1 2014 INSURANCE & REINSURANCE LAW REPORT INSIDE: RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW WAL-MART IS TRICKLING DOWN UNEVENLY TO CLASS ACTIONS AGAINST INSURANCE COMPANIES NAIC CREDIT FOR REINSURANCE UPDATE RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS
2 The Insurance and Reinsurance Law Report is published by the Global Insurance & Financial Services Practice Group of Sidley Austin LLP. This newsletter reports recent developments of interest to the insurance and reinsurance industry and should not be considered as legal advice or legal opinion on specific facts. Any views or opinions expressed in the newsletter do not necessarily reflect the views and opinions of Sidley Austin LLP or its clients. Sidley Austin LLP is one of the world s premier law firms with more than 1,800 lawyers and 18 offices in North America, Europe, Asia and Australia. Sidley is one of only a few internationally recognized law firms to have a substantial, multidisciplinary practice devoted to the insurance and financial services industry. We have approximately 85 lawyers devoted exclusively to providing both transactional and dispute resolution services to the industry, throughout the world. Our Insurance and Financial Services Group has an intimate knowledge of, and appreciation for, the industry and its unique issues and challenges. Regular clients include many of the largest insurance and reinsurance companies, brokers, banks, investment banking firms and regulatory agencies for which we provide regulatory, corporate, securities, mergers and acquisitions, structured finance, derivatives, tax, reinsurance dispute, class action defense and other transactional and litigation services. For additional copies of the Sidley Austin LLP Insurance and Reinsurance Law Report or for additional information, please contact Daniel J. Neppl at or The articles included in this edition of the Insurance and Reinsurance Law Report will be posted on the firm s website at Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; and 1501 K Street, N.W., Washington, D.C , Sidley Austin refers to Sidley Austin LLP and affiliated partnerships as explained at Prior results do not guarantee a similar outcome.
3 2014 INSURANCE & REINSURANCE LAW REPORT This Insurance and Reinsurance Law Report has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel Sidley Austin LLP and Affiliated Partnerships (the firm ). All rights reserved. The firm claims a copyright in all proprietary and copyrightable text in this report.
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5 2014 INSURANCE & REINSURANCE LAW REPORT CONTENTS 4 RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW 8 WAL-MART IS TRICKLING DOWN UNEVENLY TO CLASS ACTIONS AGAINST INSURANCE COMPANIES 14 NAIC CREDIT FOR REINSURANCE UPDATE 26 RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS
6 RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW By Thomas D. Cunningham and Jen C. Won Every state has unclaimed property laws that declare property abandoned after a certain dormancy period. The property is then turned over to the state, which tries to find the rightful owner. But in many instances no one steps forward, and the state retains beneficial use of the money. With budgets becoming increasingly stretched, state regulators have shown renewed vigor in enforcing unclaimed property laws. Several states and their contingency fee-based auditors are increasingly targeting the life insurance industry, including small to mid-sized life insurers, through unclaimed property audits and market conduct examinations. These actions have brought to the fore the question: must life insurers affirmatively search for potentially deceased insureds or permit their regulators to do so? This article highlights some of the statutory, contractual and litigation elements of that question as respects unclaimed property law. [ ] must life insurers affirmatively search for potentially deceased insureds or permit their regulators to do so? Historical Unclaimed Property Practices Laws requiring abandoned or unclaimed property to be turned over or escheated to the state have existed since feudal times. Modern statutory unclaimed property regimes generally are based on one of three Uniform Unclaimed Property Laws, enacted in 1954, 1981 or These statutes are custodial in nature, such that the state holds the property for its rightful owner and attempts to return it to the owner. Under these laws, the state stands in the shoes of the true owner. That is, the state s rights in the unclaimed property are derivative of those of the owner, and the state can only take whatever interest the owner has in the property. Accordingly, the state can only escheat property that is due and payable by the holder to the owner. Outside of insurance, the trigger for unclaimed property laws is generally based on loss of contact with the property owner. This makes sense because it is clear to whom such property belongs and when it is due and owning. For example, deposits in a bank account or credits on a gift card belong to the respective owners and not the bank or gift card issuer. Moreover, such monies are immediately due and payable upon demand. Thus, if the bank or gift card issuer has lost contact with the owner of those funds and the dormancy period has expired, the holder is to report those monies and escheat them to the state. The same is not true for life insurance. Under most life insurance policies and the laws regulating them, a life insurer s obligation to pay death benefits arises only after being notified that an insured has died and receiving due proof of death. Accordingly, for life insurance proceeds, property is defined as the amount due and payable under the terms of a life insurance policy. Life insurance proceeds due and payable are presumed abandoned for unclaimed property law a set number of years (typically three to five) after the obligation to pay arose. Absent such notice and due proof of death, no death benefits are due and payable and so there is nothing to escheat. But what if the insured dies and no claim is ever made? To address that situation, a second trigger for Under most life insurance policies and the laws regulating them, a life insurer s obligation to pay death benefits arises only after being notified that an insured has died and receiving due proof of death. 