Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Alex Silverman

Second Circuit Vacates SDNY Order Enforcing Arbitration Award Against Reinsurer

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In the latest iteration of a complex reinsurance dispute, the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order enforcing an arbitration award against IRB Brasil Resseguros S.A. (IRB). We previously blogged about the district court order here. The arbitration award required IRB to indemnify National Indemnity Co. (NICO) against a claim by Companhia Siderurgica Nacional S.A. (CSN). NICO and CSN settled CSN’s claim in a settlement agreement to which IRB was not a party. The agreement provided that CSN would receive $5 million of the $9 million NICO owed, but that the funds would come from IRB through a lawsuit that NICO would commence against it, i.e., this action.

IRB appealed the 2018 district court order, arguing that the NICO/CSN settlement agreement could not have established its liability. The Second Circuit agreed. It held that IRB cannot be responsible for paying an amount determined by a contract to which it was not a signatory.

IRB next went a step further, arguing that the NICO/CSN settlement extinguished any obligation IRB had to indemnify NICO pursuant to the arbitration award. But the Second Circuit found IRB went too far in this regard. The court held that IRB is still potentially liable for the $5 million based on the arbitration award, which had already been confirmed in 2016, and affirmed in 2017. The court rejected IRB’s suggestion that a private contract between NICO and CSN could override obligations established by the arbitration award. The court strongly implied that a judgment determining NICO’s liability to CSN could trigger IRB’s indemnity obligations to NICO.

Nat’l Indem. Co. v. IRB Brasil Ressegurous S.A., No. 18-534-cv (2d Cir. Apr. 18, 2019)

District Court Denies Summary Judgment to Trustee of Trust Account Maintained for Beneficiary of “Fronted” Reinsurance Program

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The U.S. District Court for the District of South Carolina denied summary judgment to the trustee of an account established pursuant to a “fronted” reinsurance program. The plaintiff, Accident Insurance Co. (AIC), participated in the program with non-party Freestone Insurance Co. Freestone paid AIC a fee to use its name and paper as a “front,” while bearing the actual risk of the fronted policies by reinsuring them under a “Program Agreement” with AIC. That agreement required Freestone to deposit funds into a separate trust account to be maintained by a trustee for AIC’s benefit. The defendant, U.S. Bank National Association, was the trustee. After Freeman went into receivership, AIC sued U.S. Bank for civil conspiracy and breach of fiduciary duty, among other things, after learning that nearly $7 million in trust assets seemingly disappeared. U.S. Bank moved for summary judgment on the civil conspiracy claim, arguing AIC could not have conspired with its wholly owned subsidiaries, and had no evidence of a “meeting of the minds” between these entities to “illegally transfer” trust assets. The court denied the motion, finding a genuine issue of fact as to each element of the civil conspiracy claim, and that breach of fiduciary duty is an independent tort that can give rise to a civil conspiracy claim under Delaware law.

Accident Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:16-cv-02621-JMC (D. S.C. Mar. 22, 2019).

S.D.N.Y. Vacates Amended Arbitration Award, Confirms Original $39 Million Award, Finding Panel Exceeded Authority and Manifestly Disregarded Law

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The Southern District of New York recently vacated a $37 million arbitration award (“Amended Award”), and confirmed an original award of $39 million (“Original Award”), finding the panel exceeded its authority and acted in “manifest disregard” of the law by imposing the $2 million reduction. The petitioners argued the reduction was beyond the scope of the panel’s power under American Arbitration Association (AAA) rules because it was based on substantive accounting issues already decided on the merits of the Original Award. Under AAA rules, the petitioners asserted, the panel was only authorized to correct “clerical, typographical, or computational errors” in the Original Award. The respondents insisted that the Amended Award reflected only a computational error and was therefore within the scope of the panel’s authority.

