2005 RIL Complete

VOLUME 11
NUMBER 1
W INTER 2004
2004 REINSURANCE LAW REPORT

INSIDE:
NO ARBITRATION CLAUSE, NO ARBITRATION? NOT NECESSARILY: THE ARBITRABILITY OF DISPUTES ARISING UNDER COLLATERAL AGREEMENTS THE "FOLLOW THE FORTUNES" DOCTRINE: ADDRESSING A CEDENT'S ALLOCATION AND ANNUALIZATION DECISIONS AN ANALYSIS OF THE 2004 PROCEDURES FOR THE RESOLUTION OF U.S. INSURANCE AND REINSURANCE DISPUTES REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW
The Reinsurance Law Report is published by the Insurance & Financial Services Practice Group of Sidley Austin Brown & Wood LLP. This newsletter reports recent developments of interest to the 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 Brown & Wood LLP or its clients. The Insurance & Financial Services Practice Group of Sidley Austin Brown & Wood LLP offers comprehensive counseling, negotiation, and arbitration and litigation services to domestic and foreign insurers, reinsurers, receivers, brokers, creditors, and guaranty associations. Lawyers in the worldwide offices of Sidley Austin Brown & Wood LLP are available to provide efficient and effective services for our clients on a wide spectrum of matters, including:
Contract Drafting Opinions On Contractual Rights and Obligations and Audit Findings Commutations Arbitration and Litigation Issues Arising Out of Insurance Insolvencies Letter of Credit Issues Agents and Intermediaries Problems and Issues For additional copies of the Reinsurance Law Report or for additional information, please contact Tom Cunningham at 312.853.7594; fax 312.853.7036; email address: tcunningham@sidley.com. The articles included in this edition of the Reinsurance Law Report will be posted on the firms website at www.sidley.com .
The affiliated firms, Sidley Austin Brown & Wood LLP, a Delaware limited liability partnership, Sidley Austin Brown & Wood LLP, an Illinois limited liability partnership, Sidley Austin Brown & Wood, an English general partnership and Sidley Austin Brown & Wood, a New York general partnership, are referred to herein collectively as Sidley Austin Brown & Wood.
2004 REINSURANCE LAW REPORT
This Reinsurance Law Report has been prepared by Sidley Austin Brown & Wood 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.
NO ARBITRATION CLAUSE, NO ARBITRATION? NOT NECESSARILY: THE ARBITRABILITY OF DISPUTES ARISING UNDER COLLATERAL AGREEMENTS
BY: SUSAN A. STONE, RONIE M. SCHMELZ AND JOSHUA G. URQUHART
In today's complex reinsurance environment, many reinsurance transactions consist of more than just a reinsurance agreement. Trust agreements, service and administration agreements, hold harmless and indemnity agreements, letter agreements and side agreements, and a host of other contracts can play nearly as important a role in delineating the relationship between cedent and reinsurer as does the reinsurance agreement. Unfortunately-but perhaps understandably-these related agreements often do not contain all of the contractual provisions found in the related reinsurance agreement. One oftomitted provision is an arbitration clause. While this oversight may seem trivial when negotiating a comprehensive reinsurance transaction, its omission can take on unintended significance if a dispute arises concerning one of the collateral or related agreements and one party resists arbitration. This issue was at the heart of two recent court decisions: National American Ins. Co. v. SCOR Reinsurance Co., 362 F.3d 1288 (10th Cir. 2004) ("NAICO") and New Hampshire Ins. Co. v. Canali Reinsurance Co., 2004 WL 769775 (S.D.N.Y. April 12, 2004) ("NHIC"). While they reached different conclusions on the arbitrability of a dispute arising under a collateral or related agreement, these cases teach that a broad arbitration clause, coupled with sufficient indicia that a dispute arising under the collateral agreement bears a "significant relationship" to, or "touches," the related reinsurance contract, will generally require a court to compel arbitration of disputes arising under a collateral agreement without an arbitration clause. This article explores the issue of arbitrability of collateral agreements, analyzes the NAICO and NHIC cases, and offers some suggestions on how parties can best seek to ensure that a dispute arising under any agreement that is part of a broad overarching reinsurance transaction will be arbitrated. A threshold question for any dispute between a ceding company and its reinsurer is whether the dispute falls within the scope of a potentially applicable arbitration clause. The enforcement of arbitration clauses in reinsurance contracts arising from interstate commerce is governed by the Federal Arbitration Act, 9 U.S.C. 1, et seq. Relying upon the congressional mandate in the Federal Arbitration Act, the Supreme Court has declared that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Disputes may arise, however, as to whether a collateral or related agreement is encompassed by a reinsurance contract's arbitration clause. Courts have generally addressed this issue through a two step inquiry. First, they ascertain whether the arbitration provision is a broad or narrow one. See, e.g., Collins & Aikman Products Co. v. Building Systems, Inc., 58 F.3d 16, 20 (2d Cir. 1995). Generally, a broad arbitration provision is one that "evidences the parties' intent to have arbitration serve as the primary recourse for disputes connected to the agreement containing the clause," Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 225 (2d Cir. 2001), whereas a narrow arbitration clause is one "that limit[s] arbitration to specific types of disputes." Collins, 58 F.3d at 21. If a court determines that the
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In today's complex reinsurance environment, many reinsurance transactions consist of more than just a reinsurance agreement.
These cases teach that a broad arbitration clause, coupled with sufficient indicia that a dispute arising under the collateral agreement bears a "significant relationship" to, or "touches," the related reinsurance contract, will generally require a court to compel arbitration of disputes arising under a collateral agreement without an arbitration clause.
The Supreme Court has declared that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration."
NO ARBITRATION CLAUSE, NO ARBITRATION? NOT NECESSARILY: THE ARBITRABILITY OF DISPUTES ARISING UNDER COLLATERAL GREEMENTS
If, on the other hand, the arbitration clause is broad, "there arises a presumption of arbitrability," and the clause may be deemed to encompass any dispute that is connected or related to the agreement containing the arbitration clause.
arbitration provision is narrow in scope, it generally will conclude its analysis and hold that the dispute is not arbitrable (unless, of course, the narrow arbitration provision expressly provides otherwise). See, e.g., Gerling Global Reinsurance Co.-U.S. Branch v. Ace Property & Cas. Ins. Co., 42 Fed. Appx. 522, 523 (2d Cir. 2002); Louis Dreyfus Negoce, 252 F.3d at 224. If, on the other hand, the arbitration clause is broad, "there arises a presumption of arbitrability," and the clause may be deemed to encompass any dispute that is connected or related to the agreement containing the arbitration clause. Collins, 58 F.3d at 23; accord Louis Dreyfus Negoce, 252 F.3d at 224. Even if the arbitration provision is a broad one, however, the court's analysis is not complete. It must next determine whether the allegedly related or collateral agreement under which the dispute arises bears a "significant relationship" to, or touches, the agreement containing the arbitration provision. See Personal Security & Safety Sys., Inc. v. Motorola, Inc., 297 F.3d 388, 392-93 (5th Cir. 2002). Put another way, the court must determine if the two agreements are, in fact, "part of the same overall transaction." Id. at 393. In applying this second part of the analysis, courts typically examine a number of different factors to gauge the extent of the relationship between the two allegedly related or collateral agreements. First, courts look to see if the agreements are contemporary in nature. If the agreements were executed "contemporaneously by the same parties, for the same purposes, and as part of the same transaction," then they will be "construed together," and a broad arbitration provision in one will encompass any disputes arising out of the other. Id. Second, courts examine the terms of the agreements to determine whether they reference one another-if so, a broad arbitration provision in one of the agreements will be more likely to encompass a dispute arising out of the allegedly collateral or related agreements. See Pennzoil Exploration and Production Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1068-69 (5th Cir. 1998). Third, courts explore the interdependence between the purportedly related or collateral agreements, holding that if each such agreement is dependent on the existence of the overall transaction in its entirety, a broad arbitration in one agreement will encompass disputes arising out of the other. See Neal v. Hardee's Food Sys., Inc., 918 F.2d 34 (5th Cir. 1990). Finally, courts sometimes inquire whether the agreement containing the arbitration clause is the "keystone" agreement to the overall transaction, holding that if it is, the provision is intended to "reach all aspects of the parties' relationship" and thus will govern collateral agreements which contain no arbitration provisions of their own. Neal, 918 F.2d at 37. This multifactor analysis seems to boil down to the following: If the parties to a transaction consisting of multiple contracts include a broad arbitration clause in any of the agreements that play a crucial role in the overall transaction, that arbitration provision will likely govern disputes arising out of any agreements that are part of the transaction. In other words, when parties to a transaction evidence their intent to arbitrate all disputes arising out of their relationship by inserting a broad arbitration provision in an agreement that plays a critical role in the transaction, all disputes relating to the overall transaction-including disputes arising from related or collateral agreements-likely will be arbitrated. A. Compelling Arbitration of Disputes Under Related Agreements: NAICO The Tenth Circuit's decision in NAICO aptly illustrates the above analysis. In that case (in which the authors represented SCOR Re), NAICO and SCOR Re were parties to a series of surety reinsurance treaties covering various payment and performance bonds issued by NAICO. The treaties contained an arbitration clause that provided that "[a]s a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire."
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This multifactor analysis seems to boil down to the following: If the parties to a transaction consisting of multiple contracts include a broad arbitration clause in any of the agreements that play a crucial role in the overall transaction, that arbitration provision will likely govern disputes arising out of any agreements that are part of the transaction.
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Prior to finalizing these treaties, NAICO apparently informed SCOR Re that its Best's credit rating or U.S.Treasury underwriting criteria would not permit NAICO to issue certain types of bonds that it wished to reinsure under the treaties. To permit NAICO to be eligible to write this type of business for cession to the treaties, SCOR Re agreed to act as co-surety on such bonds, provided that it did not become liable as a primary insurer or co-surety. To accomplish this goal and to protect SCOR Re from assuming any primary liability as a co-surety, the parties entered into a hold harmless and indemnity agreement whereby they agreed that NAICO would hold SCOR Re harmless and indemnify it for any losses suffered or obligations incurred as a co-surety with NAICO for such bonds. Shortly after executing these reinsurance contracts, NAICO issued two payment and performance bonds that were specially accepted by SCOR Re in its role as lead reinsurer on the treaties. Due to the large size of the project, however, NAICO apparently required additional co-surety support. SCOR Re agreed to act as co-surety as an "accommodation" to NAICO. Accordingly, SCOR Re executed a series of bonds as co-surety and delivered them to NAICO to be issued. Subsequently, SCOR Re's obligation under the reinsurance treaties was terminated. Thereafter, cost overruns resulted in losses on both bonds, and NAICO filed suit against SCOR Re in the U.S. District Court for the Western District of Oklahoma. In that suit, NAICO sought recovery not under the reinsurance treaties (which contained an arbitration clause), but under SCOR Re's allegedly "independent" co-surety agreement which contained no arbitration clause. SCOR Re moved to dismiss the complaint and compel arbitration, arguing that any co-surety obligation arose solely as a result of the parties' reinsurance treaties, and that the broad arbitration clause in those treaties extended to all disputes arising from the related co-surety agreement. NAICO replied that the treaties' arbitration provision was expressly limited to disputes arising under the treaties and did not apply to the separate agreement to act as cosurety. After extensive briefing, the district court denied SCOR Re's motion to compel arbitration. SCOR Re appealed the decision under Section 16 of the Federal Arbitration Act, which permits an immediate appeal of an order denying a petition to compel arbitration. On appeal, SCOR Re emphasized that its agreement to act as co-surety on the relevant bonds was undertaken solely in connection with the reinsurance treaties between it and NAICO, each of which contained a broad arbitration provision. NAICO reiterated its arguments from below, including that the first clause of the arbitration provision-"as a condition precedent to any right of action hereunder"-limited the scope of the arbitration clause to disputes under the reinsurance treaties only. SCOR Re responded that this prefatory clause was solely procedural in nature and could not affect the substantive scope of the arbitration provision, citing a Second Circuit opinion on the issue. See ACE Capital Re Overseas Ltd. v. Central United Life Ins. Co., 307 F.3d 24 (2d Cir. 2002). The Tenth Circuit agreed with SCOR Re. In reversing the lower court's opinion and ordering the matter to arbitration, the Circuit Court first addressed the "condition precedent" language and the issue of whether the arbitration clause in the reinsurance treaties was broad or narrow in scope. The court expressly endorsed the Second Circuit's holding in ACE Capital, finding that the "condition precedent" phrase was "a procedural clause that addresses how issues are arbitrated and when judicial action may be brought under [the reinsurance treaties], but it does not manifest an intent to limit the scope of the parties' broad agreement to arbitrate 'any irreconcilable dispute.'" NAICO, 362 F.3d at 1291 (citing and endorsing ACE Capital).
On appeal, SCOR Re emphasized that its agreement to act as co-surety on the relevant bonds was undertaken solely in connection with the reinsurance treaties between it and NAICO, each of which contained a broad arbitration provision. NAICO reiterated its arguments from below, including that the first clause of the arbitration provision-"as a condition precedent to any right of action hereunder"-limited the scope of the arbitration clause to disputes under the reinsurance treaties only.
The court acknowledged the interdependent nature of the two agreements, observing that the reinsurance treaties and the cosurety agreement were integral and interrelated parts of one deal and that "the two agreements are more than related; they are dependent on each other."
Having concluded that the arbitration provision was broad in scope, the Tenth Circuit then turned to whether the dispute arose from an agreement that was sufficiently related to these treaties. First, it noted that the reinsurance treaties, the agreement to act as co-surety and the hold harmless and indemnification agreement all involved the same subject matter-the payment and performance bonds themselves. Id. at 1291-92. Second, it cited the fact that the hold harmless and indemnification agreement referenced both the agreement to act as co-surety and the reinsurance treaties as further support of its decision that the arbitration provisions in the latter would encompass disputes arising out of the former. Id. at 1291. Third, the court acknowledged the interdependent nature of the two agreements, observing that the reinsurance treaties and the co-surety agreement were integral and interrelated parts of one deal and that "the two agreements are more than related; they are dependent on each other." Id. at 1291-92. Fourth, the court addressed NAICO's fundamental argument against compelling arbitrationthat the agreement to act as co-surety did not contain an arbitration provision-by reiterating its holding from a prior case that the absence of an arbitration provision in a purportedly related or collateral agreement does not mean that a dispute arising under such an agreement is not arbitrable. Id. at 1292 (citing ARW Exploration Corp. v. Aguirre, 45 F.3d 1455 (10th Cir. 1995)). Emphasizing that sophisticated ceding companies and reinsurers represented by counsel are always free to carve out exceptions to broad arbitration clauses contained in their reinsurance agreements, the Tenth Circuit pointedly noted that NAICO failed to do so in the present case. Id. Because the facts demonstrated a "significant relationship" between the reinsurance treaties and the co-surety agreement, the court concluded that the parties had intended to arbitrate disputes arising under the co-surety agreement. Accordingly, it reversed the trial court's decision and determined that NAICO's claims must be arbitrated. B. Denying Arbitration of Disputes Under Related Agreements: NHIC A different conclusion was reached in the NHIC decision. In NHIC, the U.S. District Court for the Southern District of New York refused to compel arbitration of a dispute arising from a trust agreement that allegedly was collateral to a reinsurance agreement containing an arbitration provision. In that case, Canali reinsured various vehicle service contracts issued by NHIC. The companies also entered into a trust agreement whereby NHIC made deposits into a trust account to ensure that sufficient proceeds were available to satisfy claims under the reinsured contracts. At some point, Canali asserted that NHIC failed to make sufficient deposits into the trust agreement. NHIC responded that Canali's affiliates lacked the financial resources to permit Canali to comply with its reinsurance obligations, thus breaching the terms of the reinsurance agreement and invalidating NHIC's obligations under the trust agreement. NHIC filed a petition to compel arbitration. In determining whether the dispute arising under the parties' trust agreement was encompassed by the arbitration clause in the reinsurance agreement, the District Court addressed the preliminary issue of whether the arbitration clause was broad or narrow. That clause provided that "[a]ll disputes or differences arising out of the interpretation of [the reinsurance agreement]" would be subject to arbitration. See 2004 WL 769775, at *3 (emphasis added). The NHIC court concluded that the clause was narrow and limited to issues concerning the interpretation of the reinsurance agreement. Because the parties' dispute involved the interpretation of the trust agreement and not the reinsurance agreement, the court refused to compel arbitration of the trust agreement dispute. Id. at *4.
In NHIC, the U.S. District Court for the Southern District of New York refused to compel arbitration of a dispute arising from a trust agreement that allegedly was collateral to a reinsurance agreement containing an arbitration provision. The NHIC court concluded that the clause was narrow and limited to issues concerning the interpretation of the reinsurance agreement. Because the parties' dispute involved the interpretation of the trust agreement and not the reinsurance agreement, the court refused to compel arbitration of the trust agreement dispute.
Conclusion The NAICO and NHIC decisions represent two sides of the same coin. Whether a reinsurance agreement's arbitration provision extends to allegedly collateral or related agreements first turns on the issue of whether the clause is narrow or broad. If the clause is narrow in scope and no specific evidence exists as to the parties' intent that disputes arising under collateral or related agreements would be arbitrable, as in the NHIC case, the court may conclude that the parties did not intend to arbitrate disputes arising under collateral or related contracts. If the clause is broad in scope, however, as in the NAICO case, the court must next determine whether the purportedly collateral or related agreement and the reinsurance agreement have a "significant relationship" with, or "touch" upon, each other such that the two agreements were part of the same overall reinsurance transaction. If so, this conclusion, coupled with the strong federal policy favoring arbitration, likely will result in an order compelling arbitration. So what does this mean for reinsurers and ceding companies? For existing reinsurance contracts, the NAICO and NHIC decisions buttress the position that disputes under collateral agreements are arbitrable where the related reinsurance contract at issue contains a broad arbitration clause. Parties may be well-served, however, to clarify this point in amendments or addenda to these existing collateral or related agreements that are part of the same broad reinsurance transaction. In negotiating future reinsurance transactions, parties can incorporate language in any collateral or related agreements to clarify that disputes arising thereunder should be arbitrated. Alternatively, these agreements could state that they are part of a broader transaction between the parties-for instance, by referencing the "keystone" agreement or the parties' overall reinsurance relationship. Even better, the parties could enter into a "global" arbitration agreement, specifying the agreements that are part of the transaction, and indicating that the arbitration provision in the reinsurance agreement is intended to encompass a dispute arising out of any of the enumerated agreements. In sum, the NAICO and NHIC decisions highlight the potential disputes that can arise in complex reinsurance transactions where the parties' relationship is governed by a multitude of agreements, only some of which contain an arbitration clause. Through planning and careful drafting, however, parties can avoid unnecessary disputes over the intended scope of arbitration agreements in complex reinsurance transactions involving multiple related contracts.
The NAICO and NHIC decisions represent two sides of the same coin.
So what does this mean for reinsurers and ceding companies? For existing reinsurance contracts, the NAICO and NHIC decisions buttress the position that disputes under collateral agreements are arbitrable where the related reinsurance contract at issue contains a broad arbitration clause. Parties may be well-served, however, to clarify this point in amendments or addenda to these existing collateral or related agreements that are part of the same broad reinsurance transaction.
Through planning and careful drafting, however, parties can avoid unnecessary disputes over the intended scope of arbitration agreements in complex reinsurance transactions involving multiple related contracts.
THE "FOLLOW THE FORTUNES" DOCTRINE: ADDRESSING A CEDENT'S ALLOCATION DECISIONS

