common interests, any parties wishing to take advantage of potentially available

insurance must take care to ensure that their communications do not cross the line from a

permissible sharing of information about the policyholder’s insurance assets (or permissible

sharing of litigation strategy for collecting on such assets) to a potentially prohibited breach of

the policyholder’s duty to cooperate in the handling of underlying claims. A cautious, case-by-

case analysis is required to determine what types of information may be safely shared and what

types of individuals or entities may safely receive it.

Special Issues Arising When the Policyholder Is a Law Firm

All of these issues become much more complicated when the policyholder is a law firm.

The law firm has ethical duties to preserve client confidences and secrets. Under Rule 1.6 of the

New York Rules of Professional Conduct, for example, a lawyer “shall not knowingly reveal

confidential information . . . or use such information to the disadvantage of a client or for the

advantage of the lawyer or a third person,” unless “the client gives informed consent” or some

other exception to the prohibition against disclosure applies. A lawyer “may reveal or use

confidential information to the extent that the lawyer reasonably believes necessary” to, among

other things, “defend the lawyer or the lawyer’s employees and associates against an accusation

of wrongful conduct,” or “comply with other law or court order.”

As a result, a law firm insured must take great care when providing notices to insurers or

sharing information about underlying claims that have been asserted against the firm or may be

asserted in the future. The law firm must take appropriate steps to preserve not only privileged

client confidences but also client “secrets” (i.e., confidential information that, while not

privileged, is still generally unknown to the public and relates to the firm’s representation of the

14

client). For example, if a client has not yet asserted a claim but the firm believes, based on

confidential client information, that the client may assert a claim in the future, and the relevant

insurance policies or insurance applications requires the firm to disclose potential claims, then

the firm may conclude that it should make the required disclosures without divulging the name

of the client. The firm also may conclude that it is precluded from disclosing the details of

certain events or communications. When formulating its strategy for complying simultaneously

with ethical duties to clients and contractual duties to insurers, the firm may need to consult with

ethics counsel as well as insurance counsel.

Conclusion

The common interest and joint defense privileges provide strong but somewhat murky

rationales for allowing insurers and insureds to share privileged claims handling information

without waiving privilege, and, at least in some circumstances, for allowing insureds and

claimants (or creditors committees) to share privileged coverage information without waiving

privilege.

15

SAMPLE COMMON INTEREST AND CONFIDENTIALITY AGREEMENT

This COMMON INTEREST AND CONFIDENTIALITY AGREEMENT (the

“Agreement”) is made as of [INSERT DATE], by and among the following parties (each a

“Party” and, collectively, “the Parties”):

1. Acme Corporation, on behalf of itself and its parents, subsidiaries, affiliated

companies, joint ventures, owners, officers, directors, members, partners, employees, agents,

representatives, successors, and assigns (collectively, the “Acme Entities”); and

2. Ajax Insurance Company, on behalf of itself and its parents, subsidiaries,

affiliated companies, joint ventures, owners, officers, directors, members, partners, employees,

agents, representatives, successors, and assigns (collectively, the “Insurers”).

RECITALS

WHEREAS:

A. The Insurers subscribed to or issued certain insurance policies under which

certain Acme Entities are insured (each a “Policy” and, collectively, the “Policies”).

B. Acme Entities have notified the Insurers of various claims and potential claims

that may be made against them that relate to or arise from alleged or actual [DESCRIBE

ALLEGED WRONGDOING] (collectively, the “Matters”).

C. The Acme Entities have requested and may in the future further request that the

Insurers provide insurance coverage under one or more of the Policies for defense costs and/or

liabilities relating to or arising from such claims and potential claims.

D. The Parties share common interests in minimizing the Acme Entities’ liabilities

and/or losses relating to or arising from the Matters. They have concluded that their common

16

interests are best served by acting jointly and cooperatively in certain circumstances to promote

those interests.

E. In furtherance of their common legal interests, the Parties have, at the direction

and with the participation of counsel, shared certain information, including documents, oral and

written communications, and legal strategy, related to the defense and resolution of the

aforementioned claims and potential claims, and/or related to other activities of the Acme

Entities relating to the Matters (such shared information being designated collectively as

“Protected Information”). The Parties expect to continue to share Protected Information from

time to time.

F. The Protected Information is non-public, confidential, sensitive, proprietary,

and/or privileged in nature.

G. The Parties wish to memorialize their understanding that all Protected Information

previously shared among them and all Protected Information to be shared among them in the

future will remain confidential and privileged to the extent permitted by law.

