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Joseph C. Monahan Partner, Insurance Practice » www.saul.com 215.972.7826 < [email protected] EDITOR’S NOTES

Frack Attack Peter A. Scarpato

A few years ago, no one heard about Act of 2014 (LIMA). With the help of present a streamlined mediation process fracking. Any mention of the word Adam Lewis, Anna gives us Test Drive for use by AIRROC members and would have evoked laughter over the Future of Runoff, a recitation of how nonmembers. And in AIRROC / IAIR its similarity to its infamous Anglo LIMA modifies useful parts of Part VII to Pair Up for Progress, Kathleen McCain Saxon sound-alike. Today, the fracking fit the Vermont and U.S. environments, discusses how she and Carolyn Fahey debate rages on, from state to state, creating the first U.S. law permitting developed AIRROC and IAIR’s second entrepreneur to environmentalist, all transfer of runoff insurance and Joint Issues Forum at the NAIC meetings wondering if this process of releasing reinsurance business. in Washington D.C. natural gas from submerged rock is Growth and adjustment are hallmarks And finally, Art Coleman revisits savior or slayer of the earth. of any successful organization. In his classic piece, Commutations – A In his review of the book, Fracking Evolution: All Aboard the Board, Connie Historical Perspective, his collaborative, Risks and Rewards by Barbara Hadley, O’Mara and Bina Dagar interview out- irreverent look at his original experiences Tom Rennell and Derek Austin, Jeffrey going board members Keith Kaplan and with commutations, including a valuable Grossman takes us cover-to-cover, with Glenn Frankel, and incoming members step-by-step guide to this time-honored a synopsis of how this comprehensive J. Marcus Doran and me, on past part of the business. End as always with work examines the geological to accomplishments and future goals. Along Fran Semaya and Peter Bickford’s Present chemical to financial elements of this with evolution, effective associations Value and we’re done. booming industry. Well-researched and need dedicated leaders. In this edition, Let us hear from you. l informative, the book gives us a sense we are pleased to hear from our past and that the jury is still out. Of course, like current Executive Directors. Trish Getty, everything else, there’s the legal side. And driving force behind the initial growth in Hydraulic Fracturing, Fred Pomerantz, of AIRROC and namesake of our Trish Andrew Scholz and James Macri survey Getty Scholarship, recounts a visit with the cracked landscape of cases, legislation our 2014 honoree, Abigayle Claflin, and and regulatory issues, predicting that her grandfather in Where Do Values Peter A. Scarpato, Editor insurance and risk shifting disputes are Spring From? And we have the Message & Chair AIRROC Matters, around the corner. from our current energetic and tireless Vice President – Ceded ED, Carolyn Fahey. Entitled Definitely Joseph McCullough and Peter Steffen Reinsurance of NOT A Polar Bear…, Carolyn outlines confront an issue lurking in the weeds but ACE Brandywine. seldom expressed, Is the Duty of Utmost upcoming events and future innovations, peter.scarpato@brandy- Good Faith in Runoff? Has the emergence including our mobile responsive website wineholdings.com of run off eroded this bedrock principle and AIRROC App. of reinsurance. Recent cases and arbitral If you’re in run off you aren’t far from awards beg to differ. disputes. AIRROC continues to offer We asked our newest AIRROC Person of more efficient alternatives to traditional the Year, Anna Petropoulos, to provide arbitration. In AIRROC Dispute perspective on a matter near and dear, the Resolution: Adding Simplified Mediation Vermont Legacy Insurance Management to Your Toolbelt, Frank Kehrwald and I

AIRROC®Publication Committee Editor & Chair Jonathan Bank Carolyn Fahey Vivien Tyrell Design & Illustration Peter A. Scarpato [email protected] [email protected] [email protected] Myers Creative Services [email protected] Peter H. Bickford Jeffrey D. Grossman Greg Wyles [email protected] [email protected] [email protected] [email protected] Assistant Editors The AIRROC® Matters Editorial Board welcomes authors’ new and Maryann Taylor Jenna Buda Nicholas Horsmon Jonathan Yorke reprinted with permission articles [email protected] [email protected] [email protected] [email protected] on current topics of interest to Michael H. Goldstein Bina T. Dagar Joseph C. Monahan AIRROC®’s membership. The [email protected] [email protected] [email protected] Marketing Consultant Board reserves the right to edit Dale Diamond Frederick J. Pomerantz Gina Pirozzi submissions for content and/ Committee Outreach [email protected] [email protected] [email protected] or space. Connie D. O’Mara Randi Ellias Francine L. Semaya [email protected] [email protected] [email protected]

AIRROC MATTERS / SPRING 2015 3 Run-off Solutions

From advising on entering the run-off market, buying and selling portfolios and entities, resolving disputes, managing discontinued operations and achieving exit strategies, our lawyers get the job done.

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Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions. AIRROC Board of Directors & Officers Vol. 11 No. 1 Spring 2015 www.airroc.org Katherine Barker (Co-Chair) Excalibur Re

Marianne Petillo (Co-Chair) ROM Re EDITOR’S NOTES Frack Attack Peter A. Scarpato 3 Ed Gibney (Vice Chair) R&Q Solutions LLC Karen Amos Resolute Management Services ON THE RADAR Michael Baschwitz Zurich Book Review: Fracking Risks and Rewards Sheila Chapman CNA Jeffrey D. Grossman 6 Art Coleman (Immediate Past Chairman) Citadel Re Hydraulic Fracturing J. Marcus Doran The Hartford/First State A Retrospective of Key Legal Disputes in 2014 Michael Fitzgerald QBE North America Frederick J. Pomerantz, Andrew J. Scholz & James D. Macri 8 Frank Kehrwald Swiss Re Mindy Kipness AIG Thanks to our Corporate Partners 11 Peter A. Scarpato Brandywine

LEGALESE Leah Spivey Munich Re America Sylvain Villeroy de Galhau Is the Duty of Utmost Good Faith in Runoff? AXA Liabilities Managers UK

Joseph T. McCullough & Peter B. Steffen 12 Ann Weikers RiverStone Resources LLC Carolyn Fahey (Executive Director)* Advertisers in this Issue 15 Joseph J. DeVito (Treasurer)* DeVito Consulting William Littel (Secretary)* Allstate THINK TANK Susan Aldridge (General Counsel)* Chadbourne & Test Drive the Future of Runoff Parke LLP Anna Petropoulos & Adam M. Lewis 18 *Non-Board member SPOTLIGHT AIRROC Executive Committees Evolution: All Aboard The Board Connie D. O’Mara & Bina T. Dagar 20 Member Services/DRP Committee Co-Chair Ann Weikers RiverStone Resources LLC AIRROC UPDATE Co-Chair Frank Kehrwald Swiss Re Vice Chair Art Coleman Citadel Re Definitely NOT a Polar Bear… Carolyn Fahey 23 Education Committee Where Do Values Spring From? Trish Getty 23 Co-Chair Karen Amos Resolute Management Services Co-Chair J. Marcus Doran The Hartford/First State AIRROC Dispute Resolution Frank Kehrwald & Peter A. Scarpato 25 Finance Committee Chair Michael Fitzgerald QBE WHO’S TALKING Co-Vice Chair Marianne Petillo ROM Re Co-Vice Chair Leah Spivey Munich Re America AIRROC/IAIR Pair up for Progress Marketing/Member Recruitment Committee Kathleen M. McCain & Carolyn Fahey 27 Co-Chair Mindy Kipness AIG AIRROC MATTERS CLASSIC Co-Chair Michael Baschwitz Zurich Vice Chair Sylvain Villeroy de Galhau Commutations – A Historical Perspective AXA Liabilities Managers UK Art Coleman 30 October Event Committee PRESENT VALUE Co-Chair Edward Gibney R&Q Solutions LLC News & Events / Mark Your Calendar Vice Chair Robert Sirois RiverStone Resources LLC Illustrations / Rafael Edwards Francine L. Semaya & Peter H. Bickford 36 Publication Committee Chair / Editor-in-Chief Peter A. Scarpato Copyright Notice AIRROC® Matters is published to provide insights and commentary on U.S. legacy business, to educate members Brandywine and the public, stimulating discussion and fostering innovation to advance the industry’s interests. Publishing and editorial decisions are based on the editor’s judgment of writing quality, relevance to AIRROC® members’ interests and timeliness of submissions. CLIP Committee Published articles should not be deemed to reflect the views of any AIRROC® member, unless so stated. AIRROC® endorsement Co-Chair Marianne Petillo ROM Re of any views expressed in articles should not be inferred, unless so stated. Co-Chair Leah Spivey Munich Re America AIRROC® Matters magazine is published by the Association of Insurance and Reinsurance Run-off Companies. ©2015. All rights reserved. No reproduction of any portion of this issue is allowed without the publisher’s prior written permission. AIRROC MATTERS / SPRING 2015 5 ON THE RADAR Book Review: Fracking Risks and Rewards Defrocks the Facts of Fracking

Between 2006 and 2013, annual written work. Industry stakeholders compositions. And while gas molecules as well as the curious will, by reading formed in source rocks are very light capital expenditure on shale gas this book, gain a valuable and broad and may migrate upward, sometimes to extraction increased sixteen fold, understanding of the shale boom in its the earth’s surface, much gas becomes from $5 billion to over $80 billion. current state. “trapped” within various rock formations Initially, the authors devote substantial having low permeability. These could Since 2007, the United States has attention to the science of shale gas. be the source rocks themselves, or rock added at least 27.5 billion cubic Prepare to learn as Fracking Risks formations sitting over the source rocks, closer to the earth’s surface. feet per day of shale gas to global and Rewards thoroughly explains the geologic, hydrologic and chemical Conventional gas extraction has long energy production. Indeed, fracking components of shale gas formation, existed, where quantities of gas have is big business; and assessing the exploration and extraction. Only migrated upward from source rocks when adequately prepared with this and collected beneath rock formations, opportunities it truly holds, as technical background may readers truly known as a cap rock. This migrated gas well as the risks it poses, is also a comprehend the potential economic forms an actual gas reservoir beneath opportunities, and the corollary the “cap rock.” By drilling a single well large, complex and controversial environmental and safety risks (and how through a cap rock to the surface of the endeavor. to mitigate those risks), associated with reservoir, this conventional gas may be fracking the earth to extract natural gas. released and extracted. In Fracking Risks and Rewards, Simply put, natural gas is formed when Unconventional drilling, which includes experienced researchers and journalists, organic matter within rock formations fracking, occurs by going to the source Barbara Hadley, Tom Rennell and Derek is subjected to heat and pressure over rock itself and releasing the gas before it Austin, tackle the key facets of the very long periods of time. These rock has migrated upward to a conventional shale gas industry through their careful formations are known as source rocks reservoir. Because no reservoir yet exists presentation of facts; and provide readers (the source of the gas) and are made for this source rock gas, its release is far with a thoroughly researched and well- of various shapes, sizes and geologic more difficult, expensive and risky. One

