Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Brendan Gooley

Southern District Confirms Arbitration Award Over Challenge Based on Failure of Arbitrators to Disclose Information

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The Southern District of New York has rejected a petition to vacate an arbitration award on the basis that the arbitrators failed to disclose allegedly material information.

Michael Miller worked as a financial advisor in a UBS branch. UBS gave Miller six loans, and Miller agreed any disputes regarding the loans could be arbitrated. A dispute regarding the loans arose after Miller left his job. Miller and UBS selected arbitrators in accordance with FINRA’s rules. The arbitrators ruled in favor of UBS. Miller unsuccessfully sought to vacate their award in the Southern District.

In his effort to vacate the award, Miller claimed the arbitrators failed to disclose pertinent information during the selection process resulting in the award (1) exceeding the arbitrators’ powers; and (2) an award that was the result of partiality or corruption in violation of FINRA’s rules. Specifically, Miller claimed one arbitrator (Teveris) failed to disclose she had represented an investor before FINRA in an unrelated matter in her initial disclosure and failed to sufficiently disclose the representation in her oath. He also claimed that another arbitrator (Rolnick) failed to disclose he was a defendant in an unrelated federal lawsuit. But Miller failed to explain how such information prevented the arbitrators from being objective. The court also rejected Miller’s argument that the information was material and would have affected how he ranked the arbitrators. That was not the standard, and the usefulness of the information was irrelevant, the court explained.

Miller also argued Rolnick had a potential interest in UBS securities that he failed to fully explain after he answered “yes” to a question asking if he or an immediate family member invested in or held securities that were the subject of the arbitration. While interest in UBS was a potential problem, it was disclosed and Miller was therefore on notice of a fact potentially indicative of bias. The applicable rules did not clearly require additional disclosures, and Miller failed to object to the allegedly incomplete disclosure, thereby waiving any right to challenge it. Moreover, Miller had been expressly told that he could object to the arbitrators after he was informed about the potential conflict.

If you don’t act as soon as practical on your right to challenge arbitrators based on information you know (or should know) about them, don’t expect to be able to vacate the award later.

Miller v. UBS Fin. Servs. Inc., No. 1:18-cv-08415 (S.D.N.Y. May 6, 2019)

U.K. Court of Appeal Prohibits “Spiking” in Mesothelioma Cases in Win for Reinsurers

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In a closely watched case, the Court of Appeal of England and Wales has given reinsurers a win with respect to reinsurance claims related to mesothelioma and other asbestos-related diseases. The decision bars insurers from engaging in “spiking.” Under that practice, insurers were making a single reinsurance claim for the entire loss to an injured employee under a single reinsurance policy of their choosing rather than allocating the loss on a pro rata basis between the various policy years in which the employee was exposed to asbestos. Prohibiting “spiking” is a significant win for reinsurers.

The decision stemmed from a dispute between insurer Municipal Mutual Insurance Limited (MMI) and reinsurer Equitas Insurance Limited.

For decades, MMI has issued employers’ liability (EL) policies to insured entities on an annual basis. Many of the entities insured by MMI faced claims from their employees for mesothelioma and other diseases related to exposure to asbestos in the workplace. Because of unique developments in the law of the United Kingdom regarding asbestos litigation, employees who made such claims did not need to prove which employer caused the critical exposure or the year in which the critical exposure occurred. (Under the Fairchild jurisprudence, all employers who made a material contribution to the risk of mesothelioma are jointly and severally liable for the employee’s injury. Pursuant to an act of Parliament that reversed a Barker decision, an employee can recover their entire damages from any employer during the years in question.) As a result, MMI did not need to, nor did it, identify which policy provided coverage for a particular claim when it paid claims. Nor did MMI apportion the claims among policy years.