NOW THEREFORE, in consideration of the mutual promises contained herein and

intending to be legally bound, the Parties agree as follows:

1. Any Protected Information provided in the past or future by a Party to another

Party in connection with Matters and/or any claim or potential claim under the Policies related

thereto shall be deemed confidential and shall be protected, to the greatest extent permitted by

law, including under the common interest privilege, joint defense privilege, work product

privilege, attorney client privilege, and any other applicable right, privilege, protection or

immunity. To the extent any Protected Information is confidential or privileged, each Party

acknowledges that the disclosure of such Protected Information to another Party to this

17

Agreement in no way constitutes a waiver of confidentiality or any applicable right, privilege, or

immunity.

2. Subject to the other terms of this Agreement, each Party agrees that it will not

disclose Protected Information received from another Party to anyone except (a) employees of a

Party with responsibilities regarding Matters or responsibilities regarding the submission or

evaluation of claims by Acme Entities for reimbursement or coverage in connection with

Matters, (b) counsel rendering professional legal services to a Party in connection with Matters

or submission or evaluation of claims by Acme Entities for reimbursement or coverage in

connection with Matters, (c) personnel or experts acting under the supervision of such Party

employees or counsel, or (d) persons or entities to whom such disclosure is specifically

authorized by the Party from which the Protected Information was received.

3. The Parties agree that such Protected Information may be used solely: (1) in the

handling of Matters, (2) in connection with the submission, evaluation, or negotiation of Acme

Entities’ requests for coverage or reimbursement; or (3) in connection with the Insurers’ request

for reimbursement from reinsurers of amounts paid by to or on behalf of Acme Entities.

4. Nothing contained in this Agreement shall limit the right of any Party to disclose

any documents or information independently obtained by such Party or information originating

with such Party.

5. This Agreement shall not preclude any Party from seeking discovery, in any

proceeding from any other Party or anyone else, of information that would constitute Protected

Information if provided by another Party pursuant to this Agreement, nor shall this Agreement

preclude any Party that obtains such information through discovery from seeking to admit it in

any proceeding. Disclosure of Protected Information by a Party pursuant to this Agreement shall

18

not constitute a waiver by such Party of any objection it may have to the discoverability or

admissibility of any information in any proceeding.

6. The Insurers may disclose Protected Information received from another Party to

their reinsurers, solely in their capacities as such, provided that, before making such disclosure,

they take appropriate measures to ensure that such reinsurers will also treat the Protected

Information as privileged and confidential, and that such reinsurers will use the Protected

Information solely in connection with the Insurers’ request for reimbursement from its reinsurers

of amounts paid by Insurers to or on behalf of Acme Entities.

7. A Party may not disclose Protected Information received from another Party to an

expert without the written agreement of the Party that provided the Protected Information. If

Protected Information is provided to any expert, the expert must certify in writing to the counsel

providing the Protected Information that such expert agrees to be bound by the terms of this

Agreement.

8. A Party may disclose Protected Information obtained from another Party if the

disclosing Party is compelled to do so pursuant to court order, subpoena, or other valid legal

process, provided that such Party shall give written notice to the other Party of such court order,

subpoena, or other allegedly valid legal process within the earlier of (a) five (5) business days of

receipt, or (b) or one (1) business day in advance of the required disclosure or production, and

provided further that such Party shall use reasonable efforts to seek confidential treatment of

such information if requested by the disclosing Party.

9. Nothing in this Agreement shall require any Party to provide specific Protected

Information to any other Party. Nothing in this Agreement shall preclude any Party from

19

20

asserting any privilege or withholding documents or information in response to any request from

any other Party.

10. Each Party reserves, and does not waive, any rights, claims, or defenses under or

with respect to the Policies that such Party may have, and each Party agrees that entry into this

Agreement shall not constitute an admission by any of them of any obligation under the Policies.

11. The terms of this Agreement may be amended or modified only by the written

agreement of the Parties.

12. All notices and other communications hereunder shall be in writing and shall be

deemed to have been fully given if sent by commercial overnight courier, courier fees prepaid, or

via e-mail (PDF file) addressed as follows:

If to Acme Entities: [INSERT CONTACT INFORMATION]

If to the Insurers: [INSERT CONTACT INFORMATION]

13. The terms of this Agreement shall be deemed severable, and if any term is held by

a court or tribunal of competent jurisdiction to be invalid or unenforceable, the remaining

provisions shall nevertheless continue in full force and effect.

14. This writing contains the entire Agreement among the Parties with respect to the

subject matter thereof, and the Parties acknowledge that they are not relying on any other

representations, warranties, or promises, whether written or oral.

15. Any dispute arising under this Agreement between Acme Entities and any Insurer

shall be resolved in accordance with any choice of law and dispute resolution provisions of the

Policy or Policies of such Insurer.

16. Each Party represents that it has read this Agreement and that for good and

valuable consideration, the sufficiency of which is hereby expressly acknowledged, such Party is

agreeing to all of the terms, conditions, and provisions set forth herein.

