Eighth Circuit Holds McCarran-Ferguson Act Bars RICO Claim Against Insurance Companies Based on Captive Reinsurance Transactions

On Thursday, April 13, 2017, the Eighth Circuit held that the McCarran-Ferguson Act barred a plaintiff from pursuing her RICO claims against an insurance company and its affiliates. The plaintiff had alleged the insurance company and its affiliates had conspired to falsely report their “shadow insurance” transactions to inflate the insurance company’s financial condition and increase the cost to purchase annuities. The federal district court had dismissed the case (the order is here), finding the claims preempted by the McCarran-Ferguson Act. The Eighth Circuit affirmed. The decision, Ludwick v. Harbinger Group, et al., Case No. 16-1561, is here.

Briggs and Morgan, led by Frank Taylor, represented Fidelity & Guaranty Life Insurance Company (F&G), and argued the case before the district court on behalf of F&G.  Debevoise and Plimpton, led by Maeve O’Connor, represented all Appellees before the Circuit.

The Plaintiff, who owned an F&G annuity, asserted that F&G fraudulently moved billions of dollars in liabilities off its books by transferring them in a series of  captive reinsurance transactions (i.e., shadow insurance).  The Plaintiff alleged that F&G’s accounting of its transactions meant that F&G’s financial condition was not as represented, and therefore her annuity was not worth what she paid for it.  She sued under RICO, alleging the F&G and its parent company conspired to distribute deceptive financial reports and marketing materials.

F&G and the other Defendants argued that the Plaintiff’s claims were barred by the McCarran-Ferguson Act, which prohibits application of a federal statute that does not specifically relate to insurance (such as the RICO statute) to impair or supersede state regulation of insurance. F&G argued that, because the state must regulate and approve F&G’s reinsurance transactions, application of the RICO statute to Plaintiff’s claim would impair the state’s regulation of insurance.

The Western District of Missouri agreed and granted F&G’s Motion to Dismiss for failure to state a claim.

On appeal to the Eighth Circuit, Plaintiff argued that her suit did not impair state regulation of insurance, because her claims pertained only to F&G’s bookkeeping, not the underlying propriety of the reinsurance transactions or the state regulator’s approval of them.  The Eighth Circuit disagreed, holding that “questions about insurance company’s solvency are, no surprise, squarely within the regulatory oversight by state insurance departments.”  Decision at p. 5.  The Eighth Circuit noted that reinsurance transactions with affiliates must be submitted to the state insurance commissioner for review before they can be consummated.  Therefore, a federal court could not rule in Ludwick’s favor without holding, more or less explicitly, that the state insurance regulators were wrong to allow the transactions to proceed.

The Eighth Circuit concluded: “Litigating Ludwick’s RICO claims would interfere with state regulation of the insurance business, and the claims are barred by the McCarran-Ferguson Act. The district court was right to dismiss.” Decision at p. 10.

About Frank Taylor

Frank Taylor is head of the Briggs and Morgan’s Financial Markets group and has more than 35 years of experience in complex financial markets litigation, class actions, regulatory investigations, enforcement proceedings and market conduct examinations. Frank has defended clients in some of the financial services industry’s most significant cases. To date, he has served as lead trial counsel in more than 100 class actions and has tried more than 350 matters to verdict, judgment or award in 42 states before federal, state and arbitration forums. Frank focuses his practice in counseling and representation of firms in various financial markets; complex litigation and arbitration in the financial markets; alternative dispute resolution; class action defense; regulatory investigations, enforcement proceedings and market conduct examinations; antitrust; and complex business disputes.
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