Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Alex Silverman

New York Court Finds the Term “Exhaustion” in Excess Policy Was Ambiguous, Rules That Full Limits of Underlying Insurance Need Not Be Paid for Excess Policy to Attach

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Fireman’s Fund Insurance Co. sued OneBeacon Insurance Co. for breach of a facultative reinsurance certificate. Fireman’s Fund settled claims with its insured and allocated a portion of the settlement to a Fireman’s Fund excess policy reinsured by OneBeacon. OneBeacon denied Fireman’s Fund’s claim, arguing that its reinsurance obligations did not attach until all insurance underlying the Fireman’s Fund policy were exhausted in payment of the full limits of the underlying policies. The Fireman’s Fund policy stated that it applies “only after all underlying insurance has been exhausted,” but did not define “exhaustion.” The reinsurance certificate provided that OneBeacon’s liability shall follow Fireman’s Fund’s, that the terms of the certificate shall be subject “in all respects” to the Fireman’s Fund policy, except as stated in the certificate, and that “all claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on [OneBeacon].”

On cross-motions for summary judgment, the court agreed with Fireman’s Fund that the term “exhaustion” was ambiguous as used in the Fireman’s Fund policy, as the policy did not specify whether the full limits of underlying insurance must actually be paid before the Fireman’s Fund policy attaches. Applying Second Circuit precedent established in Zeig v. Massachusetts Bonding Co., 23 F.2d 665 (2d Cir. 1928), the court held that once the underlying insurer settled and discharged the claims against the insured, Fireman’s Fund was within its right to treat the underlying limits as “exhausted,” even though the underlying insurer did not actually pay the full limits of its policy. In addition, based on the follow-the-fortunes and follow-the-settlements doctrines, the court found it was barred from second-guessing Fireman’s Fund’s post-settlement allocation decisions. The court therefore granted Fireman’s Fund’s motion for summary judgment and denied OneBeacon’s cross-motion.

Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 1:14-cv-04718 (S.D.N.Y. Oct. 19, 2020).

District Court Transfers Consideration of Motion to Quash Pursuant to Rule 45(f)

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An Ohio district court invoked Rule 45(f) of the Federal Rules of Civil Procedure in response to a motion to quash by the Ohio Department of Insurance (ODI). The subpoena was issued in connection with a reinsurance-related litigation pending in the U.S. District Court for the Southern District of New York. ODI had produced documents in response to the subpoena, but objected to further compliance. While noting it was questionable whether the information sought was relevant to the New York action in the first instance, the court found “exceptional circumstances” warranted transferring the issue to the SDNY pursuant to Rule 45(f). Aside from the SDNY being in a better position to assess relevancy, the court also noted that discovery in the New York action already closed, and the judge was reluctant to extend the discovery period. The court also found transferring under Rule 45(f) has been deemed appropriate under similar circumstances, such as where ruling on a discovery motion would disrupt the issuing court’s case schedule.

Ohio Dept. of Insurance V. RPM Mortgage, Inc., No. 2:20-mc-00043 (S.D. Ohio Nov. 18, 2020).

Arkansas District Court Compels Arbitration of Post-Termination Wage Dispute

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Audra Patterson filed a putative class action against her former employer, American Income Life Insurance Company (AILIC), for alleged wage violations. AILIC moved to compel arbitration of her individual claims pursuant to an arbitration clause in her agency agreement. The agreement provided that all disputes shall be submitted to binding arbitration, specifically including those alleging violations of wage and hour laws. Patterson claimed the arbitration clause was nonetheless inapplicable, arguing the agency agreement was silent as to whether the arbitration clause survived termination of the agreement. The district court disagreed, finding the argument insufficient to overcome the strong presumption in favor of arbitration. Absent clear indication to the contrary, the court noted that federal arbitration law generally presumes an arbitration provision in a contract remains valid and enforceable even after the contract expires or is otherwise terminated. The court also rejected Patterson’s reliance on specific “survival” language in other contract provisions. Patterson claimed it was implicit from the language in those other provisions that the arbitration clause was not to survive upon termination of the contract. The court again disagreed, emphasizing that the U.S. Supreme Court and the Eighth Circuit have interpreted similar arbitration clauses as covering post-termination employment disputes. The court granted AILIC’s motion to compel accordingly.

Audra Patterson v. American Income Life Insurance Co. et al., Case No. 19-cv-00918 (E.D. Ark. Oct. 30, 2020).

California District Court Grants Motion to Compel, Referring Issue of Arbitrability to Hong Kong Arbitration Forum

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A district court in California granted a motion to compel arbitration pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A shareholder’s agreement between the parties contained a provision requiring arbitration before the Hong Kong International Arbitration Centre (HKIAC), and also incorporated the HKIAC’s rules by reference. The plaintiff claimed the arbitration clause was inapplicable to the instant dispute. The defendants argued that arbitrability questions must be decided by the HKIAC. The district court agreed, finding the HKIAC rules clearly and unmistakably demonstrated the parties’ intent to delegate threshold arbitrability issues to the HKIAC. The district court also found the relevant shareholder’s agreement was enforceable against the plaintiff, even though he did not sign it, since his corporation signed the agreement as his alter-ego.

Michael Pak v. EoCell, Inc., et al., Case No. 20-cv-05791-VC (N.D. Cal. Oct. 28, 2020).

Second Circuit Affirms Arbitration Award of Over $2M in Fees to Prevailing Party

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EB Safe commenced arbitration proceedings against Mark Hurley arising out of a business dispute. The arbitrators ruled in Hurley’s favor and awarded him expenses and attorneys’ fees totaling more than $2 million. A New York district court subsequently denied EB Safe’s petition to vacate the award and granted Hurley’s cross-petition to confirm. On appeal, EB Safe argued the award should have been vacated because it was in manifest disregard of the law and/or because Hurley procured the award by fraud through committing perjury at the arbitration.

The Second Circuit disagreed in both respects, noting first that the “manifest disregard of the law” standard is limited only to the “exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent.” EB Safe claimed that in deciding Hurley’s fee request, the arbitrators failed to apply the “reasonableness” standard required by Delaware law. But the court found no basis for the argument in the record, and thus found it was properly rejected by the district court. In addition, despite inconsistencies in Hurley’s arbitration testimony, the court found EB Safe failed to meet the burden for vacating an award purportedly procured by fraud. Because the inconsistencies could have been equally attributable to confusion, mistake, or faulty memory, the court found EB Safe failed to show clear proof of “willful intent to provide false testimony.” As such, the Second Circuit affirmed the district court order in its entirety.

EB Safe, LLC v. Hurley, 19-cv-3859 (2d Cir. Oct. 20, 2020)