6 AIRROC MATTERS / SPRING 2015 Jeffrey D. Grossman must create fissures within the source juncture, and the complexities of the trucking traffic over road infrastructures rock to provide pathways for the gas to global energy marketplace in general that are often unsuited for this purpose. migrate to a main well for extraction. The only add to the unknowns. Yet, there can States, counties and municipalities have means and methods for creating fissures be no doubt that fracking for natural gas begun mitigating this risk by requiring or fractures within the source rock gave holds much economic opportunity. In drillers to post bonds for anticipated road rise to the industry term “fracking.” certain geographic regions, fracking is improvements and repair costs. red hot and, overall, fracking is rapidly Although its technology and In addition to concerns over the massive becoming a firmly entrenched sector accompanying methods may vary quantities of water utilized to frack, the within the broad energy market. somewhat, generally fracking occurs slickwater itself, and its disposal, creates when a vertical well is drilled and a the risk of environmental contamination. Although the additives within slickwater connected horizontal well or series of …beneath this beautiful wells is added within a layer of source typically comprise only .5 to 2 percent rock. Once the wells are completed, a picture lies complex by volume, these additives contain mixture of water, sand and chemical economics built upon many chemicals. Some are harmless: salt or agents (known as “slickwater”) is then assumptions. citric acid, for example. Others, however, injected through the wells at high are toxic: benzene, other volatile organic volume, pressure and velocity. This ------compounds, and possible human mixture then interacts with the source carcinogens regulated under the Safe rock, creating fissures within the source Drinking Water Act. And again, much rock itself. Gas molecules within is unknown because many energy the vicinity of these fissures are then companies consider their slickwater “freed” and capable of migrating to recipes propriety and will not voluntarily the horizontal well and up through the make disclosures. vertical well for extraction. By accident, or through less-than-ideal After thoroughly explaining the science disposal techniques, slickwater may and technology of fracking, the authors migrate into a drinking water supply. In lay out the facts and expose much of addition, the gas product itself, which is the fiction surrounding the economic mostly methane, may also contaminate opportunities. water. Such adverse results have given In the United States, shale gas is repeatedly rise to multiple lawsuits and regulatory identified as the largest economic and actions. national security opportunity available Fortunately, many contamination risks today. As proponents might describe it, may be avoided or at least mitigated. domestic shale formations holding natu- State regulators are increasingly targeting ral gas are plentiful and vast, and with the primary risks, by focusing on The risks most frequently associated with proper investments in fracking opera- requirements for well casings, increased fracking generally relate to water usage tions, gas transportation pipelines, liq- disclosures regarding the chemical and environmental contamination. uefying processes and energy efficiency, constituents of slickwater, and regulating Water usage concerns arise from the the United States will surely and quickly its disposal. However, not all states are on massive quantities of water required to become energy independent as well as equal footing and regulations widely vary create fissures within the source rock. A the worldwide leading energy exporter – from state to state. single horizontal well, over its useful life, thus safeguarding financial security and may use as much as 8.9 million gallons of Of course, the market itself may self- geo-political superiority for generations water. With many geographic areas regulate and the insurance industry to come. experiencing chronic drought, the will likely play a significant role here by However, beneath this beautiful picture benefits of gas extraction through demanding higher standards of risk con- lies complex economics built upon many fracking must be balanced with the risks trol in exchange for insurance coverage. assumptions. Extraction and production of such high water demands. A related Transportation vendors, construction is expensive, very expensive; and much risk arises because most wells are serviced contractors, well or pipeline owners and of the industry is highly leveraged, by tanker trucks bringing water to remote operators, and other industry players financing operations on borrowed funds well sites. For example, the 8.9 million each holds a distinct risk profile, and – including the issuance of junk bonds. gallons of water mentioned above would each plays a key role in risk mitigation. Profitability is far from a given at this require 1100 truckloads, drawing heavy The insurers and reinsurers covering

AIRROC MATTERS / SPRING 2015 7 ON THE RADAR

Fracking (continued)Settle Hydraulic Fracturing these business operations will also play an A Retrospective of Key Legal Disputes in 2014 important role in mitigating and spread- ing the risks of contamination and other and Predictions for the Future hazards. The investors who see fracking as a capital growth opportunity should also In 2014, hydraulic fracturing For example, in Warren Drilling v. be concerned with these risks and are ex- (“fracking”) remained a hot national Equitable Production, 2014 WL 1512699, pected to positively influence the industry topic. Often making headlines, fracking an indemnification provision in a by encouraging the companies in which also made its mark in litigation where production company-drilling company they invest to fully understand, disclose key battles wound their way through contract was applied to an underlying and mitigate against risk. the courts. Reviewing just some legal water contamination claim advanced by Fracking Risks and Rewards provides developments confirms the industry certain landowners. The court a thorough, intelligent and balanced faces unique, sometimes prejudicial, determined the contract’s language assessment of the fracking industry and challenges despite continued growth. wherein the producer’s duty to indemnify its complex facets, for both the curious was plain and consequently was triggered For example, the Eighth Circuit’s and professionals with a need to critically by the contamination claim against the decision in Hiser v. XTO Energy, 768 understand this important, evolving drilling company. The language at issue F.3d 773, illustrates how extraneous, and dynamic energy sector. The reader provided that the production company prejudicial information in the media emerges with the distinct sense that comes to the jury’s attention and the fracking industry is not yet fully High volume natural influences litigation. A drilling company formed. Much remains unknown and gas extraction involves a appealed an award for damages allegedly unproven, and much must improve – in combination of risks and terms of efficiency, risk mitigation and caused by vibrations from drilling. profitability – before the bright future its During deliberations, the jury asked rewards that are ripening promise reportedly holds may be realized. whether the company was “drilling into various forms of legal Fracking Risks and Rewards brings clarity only or were they also fracking?” One disputes. to this complex energy sector. The book juror stated that earthquakes and other is published by Iskaboo and may be negative impacts “caused” by fracking ------purchased online through www.iskaboo. were also discussed. The jurors largely co.uk and other vendors. l agreed that a pre-instruction fracking “shall assume full responsibility for and discussion occurred but disagreed about shall defend, indemnify, and hold Jeffrey D. Grossman its scope and significance. Finding the Contractor harmless from and against is a Partner in the trial court’s instruction eliminated the any loss, damage, expense, claim, fine and Philadelphia office risk of prejudice, the Court of Appeals penalty, demand, or liability for pollution of Stradley Ronon. upheld the verdict. or contamination.” jgrossman@stradley. It is not just negative press causing The contract’s language was not com legal headwinds. High volume natural restricted to “loss” or “liability” but gas extraction involves a combination extended the producer’s obligation to of risks and rewards that are ripening indemnify any “claim” or “demand.” into various forms of legal disputes. Based on expert reports that subsurface Most commonly, disputes involve chemicals caused contamination, land use, contract and tort-based law1 the court determined the producer and, in 2014, various courts addressed was contractually required to defend several major issues. Our retrospective and indemnify the drilling company. aims to provide insight into recent The court held the provision’s broad Fracking Risks and Rewards litigation trends and preview remaining, language covering “any claim or By Barbara Hadley, Tom Rennell and unresolved issues. demand” evidenced intent to expand Derek Austin Pennsylvania’s triggering rule to include (Iskaboo Publishing 2014) Contract Litigation potential liability rather than actual legal 139 pages, soft cover, may be Numerous contracts are involved liability. purchased by AIRROC members at a in natural gas extraction, such as Lease length provisions in older land- discounted price of USD $51, regular landowner-energy company leases, owner-energy company leases were price is $60. Please type AIRROC15 in contractor-subcontractor agreements commonly litigated. In fact, New York, the coupon field on the checkout page. and insurance contracts. Unsurprisingly, Ohio, and Kansas courts each addressed http://iskaboo.co.uk. contract disputes dominated 2014 habendum and/or force majeure provi- fracking litigation. sions. These cases illustrate a potential for

