Case Briefs

Multiple Unfair Practices Regarding One Claim Are Not a 'General Business Practice'

In Bacewicz, et al., v. NGM Ins. Co., et al., 3:08-cv-01530 (D. Conn. June 30, 2009), the U.S. District Court for the District of Connecticut recently granted, in part, an insurer's motion to dismiss on the basis that the insured could not prove a violation of the Connecticut Unfair Insurance/Trade Practices Acts because allegations of multiple unfair practices in dealing with a single insurance claim are not sufficient to constitute a “general business practice.”

The insured plaintiffs filed a lawsuit against their insurer alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair and deceptive practices in violation of the Connecticut Unfair Insurance Practices Act (“CUIPA,” Conn. Gen. Stat. ' 38a-816) as a result of the insurer's denial of coverage for damage to the basement walls in the plaintiffs' home. The insureds alleged that the insurer engaged in dishonest conduct that was aimed at delaying the response to plaintiffs' insurance claim to create an “untimely filing” defense and thus bar any action against the insurer. The insurer moved to dismiss the bad faith and CUIPA counts.

The court granted the insurer's motion to dismiss the CUIPA count. Although the court adopted the position of the Second Circuit Court of Appeals that there is no private right of action under CUIPA (an issue not yet decided by the Connecticut Supreme Court), the court also acknowledged that an insured can bring a private cause of action based on CUIPA under the Connecticut Unfair Trade Practices Act (“CUTPA,” Conn. Gen. Stat. ' 42-110b). However, to prove a violation of CUIPA through CUTPA, an insured must prove that the insurer's unfair practices occurred with enough frequency to constitute a “general business practice.” The plaintiffs, however, only alleged multiple instances of unfair conduct with regard to the handling of their own, single claim rather than a general business practice of engaging in unfair insurance practices. It was for this reason that the court dismissed the plaintiffs' CUIPA/CUTPA count. The court held that multiple instances of unfair conduct with regard to the handling of only one insurance claim are insufficient to show a general business practice because to hold that such allegations rise to the level of a “general business practice” would be to render established precedent meaningless, as an insured who is denied coverage could circumvent established case law merely by classifying a single denial in several different categories of unfair settlement practice.

With regard to the plaintiffs' breach of the covenant of good faith and fair dealing count, the court denied the insurer's motion to dismiss because the plaintiffs' allegation that they notified their insurer of their claim on March 11, 2008, and the defendants did not finally deny coverage until February 3, 2009, was sufficient to raise the claim above the speculative level.

English High Court Grants Equitas Part VII Transfer of Liability on Lloyd's
Policies

On June 25, 2009, the High Court of England and Wales approved a transfer of all coverage obligations on pre-1993 Lloyd's policies to a newly formed company, Equitas Insurance Limited (“EIL”) pursuant to Part VII of the Financial Services and Markets Act 2000 (“FSMA”). In the matter of the names at Lloyd's for the 1992 and prior years of account represented by Equitas Ltd., et al., No. 10587 of 2008, English High Court, Chan. Div., Cos. Ct. Under the Part VII transfer, the unlimited coverage liabilities in respect of pre-1993 Lloyd's policies that originally were assumed by underwriting members at Lloyd's (so-called “Names”) were transferred to EIL, effective June 30, 2009, and the legal obligations of the Names were extinguished under English law.

Background

The 1996 Equitas Transaction

Equitas was formed as part of the Lloyd's Reconstruction and Renewal Plan in 1996 to address all 1992-and-prior (non-life) insurance business that had been underwritten by Names participating in Lloyd's syndicates. At that time, because of a proliferation of long-tail asbestos, pollution and health-hazard claims, various internal scandals and other financial problems, the Lloyd's syndicates had been unable to respond fully to mounting policyholder claims being made against the pre-1993 Lloyd's policies. Equitas was formed to effectuate a market-wide reinsurance-to-close transaction in which Equitas reinsured the coverage obligations of the pre-1993 Lloyd's policies and agreed to act as the runoff agent to handle and resolve all pending and future coverage claims against those policies. Equitas was established with initial capital of about '16 billion, which was funded from assets of the reinsured Lloyd's syndicates, as well as from monies provided by other stakeholders in the Lloyd's enterprise.

The 2007 Equitas/Berkshire Hathaway Transaction

On Oct. 20, 2006, Equitas Ltd. and Berkshire Hathaway Inc. announced a landmark two-phase transaction under which, in Phase One, a subsidiary of Berkshire Hathaway, National Indemnity Company, reinsured the pre-1993 Lloyd's coverage obligations being reinsured and runoff by Equitas. This phase was completed in March 2007.

