Carlton Fields

FEDERAL LAW GOVERNING FOREIGN RISK RETENTION GROUPS PREEMPTS STATE LAW THAT PROHIBITS MANDATORY ARBITRATION CLAUSES IN INSURANCE POLICIES

October 1, 2014 by Carlton Fields

The Nebraska Supreme Court has held that Nebraska’s statute prohibiting mandatory arbitration clauses in insurance policies is preempted by the Liability Risk Retention Act of 1986 (LRRA). At issue was a professional liability insurance policy from Allied Professionals Insurance Company, a risk retention group incorporated in Arizona and registered with the Nebraska Department of Insurance as a foreign risk retention group. When a dispute arose between the policyholder and Allied, the policyholder filed an action seeking a declaration that Allied was obligated to provide coverage for an underlying civil suit pending against him. Allied moved to compel arbitration pursuant to the policy’s mandatory arbitration clause, which required binding arbitration of any dispute concerning the policy. The lower court rejected Allied’s argument that the Nebraska statute was preempted by federal law and concluded that the arbitration clause was neither valid nor enforceable. It therefore denied Allied’s motion to compel arbitration.

Nebraska’s Supreme Court reversed, finding that while the Federal Arbitration Act did not preempt Nebraska’s law, the LRRA did. The LRRA provides, in part, that a foreign risk retention group is exempt from any state law that would “regulate, directly or indirectly, the operation of a risk retention group.” Nebraska’s prohibition of arbitration clauses in insurance policies “regulates the operation of a risk retention group” within the meaning of the LRRA. As a result, the arbitration clause in the Allied policy was not prohibited by state statute, but was a valid and enforceable clause compelling arbitration. Speece v. Allied Professionals Insurance Co., 289 Neb. 75 (Neb. Sept. 19, 2014).

This post written by Renee Schimkat.

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REINSURER NOT ALLOWED TO INTERVENE IN ACTION INVOLVING CEDENT’S RISK

September 30, 2014 by Carlton Fields

The United States District Court for the Southern District of New York denied a reinsurer’s motion to intervene in an interpleader action in which Battenkill Insurance Company argued it had an 85% interest in the funds at stake in an action involving a dispute over distribution of funds from a residential mortgage-backed securitization trust. Battenkill reinsured 85% of the risk under certain policies issued by one of the defendants in the interpleader action, Assured Guaranty Municipal Corp. Wales, LLC, one of the other defendants, counterclaimed against Wells Fargo, an interpleading plaintiff, arguing Wells Fargo misinterpreted the trust provisions and argued that Assured should be ordered to repay $47.7 million, plus interest, of the disputed distributions which Wells Fargo had held in escrow as a result of the dispute and then interplead. Because Battenkill would be required to reinsure 85% of the amounts which Assured would have to repay, Battenkill sought to intervene.

The court rejected the motion to intervene, reasoning that Assured would also lose a significant amount of money if it did not prevail, despite holding a smaller interest in the amount at stake, such that Battenkill and Assured had identical interests in the litigation. Assured would therefore adequately protect Battenkill’s interest and Battenkill thus did not have a right to intervene in the litigation. The court also rejected Battenkill’s argument that it should be allowed to intervene so that it could litigate the interpretation of the reinsurance agreement between it and Assured. Because the reinsurance agreement was not at issue in the in the interpleader action, Battenkill’s intervention would unnecessarily complicate the litigation and introduce immaterial issues to the trust’s interpretation. Wells Fargo Bank, NA v. Wales, LLC, et. al., 13 Civ. 6781 (PPG) (USDC S.D.N.Y. Sept. 19, 2014).

This post written by Leonor Lagomasino.

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PENNSYLVANIA COURT AFFIRMS LIQUIDATOR’S DECISION THAT A CLAIM ARISING FROM A REINSURANCE POLICY IS ENTITLED TO A LOWER PAYMENT PRIORITY

September 29, 2014 by Carlton Fields

A Pennsylvania appellate court has affirmed the liquidator’s determination that a group excess insurance policy issued by Reliance is a reinsurance policy and thereby entitled to a low level of priority of payment from the now insolvent Reliance estate. At issue was a claim by the Alabama Insurance Guaranty Association for reimbursement from the estate for a claim it had paid to a general contractors fund. The Association argued that the Reliance policy was a direct insurance policy, thereby entitled to a high priority for re-payment, and that the liquidator was obligated to follow an Alabama Supreme Court ruling that the claim arose under a policy of direct insurance.

