FEDERAL LAW GOVERNING FOREIGN RISK RETENTION GROUPS PREEMPTS STATE LAW THAT PROHIBITS MANDATORY ARBITRATION CLAUSES IN INSURANCE POLICIES

The Nebraska Supreme Court has held that Nebraska’s statute prohibiting mandatory arbitration clauses in insurance policies is preempted by the Liability Risk Retention Act of 1986 (LRRA). At issue was a professional liability insurance policy from Allied Professionals Insurance Company, a risk retention group incorporated in Arizona and registered with the Nebraska Department of Insurance as a foreign risk retention group. When a dispute arose between the policyholder and Allied, the policyholder filed an action seeking a declaration that Allied was obligated to provide coverage for an underlying civil suit pending against him. Allied moved to compel arbitration pursuant to the policy’s mandatory arbitration clause, which required binding arbitration of any dispute concerning the policy. The lower court rejected Allied’s argument that the Nebraska statute was preempted by federal law and concluded that the arbitration clause was neither valid nor enforceable. It therefore denied Allied’s motion to compel arbitration.

Nebraska’s Supreme Court reversed, finding that while the Federal Arbitration Act did not preempt Nebraska’s law, the LRRA did. The LRRA provides, in part, that a foreign risk retention group is exempt from any state law that would “regulate, directly or indirectly, the operation of a risk retention group.” Nebraska’s prohibition of arbitration clauses in insurance policies “regulates the operation of a risk retention group” within the meaning of the LRRA. As a result, the arbitration clause in the Allied policy was not prohibited by state statute, but was a valid and enforceable clause compelling arbitration. Speece v. Allied Professionals Insurance Co., 289 Neb. 75 (Neb. Sept. 19, 2014).

This post written by Renee Schimkat.

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REINSURER NOT ALLOWED TO INTERVENE IN ACTION INVOLVING CEDENT’S RISK

The United States District Court for the Southern District of New York denied a reinsurer’s motion to intervene in an interpleader action in which Battenkill Insurance Company argued it had an 85% interest in the funds at stake in an action involving a dispute over distribution of funds from a residential mortgage-backed securitization trust. Battenkill reinsured 85% of the risk under certain policies issued by one of the defendants in the interpleader action, Assured Guaranty Municipal Corp. Wales, LLC, one of the other defendants, counterclaimed against Wells Fargo, an interpleading plaintiff, arguing Wells Fargo misinterpreted the trust provisions and argued that Assured should be ordered to repay $47.7 million, plus interest, of the disputed distributions which Wells Fargo had held in escrow as a result of the dispute and then interplead. Because Battenkill would be required to reinsure 85% of the amounts which Assured would have to repay, Battenkill sought to intervene.

The court rejected the motion to intervene, reasoning that Assured would also lose a significant amount of money if it did not prevail, despite holding a smaller interest in the amount at stake, such that Battenkill and Assured had identical interests in the litigation. Assured would therefore adequately protect Battenkill’s interest and Battenkill thus did not have a right to intervene in the litigation. The court also rejected Battenkill’s argument that it should be allowed to intervene so that it could litigate the interpretation of the reinsurance agreement between it and Assured. Because the reinsurance agreement was not at issue in the in the interpleader action, Battenkill’s intervention would unnecessarily complicate the litigation and introduce immaterial issues to the trust’s interpretation. Wells Fargo Bank, NA v. Wales, LLC, et. al., 13 Civ. 6781 (PPG) (USDC S.D.N.Y. Sept. 19, 2014).

This post written by Leonor Lagomasino.

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PENNSYLVANIA COURT AFFIRMS LIQUIDATOR’S DECISION THAT A CLAIM ARISING FROM A REINSURANCE POLICY IS ENTITLED TO A LOWER PAYMENT PRIORITY

A Pennsylvania appellate court has affirmed the liquidator’s determination that a group excess insurance policy issued by Reliance is a reinsurance policy and thereby entitled to a low level of priority of payment from the now insolvent Reliance estate. At issue was a claim by the Alabama Insurance Guaranty Association for reimbursement from the estate for a claim it had paid to a general contractors fund. The Association argued that the Reliance policy was a direct insurance policy, thereby entitled to a high priority for re-payment, and that the liquidator was obligated to follow an Alabama Supreme Court ruling that the claim arose under a policy of direct insurance.

The Pennsylvania court rejected all of the Association’s claims that the liquidator was bound by the Alabama Supreme Court ruling, including the application of the Full Faith and Credit doctrine and principles of collateral estoppel. The court also rejected any choice of law analysis favoring Alabama over Pennsylvania and concluded that the policy at issue was one of reinsurance under Pennsylvania’s governing law. The material characteristics the court looked to in order to determine that the policy was one of reinsurance included the language of the policy itself referring to a “reinsurance premium” and the obligations of Reliance to “reinsure” the Alabama Reinsurance Trust. The opinion generated a strong and lengthy dissent that criticized the majority for rejecting the Alabama Supreme Court’s holding and for otherwise finding that the policy was a contract of reinsurance and not a group insurance policy that covered catastrophic workers’ compensation claims of the self-insurers that were members of the group. Alabama Insurance Guaranty Association v. Reliance Insurance Co. in Liquidation, No. 6 REL 2012 (Pa. Commw. Ct. Sept. 12, 2014).