8 AIRROC MATTERS / SPRING 2015 Frederick J. Pomerantz, Andrew J. Scholz & James D. Macri

myriad disputes and the need for unam- One decision concerned the issue of Private Rights and Claims biguous contract provisions. “local rule” or, stated otherwise, whether municipalities could prohibit or limit Along with contract disputes and The Second Circuit certified questions legislation challenges, tort-based (e.g., on both clauses. Beardslee v. Inflection fracking activities within their borders without running afoul of state and federal property damage, personal injury and Energy, 761 F.3d 221. Due to unclear environmental) claims are repeatedly contract language, the court asked law. In a highly publicized case, Wallach v. Town of Dryden, 16 N.E.3d 1188, the advanced by landowners and others. two “fundamental questions” of New Creative plaintiffs assert various types York law: (1) “whether, in the context New York Court of Appeals determined that localities were empowered to do so of actions on traditional and unique of an oil and gas lease, [New York’s] damages theories. Moratorium [on fracking] amounted without preempting state law. to a force majeure event”; (2) “if so, The decision was observed by many as In a Pennsylvania environmental/ whether the force majeure clause modifies critical because shale-rich New York was, property damage case, plaintiffs seeking the habendum clause and extends the at the time, in its final decision-making to impose strict liability argued that primary terms” of gas leases. fracking is an “ultra hazardous” activity. Using Pennsylvania’s six factor test, the In DeRosa v. Hess Ohio Resources, 2014 Future contract disputes are court, however, found that plaintiffs U.S. Dist. LEXIS 119587, the habendum expected, particularly where failed to demonstrate that the practice clause was found to be clear and, as was ultra-hazardous. Ely v. Cabot Oil such, extended the lease despite a lack older contracts are viewed through the prism of new & Gas, 2014 WL 4071640. The court’s of infrastructure near a shut-in well. The decision notwithstanding, we predict court held a shut-in well was “capable fracking technology. plaintiffs in other states will seek to of production” under the habendum advance this theory given its potential clause notwithstanding a lack of nearby ------reward, if successfully proven. pipelines. The court did, however, release a section of land for failure to develop process on applicable state fracking laws Furthermore, defendants are asserting that portion. and regulations. Following that decision, various affirmative defenses in an however, New York’s administration effort to limit exposure. For example, Meanwhile, the Kansas Court of Appeals in Chesapeake Appalachia v. Cameron refused to cancel a contract due to surprised many by announcing a ban on 2 International, 2014 U.S. Dist. LEXIS alleged failure to develop, even though fracking, becoming the only shale-rich state to outright ban the practice. The ban 123307, defendant, a drilling equipment the energy company refused to drill supplier, sought to limit liability under will likely result in litigation, including for over 30 years and even though any the “economic loss rule.” The court found questioning whether bans constitute a well would be commercially unviable. the rule inapplicable under Oklahoma “taking” under the U.S. Constitution. Novy v. Woolsey Energy, 2014 Kan. App. law because the service agreement at LEXIS 68. The court refused to cancel Outside of New York, existing laws, issue created a “special relationship” with the contract, reasoning that the lack of as applied to new technologies, were the drilling company. As a result, claims viability and drilling were insufficient to also challenged. The Michigan Court for negligence, products liability, and establish a breach of contract. of Appeals interpreted the regulatory negligent misrepresentation were allowed Future contract disputes are expected, definition of “injection well” as applied to to proceed. particularly where older contracts modern fracking. Hughes v. Department Meanwhile, Texas courts addressed are viewed through the prism of new of Environmental Quality, 44 ELR 20036. two types of damages that plaintiffs fracking technology. In relevant part, an injection well is seek in fracking cases. First, the Texas defined as one in which fluids are injected Supreme Court refused “stigma” damages Legislation and Regulation for increasing hydrocarbon recovery. for lost property value after property Finding that the word “increasing” meant As nearly 20 states have permitted contamination had subsided. Houston injected fluids were used for secondary fracking, governments at various levels Unlimited Metal Processing v. Mel Acres recovery, the court held frac wells are not responded by passing statutes and Ranch, 443 S.W.3d 820. After expressing injection wells and thus not subject to regulations to govern the industry. doubts about recoverability of stigma injection well environmental regulations. Some governments, however, have not damages in general, the court found updated existing laws on gas extraction. In short, challenges continue under evidence of such damages was insufficient Regardless, various legal challenges were existing and new laws relating to where plaintiff’s expert’s methodology made to new and existing laws. fracking. was determined flawed.

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Hydraulic Fracturing (continued)Settle

Next, an appellate court in Crosstex After expressing doubts about number and types of lawsuits being filed North Texas Pipeline v. Gardiner, 2014 recoverability of stigma against various industry players, however, Tex. App. LEXIS 12343, remanded a we predict insurance-based and risk- nuisance action’s high jury award. In damages in general, the shifting-based disputes will ripen within the underlying case, a noisy compressor court found evidence of such the next year and beyond. station was built next to plaintiffs’ damages was insufficient For updates and developments on legal property. The jury awarded plaintiffs $2 where plaintiff’s expert’s challenges faced by the industry, please million in damages. The court remanded refer to Goldberg Segalla’s blog, the damages amount where evidence methodology was determined www.shalewatchblog.com. l demonstrated the defendant chose an flawed. isolated location for the compressor station, relied on expert reports, employ------Endnotes ed sound mitigation technologies and Conclusion 1 Thomas F. Segalla, Andrew J. Scholz, and continually sought to limit the sound. Matthew D. Cabral, A First Look at the Finally, private claims are sometimes Hydraulic fracturing’s national Coverage Implications of Hydraulic Fracturing, 22:34 Ins. Coverage (Jun. 1, 2012). asserted outside the tort system. As an controversy and rapid growth in recent interesting example, a Pennsylvania court years has created an environment ripe 2 Thomas Kaplan, Citing Health Risks, Cuomo decided a matter involving First Amend- for various legal disputes, many of which Bans Fracking in New York State, New York remain undecided. For example, few Times (Dec. 17, 2014); available at http://www. ment free speech rights versus the frack- nytimes.com/2014/12/18/nyregion/cuomo-to- ing industry’s rights to maintain trade cases have addressed the role of insurance ban-fracking-in-new-york-state-citing-health- secrets. Specifically, frac fluid includes in the context of fracking. Given the risks.html?ref=nyregion&_r=0. certain additives recognized by many state governments as trade secrets. A doc- tor, called upon to treat patients exposed From left: Frederick J. to said fluids, challenged a so-called “gag Pomerantz and Andrew rule” prohibiting disclosure of the fluids’ J. Scholz are Partners and contents outside the confines of treat- James D. Macri an Associate ment. The court dismissed the doctor’s at Goldberg Segalla. challenge essentially on lack of standing. fpomerantz@goldberg- Rodriguez v. Abruzzo, 2014 WL 2940450. segalla.com, ascholz@ The court also rejected an argument that goldbergsegalla.com, jmacri@ the inability to treat chemical exposure goldbergsegalla.com patients constituted a cognizable injury.

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AIRROC MATTERS / SPRING 2015 11 LEGALESE

Is the Duty of Utmost Good Faith in Runoff?

For centuries the venerable duty Court Decisions in Recent Years of utmost good faith has served As of the publication of this article, as a bedrock principle of the the most recent reported court reinsurance industry: a standard opinion referencing the duty of that has set reinsurance utmost good faith is Associated contractual relationships Industries Insurance Company v. Excalibur Reinsurance Corp., 13 apart from other commercial Civ. 8239, 2014 U.S. Dist. LEXIS transactions governed by “caveat 169163 (S.D.N.Y. Nov. 26, 2014). In e m p t o r.” this dispute, the cedent sought to confirm in part and vacate in part an However, a number of commentators arbitration award. For the portion in the industry have questioned it sought to vacate, the cedent whether the duty of utmost good alleged that the arbitration panel faith has been in decline in our exceeded its authority in granting modern era. Is a reinsurer still the reinsurer 10-15% discounts on entitled to rely in blind faith on a some of the claims at issue. The cedent’s representations? Does a cedent contended that the follow cedent still have an affirmative duty the fortunes doctrine obligated the to volunteer all material facts to its reinsurer during placement? And panel to award 100% of each claim. after the contract is signed? Or Essentially, according to the cedent, must a reinsurer spend time and if a claim was valid, the arbitrators money investigating its cedent’s did not possess any discretion to representations as well as its partially discount the amounts the underwriting, accounting and claims cedent was entitled to receive. practices to verify compliance with In the arbitration, the reinsurer the treaty’s terms? argued that deficiencies in the This article examines how today’s cedent’s claims handling constituted a courts and arbitration panels are violation of the duty of utmost good interpreting and applying the faith. While the panel did not find duty of utmost good faith. There those deficiencies sufficient to relieve are relatively few court decisions the reinsurer of most of its liability for examining the duty of utmost good the claims in question, the court ruled faith, primarily because the vast that the panel could award a discount majority of reinsurance contracts because the cedent “did less than it require the parties to resolve their should have to meet its good faith differences in private arbitration. obligation to its reinsurer.” Id. at *20. And because arbitration awards are In response to the cedent’s argument rarely made public, and most are that its reinsurer was obliged to fully in any event not reasoned awards, follow the fortunes of the cedent’s there are few published awards that deficient claims handling, the court specifically address the duty’s modern specifically referenced the duty of day application. We examine below utmost good faith, writing that the several court decisions in recent follow the fortunes doctrine is not years that have addressed the duty “applicable where the cedent fails of utmost good faith as well as two in its duty of good faith, which reasoned, unanimous arbitration requires it to protect its reinsurer’s awards (made public in court interests as if they were the cedent’s proceedings) that examined the duty’s own. Reinsurers ‘are protected by a requirements. To paraphrase Mark large area of common interest with Twain, reports of the demise of the ceding insurers and by the tradition duty of utmost good faith are greatly of utmost good faith, particularly in exaggerated. the sharing of information.’” Id. at 12 AIRROC MATTERS / SPRING 2015 Joseph T. McCullough & Peter B. Steffen

*14 (quoting Unigard Sec. Ins. Co., Inc. triggering a duty of inquiry. AXA’s In Ins. Co. of the State of Pa. v. Argonaut v. North River Ins. Co., 4 F.3d 1049, 1054 failure to engage in that inquiry Ins. Co., 12 Civ. 6494, 2013 WL 4005109 (2d.Cir. 1993)). imputed to it knowledge of the alleged (S.D.N.Y. Aug. 6, 2013), the reinsurer was In a rare case of a jury trial involving fraud and renders its fraudulent relieved of its burden to prove it was prej- issues arising under a reinsurance inducement claims time barred. udiced by late notice by demonstrating contract, the court in AXA Versicherung that the cedent acted in bad faith by not AG v. New Hampshire Ins. Co., 05-cv- In recent years, two providing timely notice. The court wrote 10180 (S.D.N.Y. 2008) squarely addressed notable arbitration awards that: “While recognizing that the modern relationship of reinsurers and their rein- the obligations the duty of utmost addressing the obligations good faith imposes on cedents. Federal sureds may no longer be characterized by District Court Judge Jed Rakoff issued the imposed by the duty of utmost good faith, the Second Circuit (in following jury instruction: utmost good faith have been Unigard, cited above), nevertheless con- made public in court filings. cluded that …“a very high level of good All parties who enter into contracts faith – whether or not designated ‘ut- have a duty not to misrepresent most’ – is required to ensure prompt and the material, or important, facts ------full disclosure of material information and, more generally, to operate in without causing reinsurers to engage in good faith toward one another. But AXA Versicherung AG v. N.H. Ins. Co., duplicative monitoring.’” 4 F.3d at 1054. because reinsurers are not involved in 391 Fed. Appx. 25, 29 (2d Cir. 2010) In the late notice context, this means that underwriting the underlying policies (internal citations omitted). The primary a cedent must implement “routine prac- (that is, in investigating the risks and “storm warning” referenced by the court tices and controls to ensure notification negotiating the terms of the underlying was the addition of language to the final to reinsurers.” Id. at 1070. Notably, the policies), a primary insurer owes a draft of the treaty wordings which were Argonaut court held that there need not particular duty to his reinsurer to signed by the lead underwriter’s deputy be “deliberate deception” for a reinsurer to disclose to the reinsurer those facts, that arguably would have tipped off be relieved of its burden of proving preju- known to the insurer but unlikely to the reinsurer to the fraudulent scheme. dice. 2013 WL 4005190 at *13. be known to the reinsurer, that are The broker did not bring to the deputy’s In Granite State Ins. Co. v. Clearwater Ins. “material,” that is facts that a reasonable attention the newly added sentence (in Co., 09 Civ. 10607, 2014 WL 1285507 insurer understands that a reasonable an article where, the reinsurer argued at reinsurer would need to know to assess (S.D.N.Y. March 31, 2014), where the trial, one would never have expected to cedent failed to give its reinsurer notice of the risks of the reinsurance. This duty find it) and instead, the reinsurer argued to disclose is sometimes referred to claims until after those claims had already at trial, led the deputy to believe that all been settled – and the reinsurer had a as the duty of “utmost good faith,” modifications to the final wording had but what it really comes down to is right to associate in the control of claims - been brought to the reinsurer’s attention the court held that such notice after settle- the continuing duty of an insurer in and had been approved. The deputy these circumstances and under these ment was untimely. Id. at *19. The court testified that she did not notice the added also ruled that “no reasonable jury could conditions to disclose these material sentence to the wordings. However, the facts to the reinsurer even if the conclude that Granite State met its duty court did not expressly address the duty reinsurer has not asked for them. of utmost good faith” when it entered into of utmost good faith and instead focused settlements without notifying Clearwater. The jury found in favor of the reinsurer, on a contracting party’s duty to read The court relieved the reinsurer of any rescinding the reinsurance treaties and thoroughly a contract before signing. liability for the settlement without requir- awarding punitive damages as well. 1 In the past two years, a pair of court deci- ing the reinsurer to prove prejudice. On appeal, however, the Second Circuit sions have addressed the requirements of reversed the lower court’s decision, the duty of utmost good faith in the con- Arbitration Awards Addressing the holding that despite the cedent’s text of late notice of claims. In most states, Duty of Utmost Good Faith fraudulent conduct the applicable New a reinsurer is required to demonstrate York statute of limitations barred the that it was prejudiced by the cedent’s late In recent years, two notable arbitration reinsurer’s rescission claim: notice. In these two recent decisions, awards addressing the obligations We hold that [the reinsurer] was however, courts have held that the rein- imposed by the duty of utmost good faith confronted with a clear “storm surer is entitled to relief without a show- have been made public in court filings. warning” in August 1998, as well as ing of prejudice if it can demonstrate that The first is a 2007 unanimous 40-page additional facts through 2000, “such its cedent acted in bad faith or failed to arbitration award issued by three highly as to suggest . . . the probability that act in accordance with its duty of utmost respected reinsurance arbitrators in a [it] ha[d] been defrauded,” thereby good faith. 1 The case is currently under appeal. AIRROC AIRROC MATTERS MATTERS / /WINTER SPRING 20142015 13 You don’t have to be the biggest to be The Best.