17. By signing this Agreement, each Party’s representative warrants that he is

authorized to sign this Agreement for and on behalf of such Party.

18. This Agreement may be executed in counterparts with the same effect as if the

signatures on each counterpart were upon a single document. All counterparts taken together

shall constitute this Agreement.

ACME CORPORATION By: ________________________________________ AJAX INSURANCE COMPANY By: ________________________________________

1146395.3

22

Stephen A. Weisbrod is a partner with Gilbert LLP in Washington, D.C. He handles civil

and criminal matters and has experience in a variety of legal areas, including insurance, banking, securities, and bankruptcy. He has represented plaintiffs and defendants in civil cases. In insurance matters, he represents policyholders exclusively. His clients have included publicly traded companies, trustees, creditors committees, fund managers, law firms, post-bankruptcy litigation trusts, and individuals. Before entering private law practice, he served as law clerk to Chief Judge James B. Moran of the U.S. District Court for the Northern District of Illinois and as law clerk to Justice Alan B. Handler of the New Jersey Supreme Court. He is a graduate of the University of Michigan and Harvard Law School. Stephen A. Weisbrod Gilbert LLP 1100 New York Avenue, NW, Suite 700 Washington, DC 20005 (202) 772-1962 [email protected]

Reprinted with permission of the authors and the Association of Corporate Counsel as it originally appeared: “Communications With Your Insurer: Are They Privileged and Protected from Disclosure to Third Parties,” ACC Docket 22, no. 3 (March 2004):119-123. Copyright © 2004 the Association of Corporate Counsel. All rights reserved. Legal resources such as this are available to members at no charge. If you are interested in joining ACC, please go to www.acc.com, call 202.293.4103 ext. 360, or email [email protected].

Climate Change: Climate Change: Reinsurance Risks and Reinsurance Risks and

OpportunitiesOpportunities

Reinsurance Outlook 2010Manhattan, New York

February, 2010

Dr. Lewis M. RothsteinDr. Lewis M. RothsteinProfessor, University of Rhode Island Professor, University of Rhode Island Graduate School of OceanographyGraduate School of Oceanography

&&Principal Scientist, RenaissanceRe Holdings Ltd.Principal Scientist, RenaissanceRe Holdings Ltd.

& WeatherPredict Consulting, Inc.& WeatherPredict Consulting, Inc.

OverviewOverview

•• The objectiveThe objective–– Accelerate the delivery of new technology to Accelerate the delivery of new technology to

market to combat climate change.market to combat climate change.

•• Our approach at RenRe/WPCOur approach at RenRe/WPC1.1. Solutions informed by the best science.Solutions informed by the best science.2.2. Mitigation and adaptation solutions are Mitigation and adaptation solutions are

treated as mutually dependent.treated as mutually dependent.3.3. Collaborative Collaborative ““Knowledge PartnershipsKnowledge Partnerships”” are are

necessary for implementing solutions.necessary for implementing solutions.

Global climate is changing, through combined Global climate is changing, through combined natural variability and anthropogenic stressorsnatural variability and anthropogenic stressors

Two fundamental responsesTwo fundamental responses•• AdaptationAdaptation: Asset protection against the : Asset protection against the

inevitableinevitable•• MitigationMitigation: Limiting adaptation measures: Limiting adaptation measures

The 2 Take Home MessagesThe 2 Take Home Messages1.1. These responses are These responses are mutually dependentmutually dependent ––

must have both for effective planning.must have both for effective planning.2.2. ‘‘Knowledge PartnershipsKnowledge Partnerships’’ -- successful successful

implementation of the implementation of the ‘‘bestbest’’ science. science.

Two Take Home MessagesTwo Take Home Messages

One Climate Change Impact: One Climate Change Impact: Sea Level RiseSea Level Rise

A Science PrimerA Science Primer

In a climate affected by global warming, three In a climate affected by global warming, three factors may act to increase the risk of flooding:factors may act to increase the risk of flooding:1.1. SeaSea--level rise due to: level rise due to:

–– Thermal expansion Thermal expansion of sea water (of sea water (slow and certainslow and certain).).–– LandLand--ice processes ice processes ((catastrophiccatastrophic; still ; still very much very much

in the scientific discovery stage).in the scientific discovery stage).

2.2. Warmer air holds more moisture (Warmer air holds more moisture (more rainmore rain).).3.3. Changes in hurricane characteristics, such as Changes in hurricane characteristics, such as

intensities & frequencies (intensities & frequencies (more extreme events?more extreme events?))–– Presently still in the scientific discovery stage although Presently still in the scientific discovery stage although

consensus building for increased intensity. consensus building for increased intensity.