Pursuant to Phase One of the transaction, National Indemnity provided reinsurance coverage to Equitas in an initial amount of $5.7 billion ('3 billion) over and above Equitas' March 2006 adjusted reserves of $8.7 billion ('4.6 billion). Lloyd's made a contribution to Equitas of $133.6 million ('72 million) as additional consideration for the reinsurance being provided by National Indemnity. At the same time, the claims-handling operations of another member of the Equitas group of companies, Equitas Management Services Limited, were transferred into the claims-handling entity in the Berkshire Hathaway group, Resolute Management Services Limited (“Resolute Management”). The runoff of the liabilities reinsured by Equitas as agent for the Names is currently being handled by Resolute Management.

The recent Part VII transfer comprises Phase Two of the transaction. The transaction proceeded in two phases because, in March 2007, when the first phase was effectuated, existing law did not allow for a Part VII transfer by Names who had ceased to be members of Lloyd's before Dec. 24, 1996. The pertinent law was amended in 2008 by the FSMA.

The Recent Part VII Transfer

The Part VII transfer effectively allows a “statutory novation” to take place, pursuant to which contracts of insurance can be transferred to another insurer, along with all rights and duties under those policies. (As such, Part VII transfers are different from reinsurance or reinsurance-to-close transactions, under which the liability may remain with the original insurer ' in this case, the Names.) By virtue of this transfer:

• all obligations of the Names with respect to pre-1993 Lloyd's policies are transferred to EIL, and Names will have no further liabilities on the policies;
• all rights, benefits, and powers conferred on or vested in the Names, including the benefit of the Equitas and National Indemnity reinsurances, are transferred to EIL; and
• all references to the Names and their agents are read and construed as being references to EIL and its directors, officers and employees or agents.

Thus, from June 30, 2009, EIL is the insurer (or reinsurer in the case of a Lloyd's reinsurance policy) in place of the Names and is wholly responsible for all obligations under pre-1993 Lloyd's policies. Names have no further liabilities in respect of the pre-1993 Lloyd's policies under English law ' including in the event of an insolvency of EIL. It is in this manner that the Part VII transfer may provide the long-sought finality for Names (and for the Lloyd's enterprise as a whole).

Significance for Policyholders

This Part VII transfer is a significant development for all holders of pre-1993 Lloyd's insurance policies.

Additional $1.3 Billion for the Payment of Claims

Now that the Part VII transfer has been approved, National Indemnity will provide an additional $1.3 billion ('685 million) of reinsurance cover for the pre-1993 Lloyd's business in exchange for a further premium of $76 million ('40 million). Equitas announced that it purchased this additional reinsurance on June 30, 2009. Accordingly, policyholders will benefit from a total of $7 billion in reinsurance cover from National Indemnity over and above Equitas' March 31, 2006 carried reserves.

Loss of Recourse to Lloyd's?

An independent expert report, required under section 109 of FSMA, concluded that the Part VII transfer does not “materially disadvantage” any group of policyholders and that policyholders will not be disadvantaged by the policy administration or claims-handling aspects of the Part VII transfer. Nevertheless, as a trade-off for obtaining the benefit of additional reinsurance to respond to claims, policyholders may lose the benefit of any recourse to Lloyd's Names and/or to the Lloyd's enterprise if additional funds are needed to respond to future coverage claims. Instead of claims against Names, the policyholders may be limited to pursuing claims only against EIL. In this regard, although Justice William Anthony Blackburne recognized that the Part VII transfer likely “will not be recognized or enforced in the courts of the USA unless and until a formal application is made by Equitas to a U.S. court,” see July 7, 2009 Approved Judgment, '27, Equitas is considering whether it is possible and reasonably practicable to obtain recognition of the Part VII transfer in major relevant overseas jurisdictions, including the United States.

Access to U.S. Situs Trust Funds

As recognized by Justice Blackburne, at least prior to any formal recognition of the Transfer, U.S. policyholders should continue to be protected by the Lloyd's and Equitas U.S. situs trust funds, such as the Lloyd's American Trust Fund and the Equitas American Trust Fund. See July 7, 2009 Approved Judgment, '28.

Possible Cut-off Scheme

EIL may seek to take advantage of English law that allows companies to terminate their obligations through the use of the Solvent Scheme mechanism, although Equitas has stated that there are no plans for any Scheme of Arrangement following the Part VII transfer. See July 7, 2009 Approved Judgment, '29. Under these Schemes, if approved by the requisite majority of creditors and the Court, a cut-off date is imposed for all policyholders to submit their coverage claims ' regardless of whether those claims are ripe for resolution or, alternatively, are only contingent claims, which will manifest in the future but which are difficult to quantify.

Julia Karen Ulrich, of Edwards Angell Palmer & Dodge LLP, contributed the first case brief. Roberta D. Anderson, of Kirkpatrick & Lockhart Preston Gates Ellis LLP and a member of this newsletter's Board of Editors, contributed the second case brief.