4 RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW
7 These entities have taken the position that life insurers must use the Social Security Administration s Death Master File ( DMF ) to ascertain whether insureds are deceased and benefits are payable under life insurance policies, or to permit the states and their outside auditors to achieve the same result by themselves using the DMF and reporting the results to life insurers. These obligations, some insurers respond, have no basis in law and are contrary to the terms of life insurance policies and statutes [...] escheatment has developed for life insurance proceeds. When the insured on a life insurance policy attains or would have attained the limiting age (i.e., the age by which actuaries assume an insured has died, typically around 100 years old), state unclaimed property laws require the life insurer to escheat any death benefits associated with that policy. The life insurance industry and its regulators operated for decades with this common understanding of when life insurance proceeds become unclaimed property. Changing Landscape in Unclaimed Property Laws Over the past few years, however, certain contingency fee unclaimed property auditors and the states retaining them have grown dissatisfied with this approach. These entities have taken the position that life insurers must use the Social Security Administration s Death Master File ( DMF ) to ascertain whether insureds are deceased and benefits are payable under life insurance policies, or to permit the states and their outside auditors to achieve the same result by themselves using the DMF and reporting the results to life insurers. These obligations, some insurers respond, have no basis in law and are contrary to the terms of life insurance policies and statutes, which require settlement and payment of death benefits only upon receipt of a claim and due proof of death, for which an insurer may require a certified death certificate. Some states, such as New York, Maryland and Kentucky, have enacted rules or laws requiring DMF searches. Other states have enacted no such laws, but arguably sought to achieve the same result by undertaking seriatim unclaimed property audits or market conduct examinations of life insurers on potential violations. To this end, a task force from the National Association of Insurance Commissioners ( NAIC ) has announced multi-state market conduct examinations of more than 40 life insurers respecting unclaimed property law and unfair claim practices and thereafter has announced settlements with 18 of those insurers. The settlements, called Global Resolution Agreements, generally require the companies to perform DMF searches on a regular basis and generate monthly reports for review. Litigation Developments To date, however, every court to have considered the assertion that life insurers are obliged to conduct DMF comparisons or otherwise affirmatively search for potentially deceased insureds in the absence of an express rule or statute has rejected it. This increase in regulatory activity has also spawned increased litigation. State regulators, as well as private litigants, have alleged that life insurance companies have breached their duties of good faith and fair dealing and have not complied with state unclaimed property laws in failing to cross-check their in-force business against the DMF. In response, some insurers have challenged certain aspects of recently enacted legislation and regulatory audits. To date, however, every court to have considered the assertion that life insurers are obliged to conduct DMF comparisons or otherwise affirmatively search for potentially deceased insureds in the absence of an express rule or statute has rejected it. SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT 5
8 Private Litigation Against Insurers In one such case, Andrews, private plaintiffs filed class action complaints alleging that their insurers breached their duty of good faith and fair dealing by failing to use the DMF in identifying possible deaths of policyholders. Andrews v. Nationwide Mutual Insurance Company, No , 2012 WL (Ohio Ct. App. Oct 25, 2012). The court rejected the argument, noting that the life insurance contracts expressly require[d] receipt of proof of death. Use of the terms receiving and receipt demonstrate[d] [the life insurers s] passive role in establishing proof of death, the court found. The court expressly refused to import additional unspoken duties and obligations into the contracts. Likewise, in Total Asset Recovery Servs., LLC v. MetLife, Inc., No CA-3719 (Fla. Cir. Ct. Aug. 20, 2013) (appeal pending), a court held that Florida has not adopted a law requiring [insurers] to