BY: DANIEL J. NEPPL
A cedent must make judgment calls when deciding whether to settle an underlying dispute with its insured. Factors that inform a cedent's decision include the applicable state law, the strengths and weaknesses of its coverage defenses, and its potential exposure. All judgment calls, of course, can be "second-guessed." Accordingly, to prevent reinsurer second-guessing, and to encourage settlement, the "follow the fortunes" doctrine developed.1 The follow the fortunes doctrine sets forth a deferential standard for reviewing a cedent's decisions, and it precludes a reinsurer from secondguessing its cedent's good-faith determinations regarding the coverage under the policy issued to the insured. Christiania General Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992). Determinations that cannot be questioned include "coverage, tactics, lawsuits, compromise, resistance or capitulation." British Int'l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 85 (2d Cir. 2003). The doctrine obligates a reinsurer to pay unless it can show that the cedent's decision was fraudulent, made in bad faith, clearly outside the scope of coverage (i.e., ex gratia), or exceeded the limits of the reinsurance contract. Christiania, 979 F.2d at 280. Recently, the follow the fortunes doctrine has been addressed by several courts in the context of a cedent's settlement allocation. The court in North River Ins. Co. v. ACE Am. Reinsurance Co., 361 F.3d 134 (2d Cir. 2004) ("North River v. ACE"), held that the follow the fortunes doctrine applied to a cedent's settlement allocation decision. Separately, in Commercial Union Ins. Co. v. Swiss Reinsurance Am. Corp., 2003 WL 1786863 (D. Mass. Mar. 31, 2003), and American Employers' Ins. Co. v. Swiss Reinsurance Am. Corp., 275 F. Supp. 2d 29 (D. Mass. 2003) (collectively, the "Swiss Re cases"),2 the courts held that the doctrine did not apply when the cedent's allocation of an environmental settlement under multi-year policies exceeded the limits of the pertinent reinsurance contracts.3 The decisions in North River v. ACE and the Swiss Re cases illustrate that the law governing reinsurance allocation is still developing. 1. Allocation and Settlements: North River v. ACE In North River v. ACE, the Second Circuit held that the follow the fortunes doctrine requires a reinsurer to accept a cedent's good faith settlement allocation decision. The cedents, North River Insurance Company and International Insurance Company (collectively, "North River"), issued multiple excess policies to Owens-Corning Fiberglas Corporation ("OCF") between 1974 and 1983. Those policies were in the second, third, fourth, and fifth excess layers of OCF's coverage block. The second excess layer had an attachment point of $26 million and afforded $50 million in per
1 Courts frequently use the phrases "follow the fortunes" and "follow the settlements" interchangeably. See., e.g., Stonewall Ins. Co. v. Argonaut Ins. Co., 75 F. Supp. 2d 893, 897 (N.D. Ill. 1997). "Follow the fortunes" is the general doctrine that a reinsurer pays as the cedent pays, while "follow the settlements" is application of the doctrine when the cedent settles its insured's claim. This article will use the phrase "follow the fortunes." 2 The cedents in both Swiss Re cases have appealed to the First Circuit, which heard oral argument on January 7, 2005. 3 Sidley Austin Brown & Wood LLP was counsel for the cedents, North River and International Insurance Company, in North River v. ACE and is appellate counsel for the cedents, Commercial Union and American Employers, in the Swiss Re cases. SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T
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The follow the fortunes doctrine sets forth a deferential standard for reviewing a cedent's decisions, and it precludes a reinsurer from secondguessing its cedent's good-faith determinations regarding the coverage under the policy issued to the insured.
The decisions in North River v. ACE and the Swiss Re cases illustrate that the law governing reinsurance allocation is still developing.
occurrence limits annually. North River provided approximately $345 million in limits in the second excess layer, from 1974 to 1983, and approximately $330 million in limits in OCF's third, fourth, and fifth excess layers over the same time period. Several years after North River had paid out the policies' aggregate limits for asbestos products claims, OCF demanded coverage for non-products asbestos liabilities, which allegedly were not subject to the aggregate limits. North River disputed the claim. After OCF began dispute resolution proceedings under the Wellington Agreement, North River and OCF reached a settlement, with North River agreeing to pay OCF $335 million for full policy buybacks of all policies, including the policies in OCF's upper layers. After settling with OCF, North River allocated 1% of its settlement ($3.35 million) to the "buyback" portion of the agreement, with each policy receiving a share of the buyback premium equal to its share of the overall limits bought back. North River allocated the remaining 99% (approximately $332 million) to its policies in the second excess layer as payment of non-products asbestos losses, using the "rising bathtub" allocation approach, i.e., a horizontal exhaustion allocation approach.4 North River then sought indemnification from its reinsurers, including ACE American Reinsurance Company ("ACE"), which had facultatively reinsured the second excess layer policies.5 North River billed ACE $49 million. ACE paid $24 million of the loss cession, but disputed the remaining $25 million. ACE did not take issue with North River's settlement. Rather, it challenged North River's allocation of 99% of the settlement payment to the second excess policies, arguing that this allocation did not properly reflect the exposure analysis that led North River to settle for $335 million. According to ACE, more of the settlement payment should have been allocated to the higher layer policies (which ACE did not reinsure) because the analyses that North River undertook when valuing OCF's claim for settlement purposes ascribed significant potential exposure to all layers of coverage, not just the lowest layer. In addition to disputing North River's allocation, ACE also challenged North River's claim that the deferential, follow the fortunes standard of review governed North River's allocation decision. ACE contended that: (i) the follow the fortunes doctrine did not apply to a cedent's settlement allocation decision; and (ii) even if the follow the fortunes doctrine did apply, the disputed amounts fell outside the terms of ACE's facultative certificates covering the second layer policies. North River, 361 F.3d at 140-41. With respect to the "follow the fortunes" doctrine and allocation, ACE drew a distinction between a cedent's settlement decisions (where cedent and reinsurer interests are aligned and ACE conceded that "follow the fortunes" applies) and a cedent's allocation decisions (where cedent and reinsurer interests are not necessarily aligned and ACE argued that "follow the fortunes" should not apply). ACE maintained that a cedent does not have discretion in characterizing what its settlement payment represents and then allocating its payment based on that characterization, citing to American Ins. Co. v. North American Co. for Prop. & Cas. Ins., 697 F.2d 79 (2d Cir. 1983) ("NACPAC"). The cedent in NACPAC settled a punitive damages claim against its insured, even though the insurance policy did not cover punitive damages. The cedent argued that the settlement was reinsured because the payment foreclosed the possibility of
4 The "rising bathtub" approach allocates losses to the lowest coverage layer first and exhausts limits in the lower layers before reaching the higher layers - an approach akin to filling a bathtub (the coverage block) with water. North River, 361 F.3d at 138 n.6. 5 ACE's facultative certificates contained follow the fortunes clauses, which provided that the "liability of the Reinsurer ... shall follow that of the Company." North River, 361 F.3d at 137. The facultative certificates also included loss settlement clauses providing that "[a]ll claims involving this reinsurance, when settled by the Company shall be binding on the Reinsurer, which shall be bound to pay its proportion of such settlements." Id. at 142.
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With respect to the "follow the fortunes" doctrine and allocation, ACE drew a distinction between a cedent's settlement decisions (where cedent and reinsurer interests are aligned and ACE conceded that "follow the fortunes" applies) and a cedent's allocation decisions (where cedent and reinsurer interests are not necessarily aligned and ACE argued that "follow the fortunes" should not apply).
a higher compensatory damages award on remand. The reinsurer refused to pay, the cedent sued to recover, and the reinsurer prevailed. The court found that the cedent's payment was clearly for a punitive damages award, which was not covered by the cedent's policy to the insured. ACE contended that North River's presentation of 99% of the $335 million settlement payment as a payment of non-products asbestos claims in the lowest layer of coverage only, when it really effected a buyback of hundreds of millions of dollars in policy limits on all layers of coverage, was akin to the cedent's presentation in NACPAC - a characterization of a settlement payment that did not square with reality and was not entitled to deference. The Second Circuit rejected ACE's analogy, distinguishing NACPAC because the cedent's settlement payment in that case was for a punitive damages award was therefore an ex gratia payment, falling outside the scope of the cedent's coverage to its insured. In contrast, there was no suggestion that North River's payments were outside the scope of its coverage to OCF. The Second Circuit held that the follow the fortunes doctrine applies to allocation decisions. According to the Court, allowing more exacting scrutiny of a cedent's settlement allocation decision would defeat the principal reasons for the doctrine - encouraging settlement in coverage litigation and protecting the cedent's ability to proceed without fear of being second-guessed. North River, 361 F.3d 140-41. In deferring to the cedent's settlement allocation decision, the Second Circuit observed: These goals are served by upholding North River's allocation here. ACE's appeal relies for its success not only on its theory regarding the limits of the follow-thesettlements doctrine, but also on the specific factual information on which it alleges North River relied in its settlement negotiations. But it is precisely this kind of intrusive factual inquiry into the settlement process, and the accompanying litigation, that the deference prescribed by the follow-the-settlements doctrine is designed to prevent. Requiring post-settlement allocation to match pre-settlement analyses would permit a reinsurer, and require the courts, to intensely scrutinize the specific factual information informing settlement negotiations, and would undermine the certainty that the general application of the doctrine to settlement decisions creates. Id. at 141. ACE also argued that it was not bound by North River's settlement allocation decision because North River's pre-settlement analysis showed that it faced a "risk of loss" in the higher layers, which ACE did not reinsure. ACE contended that North River's settlement payment extinguished this risk of loss because all policies were bought back, and North River should have allocated to those upper layers a share of the settlement payment that corresponded to the "risk of loss" North River faced in those upper layer policies. ACE relied on North River's pre-settlement analyses of exposure, which recognized significant exposure in the upper layers of OCF's coverage block under certain scenarios. The Second Circuit rejected ACE's argument, emphasizing that North River's direct policies covered "loss," not "risk of loss" (i.e., exposure), and North River's reinsurers contracted to indemnify it only for "loss." When North River settled, it decided what loss it was paying, obligating ACE to
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Requiring post-settlement allocation to match pre-settlement analyses would permit a reinsurer, and require the courts, to intensely scrutinize the specific factual information informing settlement negotiations, and would undermine the certainty that the general application of the doctrine to settlement decisions creates.
pay according to the terms of the reinsurance contracts and North River's loss presentation. The Second Circuit's treatment of the follow the fortunes doctrine in North River v.ACE is significant because, after recognizing some distinction between settlement decisions and allocation decisions, the Second Circuit determined that the follow the fortunes doctrine applies to both a cedent's decision to settle and its decision respecting how to allocate a settlement payment. Id. at 140. Echoing the rationale first articulated by the district court in Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 9 F. Supp. 2d 49 (D. Mass. 1998), aff'd, 217 F.3d 33 (1st Cir. 2000), for applying follow the fortunes to settlement allocation decisions, North River v. ACE is the first federal appellate court decision discussing the standard of review for a cedent's allocation decisions.6 II. Allocation and Multi-Year Policies: The Swiss Re Cases The Swiss Re cases involved allocation issues that arise when a cedent settles claims under multi-year policies. The cedent argued that its allocation was binding on the reinsurer under the follow the fortunes doctrine, but the reinsurer successfully claimed that the follow the fortunes doctrine was inapplicable because the cedent's billing violated the reinsurance contract limits. The following example illustrates the issues raised in the Swiss Re cases. Assume that a cedent issues its insured a three-year policy with stated limits of $5 million per occurrence. The cedent is reinsured under the following facultative certificates: Reinsurer Reinsurer A Reinsurer B Reinsurer C Limits 50% of first $1 million each occurrence $2 million xs $1 million each occurrence $2 million xs $3 million each occurrence
North River v. ACE is the first federal appellate court decision discussing the standard of review for a cedent's allocation decisions.
The insured claims coverage for property damage liability arising out of contamination at a hazardous waste site where the property damage occurred continuously across all three years of the multi-year policy. After denying liability and litigating coverage, the cedent settles for $4.5 million. How should the cedent allocate the $4.5 million when it bills reinsurers? If the cedent presents the loss as a single $4.5 million occurrence, Reinsurer A pays $500,000, Reinsurer B pays $2 million, and Reinsurer C pays $1.5 million. On the other hand, if the cedent presents the loss as a $1.5 million occurrence in each of the three years under the policy, Reinsurer A pays $1.5 million (3 times $500,000), Reinsurer B pays $1.5 million (3 times ($1.5 million less $1 million retention)), and Reinsurer C pays nothing. Thus, how the cedent presents the $4.5 million settlement to its reinsurers will have a significant impact on what different reinsurers are billed. And no matter what presentation the cedent chooses, one of its reinsurers could argue for another presentation that would lower its bill. Whether a reinsurer's challenge to the presentation would succeed depends on the standard of review applicable to the cedent's decision. Under a follow the fortunes standard, a cedent's good faith decision to present the loss as either a single
6 The Second Circuit's decision in North River v. ACE arguably conflicts with the district court's decision in Travelers Cas. & Sur. Co. v. Gerling Global Reinsurance Corp., 285 F. Supp. 2d 200 (D. Conn. 2003) ("Travelers v. Gerling"), which held that a reinsurer could reject a cedent's loss presentation because it was based on a position that the cedent had abandoned earlier in the underlying coverage litigation. Travelers appealed that decision, also to the Second Circuit, which heard oral argument on November 10, 2004. For an extensive discussion of the federal district court's decision in Travelers v. Gerling, see William M. Sneed, "Travelers v. Gerling: A Non-Products Asbestos Allocation Puzzle," Sidley Austin Brown & Wood LLP Reinsurance Law Report, Vol. 10, No. 2 (Winter 2003).
