Wednesday, May 27, 2015

Presumption against Extraterritoriality: Win for foreign insurers in Validus Reinsurance case

Tim Todd had an article in Forbes yesterday on the Court of Appeals grant of summary judgment in Validus Reinsurance Ltd. v. United States, decided May 26. This was a de novo review; the district court had granted summary judgment for Validus in 2014 (Mem. Op. Feb 5, 2014), and the government appealed on grounds that the district court had "adopted an overly narrow interpretation." From the Court of Appeals decision:
Because both parties offer plausible interpretations, we conclude that the text of the
statute is ambiguous with respect to its application to wholly foreign retrocessions [a type of insurance product at issue in the case]. The ambiguity is resolved upon applying the presumption against extraterritoriality because there is no clear indication by Congress that it intended the excise tax to apply to premiums on wholly foreign retrocessions. Accordingly, we affirm the grant of summary judgment, albeit on narrower grounds, on Validus’s refund claims. 
Tim explains the jargon in the case so I won't repeat that here, but his point of note is that:
Generally, courts presume that legislation operates only within the territorial jurisdiction of the United States. Thus, unless Congress expresses an “affirmative intention,” statutes have no extraterritorial effect. 
Here, the retrocessions were extraterritorial: wholly foreign parties issued policies that were “negotiated, executed, and performed outside of the United States.” And, the court noted, the “government has identified no clear indication by Congress that it intended the excise tax to apply to wholly foreign retrocessions, and we have found none.”
This is an interesting area of law that I have not studied enough but would like to. I note that the Appeals Court observed that "At first glance, the plain text of section 4371 appears to extend the reach of the IRS Commissioner to any casualty and life insurance policy issued by a foreign insurer anywhere in the world," but that read in conjunction with its definitions clauses, the scope is more modest. The court engages in a step by step statutory analysis (always fun) and ends up engaging in a fairly detailed discussion of what it means to "cover" something. Having hauled out a few dictionaries, the Court decides that the language is ambiguous, hence the need to turn to the general presumption against extra-territoriality.

In the context of a globally networked financial system, it is sometimes hard to tell the difference between something that is territorial and something that is extra-territorial in scope and reach. Here, the government had argued that the necessary nexus to the United States lay in the the underlying risks ultimately being insured--that is, "indirect" risk coverage. It seems that was one bridge too far for the DC Circuit.

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