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General Re Life Corp. v. Lincoln National Life Insurance Co.

United States District Court, D. Connecticut

March 31, 2017



          Victor A. Bolden United States District Judge

         Pending before the Court is (1) General Re Life Corporation's (“General Re” or “Gen Re”) Petition to Confirm the Final Arbitration Award and Vacate the Arbitrators' Purported Clarification of the Final Award (the “Petition”), ECF No. 1, (2) Lincoln National Life Insurance Company's (“Lincoln”) Cross-Petition to Confirm Arbitration Award as Clarified (the “Cross-Petition”), ECF No. 21; ECF No. 22, and (3) Lincoln's Motion to Enter Judgment (the “Motion”), ECF No. 45; ECF No. 46.

         For the reasons that follow, the Petition is DENIED, the Cross-Petition is GRANTED, and the Motion is GRANTED.

         I. BACKGROUND

         General Re entered into an Automatic Self-Administered YRT Reinsurance Agreement (the “Agreement” or the “Treaty”) with Lincoln effective January 1, 2002. See Treaty, ECF No. 7-1. Under the Agreement, General Re reinsured a portion of various individual life insurance products issued by Lincoln and also had a unilateral right to increase the reinsurance premiums so long as the new rates were based solely on a change in anticipated mortality. Treaty, Ex. C-1, ¶ 7. In the event that General Re exercised its right to raise rates, however, the Agreement allowed Lincoln to “recapture” its life insurance policies, i.e., to terminate the reinsurance going forward rather than pay the increased premiums. Id. The Agreement did not provide a specific methodology for implementing this right of recapture. Exhibit F of the Agreement did provide, under “Remittance Reporting, ” that Lincoln “will take credit, without interest, for any unearned premiums arising due to reductions, cancellations or death claims.” Treaty, Ex. F.

         In March 2014, General Re exercised its right to increase the reinsurance rates effective April 1, 2014. See 6/4/2014 Letter, ECF No. 7-2 (noting that General Re had sent a letter on March 28, 2014 regarding a rate increase). In response, on June 4, 2014, Lincoln demanded arbitration. Id.

         The dispute was submitted to a panel of three arbitrators. A hearing before the arbitrators began on June 15, 2015. See 6/15/2015 Hearing Trans., ECF No. 7-8. During the hearing, the parties devoted very little time to discussing the terms of recapture.[1] See generally Full Hearing Trans., ECF No. 22-3. On July 1, 2015, a majority of the arbitrators issued the Final Arbitration Award (the “Final Award”). On November 19, 2015, a different majority issued the Clarification of Final Arbitration Award (the “Clarification”).

         A. The Final Award

         Umpire Barbara Niehus and Arbitrator Denis Loring signed the Final Award. Arbitrator Thomas Zurek dissented. See Final Award, ECF No. 7-13. Niehus and Loring concluded that there had been a change in anticipated mortality, and that General Re was therefore entitled to a rate increase. Id. ¶ 2. If Lincoln elected to recapture in the event of a rate increase, the Final Award provided that this recapture would be effective retroactive to April 1, 2014. Id. ¶ 6.a.

         The Final Award further provided the following:

The Panel finds that, since Lincoln demanded arbitration in June 2014, the parties have continued to administer the reinsured business under the original Treaty terms. The Panel further finds that General Re has incurred expenses and capital costs associated with the reinsured business during that time. Therefore, if Lincoln recaptures the reinsured business, the Panel orders that the following shall occur:
i. All premium and claim transactions paid by one party to the other following the effective date of the recapture (i.e., from April 1, 2014) shall be unwound.
ii. Lincoln shall reimburse General Re for the expenses and cost of capital that General Re incurred in providing reinsurance to Lincoln since that date. The Panel finds that the single life expense assumption of 5% of premium used in General Re's original Treaty pricing . . . shall be applied to all premiums that would have been paid by Lincoln based on the original Treaty premium rates.
iii. The Parties shall promptly work together to agree upon the amount of premium and claims to be unwound, and the expenses associated with the administration of the reinsured business. Any disagreement over the calculations shall promptly be submitted to the Panel for resolution pursuant to ¶ 9, below. The party with the net balance owing shall remit its payment to the other party within 90 days of this Award.