consult the Death Master File or to engage in elaborate data mining of external databases... in connection with payment or escheatment of life insurance benefits. More recently, in Feingold v. John Hancock Life Ins. Co., No (1st Cir. May 27, 2014), the First Circuit upheld the dismissal of a beneficiary s claim that a life insurer had an affirmative duty to search the DMF. In reaching this decision, the Circuit Court held that language in the policy requiring submission of a proof-of-death form before paying a claim was consistent with state law. Id. at *13. The court also rejected the argument that the plaintiff could bootstrap common law claims against the insurer based solely on its signing of a Global Resolution Agreement. Id. at *9. Litigation Involving Regulators In West Va. ex rel. Perdue v. Nationwide Life Ins. Co., No. 12-C-287 (W. Va. Cir. Ct. Dec. 27, 2013), a West Virginia court considered several lawsuits filed by the West Virginia State Treasurer against life insurers for failure to turn over unclaimed life insurance proceeds to his office. The allegations were that each insurer s statutory duty of good faith and fair dealing required it to conduct annual examinations of life insurance policyholders to determine if they are deceased or three years past the limiting age. The West Virginia Treasurer alleged that such information is readily available by searching the DMF or other third party databases. The court began its analysis with West Virginia s Unclaimed Property Act ( UPA ). That law, it found, defines property as respects life insurance proceeds as an amount due and payable under the terms of an annuity or insurance policy, including policies providing life insurance. Id. at 5. Only property presumed abandoned must be turned over or reported to the administrator, the court noted. As respects life insurance proceeds, property is presumed abandoned under West Virginia unclaimed property law three years after the obligation to pay arose or, in the case of a policy or annuity payable upon proof of death, three years after the insured has attained, or would have attained if living, the limiting age under the mortality table on which the reserve is based. Id. at 5-6. Turning next to the insurance laws, the court noted that the West Virginia Insurance Code requires life insurance policies delivered or issued in the state to include language conditioning 6 RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW
9 an insurer s liability upon the presentation of a claim, which in turn required a claimant to provide an insurer with notice giving rise to liability under a policy. Id. at *6. Decisions in these cases should shed further light on the important question of what obligation, if any, do life insurers have to affirmatively search for deceased policyholders in the absence of an express rule or statute. Reading the UPA and the Insurance Code in conjunction, the court found that receipt of due proof of death required to be in each of the subject policies was the trigger giving rise to an obligation to pay under the UPA. Absent statutorily required receipt of due proof of death, the court found, there were no life insurance proceeds due and payable and hence no property. Thus, the court found, the State Treasurer s argument that the UPA applies to life insurance proceeds before those proceeds meet the definition of property and before they are presumed abandoned must fail. Id. at *7. Furthermore, the court found, the argument that the UPA imposes an affirmative duty to search the DMF is inconsistent with the UPA s limiting age trigger, which expressly provides a mechanism for unclaimed life insurance proceeds to be remitted in the event the insurer never receives due proof of death from a claimant. Id. at *8. Under the UPA, the only two statutory triggers for the unclaimed property dormancy period are receipt of due proof of death and the limiting age. Id. Based upon the clear and unambiguous language of the UPA and the Insurance Code, the court found that defendants have no obligation to surrender the life insurance proceeds under the UPA until the obligation to pay arises either upon receipt of due proof of death or once the insured reaches the statutorily imposed limiting age and dismissed the case. Id. at *9. Other lawsuits challenging regulator actions respecting life insurer unclaimed property audits or market conduct examinations are pending in California and Illinois. 1 Decisions in these cases should shed further light on the important question of what obligation, if any, do life insurers have to affirmatively search for deceased policyholders in the absence of an express rule or statute. 1 E.g., Chiang v. American National Ins. Co., Case No (Sup. Ct. Cal. Oct. 9, 2013); Chiang v. Kemper Corp., et al., Case No (Sup. Ct. Cal. Oct. 16, 2013); United Ins. Co. of America, et al. v. Boron, et al., Case No (Ill. Cir. Ct., Sept. 4, 2013). SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT 7
