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New reinsurance-related and arbitration developments from Carlton Fields

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INSURED’S CONTRACT WITH MUTUAL ASSOCIATION NOT SUFFICIENTLY AKIN TO A REINSURANCE AGREEMENT TO ESCAPE A LATE NOTICE DEFENSE

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Weeks Marine, a member of non-profit mutual insurance association, American Club, brought suit seeking a declaration that it had complied with the terms of its insurance contract and seeking damages. One of Weeks’s former employees had suffered a concussion at work and sued Weeks. Weeks defended the claim on its own; American Club only learned of it after a jury rendered a $3.7 million plaintiff’s verdict. The certificate evidencing the relationship between Weeks and American Club provided that Weeks was responsible for investigation, settlement, and defense of claims, but required Weeks to give prompt notice of claims to American Club.

American Club defended against Weeks’s coverage suit, arguing that governing New York law provided that Weeks’s late notice, even absent a showing of prejudice, vitiated the contract. This late notice rule, however, did not apply to reinsurance agreements. Weeks argued that its relationship with American Club was like a reinsurance contract because Weeks had the duty to investigate and resolve claims and, further, Weeks had self-insured the first million dollars of risk. The court rejected this argument, reasoning that the contract was not sufficiently like a reinsurance contract for the exception to the late notice rule to apply. The court therefore granted summary judgment for American Club, based upon Weeks’s late notice of the claim. Weeks Marine, Inc. v. Am. Steamship Owners Mut. Prot. & Indem. Ass’n, Inc., Case No. 08-9878 (USDC S.D.N.Y. Aug. 25, 2011).

This post written by Ben Seessel.

COURT FINDS UNJUST ENRICHMENT CLAIM INAPPROPRIATE IN REINSURANCE CLAIM BREACH OF CONTRACT LAWSUIT

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A federal district court dismissed Lexington Insurance Company’s unjust enrichment claim against reinsurer Tokio Marine, holding that the parties’ dispute was governed by their reinsurance contract. Lexington had issued two layers of excess property coverage to the Port Authority, which owned the World Trade Center. Tokio Marine reinsured 100% of the risk. Tenants of the World Trade Center successfully argued to a jury that the September 11, 2001 attacks constituted two separate occurrences and the judgment was affirmed by the Second Circuit. Lexington paid its policy limits for one occurrence and was fully reimbursed by Tokio Marine. After engaging in coverage litigation over whether the Port Authority could recover for a second occurrence, Lexington and the primary carrier, American Home, settled with the Port Authority for a second payment. Lexington sued Tokio Marine after it rejected Lexington’s claim as to the second payment, arguing that the primary carrier should have paid a larger share. The court held that Lexington’s dispute was governed by the parties’ reinsurance agreement and not properly brought as an unjust enrichment claim. The breach of contract claim is still pending. Lexington Ins. Co. v. Tokio Marine & Nichido Fire Ins. Co., Case No. 11-391 (USDC S.D.N.Y. Sept. 7, 2011).

This post written by Ben Seessel.

SPECIAL FOCUS: PROMPT NOTICE IN REINSURANCE CLAIMS

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Did you know that the notice/prejudice rules vary from state to state, and may be different for direct insurance and reinsurance claims? These rules may lead to unexpected burdens of proof and unexpected results. Special Focus Editor John Pitblado sorts out the rules in this area in a Special Focus article that recently appeared in Mealey’s Reinsurance titled: Pride and Prejudice: Prompt Notice in Reinsurance Claims.

This post written by John Pitblado.

ARBITRATION DENIED WHERE PROPONENT LACKED “SUFFICIENTLY CLOSE” RELATIONSHIP TO ARBITRATION AGREEMENT

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Arbitration was denied in a putative class action lawsuit for alleged violations of the Fair Debt Collection Practices Act brought by two cell phone users against Collecto Inc., a collection agency contracted by Verizon and AT&T. Collecto was not a party to the underlying cell phone service contracts between the plaintiffs and cell phone carriers, but sought to enforce the contracts’ respective arbitration provisions based on the doctrines of agency and estoppel. The court applied the two-prong test in the Supreme Court’s Stolt Nielsen decision, which requires a non-signatory seeking to compel arbitration to show (1) that there are “intertwined factual issues” between the claims asserted and the agreement, and (2) that there is a relationship among the parties that justifies estoppel. While the court found that the first pong was met, it found that the second prong failed because the relationship between Collecto and the cell phone carriers was not “sufficiently close” to warrant estoppel. The court made this determination because no corporate relationship existed between Collecto and the carriers, the underlying contracts between Collecto and the carriers expressly disclaimed any agency relationship, and plaintiffs contended that Collecto had acted without valid authorization from the carriers. The court concluded that although “the FAA strongly favors arbitration, the applicable rule recognized in this case – that a party cannot be forced to arbitrate without agreeing to do so – must succeed.” Butto v. Collecto, Inc., Case No. 10-cv-2906 (USDC E.D.N.Y. Aug. 15, 2011).

This post written by Michael Wolgin.

US COURT RULES SYRIAN DEFENDANTS SPONSORED TERRORISM

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The US District Court for the District of Columbia recently held an evidentiary hearing on two actions initiated by Lloyd’s against the Syrian Arab Republic, the Syrian Air Force Intelligence Agency, and Syria’s Director of Military Intelligence (the claims against the named Libyan defendants having been dismissed pursuant to the enactment of the Libya Claims Resolution Act). Lloyd’s seeks judgment and an award of damages for acts of state-sponsored terrorism that resulted in the hijacking and destruction of the aircraft of EgyptAir Flight 648 in 1985. The US Magistrate Judge ruled that the Syrian defendants provided material support and resources to and conspired with the terrorists in the hijacking of Egypt Air Flight 648, and that the Syrian defendants intended that their support would promote and cause extrajudicial killings of American citizens and the destruction of the EgyptAir aircraft. The Court additionally found that the actions could not have occurred without the explicit authorization of then-Syrian President Hafiz al-Asad. Accordingly, the Court will enter judgment and grant an award of damages on behalf of the plaintiffs against the Syrian defendants in a separate order. Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya, No. 06-cv-731 (USDC D.D.C. Sept. 2, 2011).

This post written by John Black.