Multiple Unfair Practices Regarding One Claim Are Not a 'General Business Practice'

In Bacewicz, et al., v. NGM Ins. Co., et al., 3:08-cv-01530 (D. Conn. June 30, 2009), the U.S. District Court for the District of Connecticut recently granted, in part, an insurer's motion to dismiss on the basis that the insured could not prove a violation of the Connecticut Unfair Insurance/Trade Practices Acts because allegations of multiple unfair practices in dealing with a single insurance claim are not sufficient to constitute a “general business practice.”

The insured plaintiffs filed a lawsuit against their insurer alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair and deceptive practices in violation of the Connecticut Unfair Insurance Practices Act (“CUIPA,” Conn. Gen. Stat. ' 38a-816) as a result of the insurer's denial of coverage for damage to the basement walls in the plaintiffs' home. The insureds alleged that the insurer engaged in dishonest conduct that was aimed at delaying the response to plaintiffs' insurance claim to create an “untimely filing” defense and thus bar any action against the insurer. The insurer moved to dismiss the bad faith and CUIPA counts.

The court granted the insurer's motion to dismiss the CUIPA count. Although the court adopted the position of the Second Circuit Court of Appeals that there is no private right of action under CUIPA (an issue not yet decided by the Connecticut Supreme Court), the court also acknowledged that an insured can bring a private cause of action based on CUIPA under the Connecticut Unfair Trade Practices Act (“CUTPA,” Conn. Gen. Stat. ' 42-110b). However, to prove a violation of CUIPA through CUTPA, an insured must prove that the insurer's unfair practices occurred with enough frequency to constitute a “general business practice.” The plaintiffs, however, only alleged multiple instances of unfair conduct with regard to the handling of their own, single claim rather than a general business practice of engaging in unfair insurance practices. It was for this reason that the court dismissed the plaintiffs' CUIPA/CUTPA count. The court held that multiple instances of unfair conduct with regard to the handling of only one insurance claim are insufficient to show a general business practice because to hold that such allegations rise to the level of a “general business practice” would be to render established precedent meaningless, as an insured who is denied coverage could circumvent established case law merely by classifying a single denial in several different categories of unfair settlement practice.

With regard to the plaintiffs' breach of the covenant of good faith and fair dealing count, the court denied the insurer's motion to dismiss because the plaintiffs' allegation that they notified their insurer of their claim on March 11, 2008, and the defendants did not finally deny coverage until February 3, 2009, was sufficient to raise the claim above the speculative level.

English High Court Grants Equitas Part VII Transfer of Liability on Lloyd's
Policies

On June 25, 2009, the High Court of England and Wales approved a transfer of all coverage obligations on pre-1993 Lloyd's policies to a newly formed company, Equitas Insurance Limited (“EIL”) pursuant to Part VII of the Financial Services and Markets Act 2000 (“FSMA”). In the matter of the names at Lloyd's for the 1992 and prior years of account represented by Equitas Ltd., et al., No. 10587 of 2008, English High Court, Chan. Div., Cos. Ct. Under the Part VII transfer, the unlimited coverage liabilities in respect of pre-1993 Lloyd's policies that originally were assumed by underwriting members at Lloyd's (so-called “Names”) were transferred to EIL, effective June 30, 2009, and the legal obligations of the Names were extinguished under English law.

Background

The 1996 Equitas Transaction

Equitas was formed as part of the Lloyd's Reconstruction and Renewal Plan in 1996 to address all 1992-and-prior (non-life) insurance business that had been underwritten by Names participating in Lloyd's syndicates. At that time, because of a proliferation of long-tail asbestos, pollution and health-hazard claims, various internal scandals and other financial problems, the Lloyd's syndicates had been unable to respond fully to mounting policyholder claims being made against the pre-1993 Lloyd's policies. Equitas was formed to effectuate a market-wide reinsurance-to-close transaction in which Equitas reinsured the coverage obligations of the pre-1993 Lloyd's policies and agreed to act as the runoff agent to handle and resolve all pending and future coverage claims against those policies. Equitas was established with initial capital of about '16 billion, which was funded from assets of the reinsured Lloyd's syndicates, as well as from monies provided by other stakeholders in the Lloyd's enterprise.

The 2007 Equitas/Berkshire Hathaway Transaction

On Oct. 20, 2006, Equitas Ltd. and Berkshire Hathaway Inc. announced a landmark two-phase transaction under which, in Phase One, a subsidiary of Berkshire Hathaway, National Indemnity Company, reinsured the pre-1993 Lloyd's coverage obligations being reinsured and runoff by Equitas. This phase was completed in March 2007.