10 WAL-MART IS TRICKLING DOWN UNEVENLY TO CLASS ACTIONS AGAINST INSURANCE COMPANIES By Eric S. Mattson Think back to elementary school. Some of you will remember teachers who thought it was a good idea sound discipline, even to punish the entire class when a few kids misbehaved. Class actions, when improperly certified, are kind of like that, only in reverse: an entire class of individuals, including people who suffered no harm and were subjected to no misconduct, can obtain a windfall because a handful of people within the class arguably suffered harm. And the consequences to the legal system and defendants alike can be dire. Mind you, class actions are not supposed to work like that. In general, a class should be certified only when the claims of everyone in the class can be fairly and efficiently resolved by adjudicating the claims of a single class representative. As one court put it, As goes the claim of the named plaintiff, so go the claims of the class. See Sprague v. General Motors Corp., 133 F.3d 388, 399 (6th Cir. 1998) (describing typicality requirement of Rule 23(a)(3)). In other words, if everyone in the class is truly in the same boat vis-à-vis the defendant, then the legal outcome for one can fairly stand as the binding legal outcome for many. If everyone in the proposed class is, in some sense, the victim of the same wrong (though, perhaps, to varying degrees), then it would seem straightforward for the court to recognize that cohesiveness by way of class certification. Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L. Rev. 97, 102 (2009).1 In general, a class should be certified only when the claims of everyone in the class can be fairly and efficiently resolved by adjudicating the claims of a single class representative. Why is this principle so important? One reason is that the class certification device, a procedural tool, cannot be used to change the substantive law. Elements of claims do not magically disappear in class actions, and defendants do not lose their right to assert affirmative defenses just because a class is certified. Indeed, the Rules Enabling Act, 28 U.S.C the statute that authorizes the Supreme Court to promulgate rules (including Rule 23, the foundation of class action practice in federal courts) comes with a critical limitation: The rules shall not abridge, enlarge or modify any substantive right. 28 U.S.C. 2072(b). [ ] the class certification device, a procedural tool, cannot be used to change the substantive law. Of late, courts around the country have been taking these principles more seriously than in years past. Gone are the days when courts would routinely assume the truth of the allegations in a complaint when deciding whether to certify a class. In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, (2011), and again in Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013), the Supreme Court emphasized that a class action plaintiff must affirmatively demonstrate his compliance with the requirements of Rule 23. In Wal-Mart, the Court tightened the requirements for demonstrating the existence of questions of law or fact common to the class under Rule 23(a)(2); in Comcast, it tightened the Rule 23(b)(3) requirement for showing that common questions predominate over any questions affecting only individual members of the putative class. 1 Available at 8 WAL-MART IS TRICKLING DOWN UNEVENLY TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
11 Understandably, the legal commentariat has closely scrutinized Wal-Mart and Comcast, which, taken together, have tilted the playing field in favor of class action defendants. But the vast majority of class actions never reach the Supreme Court, and despite the enactment of the Class Action Fairness Act of 2005, 28 U.S.C. 1332(d), and its expansion of federal jurisdiction over class actions, many class actions are still adjudicated in state courts. Out in the trenches in state courts, in federal district courts and in federal appellate courts the results have not been as one-sided as they have been in Washington, D.C. [ ] while the balance of power in class actions has shifted in favor of defendants, cases that should not be certified as class actions still can be. This article discusses two starkly different approaches to class certification taken this past year by two different state supreme courts. Both cases were brought against insurance companies over claims-handling practices, but the similarities end there. The cases illustrate the fact that, while the balance of power in class actions has shifted in favor of defendants, cases that should not be certified as class actions still can be. Class Actions Against Insurance Companies Insurance companies have been regular targets of class actions for nearly two decades. The subjects of these lawsuits have been many and varied, ranging from vanishing premium policies to senior citizen annuity sales; from the use of the Ingenix database to the use of retained asset accounts ; and from the use of aftermarket auto parts to the receipt of revenue sharing. It would be a mistake to underestimate the creativity of the plaintiffs class action bar when it comes to crafting legal theories to pursue against the insurance industry. With some notable exceptions (such as claims under the Telephone Consumer Protection Act, 47 U.S.C. 227), class actions against insurance companies tend to fall into one of two categories. The first involves how the product was sold. Was the purchaser misled in some material way when buying a policy? The second involves whether promised benefits were actually provided. Is the company somehow short-changing policyholders? The two cases discussed in this article fall into the latter category; that is, they involve claims that insurance companies somehow short-changed their policyholders in the claims-handling process. In one case, we will see, the court took the teachings of recent Supreme Court jurisprudence seriously; in the other, the court purported to follow Wal-Mart, but in reality did not. Ohio Our first case involved a claim that State Farm did not tell policyholders with damaged windshields about all of the benefits they could receive. Rather than paying to replace the windshields, State Farm paid to repair some of them with a chemical compound that was supposedly an inferior fix. Cullen v. State Farm Mut. Auto. Ins. Co., 999 N.E.2d 614, 618 (Ohio 2013). According to the plaintiff, State Farm s claim representatives relied on a company-prepared script to persuade policyholders to choose the repair option rather than the replacement cost of the windshield (minus any deductible). Id. at SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT 9
