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Brendan Gooley

Munich Re Prevails in Alabama Reinsurance Dispute

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A federal court recently agreed with Munich Re that it was not obligated to reimburse an insurer for losses and fees the insurer incurred in litigation with its professional liability carrier regarding a bad faith claim stemming from a personal injury suit subject to the reinsurance treaty.

Alabama Municipal Insurance Corp. (AMIC) issued a commercial automobile insurance policy to the town of Woodland, Alabama. A Woodland employee driving a Woodland vehicle was subsequently involved in an accident in which two passengers were seriously injured. The passengers sued Woodland. AMIC defended Woodland against those claims. The passengers obtained jury awards that exceeded AMIC’s applicable policy limits.

The passengers then sued AMIC claiming AMIC acted in bad faith when it failed to settle within policy limits. AMIC tendered the bad faith claim to Scottsdale Insurance Co., which had issued a professional liability errors and omissions policy to AMIC. Scottsdale and AMIC settled the bad faith suit, but Scottsdale then filed a declaratory judgment action seeking a declaration that it had not been obligated to pay any part of the settlement. AMIC counterclaimed for breach of contract and bad faith. Scottsdale prevailed in the declaratory judgment action, AMIC lost on its counterclaims, and Scottsdale obtained its costs and fees.

AMIC requested partial reimbursement for all of this litigation from its reinsurer, Munich Re. Munich Re reimbursed most of the requested sum but concluded that it was not required to reimburse AMIC for AMIC’s costs and fees and Scottsdale’s costs and fees, which AMIC had been ordered to pay, in AMIC’s litigation with Scottsdale (the declaratory judgment action). AMIC sued, claiming that Munich Re was required to reimburse it for those sums as well.

The U.S. District Court for the Middle District of Alabama disagreed with AMIC and held that Munich Re did not owe AMIC any money for AMIC’s losses to Scottsdale.

The district court analyzed the applicable treaties and concluded that Munich Re was “not generally liable for costs that AMIC decided to pay above and beyond its obligations to its insured clients (in this case, Woodland).” AMIC nevertheless maintained that the treaties “obligated AMIC to pursue any other reinsurances or insurances that might inure to Munich [Re]’s benefit, and that this obligation, in turn, further obligated Munich [Re] to reimburse AMIC for th[at] pursuit.” The district court disagreed, noting that the treaty language did not establish any such obligation. Moreover, although “AMIC would have been obligated to reimburse Munich [Re] for any amount of the Woodland settlement that it was able to recover from Scottsdale,” it did not follow (as AMIC claimed) that Munich Re was “obligated to reimburse AMIC for the money it spent while attempting to secure such a recovery.” The treaty did not support that.

This decision was one of several pending disputes between AMIC and Munich Re.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20-cv-00300 (M.D. Ala. Aug. 30, 2023).

Nevada Supreme Court Reverses Order Denying Motion to Compel Arbitration

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The Nevada Supreme Court recently reversed the denial of a motion to compel arbitration, explaining that the plaintiff’s arguments that the contract at issue was illegal were not a valid basis to deny arbitration because those arguments did not challenge the validity of the arbitration clause or delegation clause specifically, as is required to preclude arbitration.

Several individuals sued a company that operates the Uber app, including Uber’s Uber Pool feature. They claimed that Uber Pool was operating in Nevada illegally, without required licenses.

The company, Rasier LLC, moved to compel arbitration under the Uber app’s terms of service. The district court denied that motion, holding that the Federal Arbitration Act did not apply and that the terms of service were void in light of the allegations that Uber Pool was operating illegally.

The Supreme Court of Nevada reversed. It noted that “the FAA applies to contracts evidencing a transaction involving interstate commerce” and that the FAA therefore applied here. The court also noted that a party must challenge an arbitration clause itself, not the validity of a contract generally, to avoid arbitration. The plaintiffs only “generally challenge the Terms of Service and not the arbitration agreement or delegation clause specifically.” The motion to compel therefore should have been granted for the arbitrator to consider the merits.

Rasier, LLC v. Boykin, No. 84814 (Nev. Aug. 24, 2023).

Southern District of New York Dismisses Petition to Confirm $145M Foreign Arbitration Award for Lack of Personal Jurisdiction

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The Southern District of New York recently dismissed a petition to confirm a $145 million arbitration award rendered in Hong Kong based on lack of personal jurisdiction.

Zhongzhi Hi-Tech Overseas Investment Ltd. obtained a $145 million arbitration award in Hong Kong against Dr. Vincent Wenyong Shi related to Dr. Shi’s and another company’s alleged failure to make contractually required payments.

Hi-Tech moved to confirm that award in the Southern District of New York. Dr. Shi moved to dismiss, claiming a lack of personal jurisdiction. The court granted the motion, holding that New York’s long-arm statute was not met and that jurisdiction did not comport with due process.

Hi-Tech argued that New York’s long-arm statute was met based on Dr. Shi’s (1) execution of a contract providing that New York law would govern that contract, (2) Dr. Shi’s defense of a lawsuit pending in the Southern District, and (3) Dr. Shi’s role as an executive of a company listed on the New York Stock Exchange. The district court rejected these arguments.

First, it noted that the contract had been amended and that its choice-of-law provision had been replaced by a new clause providing that Hong Kong law would govern. The original choice-of-law provision therefore provided no basis for jurisdiction, and Hi-Tech conceded that a choice-of-law provision “does not equate to consent to jurisdiction” in any event.