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occurrence or an occurrence per year would be binding on reinsurers. To support a follow the fortunes standard, a cedent can argue that the single occurrence or occurrence per year decision is a coverage determination like any other coverage determination. The cedent makes a judgment respecting its exposure to the insured based on the cedent's policy language to the insured, the law governing the cedent's coverage, the nature of the insured's claim, and any other circumstances affecting the cedent's coverage to its insured. Coverage determinations made in good faith should be binding on the reinsurer. In the Swiss Re cases, the cedent made that argument, justifying its occurrence per year (or "annual") presentation of hazardous waste site settlements based on the circumstances it faced vis--vis its insured in each case.7 Certainly, a reinsurer can take issue with a cedent's coverage determination. The reinsurer in the Swiss Re cases did so, arguing that the cedent's determination respecting the occurrence liability it faced under its multi-year policies was unreasonable, especially given the weight of judicial authority respecting whether a multi-year policy provides a single occurrence limit or an annual occurrence limit for a continuing loss occurrence. If the dispute in the Swiss Re cases had been solely about the cedent's coverage determination, then it should have been governed by the follow the fortunes doctrine, which grants significant deference to a cedent's coverage determinations. However, at the same time it challenged the cedent's coverage determination, the reinsurer also framed the issue differently and in fact argued that the cedent's determination of its occurrence liability was irrelevant. The proper issue, according to the reinsurer, was the stated limits on the face of the reinsurance contracts - which reinsured the cedent for "each occurrence." The reinsurer argued that the cedent's presentation of the loss on an annual occurrence basis assumed that the reinsurance contract limits provided coverage for "each occurrence each year" - and that language did not appear in the reinsurance contracts. Relying principally on the Second Circuit's decision in Bellefonte Reinsurance Co. v. Aetna Cas. and Sur. Co., 903 F.2d 910 (2d Cir. 1990), the reinsurer argued that the cedent's billing exceeded the reinsurance contract limits. In Bellefonte, the cedent insured A. H. Robins Company ("Robins"), the manufacturer of the Dalkon Shield intra-uterine device, which was the subject of mass products liability litigation. Robins contended that the cedent was obliged to pay defense costs incurred in defending the products
The reinsurer argued that the cedent's presentation of the loss on an annual occurrence basis assumed that the reinsurance contract limits provided coverage for "each occurrence each year" - and that language did not appear in the reinsurance contracts. Relying principally on the Second Circuit's decision in Bellefonte Reinsurance Co. v. Aetna Cas. and Sur. Co., 903 F.2d 910 (2d Cir. 1990), the reinsurer argued that the cedent's billing exceeded the reinsurance contract limits.
7 The cedent in the first Swiss Re case concluded that its multi-year, occurrence-based policies would afford coverage for an occurrence in each year because those policies were required to be construed no more restrictively than underlying single-year occurrence-based primary policies and multi-year occurrence-based primary policies stating that "a policy period is comprised of three consecutive annual periods." Commercial Union, 2003 WL 1786863 at *1. The cedent in the second Swiss Re case concluded that its multi-year, occurrence-based policies would afford coverage for an occurrence in per year because it determined that New Jersey allocation law would apply to the underlying coverage dispute. Under New Jersey law, "where a per-occurrence policy has a multi-year period, and where there is a progressive injury that spans more than one year, the injury is a separate occurrence within each of those years." American Employers, 275 F. Supp. 2d at 33 n.14 (citing Carter-Wallace, Inc. v. Admiral Ins. Co., 712 A.2d 1116, 1121 (N.J. 1998), and Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974, 995 (N.J. 1994)).
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claims and that defense costs were in addition to (and therefore did not serve to exhaust) the aggregate limits in the cedent's polices. The cedent disputed these contentions. Robins filed suit, seeking a declaration that the cedent was obligated to pay defense costs in addition to the aggregate limits. The cedent eventually entered into a compromise settlement with Robins, whereby the policy limits were increased, the cedent agreed to pay defense costs, and payment of defense costs served to exhaust the increased policy limits. The cedent's subsequent loss presentation to its facultative reinsurers included a share of the defense costs above the aggregate limits in the policies. For instance, if a facultative reinsurer had assumed a $1 million part of a $10 million policy (original limits), then the cedent billed that reinsurer 10% of what the cedent paid under the $10 million policy, which was more than $10 million under the compromise with Robins. The cedent argued that the follow the fortunes doctrine obligated the reinsurers to pay their share of the increased limits because its settlement with Robins was reasonable (and therefore entitled to deference) and because the reinsurance contracts expressly obligated reinsurers to pay a share of defense costs.8 Thus, the cedent argued that the reinsurers must indemnify it for their pro rata shares of defense costs. The reinsurers argued that they could not be liable beyond the limits in the reinsurance contract (i.e., $1 million for a reinsurer assuming a $1 million part of a $10 million policy). The Second Circuit ruled for the reinsurers, holding that the follow the fortunes doctrine could not render a reinsurer liable beyond the stated limits of the reinsurance contract. According to the court, the follow the fortunes doctrine is "structured so that [it] coexist[s] with, rather than supplant[s], the liability cap." Bellefonte, 903 F.2d at 913. The court concluded that the follow the fortunes doctrine cannot "render a reinsurer liable for an amount in excess of the bargainedfor coverage." Id. In the Swiss Re cases, the reinsurer claimed that the cedent's presentation of the loss on an annual basis also violated the reinsurance contract limit because (in the example set forth above) Reinsurer A could never be billed more than $500,000 under a three-year policy for a continuing loss at a single waste site. A billing on an occurrence per year basis ($1.5 million to Reinsurer A in the example) violates the $500,000 limit. The cedents in the Swiss Re cases, by contrast, argued that Bellefonte did not apply because: (i) the number of occurrence limits available for a waste site loss under their multi-year policies was an issue for them to determine; and (ii) the reinsurer was bound by their interpretations under the follow the fortunes doctrine. According to the cedent, the reinsurance contracts did contain a limit, but how often that limit applied was necessarily a function of the cedent's coverage to the insured. The courts in the Swiss Re cases ruled for the reinsurer - holding that the cedent's billing on an occurrence per year basis violated the limits of the reinsurance contracts. In so doing, the courts accepted the reinsurer's reliance on Bellefonte and its progeny, stating in both cases that the "reinsurer's unambiguous, bargained-for limits of liability" contained in the facultative certificates could not be increased. Commercial Union, at *16; American Employers, 275 F. Supp. 2d at 36 n. 33 (citing Commercial Union, at *16; Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1071 (2d Cir. 1993); Bellefonte, 903 F.2d at 913). The district courts determined that the
The cedents in the Swiss Re cases, by contrast, argued that Bellefonte did not apply because: (i) the number of occurrence limits available for a waste site loss under their multi-year policies was an issue for them to determine; and (ii) the reinsurer was bound by their interpretations under the follow the fortunes doctrine. According to the cedent, the reinsurance contracts did contain a limit, but how often that limit applied was necessarily a function of the cedent's coverage to the insured.
8 The reinsurance contracts provided in pertinent part: "All claims involving this reinsurance, when settled by the Company, shall be binding on the Reinsurer, which shall be bound to pay its proportion of such settlements, and in addition thereto, in the ratio that the Reinsurer's loss payment bears to the Company's gross loss settlement, its proportion of expenses ... incurred by the Company in the investigation and settlement of claims or suits." Bellefonte, 903 F.2d at 911 (emphasis added).
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The district courts determined that the follow the fortunes doctrine was inapplicable. Presumably, therefore, under the decisions in the Swiss Re cases, even if the cedent is required to pay its insured three occurrence limits for a continuing loss under a three-year policy, the facultative reinsurer of the policy need only pay one limit. These decisions have been appealed.
follow the fortunes doctrine was inapplicable. Presumably, therefore, under the decisions in the Swiss Re cases, even if the cedent is required to pay its insured three occurrence limits for a continuing loss under a three-year policy, the facultative reinsurer of the policy need only pay one limit. These decisions have been appealed. Conclusion The Second Circuit's decision in North River v. ACE provides further guidance respecting the scope of the "follow the fortunes" doctrine, establishing that it applies to a cedent's allocation decisions, as well as its settlement decisions. The decisions in the Swiss Re cases underscore the continued viability of Bellefonte and the willingness of some courts to dispense with a follow the fortunes analysis when convinced that the cedent's billing violates the reinsurance contract limit. The Swiss Re cases currently are on appeal to the First Circuit. That court is expected to weigh in on this important issue, and provide cedents and reinsurers with further guidance, likely before the end of 2005.
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AN ANALYSIS OF THE 2004 PROCEDURES FOR THE RESOLUTION OF U.S. INSURANCE AND REINSURANCE DISPUTES
BY: ALAN J. SORKOWITZ AND NAVNEET K. DHALIWAL
In 2004, the Insurance and Reinsurance Dispute Resolution Task Force ("Task Force") issued a comprehensive revision of their seminal 1999 effort, the "Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes." A copy of the Procedures for the Resolution of U.S. Insurance and Reinsurance Disputes (the "Procedures") is available at www.arbitrationtaskforce.org. The Procedures are an attempt by a group of veteran arbitrators, insurers, and reinsurers to collect and codify best practices for U.S. reinsurance arbitrations1. The 2004 version of the Procedures expands upon the 1999 work in several ways. Most fundamentally, it offers two sets of protocols: one for traditional tripartite panels consisting of two party-appointed arbitrators and one neutral umpire, and another for allneutral panels. The Procedures also address several important and timely issues, including what it means for a party-arbitrator to be "disinterested," replacement of an arbitrator due to death or incapacity, and streamlined methods of document discovery. This article will briefly discuss the new Procedures for both traditional and all-neutral arbitration panels. Discussion I. The Procedures as a Compilation and Refinement of Best Practices With Traditional Panels
The Procedures are an attempt by a group of veteran arbitrators, insurers, and reinsurers to collect and codify best practices for U.S. reinsurance arbitrations.
The Incorporation by Reference Model The use of arbitration to resolve reinsurance disputes is almost as old as the idea of reinsurance itself. Over time, the standard reinsurance arbitration clause has evolved into its present form. Generally speaking, the standard clause prescribes mandatory arbitration of all disputes arising with respect to the contract; provides for appointment of two party-appointed arbitrators who then choose a neutral umpire pursuant to a stated procedure; states the place where the hearing is to be held; prescribes the method of splitting expenses; and characterizes the arbitration as an honorable engagement to which the strict rules of law are not applicable. Other provisions, such as governing law provisions, award enforcement provisions, and multiple reinsurers provisions, are sometimes added as well. This typical form of arbitration clause has become so familiar in the market, and to attorneys in the field, that it is easy to forget that it is not the only form of clause, or even the only type of clause, available. But the usual form must be seen as embodying only one of many methods of providing for arbitration - a method that is not necessarily the best, and certainly is not the only, means to that end. Specifically, the standard clause provides for arbitration by laying out, in the contract itself, a full and complete procedure for settling differences. There is another methodology, and the Procedures opt for it. This is the model of incorporation by reference, whereby the contract itself contains only a simple agreement to resolve disputes by arbitration, and a reference to externally established procedures, not recited in full in the contract, to be employed.
1 Task Force participants include senior members of insurance and reinsurance companies, industry trade associations, and experienced reinsurance arbitrators.
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This is the methodology employed in many other industries,2 and it has inherent advantages. An arbitration clause incorporated by reference can be short and concise, thus facilitating the contracting process, while the procedures themselves can be as detailed as necessary. Indeed, arbitration procedures incorporated by reference can be more detailed than "usual" arbitration procedures set forth in full in the contract, because, as a practical matter, there are limits to the amount of procedural detail the parties will load into their contracts. Moreover, an incorporation methodology allows the parties to adopt procedure that can be revised over time, whereas it may not be feasible to frequently modify express contract language. If the Procedures do no more than encourage the industry to consider drafting arbitration clauses through an incorporation model, the Task Force will have performed a significant service to the industry. But the Procedures do much more, especially in compiling and adopting industry best practices. If the Procedures do no more than encourage the industry to consider drafting arbitration clauses through an incorporation model, the Task Force will have performed a significant service to the industry. But the Procedures do much more, especially in compiling and adopting industry best practices. Best Practices The individual members of the Task Force are all reinsurance veterans well versed with existing arbitration practices. As such, they are well suited to frame a compilation of the "best practices" being employed. This is precisely what they have done. The Procedures generally prescribe rules that foster expeditious arbitration before quality panels fully equipped to do equity between the parties. The Procedures encourage speedy disposition of disputes in many ways, some of which are well-known to practitioners and others which are quite innovative. These methods include: Definition of disinterested. Accusations that an arbitrator is not disinterested have become an all too common event. The Procedures state clearly that all arbitrators must be "disinterested," but define that term in the practical sense of not being "under the control of either party, nor shall any member of the panel have a financial interest in the outcome of the arbitration." (Procedures, 2.3.) This simple and limited definition should eliminate the growing trend of challenges to party-appointed arbitrators on the basis that they have an indirect interest in the case, such as a familiarity with the parties or prior exposure to the underlying issue.3 Summary disposition. The Procedures expressly grant the panel the power to hear and determine the case via summary disposition. (Procedures, 13.1.) This should encourage panel members to decide matters on the papers when a full-blown hearing is unnecessary.
