Reverse Preemption Is Alive And Well In Washington State

Larry P. Schiffer | Squire Patton Boggs

Most reinsurance contracts have binding arbitration provisions. The Federal Arbitration Act (FAA) sets out a national policy in favor of arbitration. Yet, there are states that expressly preclude arbitration provisions in insurance contracts. Does that apply to reinsurance contracts?

In Washington Cities Insurance Authority v. Ironshore Indemnity, Inc., No. 2:19-cv-0054-RAJ, 2020 U.S. Dist. LEXIS 39633 (W.D. Wash. Mar. 6, 2020), a public entities association organized for the purse of self-insuring risks and jointly purchasing insurance and reinsurance, purchased a reinsurance agreement that included an arbitration provision. A dispute arose concerning the settlement of a police misconduct lawsuit, which the cedent presented to the reinsurer for payment. The cedent commenced an action because of the reinsurer’s denial. The reinsurer moved to compel arbitration and the cedent moved to establish that the arbitration clause was void.

Washington, it turns out, is one of several minority states that have express provisions in their insurance laws that prohibit arbitration provisions in insurance agreements. RCW § 48.18.200 expressly provides that insurance contracts delivered or issued for delivery in Washington cannot contain a provision depriving the courts “of the jurisdiction of action against the insurer.” As the court noted, although the FAA would normally preempt a conflicting state law under the Supremacy Clause of the US Constitution, the McCarran-Ferguson Act creates a system of reverse preemption for state insurance law. The court cited examples of cases that hold, and noted that the parties did not appear to dispute, that under the McCarran-Ferguson Act, RCW § 48.18.200 preempts Chapter I of the FAA.

The court then articulated the dispute before it: (1) does reinsurance qualify as insurance and (2) does the anti-arbitration provision apply to reinsurance agreements where the reinsurance was purchased by a joint self-insurance program. The court concluded that the answer to both questions was yes.

The court examined the definition of insurance under Washington law, RCW § 48.01.040, and concluded that “reinsurance” comes within the definition of “insurance.” The court noted that both are contracts where one undertakes to indemnify the other or pay a specified amount upon determinable contingencies. The court found no basis to find that the reinsurance agreement did not fall within the definition of insurance. Moreover, the court noted that nothing in the statute’s text expressly excluded reinsurance and that a review of other sections showed that the legislature knew how to specifically exempt certain types of insurance from the section and to carve reinsurance out of other sections.

The court also concluded that the statute governing the joint self-insurance program that created the cedent did not contain any language saving arbitration provisions in reinsurance contracts purchased by the cedent. Although the statute suggested that the legislature authorized the cedent to purchase their own reinsurance, the statute did not reference arbitration provisions or authorize the inclusion of arbitration provisions in those contracts. The court refused to read into the statute that which the legislature omitted.

The court concluded that there was nothing in the statutory language or the relevant case law to support the reinsurer’s arguments and the motion to compel arbitration was denied.

Insurance Coverage Questions Abound Amidst COVID-19 Outbreak

Douglas Christian | Ballard Spahr

Among the legal issues presented by the coronavirus outbreak is the extent to which insurance policies may provide relief for virus-related losses. Proactive businesses are reviewing the specific risks they face and looking for ways to manage those risks through their existing policies and additional coverage available in the insurance market.

Businesses face numerous risks, and potential insurance coverage for them, including:

  • Losses due to property damage and business interruption (property policy)
  • Third-party liability (commercial general liability, directors & officers, or errors & omissions policies)
  • Employment-related liability (employment practices and workers’ comp policies)
  • Supply chain and trade disruption (trade disruption, credit, and other policies)
  • Event cancellations (event cancellation policy)
  • Liability for medical costs (health insurance and other policies)

Our Insurance Group can help manage coronavirus risks by advising on: rights and obligations under insurance policies; possible enhancements to existing coverage; and proper presentment of a claim under the policy.

Who Decides Whether A Reinsurer Is A Run-Off Reinsurer?

Larry P. Schiffer | Squire Patton Boggs

In the past 10 years or so, several ceding companies began adding run-off reinsurer clauses to their reinsurance contracts to mitigate disputes that might arise with reinsurers no longer actively in business. In a recent case, a Georgia federal court had to address whether it or an arbitration panel should determine whether the reinsurer was, in fact, a run-off reinsurer.

In Builders Insurance v. Maiden Reinsurance North America, Inc., No. 1:19-cv-02762-SDG, 2020 U.S. Dist. LEXIS 34722 (N.D. Ga. Feb. 26, 2020), a dispute arose between a cedent and its reinsurer over a series of reinsurance contracts reinsuring underlying commercial general liability policies issued to a home builder. Underlying lawsuits arose allegedly because of construction defects. The cedent settled the underlying lawsuits and sought recovery from the reinsurer.

