Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Alex Silverman

Court Denies Reinsurer’s Motion to Compel, Finding No Basis to Decide Issues Concerning Costs for Which Cedent Has Not Requested Payment

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Lamorak Insurance Co. issued excess policies to Olin Corp. and also reinsured those policies with the defendants, Certain Underwriters at Lloyd’s, London. After Lamorak and Olin settled a declaratory judgment action concerning coverage for underlying environmental property damage suits against Olin, Lamorak sought payment from Lloyd’s under the relevant reinsurance contracts. Lloyd’s disputed the reinsurance billings, and Lamorak commenced the instant action. In response, Lloyd’s sought a declaration that it is not obligated to pay expenses that Lamorak incurred in connection with its declaratory judgment action against Olin, even though Lamorak never asked to be reimbursed for such costs. Lloyd’s moved to compel discovery regarding the declaratory judgment costs, for an order setting a deadline for Lamorak to request reimbursement of such costs, or, alternatively, for an order barring Lamorak from ever making such a request. The court denied the motion in its entirety, finding no basis for compelling Lamorak to produce documents about costs it had not asked Lloyd’s to reimburse, nor for setting an arbitrary deadline for Lamorak to assert such a claim in the future. The court also refused to affirmatively bar Lamorak from pursuing a claim for the declaratory judgment costs, as doing so would be to decide a hypothetical legal question before it is arises.

Lamorak Ins. Co. v. Certain Underwriters at Lloyd’s, London, No. 1884CV00200BLS2 (Mass. Super. Ct. June 19, 2019).

Court Confirms Arbitration Award, Finding It Was Based in Part on “Plain Error,” but Did Not Amount to Manifest Disregard of the Law

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The plaintiff commenced an arbitration proceeding with the Financial Industry Regulatory Authority (FINRA) against two of his former investment brokers and their former employers — Concorde and Westminster. The plaintiff claimed that the brokers falsely inflated his account balance, ultimately causing him to unknowingly deplete his entire retirement account. After a four-day hearing, the panel issued an award against the brokers, but it denied the plaintiff’s claims against the former employers, finding that they were not liable under a respondeat superior theory.

The plaintiff moved in district court to confirm the award against the brokers, which was confirmed. The plaintiff also moved to vacate the award in favor of the former employers, arguing that it was based on a manifest disregard of the law. The court denied the motion to vacate in both respects but found the question to be more complex as to Concorde, which is where the brokers worked for a significant portion of the relevant events. While concluding that the panel’s decision not to hold Concorde vicariously liable constituted “plain error,” the court held that the plaintiff failed to meet the “extremely high” burden of proving manifest disregard of the law. The court explained that such a finding would require a showing that the award was “based on reasoning so palpably faulty that no judge … ever could conceivably have made such a ruling.” Noting that the First Circuit has cautioned district courts not to correct even “painfully clear” arbitrator error, and that the panel here appeared to have acted more so out of a failure to appreciate the significance of the issue — it not being made a focal point of the hearing — the court found no evidence that the panel consciously ignored applicable law regarding Concorde’s vicarious liability.

Separately, the court refused to vacate the award against one of the individual brokers who did not participate in the arbitration hearing or even learn about the award until after it was issued. Instead, the court granted the plaintiff’s motion to confirm the award as against her, finding that she was properly served with the statement of claim and received adequate notice of the hearing.

Ebbe v. Concorde Inv. Servs., LLC, No. 1:19-cv-10289 (D. Mass. July 18, 2019).

SDNY Dismisses Captive Reinsurer’s Counterclaims, Finding Reinsurance Agreement Never Rescinded and Cedent’s Duty to Cede Premiums Never Arose

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The Southern District of New York granted a ceding insurer’s motion to dismiss certain counterclaims by a defendant-reinsurer, finding their reinsurance agreement was never rescinded and that the cedent adequately performed. The decision arose from a captive reinsurance agreement between Employers HR, an entity that provides outsourced insurance to the employees of temporary staffing agencies, and AmTrust North America, the ceding insurer that issued that insurance. As part of the agreement, AmTrust would reinsure the policies it issued with the defendant, Signify Insurance Ltd., a captive reinsurer created by Employers HR. The agreement required Signify to post collateral securing its reinsurance obligations, while AmTrust was required to cede certain premiums to Signify. Upon learning that Signify had not posted the required collateral, AmTrust wrote to Signify demanding that it do so in full within 30 days, otherwise it would terminate the agreement from inception. Signify posted a substantial portion of the security two days later and then wrote to AmTrust advising that it was “accepting” its termination of the agreement. The next day, however, AmTrust withdrew its intention to terminate and demanded that Signify provide all remaining collateral.