Second, Dr. Shi was involved in defending a suit in the Southern District against a company he was involved in, but “a party’s consent to jurisdiction in one case extends to that case alone” and therefore did not provide a basis for jurisdiction against Dr. Shi in this case.

Third, although a company Dr. Shi was a leader in had been listed on the New York Stock Exchange, having a company listed on the NYSE is not sufficient to confer jurisdiction. Even if it was, the company had been delisted and there was thus no basis for jurisdiction.

With respect to due process, the court noted that New York and the United States had little interest in the dispute and that Dr. Shi had little or no reason to expect to be hailed into court there.

Zhongzhi Hi-Tech Overseas Investment Ltd. v. Wenyong Shi, No. 1:22-cv-06977 (S.D.N.Y. July 17, 2023).

Third Circuit Affirms Judgment Allowing Creditors of Venezuela Who Obtained Arbitration Awards to Attach U.S. Assets of Venezuela’s National Oil Company

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The Third Circuit Court of Appeals has again allowed creditors of Venezuela to attach assets belonging to Venezuela’s national oil company to satisfy arbitration awards against Venezuela. The Third Circuit rejected Venezuela’s arguments that it was entitled to sovereign immunity and that changes in Venezuela’s government negated a prior holding that its national oil company was its alter ego.

To make a long story short, Venezuela allegedly breached various contracts with foreign creditors. A number of those creditors initiated arbitration and obtained awards.

One such creditor, Crystallex International Corp., confirmed a $1.2 billion award in the U.S. District Court for the District of Columbia and then moved to attach assets held in the United States by a subsidiary of Petróleos de Venezuela, S.A. (PDVSA), Venezuela’s national oil company, to satisfy its award. The U.S. District Court for the District of Delaware held that PDVSA was Venezuela’s alter ego and allowed the attachment. The Third Circuit affirmed in a 2019 decision.

Six other creditors then invoked Crystallex’s strategy by seeking to attach assets held by PDVSA to satisfy their arbitration awards. Venezuela objected. It claimed that the Foreign Sovereign Immunities Act (FSIA), which generally requires the United States to recognize the sovereign immunity of foreign nations, precluded the creditors’ attempts to satisfy arbitration awards against Venezuela through U.S. courts. Venezuela also claimed that changes in its government since 2019 resulted in PDVSA no longer being Venezuela’s alter ego.

The Third Circuit rejected Venezuela’s arguments. It noted that the FSIA is not absolute, that the FSIA allows U.S. courts to issue writs of attachment to an entity’s nonimmune assets where that entity is the alter ego of a foreign state, and that PDVSA remained Venezuela’s alter ego.

The Third Circuit analyzed the Bancec factors to determine alter ego status: (1) the level of economic control by the government; (2) whether the entity’s profits go to the government; (3) the degree to which government officials manage the entity or otherwise have a hand in its daily affairs; (4) whether the government is the real beneficiary of the entity’s conduct; and (5) whether adherence to separate identities would entitle the foreign state to benefits in U.S. courts while avoiding its obligations.

The Third Circuit noted that Venezuela still “exerts significant economic control over PDVSA,” that all of PDVSA’s profits go to the Venezuelan government, that “Venezuelan officials are vital to management of PDVSA and maintain a strong presence in its daily affairs,” that “PDVSA exists to benefit Venezuela,” and that Venezuela “derives significant benefits from the U.S. judicial system” because “PDVSA enjoys the benefits and protections of United States law.”

OI European Group B.V. v. Bolivarian Republic of Venezuela, Nos. 23-1647, 23-1648, 23-1649, 23-1650, 23-1651, 23-1652, 23-1781 (3d Cir. July 7, 2023).

First Circuit Holds That New York Convention Preempts Puerto Rican Law

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The First Circuit Court of Appeals has held that the New York Convention applies to an insurance arbitration dispute between a Puerto Rican company and Lloyd’s of London and that the convention preempts a Puerto Rican law seemingly banning arbitration in insurance coverage disputes.

Green Enterprises LLC, a Puerto Rican recycling company, submitted a claim to its insurer, Lloyd’s of London, after a fire destroyed one of its plants. Lloyd’s denied Green’s claim and Green filed suit. Lloyd’s moved to compel arbitration. The district court granted Lloyd’s motion and Green appealed to the First Circuit, which affirmed.

Green argued that arbitration was improper under a Puerto Rican law prohibiting provisions that deprive an insured of access to the courts and that the Federal Arbitration Act did not preempt that law because the McCarran-Ferguson Act allows state law to supersede federal law when it comes to insurance matters. Lloyd’s responded that the New York Convention applied to the dispute, trumped the Puerto Rican law, and was not subject to the McCarran-Ferguson Act because the New York Convention is a multinational treaty, not an act of Congress.

The First Circuit agreed with Lloyd’s. It rejected Green’s arguments that the New York Convention was not “self-executing” such that it required an act of Congress governed by the McCarran-Ferguson Act to implement, meaning that the McCarran-Ferguson Act’s reverse preemption provision applied to the New York Convention. The First Circuit concluded:

[N]one of Green’s arguments can overcome the self-executing nature of the plain text of Article II(3) [of the New York Convention]. That article, which is not an act of Congress, has the force of law and applies directly to preempt Puerto Rico law.

Green Enterprises, LLC v. Hiscox Syndicates Ltd. at Lloyd’s of London, No. 21-1542 (1st Cir. May 19, 2023).