Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Benjamin Stearns

Benjamin Stearns

New Jersey Supreme Court Reinstates Arbitrator’s Decision Demoting School Official

by

Under New Jersey’s Tenure Employees Hearing Law, when a school district files tenure charges against an employee, the state commissioner of education must refer the case to arbitration if he or she determines that the charges are “sufficient to warrant dismissal or reduction in salary of the person charged.” Amada Sanjuan, an assistant principal, was charged with “conduct unbecoming” after lying about the cause of a fall she had taken down a flight of stairs, which was caught on a security camera. The commissioner referred the case to arbitration, and, after a hearing, the arbitrator determined that Sanjuan should be demoted and reinstated without back pay.

Sanjuan filed a complaint seeking to vacate the arbitration award against her and to be reinstated as a tenured administrator with back pay. She argued that New Jersey law limited the possible penalties an arbitrator could impose to termination or a reduction of salary. Sanjuan argued that demotion was not an available penalty, and because the arbitrator had already heard and decided against termination, the arbitrator was collaterally estopped from firing her upon rehearing. The trial court ruled against Sanjuan, but the Appellate Division reversed.

On appeal, the New Jersey Supreme Court determined that the law limited the matters that could be referred to an arbitrator to those that could merit termination or a reduction in salary, but the law did not limit the arbitrator’s power to only those two possible remedies. Rather, the court found that arbitrators traditionally had wide-ranging discretion to fashion an appropriate remedy, and nothing in the law changed or limited that discretion. Nor did any contractual agreement relevant to the matter impose any additional limits on the penalties that the arbitrator could impose. As a result, the arbitrator had the authority to order Sanjuan’s demotion. The Supreme Court reversed and ordered that the arbitrator’s decision be reinstated.

Sanjuan v. School District of West New York, No. 087515 (N.J. Feb. 12, 2024).

Court Holds Federal Law Governs FAA Arbitration Dispute Related to Surplus Lines Insurance Contract, Compels Arbitration Under Fifth Circuit Preemption of State Law

by

Harbor Homeowner’s Association Inc. sued its insurers in Louisiana state court seeking to recover damages allegedly caused by the insurers’ failure to pay claims related to Hurricane Ida. The insurers removed to federal court, arguing that the action related to an arbitration agreement falling under the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and filed a motion to compel arbitration.

The plaintiff argued in response that arbitration provisions in surplus lines insurance contracts are not enforceable under Louisiana law. The plaintiff also argued that, because the policy included a choice-of-law provision selecting New York law, the court should follow Second Circuit precedent holding that, pursuant to the McCarran-Ferguson Act, the New York Convention did not preempt contrary state law.

The court disagreed, noting that arbitrability under the FAA is a question of federal law, not state law, whereas a choice-of-law clause in an insurance policy provides the substantive insurance law applicable to the contract. As such, the choice-of-law clause did not bear on the arbitrability of the dispute.  Moreover, the court noted that “application of New York state law does not entail application of Second Circuit federal law simply because New York sits within the Second Circuit; a Second Circuit case construing federal law is not New York state law.”

Based on the above, the court found that it was constrained to follow Fifth Circuit precedent holding that the New York Convention preempts contradictory state law, including Louisiana law prohibiting the enforcement of arbitration provisions in insurance contracts, and ordered the parties to arbitrate their dispute.

Harbor Homeowner’s Association, Inc. v. Certain Underwriters at Lloyd’s London, No. 2:23-cv-05043 (E.D. La. Jan. 12, 2024).

Reinsurer Permitted to Intervene in Affiliate’s Lawsuit Related to Breach of MGA Agreement

by

Texas Insurance Co. sued Talisman Specialty Underwriters Inc. for breaching the parties’ managing general agent (MGA) agreement by authorizing the issuance of hundreds of insurance policies by Texas Insurance in sectors (like marine and energy) where Talisman Specialty did not have the authority to do so. Texas Insurance further alleged that Talisman Specialty had withheld $10 million in premiums owed to Texas Insurance and that it had failed to segregate them in a fiduciary account for Texas Insurance’s benefit as required by the MGA agreement.

Talisman Insurance Co., an affiliate of Talisman Specialty, filed a motion to intervene. Talisman Insurance alleged that it had entered into a quota share reinsurance agreement with Texas Insurance, pursuant to which Talisman Insurance agreed to reinsure the insurance sold by Talisman Specialty. In turn, Texas Insurance agreed to pay Talisman Insurance 94% of the insurance premiums it received, pursuant to the reinsurance agreement. Talisman Insurance argued additionally that Texas Insurance agreed that Talisman Specialty would remit these payments directly to Talisman Insurance, bypassing Texas Insurance. Talisman Insurance alleged that Texas Insurance breached the reinsurance agreement by initiating the lawsuit and by claiming that Talisman Specialty must first remit the premiums to Texas Insurance, thereby interfering with Talisman Insurance’s right to payment.

The district court found that Talisman Insurance was entitled to intervene as of right because it timely filed its motion early in the case and because it had a direct and substantial interest in the insurance premiums which interest would not be adequately represented by the existing parties and which could be impaired if it were not permitted to intervene. Talisman Insurance timely sought to intervene as the motion, although filed approximately two months after Talisman Insurance learned of the suit, came before discovery had opened in the matter, and further, Talisman Insurance did not seek to reopen any prior proceedings in the case.