Id. ¶ 6.b.[2]

         The Final Award then ordered that “[a]ll other requests for relief from the parties are denied, ” id. ¶ 8, and that “[t]he Panel shall retain jurisdiction over this matter to the extent necessary to resolve any dispute over the calculation and payment of the amounts awarded herein, ” id. ¶ 9. This retention of jurisdiction would “extend until either (i) the date on which Lincoln pays General Re the amounts ordered in ¶ 5 [the “Payment of Premium” section] of this Award, or (ii) the date on which Lincoln recaptures the business reinsured under the Treaty and all associated balances due are paid, as provided in ¶ 6 of this Award.” Id.

         Paragraph 6.b.i. of the Final Award adopted the language regarding recapture that General Re had proposed to the arbitrators. See Gen Re Proposed Final Arbitration Award ¶ 6.b.i., ECF No. 7-10; see also Gen Re Pre-Hearing Br. at 34, ECF No. 7-4; Gen Re Opening Statement PPT at 46, ECF No. 7-6; Gen Re Closing Statement PPT at 142, ECF No. 7-7. Because Lincoln's position was that General Re's rate increase was improper, Lincoln's submissions to the arbitrators contained very little discussion of proposed terms for recapture.[3]See Lincoln Pre-Hearing Br. at 21, ECF No. 7-5 (discussing recapture only to the extent of arguing that “no provision in the Treaty . . . requires notice within 30 days” if Lincoln exercises right to recapture “and no provision in the Treaty . . . imposes the conditions on recapture that Gen Re requests the Panel declare”). Lincoln's proposed award did not, therefore, contain any language regarding how recapture should proceed. See generally Lincoln Proposed Final Award, ECF No. 7-11.

         B. Recapture Dispute

         Following the arbitrators' issuance of the Final Award, Lincoln and General Re communicated by e-mail regarding how to calculate the recapture payments under the Final Award, should Lincoln invoke its right to recapture. See generally Recapture E-mails, 10/26/2015 Letter Ex. B, ECF No. 7-16. The parties differed in their interpretation of the methodology for calculating the recapture payments. Id. at 1-7. General Re believed that paragraph 6.b.i. of the Final Award required “reversing all cash transactions” from the April 1, 2014 effective date of recapture. Id. at 6. Lincoln believed a “recapture effective 4/1/14” meant that Lincoln would “pay back all claims with dates of 4/1/14 and later”; “Gen Re would return premiums paid prior to 4/1/14, but unearned as of 4/1/14” to Lincoln; and “Gen Re would return all premiums paid for other coverage 4/1/14 and later.” Id. at 7. Lincoln also argued that General Re's calculations improperly “use[d] all claim payments made 4/1/14 and later regardless of date of death, ” while Lincoln “only use[d] claims where the [date of death] was after the recapture effective date, ” believing that General Re remained “responsible for all claims prior to this date.” Id. at 4. General Re's methodology and calculations indicated that General Re owed Lincoln $5, 484, 106.[4] Id. at 6. Lincoln's position was that General Re actually owed Lincoln approximately $18.5 million[5]. See Lincoln Spreadsheet, 10/26/2015 Letter Ex. A, ECF No. 7-16.

         On September 28, 2015, Lincoln formally notified General Re by email that Lincoln was invoking its right to recapture. Recapture E-mails at 5. The parties continued to communicate by e-mail regarding their differing interpretations of the amount of recapture payments that were required under the Final Award. Id. at 1-5.

         In a letter dated October 13, 2015, General Re notified Lincoln that it would be remitting to Lincoln $5, 484, 106, claiming that this amount represented the net recapture balance, based on all premium and claim payments that had been made between the parties from April 1, 2014. See 10/13/2015 Letter, ECF No. 7-16. Lincoln accepted without reservation the promised wire transfer on October 15, 2015. See Gen Re Br. at 8, ECF No. 7.