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AIRROC MATTERS / WINTER 2014 14 LEGALESE

Utmost Faith (continued)Settle reinsurance dispute between the same in London is pejoratively termed The evidence in this arbitration is ceding companies which were parties a “pick up”. Without noticing the overwhelming that time after time to the jury trial before Judge Rakoff unexplained change, [the reinsurer’s] [the cedent] opted for the obscure and (discussed above) and another of their contract wording specialist executed the imprecise communication rather than reinsurers on the same business. contracts on behalf of [the reinsurer] the clear and the explicit … They dealt Although a reinsurer cannot ignore within days. The cedents’ broker did with the most fundamental aspect of obvious errors or omissions in the not identify let alone explain to the this reinsurance relationship, i.e. the cedent’s disclosures, and will not be reinsurers the major change to what it nature of the reinsurance transaction allowed to rely on them, reinsurers are knew and had told [the cedent and the and the participation therein. not required to evaluate reinsurance US broker] was the broke. In re Arbitration Between New Hampshire submissions under the assumption Id. The panel awarded the reinsurer Ins. Co. and AXA Verischerung AG, July that they are other than complete and rescission ab initio. Notably, in contrast 27, 2012. accurate. In other words, reinsurance to the Second Circuit’s “storm warning” is not and cannot be a game of “Hide- ruling, the panel did not find that the Conclusion and-Seek”, or “20 Questions”, where unannounced inclusion of language in the As one commentator has written, the duty the reinsurer is required to review the final treaty wording “should have” been of utmost good faith means that that “one cedent’s submission with a suspicious caught by the reinsurer. party cannot, without cause, take actions mind, or the investigative powers of to elevate its interest above those of the a Sherlock Holmes, to ferret out the In a 2012 arbitration involving the same parties to the jury trial before Judge other.” Robert M. Hall, Utmost Good truth. Said another way, reinsurance Faith in the Reinsurance Relationship, provides no safe haven for the maxim Rakoff, the reinsurer brought claims for post-contract formation breaches robertmhall.com, 2014. While this duty caveat emptor or even sharp practices may evolve as the industry itself changes, that are more common in other of contract and fraudulent acts. The highly experienced 3-member panel recent court opinions and published business relations. To the contrary, arbitration awards demonstrate that the reinsurance is a business that requires unanimously ordered the cedents to refund overbilled claims that had been duty of utmost good faith is still being and needs utmost good faith, and that enforced with vigor both in courts as well starts with the cedent in its submission improperly “grossed up” (for example, in one year increasing the reinsurer’s as arbitrations and remains a cornerstone to prospective reinsurers. l treaty participation from 20% to nearly of the reinsurance industry. In re Arbitration Between New Hampshire 73%, which obviously greatly reduced Ins. Co., et al. and Lloyd’s Syndicate the cedents’ net retention for claims in 435/D.P. Mann, Aug. 31, 2007. Among the working layer). While the panel did a long list of improper acts, the ceding not refer expressly to the duty of utmost companies’ broker had failed to disclose good faith when it roundly criticized to the reinsurer’s representative that the actions of the cedent and its agent, crucial language had been added to the it made reference to the cedents’ duty to contracts, and the panel condemned that communicate material facts – here, the maneuver as a violation of the duty of grossing up - clearly to its reinsurer and utmost good faith: found that the cedents’ agents had made As part of the implementation plan, “confusing, indeed perplexing written [the cedents’ London broker] put some communications” that relieved the pressure on [the reinsurer’s] contract reinsurer of any obligation to investigate wording specialist, without contacting such clues to uncover the grossing up. the underwriter to whom the business In awarding the reinsurer $1 million of Joseph T. McCullough and Peter B. Steffen, Partners, was broked, and without identifying let exemplary damages, the panel explained Freeborn & Peters LLP. [email protected], alone explaining the change – which its reasoning: [email protected]

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Atlanta  Beijing  Raleigh-Durham  Savannah  Taipei  Washington, DC  Strategic Alliance Office - São Paulo THINK TANK Test Drive the Future of Runoff The Vermont Legacy Insurance Management Act of 2014 tors, such as foundations, institutions and trusts. Companies that take early advan- tage of the LIMA opportunity will benefit in the short term by executing innovative transactions and in the long term by shap- ing the growth of the new market sector. The established methods for shifting li- ability for runoff business are familiar: reinsurance and loss-portfolio transfers offer relative speed and familiarity, but do not provide the legal and financial finality that most auditors will require in order to reflect the transfer in financial statements. The Part VII process, while providing a legally and financially enforceable trans- fer, can be slow and inflexible, with the progress of any transfer dependent on the attitude and the workflow of the FSA and the courts. Based on the UK and global insurance sector experience of Anna Pet- ropoulos (AIRROC’s 2014 Person of the Year), LIMA adapts useful aspects of the Part VII process to the Vermont and U.S. legal and market environments to create the first U.S. law that enables transfers of runoff insurance and reinsurance business: Scope and flexibility. LIMA allows an in- surer or a reinsurer to transfer a block of business (personal and compulsory areas are excluded: e.g., life, health, automobile and workers’ compensation) to a new entity. The transferring company is not required to re-domicile or become subject to Vermont or U.S. jurisdiction. Finality. An approved LIMA transfer Under LIMA, insurers and reinsurers that Companies and investors in the effects a statutory novation of the trans- have exited a particular market or ceased runoff space are generally aware ferred business to the assuming company, to write a class of risk may divest the rele- providing financial, accounting and legal that the State of Vermont’s new vant liabilities to companies that are estab- finality to the transferring company, af- Legacy Insurance Management lished for the specific purpose of manag- ing such risks, relieving themselves of the fected policyholders and reinsureds and Act (LIMA), signed into law on associated financial and regulatory report- the assuming company. February 19, 2014, has created ing obligations and potentially liberating Regulatory process; management and a novel runoff business transfer capital reserves. Other applications—e.g., compliance. LIMA provides for a stream- internal restructurings and consolidations lined review process and swift action by method in a runoff market that of pools—have drawn growing interest. the regulator. After approval, the assum- has long been in need of growth LIMA creates a flexible, powerful process ing company will manage the transferred and innovation, but the Act, its under a sophisticated, responsive and business according to a portfolio-specific growth-oriented regulator, but above all plan developed in consultation with the background and its potential LIMA creates new opportunities in the regulator during the review process. runoff market for insurers and reinsurers, applications have only begun to Consent and opt-out. LIMA allows service providers and potential new inves- be appreciated. affected policyholders and reinsureds