Increased Flood Risk Increased Flood Risk Associated with Global WarmingAssociated with Global Warming

LandLand--Ice ProcessesIce Processes

Sea Level Rise:Sea Level Rise: IPCC Projections Now Questionable IPCC Projections Now Questionable IPCC (2007) 7 -23 inches by 2100

New study that considers recent observations of Greenland and Antarctic melting (Pfeffer, et al. 2008)

31 inches – 6.1 feet by 2100

Sea level last time temperatures were 2 deg warmer than today 16 feet

Sea level last time temperatures were 4 – 6 deg warmer than today

80 feet

•• AdaptationAdaptation: : Building safeBuilding safe–– Example: Technology to inexpensively retrofit Example: Technology to inexpensively retrofit

existingexisting homes for protection against extreme wind homes for protection against extreme wind events; building code changes for events; building code changes for newnew infrastructureinfrastructure

•• MitigationMitigation: : BuildingBuilding greengreen–– Example: Alternative and/or renewable energy Example: Alternative and/or renewable energy

sources; conservation measures (e.g. efficient sources; conservation measures (e.g. efficient lighting)lighting)

Mutually dependent: Policies must be established Mutually dependent: Policies must be established with with bothboth of these as fundamental objectivesof these as fundamental objectives

Take Home #1: Adaptation & MitigationTake Home #1: Adaptation & Mitigation Technology to Address Our Built & ToTechnology to Address Our Built & To--be Built be Built

InfrastructureInfrastructure

Building Safe Building Safe The IBHS Homes at GalvestonThe IBHS Homes at Galveston

Necessary for successful Necessary for successful policy implementation policy implementation and and insurance rate setting insurance rate setting

•• The BottlenecksThe Bottlenecks–– Science of climate change is uncertain (but Science of climate change is uncertain (but

uncertainty does uncertainty does notnot mean its wrong!) mean its wrong!) –– Communication between scientists & stakeholders Communication between scientists & stakeholders

(e.g. society)(e.g. society)

•• The RemedyThe Remedy–– Invest in continued climate research & Invest in continued climate research & EQUALLY EQUALLY

AS IMPORTANT AS IMPORTANT invest for establishing formal invest for establishing formal collaboratories for enabling collaboratories for enabling twotwo--way way feedback feedback between the scientific community and society.between the scientific community and society.

Take Home #2: Take Home #2: ““Knowledge PartnershipsKnowledge Partnerships””

•• Work with communities, resource managers, Work with communities, resource managers, planners and endplanners and end--users, such as local, state, and users, such as local, state, and federal agencies, agricultural extension specialists, federal agencies, agricultural extension specialists, Native American communities and public utility Native American communities and public utility companies to help them prepare for and adapt to a companies to help them prepare for and adapt to a changing and variable climate. changing and variable climate.

•• Coordinate, conduct, and evaluateCoordinate, conduct, and evaluate integrated integrated natural natural AND AND social science research relevant to social science research relevant to identified issues and socioidentified issues and socio--economic needs. economic needs.

““Knowledge PartnershipsKnowledge Partnerships””

•• Integrate interdisciplinary knowledge and Integrate interdisciplinary knowledge and experience into the design and support of effective experience into the design and support of effective technological response to climate variability and technological response to climate variability and change.change.

•• Collaborate with regional institutions to bring Collaborate with regional institutions to bring climate predictions, projections and information climate predictions, projections and information about climate impacts to decision makers. about climate impacts to decision makers.

““Knowledge PartnershipsKnowledge Partnerships””

Earth Scientists

Knowledge Partnerships

Successful Implementation:Insurance Rate Setting

Natural Science of Climate Change & Variability

Designing a Response(Adaptation & Mitigation Technologies)

Climate Change: Climate Change: Reinsurance Risks & Reinsurance Risks &

OpportunitiesOpportunities

Reinsurance Outlook 2010Manhattan, New York

February, 2010

Dr. Lewis M. RothsteinDr. Lewis M. RothsteinProfessor, University of Rhode Island Professor, University of Rhode Island Graduate School of OceanographyGraduate School of Oceanography

&&Principal Scientist, RenaissanceRe Holdings Ltd.Principal Scientist, RenaissanceRe Holdings Ltd.

& WeatherPredict Consulting, Inc.& WeatherPredict Consulting, Inc.