MMI reinsured its liability under its EL policies with Lloyd’s syndicates whose liabilities are currently held by Equitas. Unsurprisingly, MMI presented its claims for asbestos-related losses to Equitas initially on a pro rata basis whereby the loss was divided over the years the claimant was exposed to asbestos. However, after several years, MMI began presenting each claim under a single year of reinsurance. MMI claimed that, because each underlying insurance policy was liable in full for the loss, each claim could be presented to a single annual reinsurance policy of its choice, i.e., “spiking.” Spiking benefited MMI because it maximized its recovery. By spiking, MMI avoided multiple retentions, submitting claims to reinsurers who were insolvent and reducing paperwork and potential disputes. Spiking was detrimental to Equitas because, by MMI’s spiking, MMI had fewer retentions and was able to submit more to reinsurance, and Equitas could find itself paying for years it had not provided reinsurance.

Equitas and MMI arbitrated whether MMI could engage in “spiking.” A judge-arbitrator ruled in favor of MMI, agreeing that, because developments in the law made each annual EL policy liable for all of an insured’s loss, MMI had a contractual right to present its claim for reinsurance under any reinsurance policy year that corresponded to an EL policy year that was liable for the individual claimant’s loss. The judge-arbitrator further concluded, among other things, that even if MMI had a duty of good faith with respect to how it presented its reinsurance claims, MMI did not breach that duty because it had “expressly acknowledged that there was a need for equitable recoupment and contribution to redress any anomalies.”

Equitas obtained leave to appeal the judge-arbitrator’s decision.

The Court of Appeal reversed. The court rested its decision on the duty of good faith. (Notably, the court (and the judge-arbitrator) explained that the duty of good faith in New York differs significantly from the duty of good faith under the law of the United Kingdom.) Lord Justice Males, whose decision was joined by Lord Justice Leggatt (who also wrote a concurrence) and Lord Justice Patten, summarized his reasoning regarding the duty as follows:

In my judgment there are powerful reasons to support the implication of a term in the very specific reinsurance context existing within the Fairchild enclave that the insurer’s right to present its reinsurance claims must be exercised in a manner which is not arbitrary, irrational or capricious, and that in that context rationality requires that they be presented by reference to each year’s contribution to the risk, which will normally be measured by reference to time on risk unless in the particular circumstances there is a good reason (such as differing intensity of exposure) for some other basis of presentation.

The reasons supporting applying the duty of good faith in that manner included the fact that “spiking is inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded,” which was long before the unique Fairchild jurisprudence that allowed MMI to choose between numerous policies existed.

The Court of Appeal therefore adopted the method proposed by Equitas: Reinsurance claims based on exposure in multiple policy years for which the insurer has not allocated its loss among the various policy years at issue must nevertheless be presented to the reinsurer on a pro rata basis for purposes of calculating the applicable reinsurance payment.

MMI will likely appeal the decision to the Supreme Court of the United Kingdom.

Assuming it stands, the Court of Appeal’s decision constitutes a significant win for reinsurers exposed to asbestos-related claims in the United Kingdom. Spreading reinsurance claims regarding asbestos injuries across multiple policy years will require compliance with multiple retentions and potentially mean that more than one reinsurer is involved in each claim.

Equitas Ins. Ltd. v. Municipal Mut. Ins. Ltd., [2019] EWCA Civ 718 (Apr. 17, 2019).

Court Denies Reinsurers’ Attempts to Avoid Suit

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The U.S. District Court for the District of Columbia recently denied attempts by reinsurers to avoid a suit by moving to have the claims against them dismissed or, in the alternative, seeking to compel arbitration or stay the case pending a related arbitration.

Vantage Commodities Financial Services I, LLC sued various reinsurers. The court dismissed Vantage’s breach of contract claim but allowed Vantage to file an amended complaint in which it alleged breach of implied contract, promissory estoppel, and unjust enrichment claims. The reinsurers moved to dismiss those claims. They argued that express agreements foreclosed the claim that there was a breach of an implied contract. The court disagreed. It noted that Vantage was not a party to any agreement with the reinsurers. Thus, the court also rejected the reinsurers’ claim that Vantage’s claim was untimely under an agreement.

In the alternative, the reinsurers sought to compel arbitration. Because Vantage and the reinsurers were not parties to an agreement with Vantage, however, the court concluded that the parties had not agreed to arbitrate disputes under arbitration clauses in a related agreement.