18 AIRROC MATTERS / SPRING 2015 Anna Petropoulos & Adam M. Lewis

to opt out of a proposed transfer. This Reputation. One of the regulator’s Anna Petropoulos (anna.petropoulos@ provision was necessitated by the state- leading concerns will be reputation: apetropusa.com) is the President of by-state structure of the U.S. insurance comfort with the reputations of the Apetrop USA, Inc. She founded Apetrop environment, but the result reflects transferring company and the assuming Ltd., a service provider to the insurance the trend in non-U.S. markets, where company on the one hand and the and reinsurance industry based in the mandatory transfers are increasingly preservation of the reputation of Vermont UK, in 1999 and has more than 30 expensive and time-consuming to as an insurance jurisdiction on the other. years’ experience in the London and enforce. Absent an express opt-out Among other things, the regulator must international markets gained with risk notice, affected parties are deemed to be comfortable with the management carriers and brokers. Apetrop Ltd. was at have consented to a proposed transfer (as and capital structure of the assuming the forefront in the successful management per existing insurance novation laws in company. Early engagement, as noted of portfolio loss transfers, discontinued Vermont and other U.S. jurisdictions). above, can only help the transaction lines and accelerated closure. Before parties earn the regulator’s confidence. founding Apetrop Ltd., Anna held the LIMA augments the profile of the State of position of Director of Reinsurance at Vermont’s experienced and progressive CNA in London. Her previous employers insurance regulation department, which In recent years, two include MFK Underwriting, Willis Faber is already a leader in the captive insurance Ltd, Scottish Lion Insurance Company space with more than one thousand notable arbitration awards and Sphere Drake Insurance Ltd. Anna captives registered. The Commissioner addressing the obligations founded Apetrop USA, Inc., in 2010. of the Vermont Department of Financial imposed by the duty of Based on her extensive knowledge of the Regulation, Susan Donegan, is familiar utmost good faith have been successful management of portfolio loss to her colleagues in the U.S. and transfers and other types of accelerated abroad as an especially experienced made public in court filings. closure, she spearheaded the introduction and sophisticated regulator, due to her of LIMA as an economic catalyst for international work and travel on behalf ------Vermont. In 2014 AIRROC named Anna of the National Association of Insurance Petropoulos its 2014 Person of the Year Commissioners, and has already Capital structure. Runoff companies for her contributions to the runoff sector, established a team of professionals and investors will note the regulator’s in- including the development and passage to oversee LIMA transactions. Anna dication that reinsurance, letters of credit of LIMA. Petropoulos, as the original proponent of and other non-cash reserve structures LIMA and the founder and president of will constitute acceptable capital arrange- Anna Petropoulos is Apetrop USA, Inc., an adviser and service ments for assuming companies. President of Apetrop provider concentrating on transactions in Early action advantages. While LIMA USA, Inc. anna.petro- the runoff and legacy insurance space, has is a new law and the regulatory process [email protected] built on the drafting and passage of the is evolving, there is an opportunity for Act by engaging with the Commissioner companies and investors to shape the re- and her colleagues regarding the LIMA view process and the form of the transfer process. Based on those discussions, plan by engaging the regulator, as noted prospective transactors and advisers above, about transfer plan forms and pro- should note the following: cedures, capital reserve requirements and Regulator engagement. The other sector concerns. Commissioner prefers early contact and LIMA is a powerful tool for the benefit of Adam M. Lewis is Vice engagement on an informal and limited- insurers, reinsurers and investors, which, President and General information basis early in a transaction’s applied prudently, will grow in market Counsel of Apetrop development and continuing through significance to match the established USA, Inc. adam.lewis@ the submission and review of a transfer methods for transferring runoff and apetropusa.com plan. In general, the authors recommend legacy portfolios. Early contact, com- that prospective transactors make initial munication and participation can provide contact with the regulator in advance of significant advantages to companies in a specific transaction; to date, we have the runoff space considering LIMA as a advised several clients in connection transfer method and, in the long term, with preliminary discussions, with will only help the U.S. runoff market excellent results. grow and mature. l

AIRROC AIRROC MATTERS MATTERS / /WINTER SPRING 2014 2015 1919 SPOTLIGHT Evolution All Aboard The Board

As reported in the last issue, the management is perhaps the most critical the industry. More recently, we expanded AIRROC Board welcomes two new skill set, as all Board members have full- membership categories and created the members, J. Marcus Doran and time jobs. It is enormously important DRP process. As I left the Board, we to diligently and methodically carve out announced a Mediation program and a Peter Scarpato, and bids farewell to time to dedicate specifically to AIRROC Certified Legacy Professional designation Keith Kaplan and Glenn Frankel. work. In addition, it is imperative to be launched in the near future. We are confident that Keith and that a Board member be creative and Glenn: During the last few years, Glenn will continue their support imaginative. The runoff world is ever primarily under Carolyn Fahey’s and active involvement in AIRROC. changing, and if AIRROC is to continue unrelenting leadership, energy and providing quality service to its members Peter and Marcus bring lengthy guidance, AIRROC has moved forward it must constantly evolve. on a number of key initiatives. I think experience with the organization that the creation and implementation to their new roles. Examining both 2. What were the most important accomplishments or initiatives of the AIRROC DRP and Mediation sides of the evolution, we asked Procedures was particularly critical. undertaken by the Board during The Board identified a gap/need in the the departing members to look your tenure? back and the new members to look forward. Here is what they told us.

Glenn Frankel and Keith Kaplan look back 1. What qualities and skills did you find you used most in your tenure on the AIRROC Board? Keith: The unique thing about AIRROC as a trade association is that its membership and Board are a diverse group with diverse, and even oppositional, interests. Consequently, the ability to collaborate and relate to folks Keith Kaplan Glenn Frankel with a different frame of reference than your own is particularly important. On a practical level, all I have really done is just apply general business acumen and Keith: As a founding Board member, marketplace and created these Procedures experience to the committee work as well I can point to many things. Right out to provide professional, efficient, cost- as to the broader strategy and planning of the gate, we made a decision that effective services to the industry. exercises undertaken by the Board as a “membership has benefits,” meaning 3. What are the three most whole. Finally, and while this might seem unlimited free admission to membership trite, we all have significant day jobs, so meetings (which include education important goals for the future time management skills are essential to seminars) and regional events plus one of AIRROC? keep up with deadlines and provide a free admission to the flagship October quick turnaround on various requests, Keith: Continue to put on quality educa- event. The October event itself began in tion programs. Grow the membership. reports and projects. our first year with some uncertainty as Glenn: The AIRROC Board is comprised to how it might be received; yet it was a And, as Jonathan Rosen said when he of enormously talented professionals smashing success from the beginning and stepped down from the Board several and high-quality oriented individuals. has proven to be a very valuable forum for years ago, “stay relevant.” It was truly a pleasure and a privilege the attendees over the years. Also, early Glenn: Stay relevant. Listen to and to work with an easy, fun, and talented on, we began producing AIRROC Matters continue to engage its members. group for the past four years! It may on a quarterly basis, which continues to Continue to offer high quality, pertinent sound somewhat simplistic, but time be one the best publications of its kind in educational opportunities.

20 AIRROC MATTERS / SPRING 2015 Connie D. O’Mara & Bina T. Dagar

J. Marcus Doran and Peter Scarpato an author and speaker myself, working Peter: I think it is essential that we stay look forward with other authors, members and in touch with the business and grow with speakers at our conferences has helped the changes in the business. To do that, 1. What particular experience and/ me understand where AIRROC has been, we need to keep in touch with members or skills do you bring to the Board? where it is going and how it can continue and understand what their needs are. its successful support of its constituents. We need to figure out how to get their Marcus: In the course of my career I ideas, their compliments, their criticism have been a “jack of all trades,” working 2. What would you view as the most and their concerns so we can serve as an on direct claims, reinsurance matters, as important goals for AIRROC going educational source, but also a resource well as accounting and finance projects. forward? and catalyst for ideas and solutions to With my varied experience, I am keen to issues going forward. Finally, I would find solutions that work for the greatest Marcus: Having been a part of AIRROC be remiss if I didn’t mention that we, number of people. Over the past few since its inception, I’ve seen it grow and the Publication Committee members, years I have been a part of the Education evolve. I would like to see AIRROC keep must keep changing and broadening the Committee and have helped develop pace with the changing times, issues coverage and look of AIRROC Matters some timely and informative education and perspectives, so that it continues to to ensure that our members keep looking forward to reading it.

3. Are there things that you think should be changed going forward? Marcus: AIRROC has been pretty successful thus far, so I don’t know that wholesale changes are needed. Moreover, I just joined the Board so I am still getting my feet wet. AIRROC’s website offers good potential. Continued development and leveraging of our technology should be on the agenda, along with educational materials, distance learning and networking resources. I welcome our members to J. Marcus Doran Peter Scarpato let us know what changes are important to them. Peter: We have changed and evolved over time and I think Carolyn Fahey panels. I’ve enjoyed it because it allows be a vibrant and productive forum for has been a driving force of that change, me to bring forward an issue that I, and our members to resolve the issues of bringing to fruition successful programs others, want to learn about. the day. Keeping that original intent of and services. I think I need some time Peter: Having been in the run-off companies engaging in dialogue with to see what the Board has on its current business since 1985, and having worn one another in mind, we must aim to agenda. I close the “Editor’s Note” in many different hats, as lawyer, company welcome more of our colleagues to join each issue of the magazine with the representative, arbitrator, mediator, in the process. With continued growth phrase “Let us hear from you” and negotiator and editor of AIRROC Matters and reach in mind, we must invite more my single most important goal going magazine, I feel I bring not only my companies, both ongoing and in run- forward is to listen very closely to the experience in those roles but a network off, to take part. We have some work members so we can change as their of contacts I have made over the years. to do in promoting AIRROC and its needs change. l In particular, as editor of the AIRROC wealth of experienced and bright people magazine, I have tapped into that as a development opportunity for less Connie D. O’Mara, [email protected] and network and followed the concerns of our tenured staff and in enlisting them to Bina T. Dagar, [email protected] members since the beginning so we could participate in AIRROC initiatives and keep the magazine relevant and useful. As gain greater industry exposure.

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Definitely NOT A Polar Bear… Carolyn Fahey Message from the Executive Director

After another very cold winter, I have We have our first workshop of the year on • We are launching an AIRROC App decided that unlike a Polar Bear, I have April 17 in Princeton, New Jersey; “The which will be available for the first time not adapted to easily live in COLD Future of the Duty of Utmost Good Faith” for the July Membership Meeting. temperature environments… presented in conjunction with Freeborn • We are hard at work on our own The good news, however is that by the & Peters. We are also planning our first designation – we will soon be accepting time this article is published we should be international event in more than three applications for the Certified Legacy well on the way to seeing the first flowers years – the AIRROC London Regional Insurance Professional (CLIP) of Spring poking through the ground… is being held on May 12 at the offices of designation. l and AIRROC has a lot to look forward to Clyde & Co. in 2015. Also VERY noteworthy: Carolyn Fahey joined The Spring Membership Meeting was at AIRROC as Executive • The searchable AIRROC DRP Chadbourne & Parke’s new offices in New Director in May 2012. Arbitrator list is now available to the York City. The education day featured a She brings more public on our website. session titled “The ‘Ins and Outs’ and ‘Ups than 20 years of and Downs’ of Worker’s Compensation • AIRROC is becoming more “tech- re/insurance industry Commutations: Motivations, Pricing and savvy” in 2015 – our website is now and association Disputes.” We also heard an interesting mobile responsive making it more experience to the and informative discussion on “Current efficient for our members and supporters organization. Trends in Buying and Selling Runoff to use their smart phones and tablets to [email protected] Businesses and Blocks.” stay up-to-date.