Climate Change: Reinsurance Risks & Opportunities The Importance of the Insurance Asset In The Process Of Accelerating Delivery of New Technology To Market To Combat Climate Change

February 9, 2010

The Carbon Trust - Making Business Sense of Climate Change

Since our launch in 2001 we have:We have supported 30,000 companiesHelped our customers to save £1.4 billionHelped catalyze £1 billion of third party investmentAccelerated the commercialization of new low carbon technologies that will save over 20MtCO2 a year by 2050Supported the development of over 250 new low carbon technology products and SMEs companies in the UK

•Created by UK Government to accelerate the move to a low carbon economy by working with the business community. •Opened US operations in 2010

We cut carbon now by:•Providing specialist advice and finance to help organizations cut carbon•Setting standards for carbon reduction

We cut potential future carbon emissions by: •Opening markets for low carbon•technologies•Leading industry collaborations to•commercialize technologies•Investing in early stage low carbon•companies

Economics - The Magnitude of the Problem

Emissions intensity of world economy (per unit gross global product, GGP) needs to be 75% lower by mid-centuryCosts of Inaction – Business as Usual: Decrease of 5- 20% in consumption income over the next 50 years. Cost of Action – 550 parts per million CO2: 1% of annual global GDP for the next 50 years.

“Climate Change is the greatest and

widest-ranging market failure the world has

ever seen”- Nicholas Stern

0.51.1

0.3

1.41.8

1.0

450 ppm 400 ppm550 ppm

Defence spending

Insurance spending

Oil price increase

(USD +30/bbl)

Global foreign

Aid

Comparables % of global GDP

Total cost of abatement*% of global GDP 2030

20552005

14

7

Billion of Tons of Carbon

Emitted per Year

19550

Currently

pro

ject

ed path

Flat path

Historicalemissions

1.9

2105

14 GtC/y

7 GtC/y

Seven “wedges” - A “wedge” is a strategy to

reduce carbon emissions that grows in 50 years from

zero to 1.0 GtC/yr.

Magnitude of the Solution

O

Socolow & Pacala: Stabilization Wedges

Energy Efficiency

Decarbonized Electricity

Fuel Displacement by Low-Carbon Electricity

Forests & Soils

Decarbonized Fuels

StabilizationTriangle

2004 20547 GtC/y

14 GtC/y

Fill the Stabilization Triangle with Seven Wedges

Methane Management

Magnitude of the Solution

The Carbon Cost Curve or what do we do first...

Global New Clean Energy Investment

Clean Energy Investment types and flows (2009)

“Technology push” and “market pull” key ingredients of successful technology innovation

A resource gap prevents low carbon technology deployment, at scale

Support is required to overcome barriers along the innovation journey

Insurance in Clean Tech Deployment

Industry has been slow to innovate in the clean tech space. Many of the current products being offered by insurance companies are still in the nascent stages and have not been replicated at sufficient scaleTechnology Deployment– Liability

– E.g. – CCS liability issues

– Warranties– Efficacy Insurance - designed to cover the failure of an item to perform its

intended function – E.g. – providing for alternative energy plants (performance wraps) would accelerate the

deployment of innovative plant-based technology currently in the US pipeline such as novel wind turbine designs, solar panel factories, concentrated solar thermal plants, second-generation biofuels plants, biorefineries, and enhanced geothermal

– The developers of these plants lack the balance sheets required to provide process guarantees and product warrantees. Without them adoption is thwarted because project finance lenders cannot handle “first plant” risk. The “old technology” always wins

Project Finance:– Performance Risk– Guarantees for Carbon reductions/delivery of emissions reductions– Political Risk– Weather Insurance



The NOAA Climate Service officeCCEDA established through an amendment to the Waxman-Markey energy and climate bill– CEDA would be housed within DOE– Help bridge the “commercialization valley of death” preventing technologies from

moving from the lab into the market– Designed to finance breakthrough technologies through:

o Direct loanso Letters of Credito Loan Guarantees o Insurance Products

Initiative Proposal - Carbon Trust seeking to partner with insurers/insurance industry to collaborate on determining opportunities for risk mitigation to accelerate of the deployment of technology– Goal – Insurance is a missing element that will facilitate finance

Mitigation Proposals Under Consideration in D.C.February 9, 2010

FOR DISCUSSION PURPOSES ONLY

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This presentation and its content are the sole property of RenaissanceRe Holdings Ltd. and its subsidiaries and affiliates (“RenRe”), are intended for non-commercial, informational purposes, and have been provided for discussion purposes only. This presentation is neither an advertisement of nor a solicitation to provide (re)insurance or any other product or service in any U.S. jurisdiction. Duplication, modification or any other use or exploitation of this presentation or its content is prohibited without the express prior permission of RenRe. This presentation and its content are provided on an AS IS basis, without any representations or warranties, express or implied.

RenRe has not verified any third party information referred to in this presentation, nor does it assume any responsibility to update any information or material contained herein for any purpose whatsoever.The information in this presentation should not be construed in any way as legal, regulatory, tax, business, financial or accounting advice or recommendations, or constituting a course of action recommended by RenRe. For any questions on these or any related matters, please refer exclusively to your own professional advisor. We assume no obligation to update this presentation.

This presentation is not intended to predict, estimate or forecast the availability of reinsurance, insurance or any other financial coverage, service or product, or to address the potential terms and conditions of any of the same, and should not be construed as such. Receipt of this presentation shall be deemed to constitute acknowledgment of the foregoing.