2 See, e.g.,Volt Info. Sciences, Inc. v. Board of Trustees of the Leland Stanford Jr. Univ., 489 U.S. 468 (1989), which deals with a contract incorporating the Construction Industry Arbitration Rules promulgated by the American Arbitration Association ("AAA"). Other industries in which contracts frequently incorporate rules promulgated by the AAA or other independent authors include securities and real estate. 3 An oft-discussed case on point is Sphere Drake Ins. Ltd. v. All American Life Ins. Co., 307 F.3d 617 (7th Cir. 2002), in which a party challenged an adverse award on the basis that the other party's partyappointed arbitrator showed "evident partiality" due to his prior business contacts with one of the parties. The Seventh Circuit reversed the lower court's vacatur of the award, noting that "in the main, party-appointed arbitrators are supposed to be advocates." Id. at 620. SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T
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Death or incapacity of an arbitrator. The Procedures state that if a party-appointed arbitrator or a neutral umpire is unable or unwilling to serve, a replacement shall be chosen within 14 days. (Procedures, 6.8, 6.9.) This should eliminate the harsh effect of requiring proceedings to start "from scratch" in the event of a panel member's death or incapacity. 4 Mandatory document disclosures. Akin to the Federal Rules of Civil Procedure, the Procedures require a "voluntary, prompt and informal exchange of all nonprivileged documents and other information relevant to the dispute" prior to formal discovery. (Procedures, 11.1.) The voluntary exchange should eliminate some of the delay inherent in the arbitration discovery process. Streamlined proceedings. A separate set of streamlined procedures is prescribed for cases deemed appropriate by the parties. (Procedures, 16.) These alternative procedures, which provide for shorter time periods, no discovery, and a hearing via written submission, should result in expeditious disposition of smaller cases. The Procedures also suggest a new process for appointing arbitration panels. Many parties are unhappy with the "name, strike and draw" process whereby a party may try to "stack the deck" by advancing a short list of umpire candidates with a favorable disposition in the hopes that one will be chosen by lots. The Procedures call for a more complicated, but hopefully more equitable, process. Specifically, the Procedures require party-appointed arbitrators to be appointed simultaneously within 30 days of commencement of the arbitration. (Procedures, 6.2.) If the party-appointed arbitrators are unable to agree upon an umpire within 30 days, then each party submits a list of eight umpire candidates. After the candidates complete umpire questionnaires, each party strikes five candidates from the other's list, leaving two lists of three names each. If one individual appears on both lists, he or she is appointed umpire. If more than one individual appears on both lists, one umpire is chosen from that set by lots. If there is no overlap between the lists, each party ranks the six names on the lists in order of preference, and the person with the best total numerical ranking becomes the umpire. (See generally Procedures, 6.7.) While a detailed discussion of the merits of this numerical protocol is beyond the scope of this article, its intent - to curb abuses in the umpire selection process - is laudable. The Procedures also seek to expand the pool of qualified arbitrators. Traditional reinsurance arbitration clauses required an arbitrator candidate to be a "current or former officer or executive of an insurance or reinsurance company." The Procedures offer that traditional language, or alternative language that the parties may elect to have "professionals with no less than Akin to the Federal Rules of Civil Procedure, the Procedures require a "voluntary, prompt and informal exchange of all non-privileged documents and other information relevant to the dispute" prior to formal discovery. (Procedures, 11.1.) The voluntary exchange should eliminate some of the delay inherent in the arbitration discovery process.
Many parties are unhappy with the "name, strike and draw" process whereby a party may try to "stack the deck" by advancing a short list of umpire candidates with a favorable disposition in the hopes that one will be chosen by lots. The Procedures call for a more complicated, but hopefully more equitable, process.
4 See Trade & Transport, Inc. v. Natural Petr. Charterers Inc., 931 F.2d 191, 194-95 (2d Cir. 1991) (collecting authorities). The Procedures provide that if the umpire is unable or unwilling to serve, a replacement shall be promptly appointed, and prescribe procedures for this eventuality. A more complete treatment of the subject might have added that the resulting, reconstituted panel is empowered to resolve the dispute, but the intent is clear and the lack of this recitation appears harmless.
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The Procedures also seek to expand the pool of qualified arbitrators.
ten years of experience in or serving the insurance or reinsurance industry" act as panel members. (Procedures, 6.2.) This expanded qualification clause would presumably allow experienced attorneys to serve as panel members. Finally, the Procedures contain rules designed to ensure that the panel has full power to control the proceedings before it and make an award that fully resolves all aspects of the dispute, in a realistic business manner: Paragraph 14.3 sets forth the "honorable engagement" concept long familiar in the industry, in standard language (including the stipulation that the panel need not follow "the strict rules of law.") The paragraph goes on, however, to set forth language concerning the method of resolving the dispute which, while equally familiar to practitioners, has less uniformly been included in arbitration clauses: "In making their Award, the panel shall apply the custom and practice of the insurance and reinsurance industry, with a view to effecting the general purpose of the underlying agreement which is the subject of the arbitration." (Procedures, 14.3.) Settling a frequently controversial issue, the Procedures give the panel power to grant interim relief, including pre-hearing security. (Procedures, 8.1.) Similarly, the panel is given express authority to impose sanctions (including costs, attorneys fees and orders of preclusion) for failure to comply with interim rulings, or for discovery abuse. (Procedures, 8.2.) The parties, if all agree, are given the right to require a reasoned decision of the panel. (Procedures, 15.4.) The proceedings, hearing and award are expressly made confidential, thus allowing the parties the freedom of expression required for full airing of the issues without adverse repercussions in the marketplace. (Procedures, 7.1.) Certain exceptions to confidentiality are established, such as for judicial proceedings relating to the award, and the list of exceptions accords with currently prevalent practice. (Procedures, 7.2.) A Missed Opportunity? To the extent there is room for criticism of the Procedures, the Task Force may have devoted too much attention to compiling the best existing practices and not enough attention to curing defects that exist even when best practices are employed. It is no secret that the current arbitration system is plagued by too much litigation and controversy. There are too many challenges to the neutrality of the panel, too many parties stonewalling the process through challenges to arbitrability, too many motions for vacatur of the award, too many discovery disputes; in short, too much litigation at the margins of the process and too much abuse. The Procedures could have done more to stem the litigation tide by resolving areas of uncertainty within existing practices. Three examples typify the problem.
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To the extent there is room for criticism of the Procedures, the Task Force may have devoted too much attention to compiling the best existing practices and not enough attention to curing defects that exist even when best practices are employed.
The first relates to the definition of "neutral" as an umpire qualification. The Procedures require the umpire to be "neutral," but the definition of that term set forth in paragraph 2.4 - "disinterested, unbiased and impartial" - is somewhat tautological. The Procedures do not tell us what facts must be present to indicate an interest, bias or partiality, or what type of interests, biases and partialities the umpire must be free of in order to qualify as "neutral" (or, to put the matter more starkly, what interests, biases and partialities the umpire may have yet still be deemed "neutral"). If the intent is that an umpire must be free of any such impediment (as we must conclude if we give the Procedures their literal meaning), this is an open invitation for parties to litigate over a potential umpire's slightest previous contacts with the parties, their appointed arbitrators, or the potential witnesses. In the insular world of reinsurance arbitration, it will be difficult indeed to find umpire candidates so utterly removed from any given dispute. The Task Force could have adopted the same definition for "neutral" as it did for "disinterested," or a variant thereof, or a definition offering more specific and practical guidance. By adopting the broad definition expressed in paragraph 2.4, it has invited continued litigation over the concept of neutrality, with concomitant delay and expense.5 A second example is the problem of disputes involving multiple reinsureds or reinsurers under the same contract, especially where there are differing interests among those reinsureds or reinsurers. These cases present a myriad of procedural issues, such as whether one proceeding or multiple proceedings should be had and who controls the nomination of the party-appointed arbitrators. See, e.g., Connecticut Gen. Life Ins. Co. v. Sun Life Assur. Co., 210 F.3d 771 (7th Cir. 2000). The Procedures have precious little to say about such cases, thus leaving these issues fertile for litigation. A final example is discovery. The Procedures include only general rules regarding discovery; they give the panel the power to order the production of such documents "as it considers necessary for the proper resolution of the dispute" and "such depositions as are reasonably necessary." (Procedures, 11.2-11.3.) The Task Force chose not to limit and regularize the discovery process by adopting one or more of the specific rules that have been proposed in recent years (e.g., to confine discovery to the contract at issue or to limit the number and length of depositions). Perhaps this is as it should be, in that the scope and duration of discovery must be tailored to the circumstances of each case. But the Procedures' broad guidelines may do little to stem the discovery disputes that occur all too often. II. The Neutral Procedures: A Comparison with English Arbitration Law The Task Force also prepared an alternate set of procedures for neutral arbitration panels (the "Neutral Procedures"). Neutral panels are, of course, a mainstay of arbitration under English law. One meaningful way in which to analyze the Neutral Procedures, then, is by comparing them to the rules of arbitration under the English Arbitration Act of 1996 (the "Arbitration Act") and the arbitration rules of the A.I.D.A. Reinsurance Arbitration Society of the UK (the "UK Rules"), which are often used to supplement the procedures for arbitration conducted under the auspices of the Arbitration Act. There are several useful points of comparison among the Neutral Procedures, the Arbitration Act and the UK Rules as follows: The Task Force also prepared an alternate set of procedures for neutral arbitration panels.
5 Paragraph 2.4 of the Procedures does contain a caveat recognizing that an umpire may be "neutral" even if he has had "previous knowledge of or experience with respect to issues involved in the dispute." While this language is helpful, it does not address the common problem of a prospective umpire who has had previous contacts with the parties, their appointed arbitrators, or the witnesses.
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The custom and practice under the Arbitration Act and the UK Rules is to permit a party to have limited pre-appointment discussions with a prospective arbitrator concerning the general nature of the dispute and the identity of the parties. The Neutral Procedures, by contrast, prohibit even this limited preappointment ex parte communication.
Ex parte communications. The Neutral Procedures, the Arbitration Act and the UK Rules all require that arbitrators be neutral and have no ex parte communication with any party once the panel has been formed. These procedures differ, however, with respect to the permissibility of pre-appointment ex parte communication. The custom and practice under the Arbitration Act and the UK Rules is to permit a party to have limited pre-appointment discussions with a prospective arbitrator concerning the general nature of the dispute and the identity of the parties. The Neutral Procedures, by contrast, prohibit even this limited pre-appointment ex parte communication. Specifically, the Neutral Procedures state that "[u]nder no circumstances shall either Party or anyone acting on the Party's behalf engage in any communication with any prospective panel member that could reasonably lead such panel member to identify the Party that initiated the proposed panel member's selection. Ex parte communications between the Parties and the panel in relation to the arbitration is prohibited." (Neutral Procedures, 6.4 (emphasis added.)) Although party-appointed arbitrators may be able to surmise who appointed them, the Neutral Procedures' strict prohibition against ex parte communication may further foster the spirit of complete neutrality. Confidentiality. The Neutral Procedures and the UK Rules both expressly state that arbitrations are confidential. (Neutral Procedures, 7.1; Rule 11.5, UK Rules.) English case law interpreting the Arbitration Act likewise has held that arbitrations are confidential. Chairman Qualifications. The trend in London market practice has been towards having a three party tribunal, consisting of two London market individuals and a third arbitrator or "chairman" being an experienced reinsurance lawyer. The Neutral Procedures recognize this trend by offering that "professionals with no less than 10 years of experience in or serving the insurance or reinsurance industry" can qualify as an arbitrator. This would allow a reinsurance lawyer to sit as chairman, which may prove especially useful in drafting reasoned awards that withstand appellate scrutiny. Reasoned Awards. Both the Arbitration Act ( 52(4)) and the UK Rules (Rule 16.2) require the panel to set out their reasons for the award unless the parties agree otherwise. By contrast, the Neutral Procedures mandate a reasoned award only by agreement of both parties. The absence of any ex parte communication or a mandatory reasoned award may leave parties with little insight into the Panel's reasoning after an award is issued in an arbitration conducted pursuant to the Neutral Procedures. Interim Relief and Pre-Hearing Security. The Arbitration Act and the Neutral Procedures both permit the panel to award interim relief as it deems necessary. (Arbitration Act, 41; Neutral Procedures, 8.2.) The UK Rules, by contrast, specify certain powers which are not granted to the arbitration panel, including, the posting of pre-hearing security and the payment of exemplary or punitive damages. (UK Rules, Rule 14.) Hold Harmless Agreements. The Arbitration Act and the UK Rules both provide that an "arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his functions as arbitrator unless...in bad faith." (Arbitration Act at 29; UK Rules at Rule 21.2.) The Neutral Procedures, by contrast, are silent regarding the immunity of the arbitrators. In practice, we would expect that an arbitration panel operating under the Neutral Procedures may simply refuse to serve unless all parties to execute a hold harmless agreement.
The absence of any ex parte communication or a mandatory reasoned award may leave parties with little insight into the Panel's reasoning after an award is issued in an arbitration conducted pursuant to the Neutral Procedures.
The 2004 Procedures and Neutral Procedures represent a significant step forward in establishing best practices for both traditional arbitration panels and all-neutral panels.
Conclusion The 2004 Procedures and Neutral Procedures represent a significant step forward in establishing best practices for both traditional arbitration panels and all-neutral panels. Reinsurers, cedents and reinsurance intermediaries should review the Procedures and consider whether to incorporate them, or certain of their features, into future reinsurance arbitration clauses.
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REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW1