Pursuant to Phase One of the transaction, National Indemnity provided reinsurance coverage to Equitas in an initial amount of $5.7 billion ('3 billion) over and above Equitas' March 2006 adjusted reserves of $8.7 billion ('4.6 billion). Lloyd's made a contribution to Equitas of $133.6 million ('72 million) as additional consideration for the reinsurance being provided by National Indemnity. At the same time, the claims-handling operations of another member of the Equitas group of companies, Equitas Management Services Limited, were transferred into the claims-handling entity in the Berkshire Hathaway group, Resolute Management Services Limited (“Resolute Management”). The runoff of the liabilities reinsured by Equitas as agent for the Names is currently being handled by Resolute Management.

The recent Part VII transfer comprises Phase Two of the transaction. The transaction proceeded in two phases because, in March 2007, when the first phase was effectuated, existing law did not allow for a Part VII transfer by Names who had ceased to be members of Lloyd's before Dec. 24, 1996. The pertinent law was amended in 2008 by the FSMA.

The Recent Part VII Transfer

The Part VII transfer effectively allows a “statutory novation” to take place, pursuant to which contracts of insurance can be transferred to another insurer, along with all rights and duties under those policies. (As such, Part VII transfers are different from reinsurance or reinsurance-to-close transactions, under which the liability may remain with the original insurer ' in this case, the Names.) By virtue of this transfer:

• all obligations of the Names with respect to pre-1993 Lloyd's policies are transferred to EIL, and Names will have no further liabilities on the policies;
• all rights, benefits, and powers conferred on or vested in the Names, including the benefit of the Equitas and National Indemnity reinsurances, are transferred to EIL; and
• all references to the Names and their agents are read and construed as being references to EIL and its directors, officers and employees or agents.

Thus, from June 30, 2009, EIL is the insurer (or reinsurer in the case of a Lloyd's reinsurance policy) in place of the Names and is wholly responsible for all obligations under pre-1993 Lloyd's policies. Names have no further liabilities in respect of the pre-1993 Lloyd's policies under English law ' including in the event of an insolvency of EIL. It is in this manner that the Part VII transfer may provide the long-sought finality for Names (and for the Lloyd's enterprise as a whole).

Significance for Policyholders

This Part VII transfer is a significant development for all holders of pre-1993 Lloyd's insurance policies.

Additional $1.3 Billion for the Payment of Claims

Now that the Part VII transfer has been approved, National Indemnity will provide an additional $1.3 billion ('685 million) of reinsurance cover for the pre-1993 Lloyd's business in exchange for a further premium of $76 million ('40 million). Equitas announced that it purchased this additional reinsurance on June 30, 2009. Accordingly, policyholders will benefit from a total of $7 billion in reinsurance cover from National Indemnity over and above Equitas' March 31, 2006 carried reserves.

Loss of Recourse to Lloyd's?

An independent expert report, required under section 109 of FSMA, concluded that the Part VII transfer does not “materially disadvantage” any group of policyholders and that policyholders will not be disadvantaged by the policy administration or claims-handling aspects of the Part VII transfer. Nevertheless, as a trade-off for obtaining the benefit of additional reinsurance to respond to claims, policyholders may lose the benefit of any recourse to Lloyd's Names and/or to the Lloyd's enterprise if additional funds are needed to respond to future coverage claims. Instead of claims against Names, the policyholders may be limited to pursuing claims only against EIL. In this regard, although Justice William Anthony Blackburne recognized that the Part VII transfer likely “will not be recognized or enforced in the courts of the USA unless and until a formal application is made by Equitas to a U.S. court,” see July 7, 2009 Approved Judgment, '27, Equitas is considering whether it is possible and reasonably practicable to obtain recognition of the Part VII transfer in major relevant overseas jurisdictions, including the United States.

Access to U.S. Situs Trust Funds

As recognized by Justice Blackburne, at least prior to any formal recognition of the Transfer, U.S. policyholders should continue to be protected by the Lloyd's and Equitas U.S. situs trust funds, such as the Lloyd's American Trust Fund and the Equitas American Trust Fund. See July 7, 2009 Approved Judgment, '28.

Possible Cut-off Scheme

EIL may seek to take advantage of English law that allows companies to terminate their obligations through the use of the Solvent Scheme mechanism, although Equitas has stated that there are no plans for any Scheme of Arrangement following the Part VII transfer. See July 7, 2009 Approved Judgment, '29. Under these Schemes, if approved by the requisite majority of creditors and the Court, a cut-off date is imposed for all policyholders to submit their coverage claims ' regardless of whether those claims are ripe for resolution or, alternatively, are only contingent claims, which will manifest in the future but which are difficult to quantify.

Julia Karen Ulrich, of Edwards Angell Palmer & Dodge LLP, contributed the first case brief. Roberta D. Anderson, of Kirkpatrick & Lockhart Preston Gates Ellis LLP and a member of this newsletter's Board of Editors, contributed the second case brief.