3For Discussion Purposes Only Please Refer to the Disclaimers on P.2

“A dollar spent on mitigation saves society an average of $4.”

- The Multihazard Mitigation Council

Mitigation…Begins Before the Storm

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Role of Strategic Mitigation

• Strategic mitigation initiatives enhance safety and significantly reduce expected loss

• Building code enforcement is key – Florida is a leader• Coastal states are well served by mitigation grant and education

programs like Florida’s My Safe Florida Home

These programs should target retrofits strategically for greatest state return on investment – both citizen safety, and dollars

The track record of insurance premium “discount” programs is poor

• Federal and state standard setters can play leadership role in validating mitigation techniques

• Adoption of consistent home rating scale

• Public/private investment in mitigation R&D

IBHS Home Safety Research CenterCoastal resiliency and restoration programs

For Discussion Purposes Only Please Refer to the Disclaimers on P.2

Major Mitigation Proposals Under Consideration in D.C.

• Home Star

• S. 2818, Weatherization Legislation

• H.R. 3377, Disaster Response, Recovery, and Mitigation Enhancement Act of 2009

• Rep. Thompson Mitigation Package


Home Star Proposal

• Proposed by President Obama as part of Jobs Bill

• A 2 year program; possible funding level of $4B

• Proposal will reimburse homeowners for:– Purchase of energy efficient appliances– Weatherization projects that reduce energy consumption (e.g., insulation

installation)

• The Administration is working with Congress on drafting legislation

• May result in a reduction in “energy waste” in most homes by 20-40 percent (Efficiency First)


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Home Star Proposed Mitigation Amendment

• Proposed by Smarter Safer Coalition

• Allows mitigation to be an eligible activity under Home Star

• Homeowners would receive a rebate of up to $3000 for purchasing mitigation materials to strengthen their homes

• Timing and future of legislation uncertain

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S. 2818 – Sen. LeMieux


• Introduced by Sen. Lemieux (R-FL)

• Weatherization Assistance for Low-Income Persons

• Provides assistance for home improvements that result in increased energy efficiency or weatherization

• Potential improvement projects include installing energy efficient and wind resistant windows, roofs, and openings

• Increases existing assistance amount under program from $6,500 to $8,500

Rep. Thompson Supports Mitigation

In a ‘Dear Colleague’ to Members, Homeland Security Chairman Thompson expressed his support for pre-disaster mitigation and encouraged House support for his mitigation package:

• H.R. 3026• H.R. 3027• H.R. 3028


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H.R. 3026 –Mitigation Efforts for Public Housing Populations


• Assistance to public housing, Section 8 rental

• Units and publicly-assisted housing

• Comprehensive retrofit projects

• Long-term taxpayer costs by reducing the need for post-disaster reconstruction.

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H.R. 3027 –Enhancing the Predisaster Mitigation Grant Program


• Enhances the existing Predisaster Mitigation grant program

• Provides states with funds for homeowners, small businesses, and rental property

• Commissions a study on the utilization of natural storm barriers

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H.R. 3028 –Innovation in First Responder Programs


• Addresses the particular needs of States

• Encourages innovation

• Could answer concerns raised during HurricaneKatrina:

--Mobile nursing units for rural communities --Improvements to first responder telecom

capabilities.

SmarterSafer.org


• Leading advocacy group for mitigation

• Over 30 member organizations including–Environmentalists–Emergency Management groups–Conservative Advocacy and Taxpayer groups–Insurers, including each reinsurance trade group

• Committed to promoting mitigation, NFIP reform, and promoting responsible insurance policy that include actuarial rates.

Committing Resources to Risk Mitigation

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Financial Crisis Update

February 9, 2010

Peter Chaffetz

Reinsurance Outlook 2010 Conference: Financial Crisis Update 1

Sub-prime Collapse: Scope of Loss and Resulting Litigation

January 15, 2010: Moody’s announces revised cumulative loss projections:

• 18.7% for 2005 Securitizations



Subprime RMBS with outstanding balance of $319bn under review for potential downgrade

More than 1400 suits filed


What Drove This Market?

Traditional Mortgage Lending vs. “Originate to Sell”/Securitization


Used by permission of Grais & Ellsworth LLP



Overview of the Securitization Process

Borrower

Mortgage Broker

WarehouseLender Trustee

Lender/Conduit Trust (SPE) Bond

UnderwriterInstitutional

Investors

Servicer BondInsurer

RatingAgencies

IndividualInvestors

CDO Managers,

Hedge Funds,

Conduits, SIVs

$

RMB S

RMB S

$P&I

$P&I

Mortgage

$ $

$

$

Mortgage s

Mortgage Collateral

$P&I

Appraisers Settlement Agents Law Firms Accounting Firms D&O CarriersJeff Nielsen, with Scott Paczosa and William Schoeffler, of Navigant Consulting, Subprime Mortgage and Related Litigation, 2007: Looking Back at What's Ahead, p. 3.