12 Ohio s class action rule is virtually identical to Rule 23, so Ohio courts, like many other state courts, look to federal authorities for guidance on whether a class should be certified. Id. at 622. The Ohio Supreme Court relied on Wal- Mart and Comcast to set the stage for its holding that myriad contested issues were individualized, and that these issues precluded certification. This ruling was unquestionably faithful to those Supreme Court cases and the all in the same boat principles underlying them. The Ohio Supreme Court relied on Wal-Mart and Comcast to set the stage for its holding that myriad contested issues were individualized, and that these issues precluded certification. State Farm pointed out, and the court agreed, that it could not be liable if an individual class member knowingly chose windshield repair but individual consent and knowledge cannot be proven with common evidence. Id. at 626. Similarly, if a windshield repair could return a vehicle to preloss condition... State Farm s liability would be subject to individual examinations of each vehicle, not common questions. Id. As for the claim that State Farm systematically failed to inform policyholders of their options, the court found that policyholders had various individual, unscripted conversations with claim representatives and others, and there is no common proof of what any individual policyholder knew when consenting to windshield repair. Id. As a result, [d]etermining whether State Farm breached any obligations to insureds necessarily entails an individualized inquiry into each of these communications. Id. The court went on to find other fatal dissimilarities in the claims of class members. Id. at In so doing, it adhered to the principle that class certification is a procedural device. It is not supposed to be used to turn losing claims into winners, or vice versa. For example, in the State Farm case, if a class member had a losing claim because he consented, with full knowledge, to a repair rather than a replacement, then his claim could not succeed merely because someone else (the class representative, perhaps) did not consent. It is no answer to this to say, as some plaintiffs lawyers do, that class actions facilitate the prosecution of small claims that would never be prosecuted unless they could be aggregated into class actions. It s true that one of the justifications for class actions is that they make small claims marketable through the device of aggregation. But this cannot change substantive law. [T]he class action was never designed to serve as a freestanding legal device for the purpose of doing justice, nor is it a mechanism intended to serve as a roving policeman of corporate misdeeds or as a mechanism by which to redistribute wealth. Martin H. Redish, Wholesale Justice: Constitutional Democracy and the Problem of the Class Action Lawsuit 22 (Stanford University Press 2009). Instead, it is an elaborate procedural device designed to facilitate the enforcement of preexisting substantive law. Id. The State Farm opinion provides a good example of a court following these principles. 10 WAL-MART IS TRICKLING DOWN UNEVENLY TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
13 Montana We now move west to Montana. In contrast to Ohio s approach, Montana s supreme court has issued an opinion that turned a blind eye to individualized issues and, despite purporting to follow Wal-Mart, certified a class that cannot be squared with that precedent. If it is not clear what claims and theories are actually at issue, then it is hard to see how a class can be certified. Yet in Jacobsen, it was. The case is Jacobsen v. Allstate Insurance Co., 310 P.3d 452 (Mont. 2013). Like the Ohio case, Jacobsen involved the theory that an insurance company systematically short-changed its policyholders in the claims process. The theory was based on Allstate s use of claims guidelines that, according to the court, was designed to fast track settlements and reduce the amount paid out on claims. Id. at 455. The guidelines accomplished this goal, the court said, by encouraging claims adjusters to establish contact with claimants quickly and to work with them in an empathetic manner to resolve their claims. Id. at 458. What seemed most bothersome to the court was the alleged use of an attorney economics script that was allegedly intended to dissuade claimants from hiring lawyers. Id. at This was done, according to the court, because represented claimants generally received higher settlements. Id. The court acknowledged in passing that the plaintiff s requested relief and alleged bases for damages are not entirely clear. Id. at 464. Let s pause and consider that statement for a moment. If the requested relief and basis for damages are unclear, how can a class be certified? One of the fundamental questions of class certification is whether the claims can be fairly and efficiently resolved on a classwide basis. If