COURT APPLIES CONCEPCION AND COMPELS ARBITRATION, REJECTING CLAIM THAT AGREEMENT PRECLUDED “EFFECTIVE VINDICATION OF STATE STATUTORY RIGHTS”

In a putative class action alleging violation of Pennsylvania labor laws, unfair trade practices, and other state law claims brought by a franchisee against the franchisor and two subsidiaries, the court stayed the proceedings and compelled individual arbitration. The franchise agreement contained an arbitration clause and a class arbitration waiver provision, among other provisions limiting litigation, discovery, and certain damages, and shifting certain fees and costs. The plaintiff franchisee argued that the arbitration provision was unenforceable because it prevented him from effectively vindicating his state statutory rights. The court rejected this argument, holding that Concepcion and other U.S. Supreme Court precedent confirmed that there is “absolutely no rule that prevents arbitration when a person cannot effectively vindicate his or her state statutory rights,” and that the “effective-vindication” rule may apply only when the FAA is alleged to conflict with another federal law. The court also applied equitable estoppel to reject the franchisee’s alternative argument that only the franchisor, the sole signatory to the franchise agreement, could compel arbitration; the court found that the franchisee relied on the franchise agreement in his pleading, and that a close relationship existed among the defendant entities. The court also construed the agreements between the parties to find that the claims asserted by the franchisee fell within the scope of the arbitration agreement. Last, the court construed the scope of the arbitration provision and held that it applied to the franchisee’s claims, notwithstanding the franchisee’s argument that his claims did not arise out of the franchise agreement. The provision covered disputes “arising out of or relating to” the “rights and obligations of the parties,” which clearly applied. Moreover, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so” (citing Stolt-Nielsen). Torres v. Cleannet, U.S.A., Inc., et al., Case No. 2:14-cv-02818 (USDC E.D. Pa. Feb. 5, 2015).

This post written by Michael Wolgin.

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APPELLATE COURT RULES ON LOSS ALLOCATION AND NOTICE DISPUTES CONCERNING REINSURANCE CLAIM

A New York appellate court affirmed the denial of summary judgment but with modifications. New Hampshire Insurance Company (“New Hampshire”) together with other insurers, settled with Kaiser Aluminum & Chemical Corporation (“Kaiser”) for asbestos personal injury related claims. The settlement allocated 100% of the asbestos liability to New Hampshire and their excess reinsurance carrier, Clearwater Insurance Company (“Clearwater”). New Hampshire sought indemnification from Clearwater pursuant to a reinsurance agreement.

Clearwater challenged the allocation in the settlement arrangement alleging that it forced New Hampshire to bear costs associated with other settled claims including bad faith, which was not covered in the excess policy. Clearwater further alleged that New Hampshire breached its notice and reporting duties under the terms of the reinsurance contract. In the very early stages of discovery, New Hampshire moved for summary judgment, arguing in part that Clearwater was bound by the allocation settlement under reinsurance principles. The trial court denied summary judgment and the appellate court affirmed, finding an allocation decision was not immune from scrutiny. Therefore, New Hampshire’s settlement would be judged on its reasonableness, which at this stage of the litigation was “undeveloped.”

Furthermore, the court found another triable issue as to New Hampshire’s notice to Clearwater on loses sustained by Kaiser. Clearwater alleged that it had been prejudiced by New Hampshire’s late notice resulting in “disadvantageous communication agreements” with its reinsurers. Based on these facts, the appellate court found New Hampshire’s summary judgment motion premature.

New Hampshire Ins. Co. v. Clearwater Ins. Co., No. 12779 (N.Y. App. Div. Mar. 24, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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MONTANA AMENDS EXPANDS SURPLUS LINES STATUTE

Effective February 25, 2015, Montana’s surplus lines law, Section 33-2-301 and 33-2-302, M.C.A., (the “Surplus Lines Insurance Law”) was expanded to authorize natural disaster multi-peril insurance to be sold as surplus lines insurance in the State of Montana. House Bill 94, passed by the 64th Montana Legislature and signed into law, expanded the Surplus Lines Insurance Law to include natural disaster multi-peril insurance, a new type of insurance defined by House Bill 94 as “any bundled flood, earthquake, and landslide insurance.”

This post written by Kelly A. Cruz-Brown.