Overview of the Securitization Process

Borrower

Mortgage Broker

WarehouseLender Trustee

Lender/Conduit Trust (SPE) Bond

UnderwriterInstitutional

Investors

Servicer BondInsurer

RatingAgencies

IndividualInvestors

CDO Managers,

Hedge Funds,

Conduits, SIVs

$

RMB S

RMB S

$P&I

$P&I

Mortgage

$ $

$

$

Mortgage s

Mortgage Collateral

$P&I

Appraisers Settlement Agents Law Firms Accounting Firms D&O CarriersJeff Nielsen, with Scott Paczosa and William Schoeffler, of Navigant Consulting, Subprime Mortgage and Related Litigation, 2007: Looking Back at What's Ahead, p. 3.



The insurance industry has had its own experience with this dynamic

• Massive losses through reliance on volume compensated MGA’s in the 1980s and 1990s

• D&O losses in the S&L collapse


Sub-Prime Litigation – Types of Cases

Lender Liability

Shareholder Litigation

ERISA Claims

Claims Against Rating Agencies

Breach of Fiduciary Duty

Contract Claims

Accountants’ Negligence


Sub-Prime Litigation Developments


Traditional Defenses• Long-standing First Amendment Defense

• Non-Actionable Opinion




Traditional Defenses• Long-standing First Amendment Defense

• Non-Actionable Opinion

Current Developments• Abu Dhabi Commercial Bank and King County, Washington v. Morgan Stanley (SDNY, Sept. 2009)



Mortgage and Financial Guaranty Disputes

Nature of the products• Mortgage Insurance – blanket policy with individual certificates

• Financial Guaranty – Policy issued to trustee of securitized mortgages

• In both cases, underwriting includes reps and warranties as to quality and means of producing the underlying loans.

• “Put-back rights” as a contractual remedy

The Issue: Molecular vs. Global Relief



Mortgage and Financial Guaranty Disputes (Latest Case Law)

•Radian Insurance v. Deutsche Bank, (E.D. Pa., July 15, 2009) – Rescission claims stayed in favor of arbitration

•United Guaranty Mortgage Indemnity Co. v. Countrywide Financial Corp. (C.D. Cal., October 5, 2009) – Non-contractual claims dismissed with prejudice

•MBIA v. Residential Funding, (N.Y. Sup., December 22, 2009) – Sustaining fraud-in-the-inducement claim against mortgage originator


Liability for Madoff LossesNearly 80 Investor and Feeder Fund Cases

Predicting Liability Trends• Major Feeder Fund Cases

• Impact of Tort Reform

• “Red Flag” Cases


Liability for Madoff Losses

Something Different

“Madoff” v. Spears, Federline and SEC (E.D. Mi., March, 09)

Financial Crisis Update

February 9, 2010

Peter Chaffetz

P A S S I O N I N T E G R I T Y E X C E L L E N C EP A S S I O N E X C E L L E N C EA Division of Marcum LLP

NEW YORK NEW JERSEY CONNECTICUT PENNSYLVANIA FLORIDA GRAND CAYMAN

Marcum LLPGlobal Financial Crisis/Madoff Scandal: Reinsurance Implications

Presented By: John W. Green



SEC’s Role

How did SEC fail to uncover the fraud

Oversight role of SEC is changing

Newly proposed Consumer Financial Protection Agency – still in the works

Is Federal Oversight Necessary?

Legal Fallout that may impact insurance industry

Fund managers have been sued

Merkin, Ascott, Austin

Is defense covered under D&O

Alan Stanford filed a claim for defense and it was denied by the carrier – but overturned by the court

Madoff Scandal One Year After Conviction



• SEC’s Initiatives Post Madoff• Hedge Funds Are being investigated• Funds that have suspended redemptions are

subject of investor complaints• SEC is performing numerous investigations

• Focus on the operations of the funds• Liquidity• Possible insider trading• Possible failure to make required filings with the

SEC

Post Madoff Developments



Implications for Insurance and Reinsurance Companies

Fund managers may file a claim under their D&O policy

Coverage issues are bound to emerge

Hedge funds may find it harder to obtain professional insurance in the future

Insurers may require a higher level of compliance and internal controls in order to write coverage

Side A Coverage Issues

Shaved-limit wording may change in reinsurance contracts




Accounting firms have been sued

About a dozen firms have been sued so far

Range from Big 4 and national firms to small upstate NY firms

Outcome of litigation is years away

Depending on outcome of some lawsuits – some firms may not survive

Damages could exceed malpractice cover

Implications to Insurance and Reinsurance Industry

E&O, D&O and professional malpractice rates may increase in the long run

Insurers may impose exclusions for some entities or require a higher level of internal control