The district court disagreed that the reduction was merely computational, instead finding it involved substantive legal issues as to the method for calculating the award. By calculating the Original and Amended Awards differently, the court agreed with the petitioners that the panel exceeded its authority under AAA rules and that the Amended Award must be vacated pursuant to section 10(a)(4) of the FAA. The court also held, however, that the panel acted in manifest disregard of the law by reducing the award. While the panel itself acknowledged “well-defined, explicit and clearly applicable law prohibiting [it] from exercising jurisdiction over an issue of law already determined … and raised for the first time after the [original] award issued,” the court held that the panel ignored that law by changing course on the method of calculating the petitioner’s damages. The court found this to be an independent basis for vacating the Amended Award and confirming the Original Award under Second Circuit precedent.

Credit Agricole Corp. & Inv. Bank v. Black Diamond Capital Mgmt. LLC, No. 1:18-cv-07620-KNF (S.D.N.Y. Mar. 22, 2019).

District Court Declines to Decide Procedural Arbitrability Issue, Separately Seals Docket, Finding “Reasonably Significant Privacy Interest” in Reinsurance Treaties

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Everest Reinsurance Co. reinsured Pennsylvania National Mutual Casualty Insurance Co. under several treaties requiring the parties to arbitrate all disputes. The arbitration clauses in the treaties also contained a “consolidation” provision stating that “[i]f more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for the purposes of this Article.” A dispute later arose and Pennsylvania Mutual commenced arbitration, but Everest refused to participate fully, claiming the dispute should have been joined with an earlier arbitration between Pennsylvania Mutual and other reinsurers. While the parties agreed that this threshold “consolidation” issue was for arbitrators to decide, not the court, they disagreed as to which arbitrators. Pennsylvania Mutual wanted a new panel; Everest wanted the prior panel. The court agreed with Pennsylvania Mutual, finding the issue was purely “procedural” and, therefore, not for the court to decide. The court enforced the process set forth in the treaties for selecting a new arbitration panel before whom Everest could raise consolidation as a threshold issue.

Separately, Pennsylvania Mutual moved to seal various documents submitted in support of its motion to compel arbitration, including its arbitration demand to Everest, subsequent correspondence, and the relevant treaties. The court agreed with Pennsylvania Mutual that it had a “reasonably significant privacy interest” in the treaties and the “sensitive and proprietary” information in its correspondence with Everest. Because Pennsylvania Mutual negotiates various agreements with different reinsurers, each of which is likely similar, but not necessarily identical, the court held that “disclosure of the precise terms of any one agreement could reasonably have a significant impact on [Pennsylvania Mutual’s] ability to negotiate other agreements with different reinsurers.” Finding this privacy interest “substantially outweighs” the minimal public interest in disclosure, the court granted Pennsylvania Mutual’s motions.

Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Everest Reinsurance Co., No. 1:18-mc-00653 (M.D. Pa. Mar. 14, 2019).

Ninth Circuit Dismisses Interlocutory Appeal, Finds Order Compelling Arbitration Not a “Final Decision” Under FAA

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The plaintiff filed a putative class action for alleged violations of California employment law, and the defendant moved to compel arbitration. The district court granted the motion and stayed further proceedings pending a ruling by the arbitrators as to the arbitrability of the dispute. But before submitting the matter to arbitration, the plaintiff voluntarily discontinued the action without prejudice and immediately appealed the district court’s order. The Ninth Circuit dismissed the appeal, however, finding it lacked jurisdiction. The court agreed with the defendant that the plaintiff’s “voluntary discontinuance and immediate appeal” was an impermissible attempt to sidestep the “final-judgment rule, the Federal Arbitration Act’s explicit bar on interlocutory appeals, and prevailing case law.” Because the order compelling arbitration was not a “final decision” under § 16(a) of the FAA, the plaintiff was required to seek the district court’s permission to pursue the appeal, but failed to do so. That he voluntarily discontinued the action before appealing was deemed irrelevant, particularly since the discontinuance was without prejudice.

Gonzalez v. Coverall North America, Inc., No. 17-55787 (9th Cir. Feb. 22, 2019).