The Pennsylvania court rejected all of the Association’s claims that the liquidator was bound by the Alabama Supreme Court ruling, including the application of the Full Faith and Credit doctrine and principles of collateral estoppel. The court also rejected any choice of law analysis favoring Alabama over Pennsylvania and concluded that the policy at issue was one of reinsurance under Pennsylvania’s governing law. The material characteristics the court looked to in order to determine that the policy was one of reinsurance included the language of the policy itself referring to a “reinsurance premium” and the obligations of Reliance to “reinsure” the Alabama Reinsurance Trust. The opinion generated a strong and lengthy dissent that criticized the majority for rejecting the Alabama Supreme Court’s holding and for otherwise finding that the policy was a contract of reinsurance and not a group insurance policy that covered catastrophic workers’ compensation claims of the self-insurers that were members of the group. Alabama Insurance Guaranty Association v. Reliance Insurance Co. in Liquidation, No. 6 REL 2012 (Pa. Commw. Ct. Sept. 12, 2014).

This post written by Renee Schimkat.

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DENIAL OF ARBITRATION REVERSED WHERE TRIAL COURT FAILED TO HOLD TRIAL TO RESOLVE DISPUTED QUESTIONS OF FACT

September 25, 2014 by Carlton Fields

The Eighth Circuit reversed a trial court’s decision to deny arbitration, based on the fact that the lower court failed to hold a trial (as required by the FAA) when disputed questions of fact surrounding the parties’ agreement remained. The case surrounded a disagreement over whether a seller of equipment agreed to indemnify a manufacturer of heavy machinery, in connection with litigation against the manufacturer by a third-party. Disputed facts surrounded whether the agreement between the manufacturer and the seller included a form containing indemnification terms and arbitration provisions. The district court denied arbitration because it concluded that the only undisputed contract terms were the terms of the purchase, sale, and payment; the court left undecided the issue of whether arbitration provisions were included in the agreement, as not subject to a “definitive answer.” Citing a recent Tenth Circuit decision, on which we reported on May 20, 2014, the Eighth Circuit reversed, holding that “if the motions record reveals a material issue of fact, the FAA maintains that the court move summarily to trial. And, when that trial is not demanded by the party opposing arbitration [as was the case here], ‘the court shall hear and determine such issue.’” The court explained that here, “the district court never resolved the factual issues concerning the making of the contract but merely recognized their existence.” The Eighth Circuit vacated the order and remanded “for the district court to hold a non-jury trial, make findings of fact, and apply the appropriate U.C.C. provisions in light of those facts.” Nebraska Machinery Co. v. Cargotec Solutions, LLC, Case No. 13-2753 (8th Cir. Aug. 7, 2014).

This post written by Michael Wolgin.

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TENTH CIRCUIT REVERSES TRIAL COURT DENIAL OF MOTION TO COMPEL ARBITRATION OF WAGE DISPUTE

September 24, 2014 by Carlton Fields

The Tenth Circuit Court of Appeals reversed a trial court order denying an employer’s motion to compel arbitration of a wage dispute under the arbitration clause contained in the plaintiffs’ Confidentiality/Non-Compete Agreement. The plaintiff employees brought suit against their employer, an oil-rig servicer, under the Fair Labor Standards Act and Oklahoma Protection of Labor Act. The employer moved to compel arbitration under a provision in the parties’ non-compete agreements. The plaintiffs argued – successfully to the trial court – that the wage disputes did not come within the purview of the arbitration provision, which, although in an agreement that related mostly to non-compete and confidentiality issues, nevertheless contained a broad clause mandating arbitration of “any dispute.” The Tenth Circuit noted that, while the scope of the parties’ contract was narrow, the scope of the arbitration provision was broad, and that, under the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, and the broad federal policy favoring arbitration embodied in the FAA, it was constrained to enforce the agreement. It remanded with instructions to compel arbitration. Sanchez v. Nitro-Lift Technologies, LLC, Nos. 12-7046 and 12-7057 (10th Cir. Aug. 8, 2014).

This post written by John Pitblado.

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