Before the cedent settled the underlying litigation, it notified the reinsurer about the litigation and provided information. Shortly after, the reinsurer was acquired by a large international group that is known for its runoff operations. The cedent demanded payment from the reinsurer, but no payment was forthcoming for some time (well after 30 days). Approximately five months after demand was made for payment, and after the cedent commenced this law suit, the reinsurer paid the principal amount of the breach of contract claim. Nevertheless, the case continued on bad faith grounds.

After the case was removed from state to federal court, the reinsurer moved to compel arbitration. The cedent opposed the motion claiming that arbitration was no longer available to the reinsurer because it was a Run-off Reinsurer as defined in the reinsurance contracts.

The reinsurance contracts had two relevant provisions. First, Article 27, which was the Run-off Reinsurer article. This provision provided that if the reinsurer met the criteria of a Run-off Reinsurer the provisions of the arbitration article no longer applied. A Run-off reinsurer was defined as a reinsurer that “has ceased reinsurance underwriting operations; or has transferred its claims-paying authority to an unaffiliated party; or . . . in any other way has assigned its interests or delegated its obligations under this Contract to an unaffiliated entity.”

The second relevant provision was the arbitration article, which except for the first year, stated: “Except as provided in the Special Termination, Commutation and Run-Off Reinsurer Articles, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators . . . .”

As the court noted, whether the reinsurer was a Run-off Reinsurer mattered because, if the answer was yes, the parties must litigate their dispute in court. The parties also disagreed about whether the reinsurance contracts delegated this issue to the arbitrators to decide.

The court first determined that it and not the arbitrators would decide whether the reinsurer was a Run-off reinsurer. The evidence, found the court, indicated that the parties did not intend to delegate arbitrability questions concerning the Run-off Reinsurer article. Delegation requires clear and unmistakable evidence that the parties intended to submit to the arbitrators disputes about Article 27. The court pointed to the arbitration article that, except for the first year, explicitly excluded the possibility that arbitrators should decide whether the reinsurer was a Run-off Reinsurer. Thus, held the court, the exception language in the arbitration provision specifically removed matters related to the interpretation of Article 27 from arbitration. Article 27, itself, also supports this analysis when providing that the arbitration article did not apply to any reinsurer that became a Run-off Reinsurer. At the very least, said the court, these provisions prevent the court from concluding that there was clear and unmistakable evidence of the parties’ intent to delegate this question to the arbitrators.

After concluding that the parties did not delegate to the arbitrators the issue of whether the reinsurer became a Run-off Reinsurer, the court held that the reinsurer was not a Run-off Reinsurer. The court accepted evidence from the reinsurer that it had not ceased underwriting operations, had not transferred its claim-paying authority to an unaffiliated entity, and had not assigned its interests or delegated its obligations to an unaffiliated entity. The court found that the reinsurance contracts did not void the arbitration provisions when a reinsurer is in run-off in the ordinary sense. The court concluded that whether the reinsurer continued to accept new risks was beside the point. The reinsurer had not ceased reinsurance underwriting operations according to the evidence accepted by the court. The court also addressed the unaffiliated arguments and rejected their applicability.

Accordingly, the court granted the motion to compel arbitration on the remaining claims, including whether those claims were arbitrable.

Coronavirus: Factors for the Insurance Industry to Consider − Part 3 Liability and Workers’ Compensation Insurance

Paul S. White | Wilson Elser

Given the risk to life and the economic impact of coronavirus, policyholders and the insurance industry alike are watching and considering whether business interruption, event cancellation, or liability and workers’ compensation insurance benefits may be available while similarly assessing liability risks. This three-part series will cover specific aspects of insurance that all stakeholders – insured, insurers and brokers – should consider.  Read Part 1 here and Part 2 here

Coronavirus: Status and Impact
In response to the thousands of reported new cases of COVID-19 in countries around the globe, the World Health Organization (WHO) has upgraded their Risk Assessment for China, Regional Level and Global Level to Very High (the highest risk level). There are more than 90,000 confirmed cases of the virus. The United States is now reporting more than 100 infections as of Tuesday, March 3, 2020. 