it is not clear what claims and theories are actually at issue, then it is hard to see how a class can be certified. Yet in Jacobsen, it was. The court glossed over this problem and allowed plaintiff to proceed based on the idea that class members may have suffered actual harm because Allstate engaged in an alleged zero-sum economic plan systematically reducing claims payments to increase profits. Id.; see also id. at 467. But even if this is so, it begs the question of whether a class can be certified. Even if the allegedly unlawful conduct caused harm to the class as a whole, as the court suggested (id. at ; emphasis added), that is a different issue than whether the claims of every individual in the class can fairly be resolved in a single proceeding. It assumes, without proof, that everyone in the class is in the same boat. For instance, if Allstate gave a class member a fair and speedy resolution of his claim, what injury has that claimant suffered? The court never answers this question, but the answer seems obvious: no injury at all. Yet because a class was certified, that same claimant, having already received a fair, speedy resolution of his claim, could obtain an additional payment a windfall if the claims adjustment program is ultimately determined to be unfair at some macro level. The Montana court stated that [t]he individual context of any one [claim resolution] is not relevant to its ruling, nor is the fact that not all class members have suffered actual harm or an unfair adjustment. Id. at 472. This is impossible to square with Wal-Mart s statement that [c]ommonality requires the plaintiff to demonstrate that the class members have suffered the same injury. 131 S. SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT 11
14 Ct. at 2551 (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157 (1982)). And it confirms that the Montana court was open to changing the substantive law via the procedural tool of class certification, so that individuals with losing claims may nevertheless recover merely because they are members of a certified class. Regrettably, the Montana opinion proves the truth of this observation from one class action scholar: [T]he modern class action may give rise to as much harm as good; if not properly controlled it may wreak havoc on the legal system and the values that underlie it. Redish, supra, at 1-2. Conclusion Class certification is a critical issue, sometimes bordering on outcome-determinative, in any putative class action. If a class is certified, the exposure to the defendant can grow exponentially and may create pressure to settle, even if the claims are weak. The Supreme Court has tightened the way the rules governing class certification are applied, and to some extent, that guidance has been followed around the country, in both federal and state courts. The Ohio opinion well illustrates the effect of those Supreme Court opinions. The Montana opinion shows that the battle is far from over. 12 WAL-MART IS TRICKLING DOWN UNEVENLY TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
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16 NAIC CREDIT FOR REINSURANCE UPDATE By Charlene C. McHugh Although it has been more than two years since the National Association of Insurance Commissioners ( NAIC ) amended its credit for reinsurance model laws, the NAIC remains active in assisting state insurance regulators with procedural aspects of the new laws. By way of background, in November 2011, the NAIC adopted amendments to its Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786) ( CFR Model Laws ). In 2014, the RTF will re-examine the current (reduced) collateral requirements set forth in the Model to determine whether changes are needed (raising or lowering collateral amounts). When the Model was drafted, new collateral amounts were set with the intent that they be reviewed within two years of their use by Certified Reinsurers. Since 2011, a number of states have adopted the CFR Model Laws or are in the process of doing so. New York and Florida (propertycasualty only) had already amended collateral requirements by the time the CFR Model Laws were passed. The CFR Model Laws allow for a reduction in posted collateral from an unauthorized reinsurer that is approved by states as a Certified Reinsurer. In deciding whether to certify a reinsurer, state insurance regulators evaluate a number of factors, including whether a reinsurer is domiciled in a jurisdiction the state considers to be a Qualified Jurisdiction (i.e., one that effectively regulates reinsurers domiciled in the jurisdiction). States that have begun certifying reinsurers include Connecticut, Florida, New Jersey and New York. Since passing the CFR Model Laws, the NAIC through its Reinsurance (E) Task Force has been providing a forum for multiple-state review of Certified Reinsurer applications and has also created a process to help states determine what constitutes a Qualified Jurisdiction. Certified Reinsurer Application Review The Reinsurance Financial Analysis Working Group ( RFAWG ) was created to address specific applications by reinsurers that have already been approved as Certified Reinsurers in Florida, Connecticut, New York and New Jersey. RFAWG provides a forum for multi-state review of Certified Reinsurer applications and for peer review by state insurance regulators of decisions made by other states on applications. Peer reviews allow states to access diligence already conducted by other states during the approval process. RFAWG has reported