Where Do Values Spring From? Trish Getty

In October 2014, AIRROC announced the third recipient of the Trish Getty Scholarship to a St. John’s University student. The annual award was established to honor the organization’s founding Executive Director. The 2014 honoree, Abigayle Claflin, and her grandfather recently met Trish for lunch…

Abigayle Claflin, our 2014 recipient of Abigayle has one and a half years left the Trish Getty Scholarship Fund at in her studies at St. John’s. Since she is St. John’s University, wanted to meet Catholic, the time she spent at mass at me since I was unable to travel to New St. John’s at 5:30 PM was somewhat of a Jersey to present the award to her at the respite from the “nose at the grindstone” Commutation Event in 2014. Hallelujah, in studies, etc. She plans to work in since I love to meet and learn about the U.S. for a couple of years after the recipients. Abigayle was home graduation, then move to Europe for a in Tennessee for winter break so her while. When she talked about this, her grandfather, Norman Turcotte, drove her grandfather’s head dropped; she knows to Atlanta to meet me for lunch. that grandfather doesn’t like the idea. I thoroughly enjoyed meeting Abigayle Abigayle has worked part time at and learning more about her desires Allianz. The company is sending her to in business. Her grandfather, however, Switzerland for a month this June (when almost stole the show with his charm she will turn 21) for further experience and stories! He is 80 but looks 60, and in the international market. We talked in great shape. His vegetable gardens are about travels throughout Switzerland. his joy. What impressed me most was It has been a wonderful experience to the work ethic of Abigayle’s family from meet Abigayle and we plan to meet again grandparents and parents down to her. along with her parents. l That’s what America is made of.

AIRROCAIRROC MATTERSMATTERS // WINTERSPRING 20152014 23 23

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Michele L. Jacobson Andrew S. Lewner [email protected] [email protected] William D. Latza Seema A. Misra [email protected] [email protected] Robert Lewin Bernhardt Nadell [email protected] [email protected]

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AIRROC Dispute Resolution Frank Kehrwald & Adding Simplified Mediation to Your Toolbelt Peter A. Scarpato

Disputes, be they between well-copied) process which emphasizes variance between them is too wide (after companies, agents, insureds, cedents its usefulness. It covers all of the elements learning the strengths and weaknesses of necessary to initiate, run, and conclude their positions), or whether they can each or reinsurers, cost large dollar a streamlined, effective arbitration at a take steps to narrow the gap between amounts, exhaust significant time small fraction of traditional arbitration them to achieve either a settlement or a and emotional energy, damage costs. more simplified dispute; important relationships and often Taking a very similar approach, AIRROC • the relatively small expenditure of time now require the use of expensive has now endorsed a simplified mediation and money needed to proceed with a process as a further valuable tool for simplified mediation (often one day or electronic discovery experts to locate members and non-members to narrow less), generally using materials readily and preserve discoverable documents. and resolve apparently unresolvable available to the parties; Legal expenses for a material dispute disputes. On September 24, 2014, the • an experienced mediator’s ability to AIRROC Board of Directors adopted a preserve the existing relationship between can readily top $1 or $2 million per resolution approving the endorsement side. Add to this outside legal expense the parties and enable each party to better of a streamlined mediation process for understand the nuances of the other the internal time and e-discovery use by AIRROC members and non- party’s position; expense and one can readily see that members. The AIRROC simplified mediation procedure, like its DRP twin, • the possibility of pursuing both total dispute costs for both sides for a includes the following key characteristics: simplified mediation and simplified material, but relatively small dispute, arbitration in one or more than one • Initiation of AIRROC Mediation proceeding. can easily exceed $5 million. Proceedings form We all may have had experiences where One would think that sophisticated • Available AIRROC mediator selection mediation worked well and where it was reinsurance partners would fully • Suggested basic mediation procedures less successful. If either party does not appreciate the impact of these financial to include specifically permitted ex parte fully embrace the potential benefits of and non-financial costs, and find a way communication with the mediator mediation or otherwise remains fully to either reduce them voluntarily in • AIRROC fees ($1,000 for members, entrenched in its position, mediation ongoing proceedings or reach out and $2,000 for nonmembers) can be less successful. But given the resolve them via negotiation. Sometimes relatively small expenditure of time and they can; but often, they don’t have the • Mediator fees of $150/hour money required for simplified mediation, tools or experience necessary to make • Entirely confidential discussions AIRROC encourages members and this happen. Moreover, neither side wants non-members to consider simplified to be the first to suggest a streamlined Why Consider Mediation? mediation for what it is: an additional, procedure, because the parties now Simplified mediation, like simplified very simple, inexpensive and useful tool cannot agree on anything, or raise the l arbitration, is a very useful tool for a for potentially resolving disputes. topic of settlement, fearful that it is a variety of reasons: sign of weakness. • an experienced mediator can suggest AIRROC has developed several a nearly unlimited variety of mediation important tools to reduce both the methods and processes which can be friction and financial costs of disputes readily modified to best fit the parties and while preserving important relationships the nature of the dispute; between the parties. The first AIRROC Dispute Resolution Procedure (DRP) tool • experienced mediators bring a fresh was a simplified, single-umpire arbitration third-party view, tools that help parties process. The DRP arbitration tool has see the dispute from a new perspective, been the subject of numerous AIRROC and ultimately enable parties to clearly education roll-outs and mock umpire appreciate the strengths and weaknesses presentations, making members and non- of their case (which can be more apparent Frank Kehrwald is Senior Vice President at Swiss Re members fully aware of its advantages to a third party); America Holding Corporation. Frank_Kehrwald@ and “user friendly” procedures. The DRP • an experienced mediator can swissre.com. Peter A. Scarpato is Vice President– simplified arbitration tool has become a determine whether the parties are too Ceded Reinsurance at ACE Brandywine. fairly well-recognized, well-utilized (and firmly fixed in their positions, or the [email protected]

AIRROC MATTERS / SPRING 2015 25 In today’s insurance environment change is accelerating.

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AIRROC MATTERS / FALL 2014 35 WHO’S TALKING

AIRROC / IAIR Pair Up for Progress Kathleen M. McCain & Co-host Second Joint Issues Forum at the Winter 2014 NAIC Meeting Carolyn Fahey

AIRROC and IAIR co-hosted [email protected]; Samuel the U.S. state-based regulatory system their second Joint Issues Forum Proctor, [email protected] is likely to be challenging. More info: Matthew Wulf, [email protected] in Washington D.C. at the What’s on the Reinsurance NAIC Winter Meeting. The two Regulatory Landscape? Vermont’s Legacy Insurance organizations worked together to Management Act: How Will it Work? plan sessions that are of interest Matthew Wulf, Vice President, State to both association constituencies. Relations, and Assistant General Counsel IAIR and AIRROC were honored of the Reinsurance Association of to welcome Susan Donegan, the IAIR Issues Forum chair, America, provided an overview of the Commissioner of the Vermont Kathleen McCain, and AIRROC state of the reinsurance market and the Department of Financial Regulation, Executive Director, Carolyn Fahey, issues that the reinsurance industry is and Anna Petropoulos, President of spearheaded the development. The focused on. In a time of record levels Apetrop USA and AIRROC’s 2014 agenda included a diverse set of of capital in the reinsurance industry Person of the Year, to share their insights – partly due to the influx of alternative about Vermont’s new Legacy Insurance topics and speakers. capital – he posed the penultimate Management Act (LIMA), which was question: How long will it last? The signed into law in February 2014. As Resolution Planning: New Anna explained, LIMA is based in part Developments and Insurance on the concept of Part VII insurance Perspectives on Living Wills transfers in the UK, where legacy and runoff portfolios have been transferred Patrick Hughes, Senior Director from between companies for almost two Alvarez & Marsal, and Samuel Proctor, decades. Vermont is well-known and Associate with Debevoise & Plimpton, respected as a leader in the captive offered their perspectives on the industry and generally has a nimble recent Dodd-Frank requirement that and responsive regulatory structure, so bank holding companies with total being a pioneer in the runoff space was a consolidated assets of $50 billion or logical extension of the DFR’s established more and certain non-bank financial profile. The law is designed to be flexible companies submit resolution plans and Vermont is willing to work with to outline what the companies will each company to make the transfer a do in case of a financial collapse. win-win for all involved. Susan presented Resolution planning is an attempt by the RAA is also very focused on terrorism an overview of the regulatory process regulators to have better controls in the risk and the role of the private market. that Vermont has in place for LIMA. The current post-financial crisis operating At the time of the presentation, TRIA estimated timing for the LIMA transfer environment. Pat and Sam discussed was in motion in Congress, though it process from start to finish is four to several sections of the Dodd-Frank has subsequently been reauthorized six months. Anna spoke to the business bill in particular that pertain to the until 2020. Reinsurers are also waiting side of the LIMA concept and described AIRROC/IAIR audience. The first round to see what actions, if any, the Federal the concept ‘s origins. Under LIMA, of plans have been submitted and the Insurance Office will take related to each transfer is structured and approved government is in the process of trying “covered agreements” and collateral individually, so there is no statutory to learn from the information provided requirements. Addressing international minimum capital surplus or mandatory and identify ways to navigate the issues at the state level, there is an effort administration scheme; such items will complexities of the insurance business. to amend the NAIC Model Holding be set on a portfolio-specific basis. Anna In order for this to be successful, the Company Act (subsequently completed) also noted that there is a requirement Federal Government will need to find to add specific authority for state that the domicile regulator of the ways to work within the corporate regulators to act as the “group-wide transferring entity provide a letter of structures to determine how to best supervisor” for internationally active no objection to the transfer because the utilize the information that has been insurance groups. The majority of states purpose of LIMA is to promote stability included, and determine if there will has now passed the most recent version and predictability on all sides of the be changes to the information needed of the NAIC Holding Company Act. transfer. More info: Anna Petropoulos, in the future. More info: Patrick Hughes Getting them to “reopen” the issue in [email protected]

AIRROC MATTERS / SPRING 2015 27 www.butlerrubin.com (312) 444-9660 WHO’S TALKING

AIRROC / IAIR (continued)Settle

Clockwise from upper left : Susan Donegan, Carolyn Fahey, Jim Mumford, Matthew Wulf and Anna Petropoulos.