The Federal Reserve announced an emergency rate cut on March 3, but it was not enough to stop the market’s slide to new lows indicating that investors see the virus as a continuing threat to economic growth and corporate profits over the next several months. The Wall Street Journal reports that economists predict disruptions in the global and domestic supply chains could cause product shortages and hurt overall sales, but some U.S. retailers are noting strong sales as consumers stock up on food and other staples.  In this third part of the three-part series, we will review Liability and Workers’ Compensation insurance factors that all insurance stakeholders should consider when claims under these policies are brought forward. 

Liability Insurance
If the coronavirus continues to spread worldwide, insurers are likely to confront liability claims that span the spectrum of their insurance product lines.

General Liability Insurance
Businesses, particularly those that open their doors to the general public, may find themselves targets of claims that their negligence led to the exposure and infection of clients:

  • Exposure resulting in bodily injury or property damage
  • Negligence related to visitors to businesses or locations such as offices, daycare centers, retail shops, hotels and places of worship
  • Product liability related to air filtration and recirculation, particularly in situations involving airplanes and hospitals
  • Personal injury involving occurrences such as wrongful eviction or imprisonment
  • Constitutional claims involving the quarantine or restriction of infected or exposed persons
  • Negligence or other liability suits against a company or organization that fails to implement a pandemic contingency plan. 

Of course, the target of such claims will be not only the business but also the business’s general liability insurance and its coverage for “bodily injury.” Policy exclusions may exist for claims arising from a pandemic, virus or bacteria. Many insurers also include broadly worded pollution exclusions that could serve to preclude or limit coverage.

Errors & Omissions (E&O) Insurance
There is an adage that the most likely place to get sick is in a hospital. Medical care and managed care providers purchase errors and omissions (E&O) insurance that provides coverage for bodily injury arising out of their providing or failing to provide medical care. While such policies generally preclude coverage for bodily injury to employees during the course of their employment (i.e., an employee being exposed to an infectious or contagious disease), such policies may respond to claims that a health care professional acted or failed to act in a manner that led to a patient (non-employee) contracting a coronavirus bodily injury.

Directors & Officers (D&O) Insurance
The coronavirus has roiled stock markets worldwide, resulting in ups and downs depending on whether the market perceives that the crisis is being managed appropriately and whether global supply chains will be impacted. Ultimately, how a company responds to the coronavirus may subject its directors and officers to the scrutiny of the company’s shareholders. Shareholder suits have become commonplace when market valuations are purported to have unreasonably dipped. In response to a coronavirus-based loss in value, shareholders may argue that the directors and officers committed acts or omissions responsible for the loss in valuation and, in turn, the loss befalling the individual shareholder. 

Most D&O insurers include absolute bodily injury exclusions that expressly preclude coverage for any claim or loss “based on, directly or indirectly arising out of or relating to actual or alleged bodily injury.” While there are different versions of the exclusion, the insurer’s intent is generally to preclude coverage for any claim, even one for economic loss, if it is based on, arising out of or related to bodily injury. Of note, such exclusions continue to be challenged in the courts. 

Workers’ Compensation Insurance
Workers’ compensation policies generally extend insurance benefits to employees for injuries “arising out of or in the course of employment.” Workers’ compensation actions concerning the language often address whether the claimed injury is truly work-related, focusing on such factors related to the loss as its nature, the injured employee’s activity, the time and the location. Consequently, employees and employers whose work is related to coronavirus should maintain detailed records identifying potential exposures. 

Conclusion
To prepare for the potentially catastrophic impact of a global pandemic or similar health crisis, policyholders and insurers should review Liability and Workers’ Compensation polices to determine:

  • What new exposures and risks are present given the unique nature of the coronavirus?
  • Are coverage changes needed?
  • Which current policyholders are likely impacted most?
  • Are we receiving early inquiries and claims, and, if so, what do they indicate?
  • Do we have a process to triage claims to ensure they are handled in the best interest of all stakeholders? 

The risk of a global pandemic with catastrophic consequences seems to grow more prevalent every few years. To prepare for the potentially catastrophic impact of a global pandemic, insureds, insurers and brokers must understand what is and is not covered under such policies, and should work together to minimize potential losses by evaluating potential claims as early as possible.

Coronavirus: Factors for the Insurance Industry to Consider − Part 2 Event Cancellation and Contingency Nonappearance Insurance

Mathew P. Ross | Wilson Elser

Given the risk to life and the economic impact of coronavirus, policyholders and the insurance industry alike are watching and considering whether business interruption or event cancellation insurance benefits may be available while similarly assessing liability risks. This three-part series will cover specific aspects of insurance that all stakeholders – insured, insurers and brokers – should consider.  Part 1 can be accessed here

Coronavirus: Status and Impact
Since its discovery in late December 2019, the coronavirus has swept the globe with nearly 60 nations reporting infections. According to the World Health Organization (WHO), more than 75,000 people have been infected with the virus with nearly 3,000 resulting deaths. WHO has declared coronavirus a global health emergency and last week raised the global risk assessment to High − its second-highest risk level.

