AIRROC New York City East Coast Regional, April 2013

Summarized by Julie Rodriguez Aldort

We had a packed day of substantive discussions and workshops at AIRROC’s East Coast Reinsurance Educational Conference on April 17, 2013, hosted by DLA Piper LLP (US). 

Transfer of Legacy Business:  What Works, What Has Not Worked & What the Future Holds

Susan Grondine-Dauwer moderated a panel discussing methods for transferring legacy business.  Roger Loo of DLA Piper’s UK office led with an overview of the Part VII Transfer process used in the UK.  He explained that the process allows for the transfer of portfolios by agreement, effected by court approval.  He noted that the process allows an entity to exit a particular line of business and move its portfolio off its books all at once.  Associated assets, reinsurance, real estate, and service agreements can be included as part of the transfer.  As part of the process, independent actuaries review the proposed transfer for fairness and provide analysis to the regulators.  The Part VII Transfer has been popular because it requires court approval and is accepted across Europe.

Stephen Schwab of DLA Piper’s Chicago office described efforts in the United States to replicate the Part VII Transfer process.  He explained that several states, including Illinois, Texas, and Pennsylvania, have developed initiatives for legacy books in the context of supervision, rehabilitation, and/or receivership.  Rhode Island, on the other hand, has attempted to mimic the Part VII process, but the process has only been used once.  The Panel discussed the reasons why the Rhode Island process has not had more takers.  Among other things, participants mentioned as deterrents the requirement that a company be redomesticated in Rhode Island before participating, with no guarantee that the transfer sought would be approved. 

 Anna Petropolous of Apetrop USA, Inc., described the Legacy Insurance Management Act now under discussion in the Vermont legislature.  She explained that the Vermont Act seeks to create a restricted Part VII-type transfer.  The plan focuses on commercial business and avoids guarantee fund issues because it would only be open to non-admitted insurers and reinsurers.  She noted that Vermont has experienced regulators and established insurance regulations, making it an ideal venue for this initiative.  Stay tuned for developments on passage of the legislation! 

 

Commutation Basics

Next up on the agenda was a Panel on commutation fundamentals moderated by William Fiske of The Hartford.  J. Marcus Doran of Horizon Management explained the importance of considering the goals and reasons for the commutation before beginning commutation discussions.  He emphasized that it is critical to accurately identify the counterparty and the scope of the commutation to avoid surprises later.                                                                                                 

Joe Loggia of Buxbaum Loggia Associates provided the auditor’s perspective.  He highlighted the importance of preparation.  With respect to pre-commutation audits, he explained that it is critical to know before performing the audit what you are looking for and what you hope to achieve.  He stated that it is easier to identify those things after you have thoroughly reviewed your own files.  

Bill Popalisky of DLA Piper discussed obtaining buy-in from retrocessionaires for commutations in advance.  He suggested sharing commutation strategy with retrocessionaires, taking their feedback into account if it makes sense, and telling them that you would give notice if you could in advance of any agreement.  He also recommended following a standard allocation methodology and using an outside actuary to do the allocation with the goal of a fair, reasonable allocation.

 

E-Discovery Pitfalls and Best Practices

A presentation regarding e-discovery rounded out the morning.  Bernadette Beekman of Yorkson Legal, Inc. served as moderator.  Gina Trimarco (DLA Piper LLP US), Carmen Oveissi Field (Deloitte Financial Advisory Services LLP), and Skye Miles (HCC Specialty) were the panelists. 

Skye Miles noted that while many organizations have extensive records management programs, few people within an organization are likely to know what the document retention policy actually provides.  She explained that the key point to communicate to employees is what to save and what not to save. 

Gina Trimarco described litigation holds, which suspend the routine destruction of documents.  The duty to implement a hold arises at the outset of litigation or with the anticipation of litigation.  She emphasized that the breadth of the hold must be clearly defined, including the scope of the documents to be maintained and the individuals covered by the hold.  She emphasized the importance of re-evaluating the hold through the course of the litigation. 

Carmen Oveissi identified the key challenge of defining the information to be held as opposed to the type of document or storage device within which the information is maintained, e.g., all information relating to the XYZ program from 1999 as opposed to all emails or databases. 

The panel reviewed strategies for dealing with e-discovery and presented arguments to reduce the costs and burdens of responding to demands for e-discovery.  The panel’s slide presentation included references to key case law on the issues and best practices developed by the Sedona Conference. 