Penn Treaty Rehabilitation Plan required the Commissioner to work with interested parties have the same goal and the company to prepare a rehabilitation progress can be made when they work Patrick Cantilo, the Special Deputy plan – the initial plan was filed in April together. He used receivers and guaranty Rehabilitator (SDR) of the Penn Treaty 2013. Nearly all comments submitted funds as an example – they have the same companies (PTNA and ANIC) reported to the initial plan were critical, which focus on protecting policyholders. Any on the status of the rehabilitation. Penn sent the parties “back to the drawing disagreements are relatively small when Treaty began writing long-term care board”. A policyholder committee and viewing it from a big picture stance and business in the 1970’s, experiencing great other interested parties have worked they have generally worked together growth. In 2001, when the risk-based with the Insurance Commissioner and to resolve disagreements as quietly as capital (RBC) requirements fell below the SDR to try to find a viable solution. possible, which benefits all in the end. the regulatory requirement, the company This resulted in the filing of an amended Keep your eye on the end-game! The cut back on writing new business, and plan last October that is now in the NAIC Receivership Model Law Working worked to restructure their products to comment period with the expectation Group (formerly the IRMA Critical attempt to counteract the problems that of a hearing in Summer 2015. More info: Elements Advisory Group) is another caused the RBC decline. Ultimately, the http://www.penntreaty.com/Rehabilitation/ example. Its focus is to identify common company ceased writing new policies in CourtDocumentsandInfo.aspx areas that all interested parties can 2008 and consented to rehabilitation in support. No matter what the source of the January 2009. When PTNA’s and ANIC’s NAIC News and Committee Updates language, this group will try to find a way financial condition appeared to be much to make it efficient and acceptable to most. worse than expected, the Pennsylvania James Mumford, First Deputy In closing, he said that this is the third Insurance Commissioner moved to Commissioner of the Iowa Insurance time he has retired (but obviously wasn’t place the companies in liquidation in Division, offered his parting words to the very good at sticking to that goal). He has October 2009. A long process of litigation IAIR/AIRROC audience as he prepares to thoroughly enjoyed his job – insurance is between the Pennsylvania Insurance retire. Jim has been a “regular” speaker on not a boring industry anymore! l Department and the parent company the IAIR Issues Forums for many years. In ensued that included the court’s denial his parting words of advice, he reflected Kathleen M. McCain is Senior Counsel in the Regulatory of the Insurance Commissioner’s on the need for the players on any issue and Administrative group of Michelman & Robinson, application to liquidate. The court to work together. In many situations the LLP, in California. [email protected]

AIRROC MATTERS / SPRING 2015 29 AIRROC MATTERS CLASSIC Commutations – A Historical Perspective

When the opportunity arose to put with a number of its reinsurers on a par- together an article for AIRROC ticular treaty. An arbitration was pending, but in the spirit of good faith and recon- Matters on the historical perspective ciliation, the parties agreed to meet to of commutations, I agreed as long consider commuting the treaty participa- as: (a) it could be a bit irreverent to tions. The reinsurers had been acting cal- the sacred beliefs of our industry, lously and with considerable disregard for their obligations, I thought; I am sure that and (b) I could seek collaboration. they thought our company had treated As you will see, they agreed to both them poorly (or worse) in how the treaty points. was operated. Nevertheless, old bonds of engagement friendship (and business-like pragmatism) between two parties. I decided to go back to 1986 when I was prevailed, and we scheduled our meeting. I later heard reinsurance hired at Continental Insurance as the defined as an honorable engagement Director of Reclamations. You may ask, between two parties, their auditors, as I did, “what’s a Reclamation?” (Imitate Early in my career I was lawyers and external actuaries. I think Groucho Marks “Viaduct? – Why not a told once that reinsurance the latter definition speaks to how our Chickena?”) While it was a fancy word was defined as an honorable business really works. for collections, settlements and disputes, engagement between two Our next submission comes from one of it is where I experienced commutations parties. the great collection/commutation people for the first time. in the industry. My first commutation was a relatively ------In the 1980s, an alien pool closed down small one, at the time being just under and sent a letter telling us we needed to $600k. I recall that it was comprised of go direct. We dutifully broke out the pool $100k in balances, $350k in undiscounted The meeting was to take place at the office and started sending direct notices of loss reserves and $250k of something called of the reinsurers’ lawyers. Twelve and bills. One of the smaller players sent IBNR (which for a while I believe meant representatives of the reinsurers were to us a letter from their President saying he I Bought No Reinsurance! – I have now attend, plus two of their lawyers ... and was going to be in Chicago and would come to know that IBNR is determined me. Clearly, the logistical planning had like to meet us. When he arrived, he was with a blindfold and a dartboard!). We been unsound. accompanied by two other gentlemen had to do something called “discount the I was met in reception by the junior lawyer who were there to translate for him. reserves for the time value of money”. Not on the case. It seemed like a ten-minute really knowing how to do this I found that walk through maze-like corridors to get We calculated the value of the deal, paid, one of the guys in the office had a piece to the conference room. As he was about case and IBNR at about $3,000. After the of shareware software on a 5 inch floppy to open the door, this lawyer looked me in preliminaries and the revelation of the disk (hey, remember – it was 1986) that the eye and said, “Ah, I am now bringing amount he asked his cohorts if they hap- allowed you to calculate mortgage rates the lamb to the slaughter.” I then entered pen to have $3,000 on them so we could and present value (the other side had Ms. the room where the twelve reinsurance do the deal. My colleague who was also in Pacman). Well, we did it and got the deal men were all smiling broadly. They may the meeting had earlier pointed out that done for $575k. We never looked back have been pleased to see me, or optimistic the President was sporting a rather nice from there – well maybe a bit! So, to be of a conciliatory settlement, but I had Rolex Crown Ambassador watch. fair to you, the reader, I reached out to no ability to recognize any of that. The We therefore proposed we would do the some of my peers to divulge a few of their two lawyers were also smiling, as if to deal for his watch (which we figured we memorable commutations. Some of the suggest: “This dispute will put our children could fence on Van Buren Street for a responses were unprintable, while others through college.” The meeting lasted least $5,000). The guy laughed and said he expressed quite a bit of anger (so much for twenty minutes and was an absolute fiasco. was serious about the deal and we said we the “win-win” school of thought!). Others Approximately a month later, we met were serious about taking his watch! though, hit the mark right on the head. again. Lawyers were forbidden from any Many years later his cohorts were in our The first entry comes from someone you participation in the meeting, which was offices on another matter and I went in to all know, but has pleaded anonymity, as held in one of the reinsurers’ offices. We say hello. We had a good laugh over the have the rest of the contributors. commuted the treaty. failed “watch deal” but I had to ask why Some years ago, I was working for a ceding Early in my career I was told once that the President wouldn’t do it. They told me company that was engaged in a dispute reinsurance was defined as an honorable it was because the watch wasn’t insured!!

30 AIRROC MATTERS / SPRING 2015 Art Coleman (with a little help from his friends) This article originally appeared in the Summer 2007 AIRROC Matters.

Step-by-Step The following is an excerpt from the “Practical Guide to Commutations” which breaks down the process into simple step-by-step instructions. 1

1. Evaluation 4. Valuation • Know your counterpart – how A commutation will affect each party’s When pricing the commutation, valuation knowledgeable are they of the business financial condition, which should be measured usually consists of four components: being commuted? before entering negotiations. For example, if 1. Paid Loss Recoverables • Be prepared — have all the material the reinsurer is not carrying adequate reserves 2. Outstanding Loss Recoverables available in an organized manner. or IBNR provisions, the settlement amount 3. Incurred But Not Reported [“IBNR”] • Have a number in mind — establish the could adversely impact the reinsurer’s surplus. highest and lowest amounts you consider 2. Qualification 4. Cash Credits (LOCs, Trusts, Cash-onhand, acceptable. Your target figure should be etc.) Both parties should set a cut-off date to be somewhere in the middle. used in the presentation of balances, reserves Reconciling Paid Loss Recoverables at the • Understand the other side’s strategy — and IBNR. Additionally, a timetable should be agreed cut-off date should be an area of consider their motivation for cutting a deal, agreed incorporating: little contention unless there is a contractual their financial condition, or issues that will dispute. It is usual for an actuarial or claims affect their position. • Who will reconcile liabilities and by what date? team to review the reasonableness of • Who will prepare the IBNR study & when will established case reserves. Understanding the For the deal to be successful there should ap- it be ready for review? cedant’s reserving philosophy will help to pear to be a “win-win” scenario for both sides. • When will negotiations commence? determine future case reserve development 6. Agreement • Who will prepare the Commutation and IBNR. It is advisable to get legal counsel to draw Agreement? An actuarial or claims team can help to up or at least review the Commutation • By what date should the commutation be determine projected frequency and severity Agreement, which should include: concluded? of claims for IBNR purposes by reviewing the • An exhibit identifying the contracts to be 3. Identification following: commuted. All the information regarding each pertinent • Loss Development Analysis (Triangulation) • Incorporate any name changes the parties contract, policy or certificate must be gathered • Inception-to-date experience may have undergone. prior to valuation. In identifying exposures • Type of business (proportional, treaty or • Restrict circulation of the document and consider the following: facultative) terms, via a confidentiality clause, to those • Do the contract years run concurrently? Are • Class of business (property, casualty, that have a right to know. there gaps and can they be explained? accident & health, etc.) • Specify the date, method or payment and • Have the parties to the contract changed • Limits and attachment points (working or terms for execution of the agreement, names or was the business fronted? high layers) including releasing any LOCs or Funds Held. • Was the reinsurer part of a pool or There needs to be credit for the time value • Name the jurisdiction that would apply represented by an MGA? of money. This and other credits should be in the case of a dispute to the agreement. Mistakes are costly and difficult to undo, • Does the broker have complete records treated as a deduction to the net commutation amount or discounted accordingly. so careful consideration and planning that could fill any information gaps, such as is necessary at each stage to produce a reference numbers? 5. Negotiation favorable outcome. • Is the broker holding any pipeline Successful negotiations are performed by 1 These notes should not be treated as a substitute adjustments or funds? those who know the business, as well as other for obtaining legal advice specific to a particular • Are there current Letters of Credit [“LOCs”]? factors such as: commutation.

Another funny point; we submitted the what we believed to be an exorbitant our business, two fellows, who I later deal to our central corporate HQ for ap- Commutation offer from the Cedant. found out were from the Accounting proval … and it was REJECTED!! We knew they were hurting but the price Department, were talking and one said, Well, like they say, timing is everything! $55M they were asking was ridiculous! “You know, I don’t think we’re going to Knowing the two guys referenced in the Unfortunately, our review of the claims be able to make payroll next week due to story, they certainly would have received was telling a story that supported their cash flow.” A smile came across my face. more than $5,000 for the watch. position. Then our fortunes changed! We walked into the MD’s office and of- Some deals have happy endings (for It was Friday and after a quick (?) lunch fered $20M by close of business the some) as can be seen in the next entry. at the nearby Pub, we were back at the following Monday, $10M the following Back in the late 1980s I was in the rural office and attending to the after effects of January 3rd and $10M the January 3rd UK doing an audit trying to support the Pub in the “Gents”. As we were doing after that.