The spread of the virus has caused global markets to tumble to record lows. U.S. stocks closed lower for the sixth straight day on February 27, ending the week at its lowest since 2008. In Europe last week, the FTSE 100 in Britain fell more than 3 percent and the DAX in Germany fell more than 4 percent. In Asia, the Nikkei 225 in Japan closed down 3.7 percent, the KOSPI in South Korea dropped 3.3 percent and the Shanghai Composite in China dropped 3.7 percent.

Major events and industry conferences have been cancelled due to fears of spreading the virus. The Geneva International Motor Show was effectively cancelled when Switzerland banned all gatherings of more than 1,000 people until mid-March. Facebook cancelled one of its most anticipated annual events, the annual F8 conference in California, and in Barcelona the Mobile World Congress, the world’s biggest mobile phone trade show, also was cancelled. Earlier this week, the International Olympic Committee suggested the Tokyo Olympic Games, scheduled for July, may be cancelled if the virus is not contained by the spring. 

In this second part of the three-part series, we will review Event Cancellation and Contingency Nonappearance factors that insurance stakeholders should consider when claims under these policies are brought forward

Event Cancellation/Contingency and Nonappearance Insurance
Not surprisingly, coronavirus is already impacting scheduled events. For example, the Dalai Lama cancelled all current public engagements; some ports have rejected cruise ships altogether; some airlines have stopped flights to parts or all of China; and 50 countries have imposed travel restrictions and visa requirements primarily on those who recently visited China or are Chinese nationals. Major events such as the Shanghai Grand Prix, the annual Goldman Sachs partners’ meeting in New York and the Mobile World Congress in Barcelona also were cancelled or curtailed.

Insurance products specific to event cancellations or nonappearance of a key person generally provide coverage due to perils beyond the control of the insured, the organizer of an event and the attendees when such perils result in cancellation, abandonment, postponement or enforced reduced attendance. Insureds, insurers and brokers now may find themselves evaluating such products to determine whether coverage under such policies may have been triggered. Under most policies, an insured has an obligation to mitigate its losses by reasonably seeking to postpone and/or reschedule an event to a different time or location. Terms and conditions of each policy may vary. An event cancellation policy can protect an insured from financial losses such as lost ticket sales, out-of-pocket expenses, contractual guarantees to others and sometimes even reimbursement to attendees for their purchased tickets. 

Covered Perils & Losses
Covered perils in a typical Event Cancellation policy may include death, accident or illness; unavoidable travel delay; venue damage; and inclement weather. A covered claim may appear to be a claim for unavoidable travel delay in which event attendees could not make it to their destination due to travel arrangements that were delayed or cancelled, making it impossible to reach the event. A common misconception made by insureds, however, would be submitting a claim for an event cancellation due to the attendees’ or event organizers’ fear of traveling or spreading or catching the coronavirus, even though travel restrictions do not exist and the event is ready to go forward. The cancellation of an event while possibly in the best interest of the business may not necessarily be covered under such policies because the cancelation was not beyond the control of the event organizers or attendees. 

Exclusions
A typical Event Cancellation policy may contain exclusions for lack of interest or support for an event, a preexisting condition, terrorism, breach of contract, financial failure of a venture and even communicable diseases. One issue to be aware of is the Communicable Disease exclusion that excludes coverage where a loss arises out of fear of any world epidemic determined by the World Health Organization. While this exclusion may exist in some Event Cancellation policies, coverage still may be provided in some circumstances, such as if the venue where the event was to take place were closed under the order of a government or public or local authority due solely to a communicable disease that manifested within the venue. 

Conclusion
To prepare for the potentially catastrophic impact of a global pandemic or similar health crisis, policyholders and insurers should review Event Cancellation/Contingency and Nonappearance Insurance policies to determine:

  • What new exposures and risks are present given the unique nature of the coronavirus?
  • Given the global scale, what are the events that are being cancelled?
  • Which current policyholders are likely impacted most?
  • Are there early inquiries and claims, and what do they indicate?
  • Do we have a process to triage claims to ensure they are handled in the best interest of all stakeholders?

The risk of a global pandemic with catastrophic consequences seems to grow more prevalent every few years. To prepare for the catastrophic impact of a global pandemic, insureds, insurers and brokers must understand what is and is not covered under such policies, and should work together to minimize potential losses by evaluating potential claims as early as possible.