that, as of year-end 2013, of the twenty-one reinsurer applications that had been peer reviewed, eighteen were approved and two were still pending. One application was denied (so that the reinsurer, certified in one state, must seek individual approval in all other states). In deciding whether to certify a reinsurer, state insurance regulators evaluate a number of factors, including whether a reinsurer is domiciled in a jurisdiction the state considers to be a Qualified Jurisdiction (i.e., one that effectively regulates reinsurers domiciled in the jurisdiction). Since passing the CFR Model Laws, the NAIC through its Reinsurance (E) Task Force has been providing a forum for multiple-state review of Certified Reinsurer applications and has also created a process to help states determine what constitutes a Qualified Jurisdiction. RFAWG provides a forum for multistate review of Certified Reinsurer applications and for peer review by state insurance regulators of decisions made by other states on applications. Peer reviews allow states to access diligence already conducted by other states during the approval process. 14 NAIC CREDIT FOR REINSURANCE UPDATE
17 Qualified Jurisdiction Process To assist states in determining whether a reinsurer s domicile is a Qualified Jurisdiction, the NAIC adopted a written process in August 2013 for developing and maintaining a list of qualified jurisdictions (Qualified Jurisdiction Process). In drafting the Qualified Jurisdiction Process, the NAIC recognized the importance of consistency among states and took into account that some states (e.g., Florida and New York) had already, in effect, made decisions on certain countries when they certified 29 reinsurers domiciled in Bermuda, the UK, Switzerland, and Germany. An expedited review is used for jurisdictions that have already been vetted by states that granted Certified Reinsurer status to reinsurers domiciled in those jurisdictions. Qualified Jurisdiction Working Group The NAIC created a specific group to perform the jurisdictional analysis the Qualified Jurisdiction Working Group of the Reinsurance (E) Task Force ( Working Group ). The Working Group is responsible for: initiating the evaluation process and coordinating the review of a jurisdiction; making a preliminary determination as to whether the jurisdiction under consideration meets the Qualified Jurisdiction Process Standard of Review and is deemed acceptable to be included on the NAIC List of Qualified Jurisdictions; communicating this information in written form to the supervisory authority of the jurisdiction under review; considering any response from the jurisdiction, and then preparing a final report for recommendation to the Reinsurance Task Force and ultimately the NAIC s Executive/Plenary Committees; and coordinating the process for ongoing and periodic reviews. Once a jurisdiction is approved, it is added to the NAIC s List of Qualified Jurisdictions (if not approved, reapplication is allowed at the NAIC s discretion). A Qualified Jurisdiction must agree to share information and cooperate on a confidential basis with US state insurance regulatory authority with respect to all certified reinsurers domiciled within that jurisdiction. Once a jurisdiction is approved, it is added to the NAIC s List of Qualified Jurisdictions (if not approved, reapplication is allowed at the NAIC s discretion). A Qualified Jurisdiction must agree to share information and cooperate on a confidential basis with US state insurance regulatory authority with respect to all certified reinsurers domiciled within that jurisdiction. The NAIC has also created a Memorandum of Understanding ( MOU ) template for negotiation by the NAIC with the Qualified Jurisdiction; the MOU will memorialize confidentiality safeguards with respect to information shared between jurisdictions. After approval, a Qualified Jurisdiction is subject to re-evaluation every five years. Further, Qualified Jurisdictions are required to notify the NAIC of any material change in the applicable reinsurance supervisory system that may affect the status of the Qualified Jurisdiction. U.S. jurisdictions are expected SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT 15
18 to notify the NAIC if they receive notice of any such material change, or any adverse developments with respect to enforcement of final US judgments that may affect the status of the Qualified Jurisdiction. Expedited Review Process The Qualified Jurisdiction Process allows for expedited review of a jurisdiction, after which the jurisdiction is designated as a Conditional Qualified Jurisdiction. The expedited process facilitates the certification of reinsurers domiciled therein until a complete evaluation is completed. Because certain states have already approved reinsurers in Bermuda, Germany, Switzerland and the UK, an expedited review procedure was used by the NAIC in analyzing such jurisdictions. At year-end 2013, the NAIC announced that it had completed its expedited review and had granted these jurisdictions Conditional Qualified Jurisdiction status. Standard of Review and Evaluation Methodology The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations are intended to be outcomes-based comparisons to financial solvency regulation under the NAIC s accreditation program, adherence to international supervisory standards and relevant international guidance for recognition of reinsurance supervision. The Standard of Review for a jurisdiction s qualification is that the NAIC must reasonably conclude that: the