BY: MICHAEL P. GOLDMAN AND SEAN M. KEYVAN
I. Introduction Reinsurance is an integral component of the operations and financial position of most insurance companies. At the most basic level, a ceding insurance company uses reinsurance to transfer policy-related risk to another legal entity. If structured correctly, such cession of risk will be recognized for financial reporting purposes, affording the ceding insurer additional capacity to expand its operations. In the context of insurance company mergers and acquisitions, due to the role and prominence that reinsurance can play in the financial structure of an insurance company, an acquiring party should devote a significant level of due diligence to the reinsurance programs of the target, as well as structure transaction documentation to address any related legal, business and financial issues. Separate from the ceded reinsurance programs existing within a target insurance company, reinsurance can also be used as a tool to facilitate insurance company acquisition transactions. In the context of a traditional stock acquisition, reinsurance can be used as a tool to add flexibility to the structure of the transaction, by removing lines of business that the parties desire to exclude from the principal transaction, by providing transitional financial and operational support for continuing operations, or by providing stop-loss protection to the acquiring party as a substitute for certain types of indemnities and/or a purchase price adjustment. In the ultimate sense, reinsurance can also be used as the primary vehicle for the acquisition of specific lines of insurance business, essentially creating the equivalent of an asset acquisition with respect to all or a portion of a target insurance company's operations. On an ever increasing basis, acquiring parties in the insurance industry are pursuing this mode of acquisition as a strategy to avoid unrelated liabilities, successor liability and operational issues associated with unwanted lines of business. II. Reinsurance in the Context of Stock Purchase Transaction One common form of insurance company acquisition is a stock purchase transaction, whereby the purchaser acquires the target insurance company through the direct or indirect acquisition of the capital stock of the insurance company.2 Although reinsurance is not the primary acquisition vehicle in a traditional stock purchase transaction, reinsurance is, nevertheless, an important consideration in nearly all such transactions, affecting the due diligence, structuring and documentation aspects of the deal. A. Reinsurance due diligence considerations in insurance company acquisition transactions The evaluation or "due diligence" phase of a stock purchase acquisition is perhaps the most important aspect of the transaction. Given the relative prominence of ceded reinsurance in the overall operations and financial structure of most target insurance companies, a thorough review of a target insurance company should include an evaluation of the target's overall reinsurance program.
1 This article is adapted from a version that originally appeared in the Spring 2004 issue of the Journal of Reinsurance, published by the Intermediaries & Reinsurance Underwriters Association. The authors would like to thank Bobbi Anderson, Anthony Calabrese and Claudine Chen-Young for their contribution to this article. 2 Such an acquisition could be accomplished directly through the acquisition of the stock of the target insurance company, or indirectly, through the acquisition of the stock of the direct or indirect parent of the target insurance company.
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Separate from the ceded reinsurance programs existing within a target insurance company, reinsurance can also be used as a tool to facilitate insurance company acquisition transactions.
REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW
Such evaluation generally includes a review and assessment of (i) the types of reinsurance coverage maintained and in-force with respect to the target's business, including a review of overall retention and participation levels and limits of coverage, (ii) the adequacy of the target's reinsurance program in relation to the target's business, (iii) the credit quality of the target's reinsurers, including a review of the credit and financial strength ratings of the reinsurers, (iv) the target's relationship with its reinsurers, including investigation of any disputes and collection issues, (v) whether the target's ceded reinsurance contracts satisfy applicable statutory credit for reinsurance requirements, permitting the company to reduce the liability on its statutory financial statement with respect to policies ceded under such reinsurance contracts, including review of reinsurance trusts, letters of credits, etc.,3 (vi) prior ceded assumption reinsurance transactions, including an analysis of the target's compliance with applicable regulatory requirements and an evaluation of whether the target may have any residual liability under the ceded policies,4 and (vii) reinsurance assumed by the target. The diligence process should also include a review and evaluation of specific material reinsurance contracts. Particularly, with respect to each material reinsurance agreement to which the target company is a party, whether as the cedent or the reinsurer, the purchaser should review such agreement's (i) termination provisions, (ii) change of control/assignment provisions, (iii) going forward treaty obligations, and (iv) recapture rights. B. Reinsurance as a tool for adding flexibility to a stock acquisition transaction Reinsurance can be an important tool in adding flexibility in the structuring of insurance company stock acquisitions. In that regard, the ability of the parties to customize the transaction to address the objectives of both parties can be integral to the parties reaching agreement and eventually closing the transaction. Specifically, reinsurance can be used as a tool to remove specific lines of business from the principal transaction, provide transitional ceded reinsurance or fronting support to the purchaser, or provide stop-loss protection. 1. Excluding a line of business Acquiring the capital stock of the target insurance company sometimes can result in the purchaser acquiring unwanted policies or lines of business that have been written by and represent contractual liabilities of the target company. By purchasing the capital stock of the target insurance company, the purchaser will acquire all known and unknown liabilities of the target; unless such liabilities are somehow transferred to another party, they will remain with the target. In that regard, unwanted insurance business can be carved out of the transaction, by reinsuring such business with the seller, one or more of its affiliates or a third party prior to, or simultaneous with, the closing of the stock purchase transaction. There are several key considerations in carving out a line of business in connection with a stock acquisition. As a threshold matter, the parties must define the scope of the business that is being excluded via the subject reinsurance transaction. This primarily is a question of how specifically or broadly the parties would like to define the excluded business. The variety of methods by which the parties can tailor the scope of the excluded business
3 A general discussion of certain regulatory considerations respecting insurance company acquisition transactions, including credit for reinsurance requirements, is set forth in the original version of this article in the Spring 2004 issue of the Journal of Reinsurance. 4 See Section III(B) below for a discussion of assumption reinsurance.
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Reinsurance can be used as a tool to remove specific lines of business from the principal transaction, provide transitional ceded reinsurance or fronting support to the purchaser, or provide stop-loss protection.
is limited only by the creativity of the parties; however, some of the most common methods include referencing a line of business, naming specific policy types or forms, and listing specific individual insurance policies to be excluded. The level of specificity with which the purchaser will be comfortable will often depend on the level of diligence that the purchaser is able to undertake with respect to the target company and its various businesses. Generally, the purchaser will have a lesser risk of acquiring unknown risks and liabilities the more broadly that the definition of excluded business is tailored. Accordingly, purchasers generally are more comfortable accepting a definition of excluded business that is narrow in scope, if they have had sufficient opportunity to conduct due diligence to evaluate the potential for unknown risks and liabilities.5 One way for a purchaser to limit the uncertainties of unknown insurance liabilities of the target company is for the parties to define the business that will be included with the company being sold, rather than defining the business that is excluded. This can be achieved by reinsuring out all of the insurance liabilities of the target company, other than those specific portions of the business that the purchaser seeks to purchase and which it has had an opportunity to sufficiently diligence. In this manner, the risk of unknown insurance liabilities can be allocated to the seller rather than to the purchaser, and the purchaser can obtain more certainty with respect to the business of the company that it is purchasing. In addition to defining the scope of the excluded business, it is also important for the parties to define the scope of the specific liabilities associated with the business that will be reinsured. For example, the parties will need to decide whether the excluded business will be ceded net or gross of third-party reinsurance recoverables, in effect determining which party will assume the risk of non-collection of thirdparty reinsurance recoverables. In negotiating this issue, purchasers typically take the position that the seller should assume the risk of third-party reinsurance recoverables relating to the excluded business, given that the reinsurance is for the benefit of the business that will remain with the seller. Another issue relating to the scope of assumed liabilities is whether extracontractual obligations (ECO)6 should be included as part of the liabilities being reinsured. Again, purchasers typically take the position that the ECO risk should be assumed by the seller, as the seller will be "retaining" (via reinsurance) the excluded business; however, in the event that the purchaser provides post-closing administrative services with respect to the excluded business, the seller typically insists that the purchaser be responsible for ECO liabilities, to the extent that the ECO liabilities arise out of the wrongdoings of the purchaser in providing administrative services.7 It should be noted, however, that to the extent that a state's public policy prohibits insurance for punitive damage awards, a court might similarly find certain ECO liabilities to be invalid and against public policy.8 Notwithstanding such prohibition, the parties, nevertheless, may be able to allocate the risk of ECO liabilities within the confines of the indemnification provisions of the overall stock purchase transaction.
5 Similarly, in the context of the acquisition of a book of business through a reinsurance transaction (see Section III below), purchasers will generally be more comfortable accepting a definition of assumed business that is broad in scope, if they have had sufficient opportunity to diligence the target company and the assumed business to evaluate the potential for unknown risks and liabilities. 6 Extra-contractual obligations are generally those obligations that are outside of the contractual provisions of the underlying policy, such as obligations for punitive damages, consequential damages, and regulatory fines or penalties. 7 See Section IV(A) below for a general discussion of administrative services. 8 Such courts would presumably base such a decision on the rationale that ECO liabilities relating to the bad acts of an insurer are not liabilities under the terms of the insurance policies being reinsured, and therefore, the assumption of ECO liabilities by an assuming reinsurer is not reinsurance but rather the insurance of the bad acts of the insurer, which would be against public policy. Similarly, a New York Office of the General Counsel opinion issued on February 26, 2002 provides that a New York domestic reinsurer may not enter into a reinsurance agreement that covers a ceding insurer's extracontractual obligations.
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Another issue relating to the scope of assumed liabilities is whether extra-contractual obligations (ECO) should be included as part of the liabilities being reinsured.
2. Transitional reinsurance arrangements Reinsurance also may be used in insurance company acquisition transactions as a means of providing post-closing, transitional operational or financial support or assistance by one party to another party. Reinsurance also may be used in insurance company acquisition transactions as a means of providing post-closing, transitional operational or financial support or assistance by one party to another party. For example, a target insurance company that, prior to its sale, had been dependent on ceded reinsurance support provided by its parent or an affiliate that is not included in the transaction may require the continuation of such support following the closing. Because the existing, pre-closing reinsurance agreement is an arrangement between affiliates, its terms may not be appropriate for a postclosing agreement between an unaffiliated purchaser and seller; consequently, it may be advisable to negotiate a new reinsurance agreement between the parties, with more arms-length terms. A reinsurance arrangement can also be used as a means of providing policy issuance or "fronting" support from one party to another following the closing of the acquisition transaction. For example, the target company may not possess all of the appropriate licenses or form filings to write the acquired businesses in all jurisdictions and may have relied on the parent or an affiliate not included in the transaction to write such business on its behalf.9 Similarly, the seller or one of its affiliates that is not included in the transaction may have been relying on the target company for such fronting support, or the seller may need such support with respect to a business that is being excluded as part of the transaction.10 These transitional arrangements require careful consideration and negotiation by the parties with respect to a number of issues, such as the extent of the underwriting and claims handling authority granted to the reinsurer, the level of indemnification to be provided by the parties, obligations with respect to regulatory compliance and covenants relating to the licensure of the ceding company.11 3. Reinsurance as a means of purchase price protection Reinsurance can also be used as an effective tool for replicating a postclosing purchase price adjustment or indemnification settlement, and as a means of bridging differences with respect to the valuation of the target company. One of the most important factors in the valuation of an insurance company with an existing, in-force book of policies is the adequacy of the reserves associated with such policies.12 If there is significant disagreement between the parties as to the correct level of reserves, it may be difficult for the parties to reach agreement on a purchase price, without some form of post-closing purchase price adjustment that is based on the development of the reserves. Such a purchase price adjustment, in effect, shifts to the seller some of the uncertainty of how the reserves will develop following the closing.
9 E.g., through a fronting arrangement, whereby one insurance company, which holds the requisite licensure and other authority to write a particular policy within a state (i.e., the "fronting company"), issues a policy on behalf of another insurance company that generally does not have the requisite licensure or other authority to write such policy and which subsequently assumes from the fronting company, by reinsurance, most or all of the risk covered by such policy. See Section IV(B) below for a general discussion of fronting arrangements. 10 I.e., an excluded business. See Section II(B)(1) above. 11 See Section IV(A) below. 12 For example, disagreements can arise as to the adequacy of reserves relating to certain liabilities, such as asbestos and mold, with respect to property and casualty insurers, and guaranteed minimum death benefits (GMDB) and guaranteed retirement income benefits (GRIB), with respect to life insurers, which can be difficult to estimate in today's environment.
If there is significant disagreement between the parties as to the correct level of reserves, it may be difficult for the parties to reach agreement on a purchase price, without some form of post-closing purchase price adjustment that is based on the development of the reserves.
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One means of achieving this allocation of risk is though the representations and warranties and indemnification provisions of the stock purchase agreement, by providing that the seller would indemnify the purchaser for all or a portion of the amount by which the reserves exceed an agreed-upon level. The same result can also be achieved though an "excess of loss" or "stop-loss" reinsurance agreement, whereby the seller would agree to provide reinsurance coverage to the purchaser13 with respect to all or a portion of losses relating to the in-force business above a certain level. The chosen form of such protection could affect the financial accounting and tax aspects of the transaction, for both the purchaser and seller.14 Also, with respect to both forms of protection, the parties will typically need to negotiate complex settlement procedures for such purchase price adjustments. For example, the seller will typically request audit rights and a method for verifying the final loss and reserve numbers, given that the purchaser will have primary control over the business following the closing. Also, the parties will often negotiate dispute resolution mechanisms, which typically provide for review and arbitration of the final reserves by independent third parties, such as independent actuaries.