         C. The Clarification

         On October 26, 2015, Lincoln submitted a letter to the arbitrators asking them to resolve a dispute between the parties as to how to read paragraph 6.b.i. of the Final Award. See 10/26/2015 Letter, ECF No. 7-15. Lincoln's letter reiterated the position that it had taken in its communications with General Re that General Re's proposed calculation should be adjusted by: “returning to Lincoln the unearned portion of premiums paid prior to April 1, 2014”; “paying to Lincoln claims with a date of death prior to April 1, 2014”; and “removing from the calculation those premiums paid or on subsequent to April 1, 2014 but relating to prior coverage periods.” Id. at 3.

         In support of its argument, Lincoln referred to Exhibit F of the Treaty, which provided that Lincoln “will take credit, without interest, for any unearned premiums arising due to reductions, cancellations, or death claims.” Id. at 5. Lincoln also argued that the Final Award had retained the arbitrators' jurisdiction to resolve disagreements over the calculation of the recapture payments and that the current dispute was one regarding whether the Final Award “compels the recapture calculation that Gen Re asserts is required.” Id. at 7.

         On November 4, 2015, General Re submitted its objection to the arbitrators. 11/4/2015 Letter, ECF No. 7-17. General Re argued that Lincoln's request was beyond the authority of the arbitrators because it sought reconsideration of and a fundamental change to the recapture methodology unambiguously ordered in the Final Award. Id. at 6-10.

         On November 19, 2015, Niehus and Zurek signed the Clarification, from which Loring dissented. Clarification, ECF No. 7-19. Zurek had not been a signatory of the Final Award, while Loring had been. Clarification Dissent, ECF No. 7-20.

         The Clarification stated that the Final Award contained “ambiguities requiring clarification, ” Clarification at 1, ECF No. 7-19. The Clarification concluded that both Lincoln and General Re were reading paragraph 6.b.i. of the Final Award in a manner inconsistent with the language of the Treaty, and that paragraph 6.b.i. “is not intended to and does not change the terms of the Treaty.” Id. at 2.

         The Clarification provided, in relevant part, that “[w]hen read in the context of recapture under the Treaty, paragraph 6.b.i only deals with prospective unwinding of premiums and claims transactions beginning April 1, 2014, ” and “when read in context of the Treaty, Paragraph 6bi entitles Gen Re to retain the unearned premium it held as of the date of recapture.” Clarification. at 2, ECF No. 7-10. The Clarification further provided that:

When read in context of the Treaty, Paragraph 6bi requires Gen Re to be liable for claims for which it retains premium. Therefore, Gen Re must pay reinsurance benefits to Lincoln pursuant to the Treaty for Lincoln insureds who died during a period covered by premium paid by Lincoln to Gen Re regardless of whether the death claims were paid by Lincoln before, on, or after April 1, 2014.

Id. at 3. The Clarification also pointed to two relevant provisions of the Treaty. Id. at 2-3.

         First, the Clarification noted that Exhibit F of the Treaty provided, in relevant part, that Lincoln “will take credit, without interest, for any unearned premiums arising due to reductions, cancellations or death claims.” Clarification at 2; see also Treaty, Ex. F. The Clarification noted that Exhibit F did not provide for credit of unearned premiums to Lincoln in the event of recapture, thus, when read in context of the Treaty, paragraph 6.b.i entitled Gen Re to retain the unearned premiums it held as of the day of recapture. Clarification at 2.

         Second, the Clarification pointed to Section 4.1 of the Treaty, which provided, in relevant part that:

[General Re's] liability to [Lincoln] for the reinsurance due shall be based on the net amount of risk at the time of the Insured Individual death. [General Re's] liability to [Lincoln] for the net amount at risk on a Policy that is reinsured shall be determined based on a ratio of [General Re's] liability to the total net amount at risk under the policy at the time the reinsurance is placed. [General Re] shall share in any decrease in the net amount at risk in proportion to its share of the reinsurance on the Policy.

         Clarification at 3. The Clarification concluded that, when read in context of the treaty, paragraph 6.b.i required Gen Re to be liable for any ...

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