AIRROC MATTERS / SPRING 2015 31

AIRROC MATTERS CLASSIC Historical Perspectives (continued)Settle

We did not mind the 8 hour flight home When he gets to my office there is a man My associate and I stepped outside on that evening! that could not have been wetter if he the premise of getting him more towels They say that the doctrine of “caveat stood for an hour under Niagara Falls and some coffee. We agreed that to take emptor” means, “let the buyer beware”. without an umbrella. We tried to dry him more than $400K from him would be Knowing the two parties involved, this off with paper towels but why bother! in really bad form. We actually had to was certainly a “win-win” scenario. argue with him to get him to pay the lower amount! This next story was one of my favorites Anyone who thinks that the and shows that there really is a humane business of run-off is boring It seems that today, we use phrases such side to our industry (it’s not frequently just is not having enough fun! as exit strategies, solvent and insolvent shown — but it is there nonetheless). schemes and that the business seems ------like more of an exact science than it Late 1980s lower Manhattan, was back in the day. The best lesson we mid-afternoon and I had a 3 p.m. This gentleman sits down in my now re- can probably learn from the past is that appointment with a gentleman from a placed chair and states that his company the best deal is not necessarily the one German reinsurer that was in run-off. is in run-off and while appearing to be There is a monsoon of a thunder storm where the numbers are right – the lesson (and probably was) very uncomfortable is that this is still a people business and going on and I realize that the meeting he advises that he is only willing to pay will probably be late. relationships make for better deals. $500K for the commutation. Anyone who thinks that the business I had been going over my financials and This could have been the fastest commu- of run-off is boring just is not having was thinking that I would have a hard tation on record. We asked if he had re- enough fun! l time getting the $300K that was my wish viewed the business and if he was sure of list amount never mind my walk-away his price. He then advised that if pushed Art Coleman is President at Citadel Risk Management, number of $250K from this reinsurer. there was probably a bit more that could Inc. and American Millennium Insurance Company. At 2:58 p.m. I receive a call from the front be had but he would have to go back to [email protected] desk advising that my visitor has arrived. management for approval.

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AIRROC MATTERS / SPRING 2015 33 When Experience Counts Reinsurance Professional’s Deskbook (co-published by DRI) PRESENT VALUE

News & Events

million, increasing $20 million per year Regulatory News beginning in 2016; it raises the amount Financial Stability of the federal government’s mandatory Oversight Council (FSOC) TRIA recoupment from $27.5 billion to $37.5 On February 4th, the Financial Stability th billion, increasing by $2 billion each year On February 4 , Federal Insurance Office beginning Jan. 1, 2016; and in total for all Oversight Council adopted significant Director Michael McRaith released events, the Act raises the private industry changes to its procedures relating to its guidance on how insurers should recoupment from 133% of covered losses process for reviewing non-bank financial deal with the 12-day gap in terrorism to 140% of covered losses. companies for potential designation. coverage created when Congress failed to Pursuant to Title I of the Dodd-Frank reauthorize the extension to TRIA before Wall Street Reform and Consumer it expired on Dec. 31, 2014. There is Protection Act, FSOC is authorized concern that many of the policies issued to identify and designate individual under the prior Act expired or were non-bank financial companies that st cancelled as of December 31 because could pose a significant risk to the U.S. TRIA was not timely reauthorized. The financial stability. Such designated guidance provided that insurers have non-bank financial companies are then th until April 13 to issue proper disclosures subject to consolidated supervision to policyholders and required filings by the Board of Governors of the to regulators. The guidance stated that Federal Reserve System and enhanced insurers are not required to provide a prudential standards. revised disclosure to policyholders if the The law also included National insurers offered coverage for insured Association of Registered Agents and losses prior to January 12. For further National Association of Brokers (NARAB II) legislation that information, please see Interim Guidance establishes a permanent NARAB, on www.treasury.gov/fio Insurance Commissioners which should ease the current burden FIO is also seeking public comment faced by producers doing insurance At a special regarding potential improvements to the business across state lines. NARAB meeting of the process for certifying an event as an “act will be governed by a board of state National of terrorism” under the current TRIA insurance commissioners and industry Association of legislation. Comments are due by March 6. representatives. Insurance Commissioners (“NAIC”) held on TRIA Extension Federal Insurance Office (FIO) February 8th, On January 12th, President Obama Reinsurance Report Missouri Insurance signed into law the Terrorism Risk st Insurance Program Reauthorization On December 31 , the Federal Insurance Director John M. Huff was elected as Act of 2015 (the “Act”), which had Office released its delayed report on the NAIC President-elect. The position expired on December 31, 2014 because global reinsurance market. The Report became vacated when former the Senate failed to authorize the bill refers to reinsurance as “vital” to the Pennsylvania Insurance Commissioner before the recess. The Act includes economic stability of the United States. Michael F. Consedine resigned from his several significant changes from the Although the report identifies five key post. Director Huff served a two-year previous Act, including: it increases the benefits that reinsurance provides to term as the first NAIC representative to the insurance industry, the consensus amount needed in total losses under the the Financial Stability Oversight has been that the Report did not go far previous Act from $100 million to $200 Council. enough. Based on the Report itself, it is difficult to determine what policy changes The NAIC hired Christina Urias to the If you are aware of items that may qualify for should be made by insurance regulators new position of International Insurance the next “Present Value,” such as upcoming and Congress with regard to reinsurance. Regulatory Affairs Managing Director, events, comments or developments that For a more detailed discussion of the which reports directly to the NAIC CEO, have, or could impact our membership, state of reinsurance in the United to oversee the International Insurance please email Fran Semaya at flsemaya@ States, including an analysis of the FIO Regulatory Affairs Division of the NAIC. gmail.com or Peter Bickford at pbickford@ reinsurance report, look for the reinsurance Ms. Urias served as the Director of the pbnylaw.com. article in the upcoming Summer edition of Arizona Insurance Department from AIRROC Matters. 2003 to 2012.

36 AIRROC MATTERS / SPRING 2015 Francine L. Semaya & Peter H. Bickford

announced that it was acquiring the SPRING 2015 Industry News high-net-worth personal lines business After a relatively slow period of insurer of Fireman’s Fund Insurance Company M&A activity through the Fall of 2014, from Allianz S.E. for $365 million. activity picked up substantially at year- The transaction is scheduled to close in end, culminating in late January with the second quarter of 2015 subject to the blockbuster merger of Axis Capital regulatory approvals. Holdings Ltd. (“Axis Capital”) and Also in December, Hong Kong based March 28–31, 2015 National Association of Insurance Commissioners PartnerRe Ltd. (“PartnerRe”). The Fosun International Limited (“Fosun”) (NAIC). Spring National Meeting merger will result in a stock swap totaling agreed to purchase Michigan-based Phoenix, AZ nearly $11 billion, with PartnerRe Meadowbrook Insurance Group, Inc. www.naic.org shareholders owning 51.6% and Axis (“Meadowbrook”) in a transaction Capital shareholders owning 48.4% of valued at about $433 million. After the March 29, 2015 the company. The merger is expected acquisition, scheduled to close in the International Association of Insurance second half of 2015, Meadowbrook will Receivers (IAIR) Issues Forum to be completed in the second half of Phoenix, AZ 2015, and will result in the combined continue to operate as a stand-alone www.iair.org company being among the top five largest entity from its Michigan location, while reinsurers in the world. Commenting on providing Fosun, one of China’s largest April 17, 2015 the merger, Albert A. Benchimol, current conglomerates, with access to the US AIRROC Workshop: “The Future of the Duty of CEO of Axis Capital, who will retain property and casualty market. Utmost Good Faith” (NEW DATE) that position in the combined company, Princeton, NJ www.airroc.org stated: “The combined company will have three strongly positioned businesses People on the Move April 17, 2015 – a top-five global reinsurer, a $2.5 Maryann Taylor, New York City Bar Association, ABA/TIPS & IFNY billion specialty insurance underwriting “Current Issues in Insurance Regulation 2015” a member of the business, and a highly successful and New York, NY AIRROC www.nycbar.org/cle growing life, accident and health Publication franchise – all with increased strategic Committee and April 21–22, 2015 flexibility.” Assistant Editor of Runoff and Commutations Forum / ACI Before the late January announcement AIRROC Matters, New York, NY of the Axis/PartnerRe blockbuster recently rejoined www.americanconference.com/runoff transaction, the new year got off to a D’Amato & Lynch, April 29–May 1, 2015 major start with the announced $4.1 LLP as a Partner in ABA Tort Trial & Insurance Practice billion acquisition by Dublin based XL their reinsurance department, where she TIPS Section Conference Group plc (XL Group”) of Bermuda started her career in 1985. Maryann Philadelphia, PA domiciled insurer and reinsurer Catlin concentrates her practice on reinsurance www.americanbar.org/groups/tort_trial_ Group Limited (Catlin”). According and insurance regulatory matters. insurance_practice. [email protected] to XL Group’s press release on the May 6–8, 2015 acquisition: “Following the completion Nicholas Horsmon, an Associate in the IRLA Annual Congress of the transaction, the name of the New York City office of Mound Cotton Brighton, UK parent company of the combined Wollan & Greengrass, has become a www.irla-international.com group will remain XL Group plc, and member of the AIRROC Publication the newly combined company will Committee. nhorsmon@moundcotton. May 12, 2015 AIRROC London Regional be marketed as XL Catlin, reflecting com. London, England the strong reputation of both brands.” Sandra M. McDermott has joined www.airroc.org The combination will create a top 10 the law firm of Goldberg Segalla as a reinsurer with expanded alternative Partner in its Global Insurance Services August 14-17, 2015 National Association of Insurance Commissioners capital capabilities.” The transaction is Practice Group, and will practice from (NAIC) expected to close in mid-2015 subject to the firm’s offices in Manhattan and in her shareholder and regulatory approvals. Summer National Meeting hometown of Syracuse. Before joining Chicago, IL This winter also saw a number of other Goldberg Segalla, she was a Partner at www.naic.org significant transactions, including the Wilson Elser Moskowitz Edelman & following: In December 2014, Ace Ltd. Dicker LLP in New York. l

AIRROC MATTERS / SPRING 2015 37 38 AIRROC MATTERS / WINTER 2014 Carroll McNulty Kull

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