C. Drafting considerations in a stock purchase agreement relating to reinsurance The stock purchase agreement for the acquisition of an insurance company should contain specific provisions relating to reinsurance. The purchase agreement's representations and warranties specifically should address the target's reinsurance agreements. Specifically, insurance company stock purchase agreements typically include representations and warranties addressing (i) a listing of material reinsurance contracts, (ii) the enforceability of reinsurance contracts, (iii) disputes and litigation with reinsurers, (iv) recoverability of reinsurance receivables and (v) overdue payments from reinsurers. The covenants and closing conditions in an insurance company stock purchase agreement should also address reinsurance issues. In order to preserve the value of the company being acquired between the time of the signing of the purchase agreement and the closing of the transaction,15 purchasers generally will require the seller to covenant that the target company will not enter into any new reinsurance agreements or amend or modify any existing reinsurance agreements, or exercise or waive certain rights under existing reinsurance agreements, in each case, without the prior consent of the purchaser. Additionally, in certain transactions, the purchase agreement may provide that the closing is conditioned upon the termination or recapture of specified reinsurance agreements or the seller's obtaining certain required third party consents or waivers.16 For example, to the extent that a ceded reinsurance contract is material to the business of the target, the failure to obtain a waiver of the reinsurer's termination rights may affect the target's financial position or ability to write additional business, thus impacting the valuation of the company.
13 Or more specifically, the target insurance company. 14 The various aspects of an insurance company acquisition transaction, including the use of reinsurance in connection with such transactions, can have important tax and financial accounting implications, which should be carefully considered in structuring such transactions. A discussion of such financial accounting and tax considerations is beyond the scope of this article. 15 Given the regulatory filings and approvals that typically are necessary to consummate an insurance company acquisition transaction (e.g., Form A approvals for a change of control under the insurance holding company laws), the period of time between the signing of the purchase agreement and the closing of the transaction can be significant. 16 E.g., waivers of the right by a reinsurer under the terms of a reinsurance agreement to terminate such agreement in the event that the target undergoes a change of control.
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Although insurance company acquisitions traditionally have been structured in the form of stock purchase transactions, the use of reinsurance as a primary acquisition vehicle has grown in popularity in the recent past.
A reinsurance acquisition transaction can provide the purchaser with the highest level of flexibility, by allowing the purchaser to select the specific portions of the target's business to acquire, while also allowing the purchaser to define the specific liabilities related to the business that will be assumed by the purchaser, essentially "leaving behind" unwanted assets and liabilities.
III. Reinsurance as the Primary Acquisition Vehicle Although insurance company acquisitions traditionally have been structured in the form of stock purchase transactions, the use of reinsurance as a primary acquisition vehicle has grown in popularity in the recent past. Whether used as the mechanism for acquiring an insurance company business unit or division or simply acquiring a specific "book of business," reinsurance as a mode of acquisition can afford the purchaser with certain important advantages. In particular, a reinsurance acquisition transaction can provide the purchaser with the highest level of flexibility, by allowing the purchaser to select the specific portions of the target's business to acquire, while also allowing the purchaser to define the specific liabilities related to the business that will be assumed by the purchaser, essentially "leaving behind" unwanted assets and liabilities.17 In such transactions, the purchaser assumes, via a reinsurance agreement, the policy liabilities related to a book of business in exchange for a premium equal to the estimated liabilities or reserves relating to such assumed business, minus a negotiated allowance or ceding commission. The ceding commission in a traditional reinsurance agreement typically represents an allowance or reimbursement to the ceding company for the ceding company's acquisition costs;18 however, in the context of reinsurance agreements entered into in connection with acquisition transactions the negotiated allowance (i.e., the difference between the value of the liabilities/reserves assumed and the consideration received by the purchaser) can also represent the purchase price/consideration paid to the ceding company/seller for the book of business being sold. Such purchase price may be a function of, among other things, the expected returns on the business from future renewals of the policies ceded and investment return on the assets supporting the reserves transferred in connection the transaction. A. Acquisition of a business unit versus acquisition of book of insurance business Transactions using reinsurance as the primary acquisition vehicle generally take one of two forms: (i) the acquisition of an insurance business unit or division or (ii) the acquisition of a specific book of insurance business. The acquisition of an insurance business unit will likely involve more that just the assumption of the target insurance business through reinsurance; typically, such acquisition will also include the purchase of the operating assets, the assumption of third-party contracts and the hiring of employees that support the business being reinsured. In that regard, the purchase of an insurance company business unit, at its heart, is an "asset purchase" transaction, where the primary assets being purchased are the assets and liabilities relating to the insurance policies being assumed. By comparison, the acquisition of a specific book of business is a relatively straight-forward transaction, in that the purchaser simply assumes, via a reinsurance agreement, policy liabilities related to a book a business, without acquiring any operating assets or personnel relating to the book of business being acquired. In either case, the reinsurance transaction typically involves the purchaser's acquiring not only the in-force policies of the seller, but also the right to renew such policies.
17 As discussed in Section II(B)(1) above, specific lines of business and liabilities can also be carved out in a stock purchase transaction through reinsurance or indemnification. However, unlike a stock purchaser that will have to rely on the seller's ability to meet its indemnification obligations with respect to the excluded business and liabilities, a purchaser in a reinsurance acquisition transaction is not subject to the credit risk of the seller and will only be responsible for the specific business and liabilities that it assumes in the transaction. As with any asset purchase transaction, however, the parties will need to also consider potential "successor liability" exposure (i.e., the risk that a purchaser assumes all or certain of the obligations and liabilities of an entity by operation of law as a result of the transfer of all or substantially all of the assets the entity to the purchaser, even if the transfer of the obligations and liabilities of the entity was not agreed to by the parties). 18 I.e., commissions paid to agents and producers and other costs of acquiring the ceded business.
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B. Indemnity versus assumption reinsurance Reinsurance transactions generally can be structured as either indemnity reinsurance or assumption reinsurance. Indemnity reinsurance involves an agreement by the reinsurer (the "purchaser") to indemnify the ceding company (the "seller") for the losses that the ceding company incurs under the ceded insurance policies written by the seller. Although in an indemnity reinsurance transaction the reinsurer assumes the obligations of the ceding company under the underlying ceded insurance policies, the ceding company continues to remain directly liable to the policyholders under such policies. Similarly, a policyholder generally has no privity of contract with the reinsurer and, therefore, can only look to the ceding company for the payment of claims under the policy19 Because the cedent/seller remains directly liable to the policyholder, it remains dependent on the solvency of the reinsurer and the ability of the reinsurer to meet its obligations under the reinsurance agreement. In other words, a ceding company will not be fully relieved of the risks ceded under an indemnity reinsurance agreement, and the gross liability associated with such business will remain on the books of the ceding insurer, subject to its ability to receive credit for ceded reinsurance. In contrast to indemnity reinsurance, assumption reinsurance involves the "novation" of the individual underlying insurance policies, whereby the policyholder/obligee with respect to a given policy agrees, or is deemed to agree, to look to the reinsurer/purchaser as the sole obligor on the subject policy, with the reinsurer/purchaser essentially taking the place of the ceding company thereunder. When the assumption reinsurance becomes effective the reinsurer becomes directly liable to the policyholder, and the ceding company's obligations under the originally issued insurance policy are extinguished; thereafter, the policyholder can only look to the reinsurer for recovery under the policy. Although assumption reinsurance would appear preferable to indemnity reinsurance, due to the finality that assumption reinsurance brings to the seller and purchaser, pure assumption reinsurance transactions are somewhat less prevalent than one might anticipate because of the relative difficulty of effecting such transactions. Under general common law principles, the novation of a contract generally requires the consent of all involved parties20 which, in the case of the novation of an insurance policy, would require not only the agreement of the cedent/seller and the reinsurer/purchaser, but also the consent of the policyholder. As such, under common law, the transfer of a book of insurance business by assumption reinsurance would require policyholder consent on an individual policyholder-by-policyholder basis, necessitating the dissemination of notices to all policyholders, requesting each to affirmatively consent to the novation. Depending on the size of the policyholder base, this process could be extraordinarily time consuming and costly, and it may be difficult to obtain the consent of all, or a threshold level of, policyholders. Although under common law the novation of an insurance policy would require the affirmative consent of the individual policyholders, the insurance laws of a small number of states provide for a statutory assumption reinsurance process, whereby the consent of an individual policyholder is deemed given if, after proper notice is given to the policyholder, the policyholder does not object to the novation of the policy. Such statutes are generally based on the National Association of Insurance Commissioners' (NAIC) Assumption Reinsurance Model Act.21
19 In certain circumstances, privity of contract can be created between the reinsurer and a policyholder though a "cut-through" agreement or endorsement. Generally, under a "cut-through" agreement or endorsement, the reinsurer will grant the insured under a reinsured policy the right to make claims directly against the reinsurer, to the extent such claim would be covered under the reinsurance agreement, with such right typically being triggered in the event of the insolvency of the ceding company. 20 See Restatement (Second) of Contracts 280. 21 Although only a handful of states have adopted the NAIC Model Assumption Reinsurance Act, certain states, on an individual case basis, have allowed for assumption reinsurance transactions to be effected by the negative consent of policyholders, similar to the process provided in the NAIC Model Assumption Reinsurance Act.
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Although assumption reinsurance would appear preferable to indemnity reinsurance, due to the finality that assumption reinsurance brings to the seller and purchaser, pure assumption reinsurance transactions are somewhat less prevalent than one might anticipate because of the relative difficulty of effecting such transactions.
In addition to the states that have adopted the NAIC Assumption Reinsurance Model Act, a number of states have regulations, guidelines or procedures for effecting an assumption reinsurance transaction.22 Although there is some variability as to the specific requirements and procedures imposed by the subject states, most states generally require the state insurance commissioner approval of an assumption reinsurance transaction, as well as approval of the information and the form of notice to be given to the policyholders. Additionally, most states require that the reinsurer/purchaser be licensed in each state wherein transferred policies were written; because a novation is being effected with respect to a transferred policy, the reinsurer/purchaser would need the authority and licensure to be able to issue the transferred policy to the insured. Given the amount of time and cost required to effect an assumption reinsurance transaction, and the fact that there can be no assurance that all policyholders will consent (or not object) to the transfer of the subject policies, purchasers and sellers will sometimes avoid pure assumption reinsurance transactions as a practical means of acquiring a book of business. Instead, many assumption reinsurance transactions are structured as transitional, indemnity-to-assumption arrangements, whereby the book of business is initially transferred to the reinsurer/purchaser via indemnity reinsurance, with the parties agreeing to use their reasonable or best efforts to transfer the policies via assumption reinsurance and to obtain the required regulatory and policyholder consents. Once the required regulatory and policyholder consents are obtained, a novation is effected, and the cedent/seller is relieved of any residual exposure with respect to the underlying policies, which are now treated as having been issued by the reinsurer/purchaser. C. Key issues relating to reinsurance transactions As with reinsurance agreements excluding a line of business,23 reinsurance agreements affecting the acquisition of a book of business must clearly define and set forth the scope of the business being acquired. As discussed above, while there are many different approaches that can be used to define the scope of the business that is transferred via a reinsurance agreement, the subject provisions must be clearly drafted, with an appropriate level of specificity. Also, consideration must be given as to whether the business being transferred will be gross or net of third-party reinsurance; whether such business will include assumed reinsurance; and which party will be responsible for guaranty association and residual market assessments on the transferred business. The parties will also need to determine how to address specific risks, such as extra-contractual obligations. If a book of business is being acquired as an on-going business, rather than for run-off, the reinsurer/purchaser should insist that the transaction documents provide the purchaser with the exclusive right to renew the acquired policies upon expiration. In addition to the above considerations, there are additional issues that have particular significance in reinsurance acquisition transactions. If a book of business is being acquired as an on-going business, rather than for run-off,24 the reinsurer/purchaser should insist that the transaction
22 Including those states that have adopted the NAIC Model Assumption Reinsurance Act, an assumption reinsurance statute or regulation has been adopted in some form by approximately fifteen (15) states. See, e.g., Sections 301 s 90i.1 to .4 of the Pennsylvania Insurance Code and Sections 33-52-1 to -6 of the Georgia Insurance Code. 23 See Section II(B)(1) above. 24 The term "run-off" generally refers to a company's continued administration of in-force insurance business, until the expiration of all existing policies and until all liabilities relating to such business have been settled or otherwise discharged, without the company renewing any of the existing policies or writing new policies with respect to such business.