 

Extra-Contractual Exposure in Coverage Litigation

After networking over box lunches, the group reconvened for a panel presentation on Extra-Contractual Exposure in Coverage Litigation conducted by four attorneys from DLA Piper LLP,  Christopher Strongosky (moderator), Stephen Davidson, Megan Shea, and Eric Connuck.  The panel discussed scenarios that could lead to bad faith claims.  They explained that, depending on the jurisdiction, a covenant of good faith and fair dealing may be implied into the insurance contract or it may be treated as a distinct tort of bad faith. 

For discussion, the Panel set out a fact scenario in which an insured-versus-insured exclusion potentially applied.  Using the fact pattern, Eric Connuck described the most common points at which bad faith issues arise.  The first is the insurer’s provision of a defense.  The duty to provide a defense is typically perceived to be broader than the coverage obligation.  Connuck explained that, in Illinois, if there is a duty to defend and the insurer denies coverage, the insurer must file a declaratory judgment action to minimize the likelihood of a bad faith finding. 

The Panel described the second trigger point as the insurer’s investigation of the claim, which must be reasonable and in good faith.  In the hypothetical scenario, the insurer briefly reviewed the allegations of the complaint and took the additional step of interviewing the insured’s in-house counsel to assess the coverage issue.  The Panel felt this was likely sufficient to avoid a bad faith finding for failure to investigate.

The Panel next focused on the coverage decision, which they said must be reasonable in view of the policy terms, facts, and law.  The Panel found no issue with the initial coverage decision in the hypothetical.  They did, however, see a duty to review the coverage position after new information came to light.  They noted that the safest avenue in such a situation, may be to reserve rights and provide the defense. 

The Panel highlighted settlement as a flashpoint for bad faith claims.  In particular, if a claim was truly covered and a demand was made within limits, the insurer could face bad faith liability if it refused to negotiate or refused to settle when it was aware of the risk of an adverse ruling to the insured.  Overall, the Panel emphasized the importance of understanding the risks of bad faith liability and the controlling law in the relevant jurisdiction. 

 

Mediation Essentials

A session on the Art and Science of Mediation run by Peter Scarpato, Aidan McCormack of DLA Piper, Cyril Smith of DLA Piper, and Leah Spivey of Munich Re topped off the educational conference.  Before beginning the hands-on workshop, Peter Scarpato oriented the group by explaining the steps to facilitate effective negotiation and to achieve settlements through the mediation process.  In particular, he noted the need to provide facts and to understand the strengths and weaknesses of your case and your opponent’s case.  He also advised entering the mediation with an understanding of your goals, what your walk-away point is, and what the other side would need to sell your settlement to its constituents.  Aidan McCormack noted the importance of selecting a mediator who was suited to the personalities in the case, and not just a mediator who was familiar to the parties.    

Cyril Smith described the fact pattern, which involved a dispute over losses associated with a fire on an oil rig.  The fire was started by an employee who smoked during a break and discarded his cigarette into the sea.  The thorny issue related to an exclusion in the insurance policy for fire loss caused by employee misconduct and reinsurance coverage for the insurance company’s settlement with the policyholder in the absence of an explicit follow the settlements clause.  The attendees were divided into two groups – a reinsurer group and an insurer group – and asked to consider several questions: (1) what sort of mediator would be best; (2) what factors played into the insurer’s settlement; (3) what is the best alternative to a mediated settlement; (4) what are your opening demand/offer, zone of acceptance, and walk-away point.

After the break-out session, Leah Spivey led both groups in a spirited discussion that revealed the different motivations of each side.  The reinsurer team disclosed concerns about maintaining the long-term business relationship with the cedent, which made them willing to compromise even in the face of what team members perceived to be a claim that was likely not covered.  The cedent team showed a willingness to walk away from the mediation and take its chances in court, where the team members anticipated a potentially sympathetic fact finder.  The difference highlighted the parties’ BATNA – “Best Alternative to the Negotiated Agreement.”  The cedent showed a greater willingness to walk, providing it greater leverage in the negotiation.  Ultimately, the parties found common ground and reached agreement on a settlement amount.  The exercise emphasized the importance of information exchange in achieving a resolution in mediation. 

 

Julie Rodriquez Aldort is a Partner with Butler Rubin in Chicago.   jaldort@butlerrubin.com