The court found that Talisman Insurance had a direct and substantial property interest in the premiums and the method of payment, as its alleged contractual right to receive its share of the premiums directly from Talisman Specialty allegedly resulted in administrative cost-savings. If Talisman Insurance were not permitted to intervene and instead was required to institute a separate proceeding, its interests in the premiums and method of payment could be impaired by rulings in the instant lawsuit. Finally, the court found that Talisman Insurance’s interests were not adequately represented by its affiliate, Talisman Specialty, even though the two shared the same counsel, as Talisman Specialty was not a party to the reinsurance agreement and the two entities sought to enforce different contractual rights derived from their individual contracts with Texas Insurance.

As such, the court granted the motion to intervene, finding Talisman Insurance satisfied all of the requirements necessary to establish its entitlement to intervention.

Texas Insurance Co. v. Talisman Specialty Underwriters, Inc., No. 2:23-cv-03412 (E.D. La. Dec. 1, 2023).

Second Circuit Affirms Schwab Victory in FINRA Arbitration

by

The Second Circuit Court of Appeals recently affirmed a decision confirming an arbitration award in favor of Charles Schwab & Co. over allegations of discovery abuses that purportedly rendered the arbitration proceeding unfair. We previously wrote about the district court decision confirming the arbitration award in a prior post.

The appellant again argued to the Second Circuit that the arbitration panel had “refused to hear evidence pertinent and material to the controversy and thereby rendered the proceedings fundamentally unfair.” But the Second Circuit found the appellant failed to carry its burden to demonstrate the panel’s discovery-related decisions rendered the proceeding unfair. To the contrary, the court noted that the panel considered numerous discovery motions, including hearing oral argument, and further that Schwab produced more than 5,500 documents to the appellant over 14 different document productions.

In concluding, the court stated that “in light of the ‘great deference’ accorded to arbitrators ‘in their evidentiary determinations,” the court found the arbitration proceeding was not fundamentally unfair.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 22-2748 (2d Cir. Nov. 29, 2023).

Broker Obtains Preliminary Injunction Enjoining FINRA Arbitration Initiated by Non-Signatories to Arbitration Agreement

by

Interactive Brokers LLC filed an action in the Southern District of New York seeking preliminary and permanent injunctions against an arbitration proceeding initiated by a group of non-signatories to an agreement between Interactive Brokers and an investment adviser. The non-signatories had “entrusted investment assets” to the adviser. According to the statement of claim the non-signatories filed in the FINRA arbitration, the investment adviser “misled investors, misappropriated … investment assets, and made ‘Ponzi-like payments to investors.’” The non-signatories contended that Interactive Brokers, an online broker that provides for “self-directed” trading, failed to detect and prevent the adviser’s misconduct and sought to hold it liable for their losses.

Shortly after FINRA notified Interactive Brokers of its status as a named party in the arbitration, Interactive Brokers filed suit in the Southern District seeking a declaration that it had no obligation to participate in the arbitration and an injunction against the non-signatories arbitrating their claims against it.

The court granted the injunction. Although the court recognized that, under certain circumstances, non-signatories may compel arbitration, those circumstances did not exist here. For instance, third-party beneficiaries may compel a signatory to arbitrate a dispute if the agreement provides for such an outcome “in express language.” However, no such express language existed in the arbitration agreement at issue.

In addition, a non-signatory may rely on the doctrine of equitable estoppel to compel arbitration against a signatory where (1) the relationship among the parties, the contracts they signed, and the issues that had arisen reveals that the dispute the non-signatory seeks to compel is “intertwined” with the agreement to arbitrate and (2) there is a relationship among the parties that justifies permitting the non-signatory to stand in for a signatory and compel arbitration.

The parties’ relationship must either (1) illustrate that the signatory resisting arbitration effectively consented to extend its agreement to arbitrate to the non-signatory or (2) make it inequitable for the signatory to refuse to arbitrate.

The Second Circuit has noted that “estoppel cases tend to share a common feature in that the non-signatory party asserting estoppel has had some sort of corporate relationship to a signatory party; that is, the Circuit has applied estoppel in cases involving subsidiaries, affiliates, agents, and other related business entities.” The defendants did not argue that they had a corporate relationship to a signatory party and failed to otherwise argue that they had a sufficient relationship to the signatories to state a claim for estoppel.

Lastly, the non-signatories sought to compel arbitration pursuant to FINRA Rule 12200. The FINRA Code requires parties to submit to FINRA arbitration of a dispute if, among other requirements, the dispute is between a “customer” and a member or associated person of a member. Although the FINRA Code does not define the term “customer,” the Second Circuit has established a “bright-line rule” in determining its meaning to be “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” The non-signatories did not satisfy either of the criteria for being deemed a “customer” that may compel FINRA arbitration under FINRA Rule 12200.

As such, the court granted the preliminary injunction against the arbitration.

Interactive Brokers LLC v. Delaporte, No. 1:23-cv-05555 (S.D.N.Y. Oct. 13, 2023).