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documents provide the purchaser with the exclusive right25 to renew the acquired policies upon expiration. Additionally, the transaction documents should clearly provide that the purchaser is acquiring all of the seller's rights to all policyholder data. The purchaser should also give consideration to non-solicitation and noncompetition provisions in the transaction documents, prohibiting the seller from soliciting the transferred policyholders for similar types of policies or competing with the purchaser respect to the acquired business, for a period of time sufficient to perfect the purchaser's business objectives. From the perspective of the cedent/seller, credit for reinsurance and security mechanisms (such as reinsurance trusts and letters of credit) represent important considerations, as they would in any reinsurance transaction. In that regard, the reinsurance agreement should specify the mechanism that will be used to ensure that the ceding company will be able to receive statutory financial statement credit for the reinsurance transaction. Even if credit for reinsurance is not a consideration in a reinsurance transaction,26 a security mechanism may nevertheless be advisable to protect the ceding company from credit risk associated with the reinsurer. 27 Representations and warranties should also be an important part of the documentation of a reinsurance transaction. As a matter of industry custom, reinsurance agreements typically do not include many representations and warranties. However, whenever a reinsurance agreement represents the acquisition of a business unit, division or block of insurance business, it is essentially an acquisition document, representing a material transfer of assets and liabilities; consequently, it is important that the document be carefully drafted and include all of the protections afforded in other types of acquisition documents (i.e., representations, warranties, indemnities, etc.). At a minimum, a reinsurance agreement should include basic representations and warranties relating to the organization, power and authority of the parties and the enforceability of the agreement. A purchaser of a book of business should also seek other representations and warranties from the seller, relating to the acquired business, such as those relating to the licensure and regulatory compliance of the ceding company; the reserves relating to the transferred business and any actuarial analysis used to determine such reserves; and title of the assets being transferred in connection with the reinsurance transaction (including assets supporting the reserves). In addition, depending on the nature of the business being acquired, the parties should also consider certain representations and warranties that are traditionally not found in reinsurance agreements, but which are customary in other acquisition transactions. For example, it may be appropriate for a purchaser to ask for representations and warranties regarding the computer and data systems and accounting control systems of the ceding company, to ensure the integrity of the data that is used to determine the reserves of the business being acquired. D. Due diligence considerations in acquiring a book of business via reinsurance Structuring an insurance acquisition as a reinsurance transaction does not obviate the need for appropriate due diligence with respect to the target business. Although a reinsurance transaction allows the purchaser more flexibility in defining the liabilities that it will assume, the purchaser is nevertheless at some level of risk regarding past and, in some cases, future liabilities with respect to the target business. With respect to liabilities for past actions, the purchaser's assumption of such liabilities will depend mostly on the scope of the definition of the business assumed
25 Exclusive as between the purchaser and the seller. 26 E.g., if the reinsurer is a licensed insurer in the ceding company's state of domicile or if the ceding company is domiciled in a non-U.S. jurisdiction without similar credit for reinsurance requirements. 27 Because the financial support provided to a ceding insurer under a reinsurance transaction is dependent on the ability of the reinsurer to satisfy its obligations at a point in time in the future, the ceding insurer (and its financial position) remains subject to the credit risk of the reinsurer.
Structuring an insurance acquisition as a reinsurance transaction does not obviate the need for appropriate due diligence with respect to the target business
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If the reinsurance agreement provides that the purchaser assumes the extra-contractual obligations of the ceding company relating to the assumed business, a purchaser can potentially become subject to class action liability with respect to the policies assumed, particularly if there were market conduct or sales practices issues relating to the marketing of the acquired policies.
under the subject reinsurance agreement. For example, if the reinsurance agreement provides that the purchaser assumes the extra-contractual obligations of the ceding company relating to the assumed business, a purchaser can potentially become subject to class action liability with respect to the policies assumed, particularly if there were market conduct or sales practices issues relating to the marketing of the acquired policies. The purchaser can also become subject to potential liability with respect to post-closing actions. For example, if the purchaser is acquiring the employees and management of the target as part of the transaction, individuals with poor employment histories and certain institutional management, compliance and market conduct problems associated with the business could expose the purchaser to future liability. The purchaser can similarly be subject to potential future liability if it chooses to adopt and use policy forms, procedures and practices obtained from the seller. Similarly, the purchaser should be cognizant of potential reputational risks associated with the target business, particularly if the purchaser will be using a product or trade name purchased in connection with the business. Even if the purchaser is able to effectively shift the risk of liabilities relating to past actions to the seller, negative publicity regarding such liabilities can tarnish the name of the purchaser if it becomes associated with such negative publicity. IV. Ancillary Arrangement and Agreements Reinsurance agreements entered into in connection with an insurance company acquisition transaction, whether structured as a stock purchase transaction or the sale of a book of business, often will be accompanied by other ancillary agreements, addressing issues such as administrative services and underwriting authority. A. Administrative services Following the closing of many insurance company acquisition transactions, one or both parties may require transitional support from the other party in connection with business acquired or excluded, due to the fact that operational assets or employees supporting such business are owned by the other party following the closing. For example, a seller may offer for sale a book of business without including in the transaction all assets and personnel needed to run the business, because such assets and employees are needed in another business of the seller. Similarly, a seller may require support with respect to assets and employees transferred to a purchaser, to continue to administer retained or excluded businesses of the seller. In such circumstances, it is common for the parties to enter into ancillary agreements for the provision of such services or support, often for a transitional period of time. Such services may include claims handling, billing and collection of premiums, calculation and payment of producer commissions, calculation and payment of premium taxes and guaranty association fees, customer service and underwriting functions, preparation of financial statements and other reports, and regulatory compliance. B. Fronting arrangements In certain circumstances, one party also may need the other party to continue writing/issuing policies on its behalf, until such time as it has the proper licenses and form filings to be able to write such business directly.28 Such "fronting arrangements" generally require the cedent/seller (i.e., fronting company) to provide the reinsurer/purchaser with a certain degree
In certain circumstances, one party also may need the other party to continue writing/issuing policies on its behalf, until such time as it has the proper licenses and form filings to be able to write such business directly. Such "fronting arrangements" generally require the cedent/seller (i.e., fronting company) to provide the reinsurer/purchaser with a certain degree of underwriting and claims handling authority.
28 See Section II(B)(2) above.
29
of underwriting and claims handling authority. The reinsurer will generally be allowed a great degree of discretion in exercising such authority, given that the reinsurer generally assumes all economic liability and risk with respect to the fronted business. However, the ceding company will need to ensure that it is adequately protected from the credit risk of the reinsurer associated with the transaction, as well as reputational and regulatory risks that may arise from underwriting and claims handling decisions made by the reinsurer. The ceding company typically will also require the reinsurer to provide all necessary administrative services with respect to the fronted business.29 Conclusion Reinsurance can be an effective tool in facilitating insurance company acquisition transactions, by allowing the parties greater options in crafting transaction structures that meet their respective goals and objectives. However, in deciding among the many options afforded by the use of reinsurance, the parties will need to give careful consideration to various business, legal and regulatory issues, which will be impacted based on the options chosen by the parties. Whether reinsurance is used as the primary acquisition vehicle or to add flexibility to a stock acquisition transaction, taking a thoughtful approach to issues relating to reinsurance is critical.
29 Despite the adoption of the Fronting Disclosure and Regulation Model Act by the NAIC in 1993, very few states have anti-fronting laws. Nevertheless, some states have adopted such laws, and applicable anti-fronting laws should be considered in connection with any reinsurance transaction that provides for fronting. See, e.g., Section 624.404 of the Florida Insurance Code and Section 806 KAR 5:020 of the Kentucky Administrative Regulations.
30
Profiles of the Authors
Navneet K. Dhaliwal Michael P. Goldman
Sean M. Keyvan
Daniel J. Neppl
Alan J. Sorkowitz
Ronie M. Schmelz
Susan A. Stone
Joshua G. Urquhart
N AV N E E T K . D H A L I WA L ,
an associate in the New York office, received
DANIEL J. NEPPL,
counsel in the Chicago office, graduated with
her law degree with honors from Cambridge University, England, in 1996. Her practice includes the fields of reinsurance arbitration, litigation, transactional and mediation work in the U.S. and international reinsurance markets. Ms. Dhaliwal's telephone number is 212.839.5722; fax number 212.839.5599; email address: ndhaliwal@sidley.com.
M I C H A E L P. G O L D M A N ,
honors from the University of Iowa in 1990 and received his law degree cum laude from Creighton University in 1993. His practice includes reinsurance arbitration, litigation, insurance coverage, and related commercial matters. Mr. Neppl's telephone number is 312.853.7334; fax number 312.853.7036; email address: dneppl@sidley.com.
ALAN J. SORKOWITZ,
a partner in the Chicago office, graduated with
counsel in the New York office, graduated cum
high honors from the University of Illinois with a degree in Accountancy and became a Certified Public Accountant in 1982. Mr. Goldman also received his law degree with honors from Loyola University in 1985. His practice focuses on the corporate representation of insurance companies and other insurance entities, the representation of investment banks, commercial banks, private equity funds, investment advisors, derivatives dealers and other sectors of the financial services industry, with respect to insurance company relationships and transactions. Mr. Goldman is a member of the Chicago Bar Association's Insurance and Corporate Law Committees and the American Bar Association's (ABA) Tort and Insurance Practice and Business Law Sections. Within the ABA, he has been a vice-chair of the committee on insurance company investments, where he chaired the subcommittee on subsidiary and affiliate investments. In addition, he has been appointed to industry advisory and technical resource committees to various NAIC Task Forces and regularly provides counsel to the Illinois Department of Insurance regarding emerging insurance regulatory issues. Mr. Goldman is also a member and past Chair of the Insurance Companies Committee and Regulatory Liaison Subcommittee of the Illinois CPA Society and is an associate member of the Society of Financial Examiners (Insurance). He has written numerous articles relating to the financial, invested asset and general regulation of insurance companies and is a frequent speaker and moderator on specific issues relating to the insurance industry. Mr. Goldman's telephone number is 312.853.4665; fax number 312.853.7036; email address: mgoldman@sidley.com.
S E A N M . K E Y VA N ,
laude from City University of New York in 1977 and received his law degree from St. John's University School of Law in 1980. For more than twenty years, his practice has focused primarily on reinsurance disputes, including both litigation and arbitration. He has substantial experience with issues such as fronting, contract interpretation, follow the fortunes, allocation and alleged fraud in placement. Mr. Sorkowitz's telephone number is 212.839.5791; fax number 212.839.5599; email address: asorkowitz@sidley.com.
RONIE M. SCHMELZ,
a partner in the Los Angeles office, received her
law degree from the University of California, San Francisco, Hastings College of Law in 1987. Her practice focuses on complex civil litigation, with an emphasis on class action defense, and reinsurance arbitration and litigation. Ms. Schmelz's telephone number is 213.896.6658; fax number 213.896.6600; email address: rschmelz@sidley.com.
S U S A N A . S TO N E ,
a partner in the Chicago office, graduated summa cum
laude from Yale University in 1983 and received her law degree cum laude from Harvard Law School in 1987. Her practice includes a variety of reinsurance litigation, arbitration, insurance coverage, commercial and financial litigation matters. Ms. Stone has handled numerous reinsurance arbitrations and reinsurance commutations, involving such diverse issues as the World Trade Center, Enron/Mahonia, Unicover, and asbestos/environmental claims. She writes and speaks frequently on reinsurance topics, has chaired several reinsurance industry conferences, and is a Member of the Board of ARIAS-US. Ms. Stone has served as an Adjunct Professor teaching Trial Practice at DePaul University College of Law for several years. She was featured in the list of "The Next Generation of Killer Litigators" in the Illinois Legal Times, and was named by the Chicago Lawyer as one of the "40 Attorneys Under 40." Ms. Stone's telephone number is 312.853.2177; fax 312.853.7036; email address: sstone@sidley.com.
JOSHUA G. URQUHART,
a partner in the Chicago office, graduated from
Northwestern University in 1992 and received his law degree from Boston University in 1995. His practice is focused on a variety of corporate and regulatory matters relating to the insurance industry, including, but not limited to, the representation of insurance companies and other insurance entities and corporate reorganizations. Mr. Keyvan's practice also involves the representation of investment banks, commercial banks, private equity funds, investment advisors, derivatives dealers and other sectors of the financial services industry, with respect to insurance company relationships and transactions. Mr. Keyvan's telephone number is 312.853.4660; fax number 312.853.7036; email address: skeyvan@sidley.com.
an associate in the Chicago office, graduated
cum laude from Southern Methodist University in 1998 and received his law degree with honors from the University of Chicago Law School in 2001. His practice includes a variety of insurance and reinsurance litigation, arbitration and regulatory matters. Mr. Urquhart's telephone number is 312.853.4091; fax 312.853.7036; email address: jurquhart@sidley.com.
REINSURANCE LAW REPORT WINTER 2004
BEIJING One China World Tower 1 Jian Guo Men Wai Avenue Beijing 100004, China T: 86.10.6505.5359 F: 86.10.6505.5360
HONG KONG 39F Two International Finance Centre 8 Finance Street Central Hong Kong T: 852.2509.7888 F: 852.2509.3110
SHANGHAI Shui On Plaza 333, Middle Huai Hai Road Shanghai 200021, China T: 86.21.5306.2866 F: 86.21.5306.8966
BRUSSELS Square de Meeus, 35 B-1000 Brussels Belgium T: 32.2.504.6400 F: 32.2.504.6401 LONDON Woolgate Exchange 25 Basinghall Street London, EC2V 5HA United Kingdom T: 44.20.7360.3600 CHICAGO Bank One Plaza 10 S. Dearborn Street Chicago, Illinois 60603 T: 312.853.7000 F: 312.853.7036 LOS ANGELES 555 West Fifth Street Los Angeles, California 90013 T: 213.896.6000 F: 213.896.6600 DALLAS 717 North Harwood Suite 3400 Dallas, Texas 75201 T: 214.981.3300 F: 214.981.3400 NEW YORK 787 Seventh Avenue New York, New York 10019 T: 212.839.5300 F: 212.839.5599 F: 44.20.7626.7937
SINGAPORE 6 Battery Road, #40-01 Singapore 049909 T: 65.6230.3900 F: 65.6230.3939
TOKYO Sidley Austin Brown & Wood Gaikokuho Jimu Bengoshi Jimusho Nishikawa & Partners (Registered Associated Offices) Marunouchi Building 23F 4-1, Marunouchi 2-chome Chiyoda-Ku, Tokyo 100-6323 Japan T: 81.3.3218.5900 F: 81.3.3218.5922
WASHINGTON, D.C. 1501 K Street N.W. Washington, D.C. 20005 T: 202.736.8000 F: 202.736.8711
GENEVA Rue de Lausanne 139 Sixth Floor 1202 Geneva Switzerland T: 41.22.908.25.25 F: 41.22.908.25.20
SAN FRANCISCO 555 California Street San Francisco, California 94104 T: 415.772.1200 F: 415.772.7400
www.sidley.com
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VOLUME 11