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THIRD CIRCUIT: PENNSYLVANIA LAW PREEMPTED BY THE FAA

The Third Circuit recently ruled that a Pennsylvania statute prohibiting an unregistered businesses from maintaining any “action or proceeding” in any court in the state interferes with the enforcement of arbitration awards and therefore is preempted by the Federal Arbitration Act. The plaintiff was a non-registered company, but the parties had agreed that the arbitration could proceed and be administered under the rules of the American Arbitration Association. The district court confirmed the arbitration award, and the Third Circuit affirmed, holding that the FAA preempted application of the law because it rendered the arbitration agreement unenforceable, noting that the intent of Congress in enacting the FAA was to promote arbitration. Therefore, the Pennsylvania statute, by barring any “action or proceeding,” interfered with the enforceability of the FAA and therefore was preempted.

The issue of state statutes interfering with the enforcement of arbitration awards has been a subject of Reinsurance Focus blogs numerous times. Particularly, courts have examined state statutes that require the posting of security before a non-admitted company may file suit in that state. We will continue to monitor case law addressing whether other courts find that the FAA pre-empts similar pre-pleading security statutes.

Generational Equity LLC v. Schomaker, No. 14-1291 (3d Cir. Feb. 23, 2015).

This post written by Catherine Acree.

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SOUTH DAKOTA REVISES STATUTES REGARDING REGULATION OF CAPTIVE INSURANCE COMPANIES

House Bill 1180 (2015), signed into law February 27, 2015, amends Chapter 56-46 of the South Dakota Insurance Code, Captive Law, to allow the formation and regulation of agency captive insurance companies in South Dakota. As defined in House Bill 1180, an agency captive insurance company is either: i) an insurance company that is owned, controlled or under common ownership or control by an insurance agency, brokerage, or reinsurance intermediary that only insures the risks of insurance or annuity contracts placed by or through the agency, brokerage or reinsurance intermediary; or ii) owned or controlled by a producer of service contracts or warranties that only reinsures the contractual liability arising out of service contracts or warranties sold through such producer. An agency captive insurance company may be formed as in the same manner as a pure captive insurance company. An agency captive insurance company must comply with the following financial reporting requirements:

  • Submit annually no later than six months after the close of its financial year to the director a report of its financial condition using statutory accounting principles certified under oath by two of its officers. An agency captive insurance company may make written application for permission to file the annual report on a fiscal year end date that is consistent with its parent company’s fiscal year;
  • Provide a report of its financial condition audited by an independent certified public accountant every five years pursuant to Chapter 58-43 if it has annual direct premiums written of less than $2.5M dollars;
  • If an agency captive insurance company has $2.5M dollars or more of annual direct premiums written, it shall provide a report of its financial condition audited by an independent certified public accountant every three years pursuant to Chapter 58-43; and,
  • File an actuarial opinion following the year of operation and in connection with its audited statement of financial condition.

Regarding financial and business operations, an agency captive insurance company is not subject to any restrictions on allowable investments and may make a loan to its parent or affiliated entities. However, any investment that threatens the agency captive insurance company’s solvency or liquidity may be limited or prohibited by the Director of the Division of Insurance. Furthermore, loans to parents or affiliated entities of an agency captive insurance company is subject to prior approval by the Director of the Division of Insurance. Finally, an agency captive insurance company may enter into any arrangement to provide risk management services to a controlled unaffiliated business or an unaffiliated business; however, it may not accept any insurance risk from an unaffiliated business.

This post written by Kelly A. Cruz-Brown.

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REINSURANCE EXCLUSION BARS COVERAGE FOR BAD FAITH LAWSUIT

A federal judge in North Carolina recently examined a reinsurance policy provision excluding loss “resulting from any claim for . . . any actual or alleged lack of good faith or unfair dealing in the handling of any claim or obligation under any insurance contract.” The case involved a request for coverage under a reinsurance policy for a lawsuit filed by a doctor against his medical malpractice carrier, the reinsured. The doctor, against whom an excess verdict had been entered, asserted a number of causes of action including bad faith refusal to settle within the policy limit. The reinsurer filed a motion for summary judgment arguing that there was no coverage for the doctor’s lawsuit based on the exclusion mentioned above because all potential loss resulted from the reinsured’s alleged lack of good faith in refusing to settle the underlying matter within the underlying policy limit. Applying North Carolina law, the court agreed with the reinsurer, concluding that all the causes of action alleged a single course of conduct involving a lack of good faith in refusing to settle within the limit. Because all potential loss “resulted from” and was “inextricably intertwined” with the bad faith allegations, the reinsurer had no duty to defend or indemnify.

Greenwich Ins. Co. v. Medical Mutual Ins. Co. of North Carolina, No. 5:14-cv-295 (USDC E.D.N.C. Jan. 27, 2015).

This post written by Catherine Acree.