jurisdiction s reinsurance supervisory system achieves a level of effectiveness in financial solvency regulation that is deemed acceptable for purposes of reinsurance collateral reduction; The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations are intended to be outcomesbased comparisons to financial solvency regulation under the NAIC s accreditation program, adherence to international supervisory standards and relevant international guidance for recognition of reinsurance supervision. the jurisdiction s demonstrated practices and procedures with respect to reinsurance supervision are consistent with its reinsurance supervisory system; and the jurisdiction s laws and practices satisfy the criteria required of Qualified Jurisdictions as set forth in the CFR Model Laws. In evaluating a jurisdiction, the Working Group uses a specific Evaluation Methodology set forth in the Qualified Jurisdiction Process, which considers the jurisdiction s: laws and regulations; regulatory practices and procedures; requirements applicable to US-domiciled reinsurers; regulatory cooperation and information sharing; history of performance of domestic reinsurers; enforcement of final US judgments; and 16 NAIC CREDIT FOR REINSURANCE UPDATE
19 allowance of solvent schemes of arrangement. The specific laws, regulations, and regulatory practices are outlined below in Appendices A and B. Conclusion States that have adopted reinsurance collateral reform (thus far, nineteen states and at least five with pending bills) are beginning to process applications for Certified Reinsurers, and many are using the NAIC s uniform, multi-state process. At year-end 2013, the NAIC announced that it will now review the regulatory supervisory systems of Ireland and France, which have requested approval as Qualifying Jurisdictions. It is expected that additional jurisdictions, such as Japan, will be considered in the near future. Appendix A: Laws and Regulations 1. Examination Authority Does the jurisdiction have the authority to examine its domestic reinsurers? This description should address the following: a. Frequency and timing of examinations and reports. b. Guidelines for examination. c. Whether the jurisdiction has the authority to examine reinsurers whenever it is deemed necessary. d. Whether the jurisdiction has the authority to have complete access to the reinsurer s books and records and, if necessary, the records of any affiliated company. e. Whether the jurisdiction has the authority to examine officers, employees and agents of the reinsurer when necessary with respect to transactions directly or indirectly related to the reinsurer under examination. f. Whether the jurisdiction has the authority to share confidential information with U.S. state insurance regulatory authorities, provided that the recipients are required, under their law, to maintain its confidentiality. 2. Capital and Surplus Requirement Does the jurisdiction have the authority to require domestic reinsurers to maintain a minimum level of capital and surplus to transact business? This description should address the following: a. Whether the jurisdiction has the authority to require reinsurers to maintain minimum capital and surplus, including a description of such minimum amounts. b. Whether the jurisdiction has the authority to require additional capital and surplus based on the type, volume and nature of reinsurance business transacted. SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT 17
20 c. Capital requirements for reinsurers, including reports and a description of any specific levels of regulatory intervention. 3. Accounting Practices and Procedures Does the jurisdiction have the authority to require domestic reinsurers to file appropriate financial statements and other financial information? This description should address the following: a. Description of the accounting and reporting practices and procedures. b. Description of any standard financial statement blank/ reporting template, including description of content/disclosure requirements and corresponding instructions. 4. Corrective Action Does the jurisdiction have the authority to order a reinsurer to take corrective action or cease and desist certain practices that, if not corrected or terminated, could place the reinsurer in a hazardous financial condition? This description should address the following: a. Identification of specific standards which may be considered to determine whether the continued operation of the reinsurer might be hazardous to the general public. b. Whether the jurisdiction has the authority to issue an order requiring the reinsurer to take corrective action when it has been determined to be in hazardous financial condition. 5. Regulation and Valuation of Investments What authority does the jurisdiction have with respect to regulation and valuation of investments? This description should address the following: a. Whether the jurisdiction has the authority to require a diversified investment portfolio for all domestic reinsurers as to type, issue and liquidity. b. Whether the jurisdiction has the authority to establish acceptable practices and procedures under which investments owned by reinsurers must be valued, including standards under which reinsurers are required to value securities/investments. 6. Holding Company Systems Does the jurisdiction have laws or regulations with respect to supervision of the group holding company systems of reinsurers? This description should address the following: 18 NAIC CREDIT FOR REINSURANCE UPDATE