This post written by Renee Schimkat.

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DENIAL OF ARBITRATION REVERSED WHERE TRIAL COURT FAILED TO HOLD TRIAL TO RESOLVE DISPUTED QUESTIONS OF FACT

The Eighth Circuit reversed a trial court’s decision to deny arbitration, based on the fact that the lower court failed to hold a trial (as required by the FAA) when disputed questions of fact surrounding the parties’ agreement remained. The case surrounded a disagreement over whether a seller of equipment agreed to indemnify a manufacturer of heavy machinery, in connection with litigation against the manufacturer by a third-party. Disputed facts surrounded whether the agreement between the manufacturer and the seller included a form containing indemnification terms and arbitration provisions. The district court denied arbitration because it concluded that the only undisputed contract terms were the terms of the purchase, sale, and payment; the court left undecided the issue of whether arbitration provisions were included in the agreement, as not subject to a “definitive answer.” Citing a recent Tenth Circuit decision, on which we reported on May 20, 2014, the Eighth Circuit reversed, holding that “if the motions record reveals a material issue of fact, the FAA maintains that the court move summarily to trial. And, when that trial is not demanded by the party opposing arbitration [as was the case here], ‘the court shall hear and determine such issue.’” The court explained that here, “the district court never resolved the factual issues concerning the making of the contract but merely recognized their existence.” The Eighth Circuit vacated the order and remanded “for the district court to hold a non-jury trial, make findings of fact, and apply the appropriate U.C.C. provisions in light of those facts.” Nebraska Machinery Co. v. Cargotec Solutions, LLC, Case No. 13-2753 (8th Cir. Aug. 7, 2014).

This post written by Michael Wolgin.

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TENTH CIRCUIT REVERSES TRIAL COURT DENIAL OF MOTION TO COMPEL ARBITRATION OF WAGE DISPUTE

The Tenth Circuit Court of Appeals reversed a trial court order denying an employer’s motion to compel arbitration of a wage dispute under the arbitration clause contained in the plaintiffs’ Confidentiality/Non-Compete Agreement. The plaintiff employees brought suit against their employer, an oil-rig servicer, under the Fair Labor Standards Act and Oklahoma Protection of Labor Act. The employer moved to compel arbitration under a provision in the parties’ non-compete agreements. The plaintiffs argued – successfully to the trial court – that the wage disputes did not come within the purview of the arbitration provision, which, although in an agreement that related mostly to non-compete and confidentiality issues, nevertheless contained a broad clause mandating arbitration of “any dispute.” The Tenth Circuit noted that, while the scope of the parties’ contract was narrow, the scope of the arbitration provision was broad, and that, under the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, and the broad federal policy favoring arbitration embodied in the FAA, it was constrained to enforce the agreement. It remanded with instructions to compel arbitration. Sanchez v. Nitro-Lift Technologies, LLC, Nos. 12-7046 and 12-7057 (10th Cir. Aug. 8, 2014).

This post written by John Pitblado.

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HAWAII ENACTS NAIC-RECOMMENDED REVISIONS TO CREDIT FOR REINSURANCE LAW

Hawaii’s House/Senate conference committee cleared the way for passage by the full houses of NAIC’s Model Act on Credit for Reinsurance, to address NAIC’s recommended updates pursuant to its Solvency Modernization Initiative.  The bill was adopted and became law July 8, 2014.  The Committee amended prior drafts of HI SB 2821 “A Bill for an Act Relating to Insurance,” and recommended final passage of the amended version to the respective Houses. According to the Conference Committee Report, the purpose of the bill is to (1) adopt revisions to NAIC’s model laws on Credit for Reinsurance, Standard Valuation, Standard Non-Forfeiture Law for Life Insurance, and Insurance Company Holding System Act; and (2) maintain accreditation with NAIC. The Committee’s amendments included:

  • Adding a definition for “domestic insurance holding company system;”
  • Deleting a definition for “domestic single-state insurer;”
  • Clarifications regarding the filing of financial statements;
  • Specifying exemptions regarding the annual enterprise risk report;
  • Permitting certain Insurance Commissioner examinations;
  • Specifying obligations regarding subpoenas; and
  • Creating effective dates for various parts of the measure.