Financial Guarantee Insurers

Prior to the Credit Crisis, there were only a handful of Financial Guarantee (Mono-line) insurers in the Market

Virtually all of the Mono-Lines have had capital and liquidity issues

Most are in run-off

Some have been able to Spin off the good business from the more risky business

Some Mono-lines are impaired and working with regulators

Global Financial Crisis and Implications to Insurance and Reinsurance Industry



Credit Default Swaps

Counterparties are still unwinding positions

Market for new CDS has decreases – According to ISDA

2006 $17 Trillion

2007 $62 Trillion

2008 $38 Trillion

June 2009 - $31 Trillion

Collateral requirements will likely increase moving forward

Central clearing house or other regulation has been proposed

Will insurance industry continue writing protection in the form of CDS?




Impact to Reinsurers and Counterparties from Mono-Lines

Mono-lines are attempting to commute reinsurance treaties

Negotiations also underway to eliminate or reduce collateral requirements or payments under Credit Default Swaps

New entrants to market could dominate

What is the implication for future

Some municipal issuers have forgone the guarantee insurance altogether

Underwriting standards will likely be scrutinized





Reinsurance Outlook 2010

Not Knowing What’s NextAre Reinsurance Wordings ReadyFor the Era of the “Black Swan?”

Reka Koerner & Carey G. Child

Reinsurance Outlook 2010Not Knowing What’s Next

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Disclaimers


2

Source: www.commons.wikimedia.org


• Taleb, Nassim Nicholas (2001) Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Thomas Texere, New York and London.

• Taleb, Nassim Nicholas (2007) The Black Swan: The Impact of the Highly Improbable, Random House, New York.

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“What we call here a Black Swan [has] three attributes[:]

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility….

Second, it carries an extreme impact….

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

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Nassim Taleb, New York Times, Apr. 22, 2007, http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html?_r=1

http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html?_r=1


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“In spite of its outlier status, human nature makes us concoct explanations for [the Black Swan’s] occurrence after the fact, making it explainable and predictable."

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http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html?_r=1


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Reinsurance Wording ResponsesOccurrence Definition / Aggregation


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Reinsurance Wording ResponsesMore Robust Wording


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More Robust WordingGeneral Provisions and Considerations


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More Robust WordingStress Testing


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Reinsurance Outlook 2010

Not Knowing What’s NextAre Reinsurance Wordings ReadyFor the Era of the “Black Swan?”

Reka Koerner & Carey G. Child


1

Disclaimers

• The outcome for any particular wording will depend upon many factors, including evidence of the parties’ intent. We are not expressing an opinion on any wording; Our comments are only for purposes of provoking discussion and are entirely hypothetical.

This presentation is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose.

• Any comments made are strictly our own and do not necessarily reflect the practices or views of Swiss Re, its subsidiaries, management and/or shareholders, or of Chadbourne & Parke, LLP or its clients.

• Neither Chadbourne & Parke, nor Swiss Re, shall be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this presentation.

Our comments are not attributable to others.

DC1 - 286587.01

I. The Black Swan.

• Taleb, Nassim Nicholas (2001) Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Thomas Texere, New York and London.

• Taleb, Nassim Nicholas (2007) The Black Swan: The Impact of the Highly Improbable, Random House, New York.

“What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."


II. Lessons of the Black Swan for Reinsurance Wording.

A. Backward- looking responses alone are often insufficient.

B. Embrace the fact that we live in a world we don’t understand very well.

C. Seek robust wordings as a competitive advantage.

III. Modest Proposals for Working Toward More Robust Wording.

A. Include wordings as a risk-management tool.

B. Look at provisions that add general robustness.

1. Business Covered.

2. Category-based exclusions.

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DC1 - 286587.01

3. Alignment of interests and cost-sharing.

(a) Treatment of expenses.

(b) Claims handling provisions and follow the settlements.

(c) Limits, retentions, reinstatements and similar provisions.

4. Claims made vs. occurrence.

5. Aggregation provisions.

6. Counterparty risk.

C. “Stress test” beyond backward- looking provisions and “emerging risks.”

1. Not an effort to predict “Black Swans.” Purpose is to make the wording more robust.

2. Look for correlations.

3. Consider past disasters in different contexts.

4. Consider the effects of ubiquity.

5. Consider the failure of complex systems.

6. Anticipate escalating and varied malicious attacks.

7. Beware of biology.

8. Anticipate continuing bubbles and financial crises.

9. Beware of accepted products being extended into new areas.

10. Constantly revisit your analysis: just because you have never seen a black swan does not mean that one does not exist.

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