2004 REINSURANCE LAW REPORT

2004 REINSURANCE LAW REPORT

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

THE "FOLLOW THE FORTUNES" DOCTRINE: ADDRESSING A CEDENT'S ALLOCATION DECISIONS

THE "FOLLOW THE FORTUNES" DOCTRINE: ADDRESSING A CEDENT'S ALLOCATION DECISIONS

THE "FOLLOW THE FORTUNES" DOCTRINE: ADDRESSING A CEDENT'S ALLOCATION DECISIONS

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

THE "FOLLOW THE FORTUNES" DOCTRINE: ADDRESSING A CEDENT'S ALLOCATION DECISIONS

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

The Procedures also seek to expand the pool of qualified arbitrators.

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW1

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW

28 See Section II(B)(2) above.

SIDLEY AUSTIN BROWN & WOOD LLP R E I N S U R A N C E L A W R E P O R T

REINSURANCE IN THE CONTEXT OF INSURANCE COMPANY M&A TRANSACTIONS: A PRACTICAL OVERVIEW

Profiles of the Authors

Navneet K. Dhaliwal Michael P. Goldman

an associate in the New York office, received

counsel in the Chicago office, graduated with

a partner in the Chicago office, graduated with

counsel in the New York office, graduated cum

a partner in the Los Angeles office, received her

a partner in the Chicago office, graduated summa cum

a partner in the Chicago office, graduated from

an associate in the Chicago office, graduated

REINSURANCE LAW REPORT WINTER 2004

SINGAPORE 6 Battery Road, #40-01 Singapore 049909 T: 65.6230.3900 F: 65.6230.3939

SIDLEY AUSTIN BROWN & WOOD LLP 2005 PROMOTIONAL MATERIALS

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