AmTrust subsequently filed this action alleging breach of contract and seeking a declaration that Signify is required to maintain its security obligations. In its counterclaims, Signify argued, among other things, that AmTrust terminated the agreement from inception or, in the alternative, that the court should rescind the agreement. AmTrust moved to dismiss Signify’s first two counterclaims, while Signify moved to dismiss the complaint in its entirety. The court granted AmTrust’s motion and denied Signify’s.

As an initial matter, the court rejected Signify’s argument that AmTrust unilaterally rescinded the agreement by demanding that Signify post all collateral within 30 days, finding a reasonable person would have understood the letter to be no more than a request to cure. The court held that AmTrust’s letter was insufficient to rescind the reinsurance agreement by itself. Signify’s “mutual rescission” theory was also rejected. Although Signify argued it had “accepted” AmTrust’s “offer” to rescind, the court found no such offer was ever made. The court observed that AmTrust merely threatened to rescind in the event Signify failed to cure its breach and that AmTrust had maintained total discretion to rescind regardless of Signify’s consent. Finally, the court rejected Signify’s claim that AmTrust failed to perform under the agreement by, among other things, failing to cede required premiums. While acknowledging AmTrust’s obligation to cede “gross ceded premium” and to remit “net ceded premium,” the court found that these duties were only triggered by a series of events, including AmTrust’s receipt of bank confirmation that Signify increased its collateral to required levels. Because Signify did not allege that it ever posted that collateral, the court held that AmTrust’s duty to cede premiums to Signify never arose.

AmTrust N. Am., Inc. ex rel. Tech. Ins. Co. & Sec. Nat’l Ins. Co. v. Signify Ins. Ltd., No. 1:18-cv-03779, 2019 WL 3034891 (S.D.N.Y. July 11, 2019).

Ninth Circuit Binds Plaintiff to Arbitration Clause It Never Received, Finding Clause Was “Readily Available” and Incorporated by Reference Into Purchase Order

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The Ninth Circuit affirmed an order granting a motion to compel arbitration and to dismiss, finding that a purchase order issued by the plaintiff to purchase goods from the defendant incorporated a binding arbitration clause encompassing the parties’ dispute. The arbitration clause was contained in terms and conditions expressly incorporated by reference into the defendant’s initial quotation. The plaintiff argued that it never received the terms and conditions — only the quotation — and thus that it could not have agreed to arbitrate. The Ninth Circuit disagreed, finding that the arbitration clause became part of the contract because the terms and conditions were “readily available” to the plaintiff, and the plaintiff therefore “acquiesced” to the arbitration provision by failing to reject it upon issuing its purchase order. The court also rejected the plaintiff’s argument that the arbitration clause was unconscionable, finding that the parties were both business entities with equal bargaining power and that they negotiated their agreement for months. The plaintiff’s final argument that the defendant waived its right to arbitrate was similarly rejected. The court held that the plaintiff failed to carry its “heavy burden” of showing that the defendant acted inconsistently with a known right to compel arbitration and that the plaintiff was prejudiced as a result.

Cunico Corp. v. Custom Alloy Corp., No. 18-55047, 2019 WL 2895148 (9th Cir. July 3, 2019).

Failure to Specifically Challenge “Delegation” Clause in Arbitration Agreement Means Motion to Compel Arbitration “Must Be Granted”

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The plaintiff sued his former employer for discrimination, retaliation, hostile work environment, and violations of the Missouri Human Rights Act. The defendant moved to compel arbitration based on the parties’ Mutual Agreement to Arbitrate (MAA). The MAA incorporated the rules of the American Arbitration Association and the Judicial Arbitration & Mediation Services, both of which authorize the arbitrator to resolve threshold, or “gateway,” questions of arbitrability. As the court observed, the U.S. Supreme Court has held that the incorporation of these rules into an arbitration agreement constitutes a “clear and unmistakable” expression of the parties’ intent to delegate arbitrability issues to the arbitrator, “unless the provision delegating such authority to the arbitrator is specifically challenged.” Here, the plaintiff did not specifically challenge the MAA’s delegation provision; he argued only that the MAA as a whole was unenforceable for lack of consideration. As such, the court granted the defendant’s motion to compel arbitration.

Murphy v. Oracle Am., Inc., No. 4:19-cv-01207 (E.D. Mo. June 19, 2019)