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CFPB ISSUES ARBITRATION STUDY – POSSIBLE IMPACT ON REINSURANCE UNCLEAR

The Consumer Financial Protection Bureau has issued a study that is critical of arbitration in the context of consumer claims, contenting that arbitration “restricts” the rights and remedies of consumers by limiting or prohibiting class actions.  For a summary of the study and links to the study and a summary fact sheet, visit our Class Action blog. It may be questionable whether the CFPB has given appropriate consideration to the various United States Supreme Court and federal Court of Appeals opinions concerning the enforceability of arbitration agreements under the Federal Arbitration Act, and it will be interesting to see how this CFPB’s arbitration-related pronouncements develop. Since the CFPB’s principal focus is on consumer issues, it remains to be seen if and how its activities in this area may affect the resolution of reinsurance disputes.

This post written by Rollie Goss.

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REINSURER PLACED UNDER ORDER OF REHABILITATION

An Illinois circuit court entered an agreed order of rehabilitation against a reinsurer, Millers Classified Insurance Company, following a complaint for rehabilitation filed by the Illinois Department of Insurance. Millers Classified’s board of directors had passed a corporate resolution on December 16, 2014 agreeing to the entry of the order of rehabilitation. The effect of the order was to create an estate comprising of all of the company’s assets and liabilities to be managed by an appointed rehabilitator. The order specifically allowed all policies where Millers Classified was the ceding company to remain in place subject to further review. All policies where Millers Classified was the assuming or retrocessional reinsurer were cancelled on a cut-off basis effective upon the order’s entry. State of Illinois ex. rel. Stephens v. Millers Classified Insurance Co., Case No. 2015CH (Ill. Cir. Ct. Jan. 20, 2015).

This post written by Leonor Lagomasino.

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INSURER NOT REQUIRED TO PRODUCE COVERAGE MEMORANDA OR REINSURANCE INFORMATION IN DISCOVERY

A federal district court in New York has held that the attorney-client and work-product privileges apply to coverage memoranda sought by an insured from AIG Specialty Insurance in an ongoing coverage and bad faith litigation where AIG declined coverage for claims brought under a pollution liability policy. The insured first sought production of a memorandum prepared by AIG’s own coverage counsel, which the court found “unquestionably” came within the attorney-client privilege. The insured then sought production of a memorandum prepared by coverage counsel for an additional insured named on the policy, who AIG had covered in the underlying lawsuit. The court found the memorandum was protected by the work-product privilege and because the insured neither demonstrated a “substantial need” for the document nor an “undue hardship” in obtaining equivalent information elsewhere, it was not discoverable. The court further held that certain “executive claim summaries” previously produced by AIG in redacted form were not discoverable. The redacted information concerned only reinsurance calculations and was therefore irrelevant. The court did, however, direct AIG to produce drafts of a coverage letter and any metadata pertaining to that letter, rejecting application of any privilege to that information. Broadrock Gas Services, LLC v. AIG Specialty Insurance Co., Case No. 1:14-cv-03927 (USDC S.D.N.Y. March 2, 2015).

This post written by Renee Schimkat.

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COURT ALLOWS PUTATIVE CLASS ACTION TO PROCEED WITH DISCOVERY REGARDING EQUITABLE TOLLING OF RESPA VIOLATIONS

M&T Bank Corporation, M&T Bank, and M&T Mortgage Reinsurance Company unsuccessfully sought to stay all discovery in a suit brought against it in a putative class action involving allegations that M&T violated the federal Real Estate Settlement Procedures Act. The named plaintiffs were individual borrowers who entered into loan transactions with M&T and paid private mortgage insurance through M&T. M&T placed the private mortgage insurance with certain insurers who then reinsured the policies with M&T’s captive reinsurer. This scheme was allegedly an illegal sham because it did not create a bona fide reinsurance relationship. Moving to dismiss, M&T argued the entire case was barred under RESPA’s one-year limitations period. Plaintiffs countered that, under the doctrine of equitable tolling, M&T’s fraudulent conduct prevented them from discovering the RESPA violation within the one-year period.

The court allowed the plaintiffs to conduct limited discovery related to the equitable tolling argument. This ruling was in part informed by the ruling from a different judge in a companion case, Riddle v. Bank of America. The Riddle court subsequently entered an order in favor of the defendants which the plaintiffs in that case appealed. M&T thus moved for stay of all discovery pending the outcome of the appeal of the Riddle case. The motion was denied. Although some overlap existed, the court found that the Riddle court had too narrowly limited the issue as to whether plaintiffs in that case engaged in due diligence following execution of their mortgages. Cunningham v. M&T Bank Corp., Case No. 1:12-cv-1238 (USDC M.D. Pa. Jan. 14, 2015).

This post written by Leonor Lagomasino.

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