This post written by John Pitblado.
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ARBITRATION DENIED IN CLASS ACTION WHERE PLAINTIFF’S TRUST WAS A PARTY TO ARBITRATION AGREEMENT, BUT PLAINTIFF WAS NOT

In a life settlement transaction, in which a life insurance policy is sold by its owner to another for more than its cash-surrender value but less than the net death benefit, the seller contended that the broker and purchaser conspired to rig the bidding process, resulting in undisclosed kickbacks to the broker. The seller filed a putative class action against the broker, purchaser, and related entities alleging fraud and other similar claims. The defendants moved to compel arbitration (among other things), relying on an arbitration clause in the purchase agreement. The seller, however, had formed a trust to acquire the policy and never personally participated in the purchase agreement. The trial court thus denied arbitration, finding that the seller was a non-signatory against whom arbitration could not be compelled. The defendants appealed, and the Third Circuit affirmed, holding that the seller of the policy could not be equitably estopped from avoiding the reach of the purchase agreement. The court explained that the “alleged fraud was related to the purchase agreement—it set the purchase price and, allegedly, the inflated, undisclosed broker’s commission. But that alone is not sufficient to compel arbitration under the equitable estoppel doctrine: the claims must be based directly on the agreement.” Here, the allegedly fraudulent kickback agreement “took place prior to and apart from the execution of the purchase agreement.” Griswold v. Coventry First LLC, Case No. 13-1879 (3d Cir. Aug. 11, 2014).

This post written by Michael Wolgin.

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DEFAMATION ACTION REGARDING FRAUDULENT ACCOUNTING CLAIM WITHSTANDS MOTION TO DISMISS

Action by Greenberg against Spitzer for defamation based on public statements by Spitzer about Greenberg’s stewardship of AIG regarding, among other things, Spitzer’s assertion that Greenberg engaged in fraudulent accounting. Spitzer’s motion to dismiss as to those statements was denied. The court found no documentary evidence sufficient under New York procedural rules to conclude on motion to dismiss that Spitzer’s statements were substantially true as a matter of law. Greenberg v. Spitzer, 44 Misc. 3d 1202 (N.Y.S.C., June 24, 2014).

This post written by Kelly A. Cruz-Brown.

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THIRD CIRCUIT: FEDERAL COURT SHOULD DECIDE WHETHER AN ARBITRATION CLAUSE AUTHORIZES CLASSWIDE ARBITRATION – NOT THE ARBITRATOR

The Third Circuit recently was presented with the question of whether, in the context of an otherwise silent contract, the availability of classwide arbitration is to be decided by a court rather than an arbitrator. The underlying dispute involved a putative class action brought under the Fair Labor Standards Act concerning an employer’s classification of its workers as overtime-exempt employees. The two named plaintiffs each had signed an employment agreement requiring that any dispute relating to their employment be submitted to arbitration, but the agreements did not mention classwide arbitration. A New Jersey federal court granted the employer’s motion to compel arbitration, but held that the arbitrator would have to decide whether the arbitration could include classwide claims. The arbitrator issued a partial award, and addressed the “who decides” issue, ruling that the employment agreements permitted classwide arbitration. The employer then returned to federal court and filed a motion to vacate the arbitrator’s award, and the district court denied the motion. On appeal, the Third Circuit reversed, concluding that the issue of the availability of classwide arbitration should be decided by a court, not an arbitrator.

In reaching its conclusion, the Third Circuit noted that “questions of arbitrability,” such as whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy – are “gateway issues” to be resolved by a court. This is in contrast to “procedural” questions that are resolved by arbitrators. The Third Circuit ruled that the permissibility of classwide arbitration is not solely a question of procedure or contract interpretation (which would be decided by an arbitrator) but rather involves a “substantive gateway dispute qualitatively separate from deciding an individual quarrel” (which would be decided by a court). In reaching this conclusion, the Third Circuit followed the Sixth Circuit holding in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), which is the only other circuit court opinion to have squarely addressed the “who decides” issue.

David Opalinski v. Robert Half Int’l Inc., No. 12-4444 (3rd Cir. July 30, 2014).

This post written by Catherine Acree.

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COURT DENIES MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

In prior proceedings, Glory Wealth obtained an England arbitration award against Industrial Carriers, Inc. (ICI) and a confirmation of the award in the United States District Court for the Southern District of New York.

Glory Wealth instituted an admiralty case in the Eastern District of Virginia to attach a vessel to satisfy the confirmed arbitration award, naming ICE and Freight Bulk PTE, Inc. (FBP) as defendants. FBP moved to vacate the arbitration confirmation judgment of the Southern District of New York, relying on Rule 60(b)(4), Fed.R.Civ.P., contending the New York judgment was void for lack of jurisdiction. The Virginia district court held that FBP could not collaterally attach the New York confirmation judgment, since FBP was not a party to the New York proceeding. Strong elements of judicial estoppel appear to have influenced the Virginia district court’s decision, since the court noted that FBP had repeatedly denied any status as ICI’s alter ego, yet in the motion at bar to dismiss Glory Wealth’s action, FBP contended it had standing as a party to the New York case to move to vacate the New York judgment. Flame S.A and Glory Wealth Shipping PTE Ltd. v. Industrial Carriers, Inc., Vista Shipping, Inc. and Freight Bulk PTE, Inc., Case No. 2:13-cv-658 (U.S.D.C., E.D. Va., July 17, 2014).

This post written by Kelly A. Cruz-Brown.

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