The court then rejected the reinsurers’ request that Vantage revise its amended complaint, reasoning that the complaint was not unduly vague or ambiguous. Finally, the court denied the reinsurers’ request for a stay pending ongoing arbitration. The court recognized that there were “overlapping factual issues common to both the arbitration and [the] litigation,” but found that overlap was insufficient to justify a stay and that it would not be in anyone’s interest to allow the “case to languish” during a pending arbitration of undetermined length.

Vantage Commodities Fin. Servs. I, LLC v. Assured Risk Transfer PCC, LLC, No. 1:17-cv-01451 (TNM) (D.D.C. Apr. 26, 2019).

New York Court Discusses Qualifying and Disqualifying Conditions for Umpires

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A New York Supreme Court recently explained the conditions that qualify and disqualify a proposed umpire. National Union Fire Insurance and Enstar could not agree on an umpire for their asbestos-claim-related arbitration. Each felt the umpires proposed by the other’s arbitrator should be disqualified. They invoked a procedure allowing the court to select the umpire.

The court explained that umpires must be “impartial such that his/her decision will be based upon the merits of the dispute rather than the personal influence or identity of the disputants.” Applying that general standard, the court struck one proposed umpire (Chaplin) on the ground that he had previously testified for Enstar in another arbitration on an issue material to the present arbitration and was therefore “not entirely neutral as to this arbitration.” The court noted, however, that prior service as an expert is not always an automatic disqualification. The court then struck another proposed umpire (Maneval) because he had voted against Chaplin’s interpretation in a prior arbitration. The court explained that his service as an umpire in the instant arbitration could therefore create “an appearance of possible bias.” Another proposed umpire (Stern) was previously adverse to National Union’s arbitrator and, while not necessarily a problem, there was no reason to put that arbitrator in such an “untenable position” when there were other qualified candidates. Those candidates did not include an arbitrator (Gurevitz) who had previously worked for National Union’s counsel, which warranted disqualification, and another arbitrator (White) who was not a lawyer and who was therefore not ideal given the legal nature of the issues in the forthcoming arbitration. The court determined that another arbitrator (Bickford) with substantial industry experience was best suited to serve in this dispute.

Enstar EU Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, No 654089/2018 (N.Y. Sup. Ct. Apr. 19, 2019).

Ninth Circuit Finds No Foreign Arbitration Award to Uphold

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Foreign arbitration awards must generally be upheld in the United States under treaty obligations. Upholding a foreign award requires that there actually be an arbitration award, however. For that matter, it requires an actual arbitration proceeding. A recent Ninth Circuit decision confronted a strange situation where there was no arbitration to confirm.

Michael Castro signed an employment agreement to be a commercial fisherman for Tri Marine. The agreement contained a mandatory arbitration provision that required him to arbitrate any disputes in and subject to the procedural rules of American Samoa. Castro was injured on the job. He released his claims in exchange for a cash settlement. The release also contained an arbitration clause requiring arbitration in American Samoa. Castro was then advised to go to an arbitrator in the Philippines with a representative of Tri Marine, though claimed he was told and believed he was merely picking up his settlement check. At the arbitrator’s office, Tri Marine filed a motion to dismiss the arbitration, even though there was not an arbitration case filed (indeed, there wasn’t even a case number assigned to the matter). The arbitrator granted that motion. Castro later required additional surgery and sought to bring suit in Washington state court in the United States. Tri Marine removed to Washington federal court, which dismissed the case.

The Ninth Circuit reversed. The court recognized that foreign arbitration awards must generally be upheld under the New York Convention, but concluded that there was no arbitral award under the facts. Although the arbitrator had issued a decision on a motion to dismiss, the parties had settled their dispute before the “case” was even filed. There was nothing to arbitrate. But even if there was an “arbitration,” it did not comply with the arbitration agreement’s arbitration clause or choice-of-venue provision. There was no evidence Castro waived those provisions. And even putting aside all those problems, the “arbitration” did not comply with the law of the Philippines concerning arbitration. The Ninth Circuit was careful to note that it was not infringing on “consent awards” whereby settlements reached during arbitration are turned into arbitration awards. That did not happen in this case. The court then remanded the case to the district court and instructed it to consider whether jurisdiction existed.

Castro v. Tri Marine Fish Co., No. 17-35703 (9th Cir. Feb. 27, 2019).