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THIRD CIRCUIT CONFIRMS THAT FEDERAL ARBITRATION ACT PREEMPTS STATE LAW DEEMING CLASS ARBITRATION WAIVERS UNCONSCIONABLE

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The Third Circuit reversed a prior decision and held that, under the Supreme Court’s ruling in AT&T Mobility v. Concepcion, a New Jersey law providing that class arbitration waivers in consumer adhesion contracts are unconscionable is preempted by the Federal Arbitration Act. As we reported earlier on June 1, 2010, the Third Circuit had previously vacated a trial court order compelling individual arbitration holding that, under governing New Jersey law, provisions in adhesion contracts precluding class arbitrations are unconscionable and thus unenforceable. The defendant, Cellco Partnership, d/b/a Verizon Wireless, successfully petitioned for a writ of certiorari to the Supreme Court, which vacated the Third Circuit’s decision after deciding in Concepcion that a similar California law was preempted by the FAA. On remand, the Third Circuit reversed its prior decision and affirmed the trial court’s order compelling individual arbitration of the plaintiffs’ claims. Litman v. Cellco Partnership, No. 08-4103 (3d Cir. June 6, 2011).

This post written by Ben Seessel.

ONGOING REINSURANCE DISPUTE SURVIVES MOTION TO DISMISS

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A court granted in part and denied in part a motion to dismiss in a case involving the alleged miscalculation and underpayment of amounts owed to plaintiff Lincoln General Insurance Company by defendant U.S. Auto Insurance Services, Inc. We covered this litigation in a May 11, 2009 post. Lincoln General was the reinsurer of a variety of auto insurance policies sold by U.S. Auto, as managing general agent for State and County Mutual Fire Insurance Company. U.S. Auto sought dismissal on variety of grounds, including that a memorandum of understanding entered by the parties in a 2007 lawsuit between the parties necessitated dismissal of claims not raised in that earlier suit. The court, however, found that the memorandum did not limit the available causes of action in the later suit to those delineated in the 2007 suit, so the motion to dismiss on this ground was denied. Defendants also claimed that an “Assignment of Rights” between State and County and Lincoln General was invalid because it contained a “revocability clause.” The court noted, however, the absence of any case or statute saying a court must ignore the manifested intent of the parties in declaring the assignment void on revocability grounds. The court did dismiss Lincoln General’s claims of alter ego liability against others for U.S. Auto’s breaches of contract, fiduciary duty, and conversion because Lincoln General voluntarily withdrew these claims. Lincoln General Insurance Co. v. U.S. Auto Insurance Services, Inc., No. 10-CV-2307-B (USDC N.D. Tex. Aug. 18, 2011).

This post written by Brian Perryman.

TWO LONDON ARBITRATION AWARDS ENFORCED

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Constellation Energy recently filed a petition in the US District Court for the Southern District of New York to confirm two London arbitration awards entered against Transfield ER Cape Ltd. Constellation also sought to enforce the awards against ER Cape’s alleged alter ego, Transfield EL Limited, which was not a party to the arbitrations. The District Court held that the arbitration awards against ER Cape should indeed be enforced, concluding that forum non conveniens did not prevent adjudication in US Court and that venue was appropriate. The Court noted that the petitioner’s choice of home forum is entitled to substantial deference, the balance of private and public interests did not strongly favor ER Cape, and that the mere existence of adequate alterative forums in insufficient to override petitioner’s choice of forum. The Court, however, ruled that Constellation had failed to plead sufficient factual content to support a claim for alter ego liability and accordingly dismissed the petition against ER Limited. Constellations’ petition for attorneys’ fees and costs was also denied. Constellation Energy Commodities Group, Inc. v. Transfield ER Cape Ltd., No. 10-cv-04434 (USDC S.D.N.Y. July 29, 2011).

This post written by John Black.

REINSURER’S REQUEST TO BELATEDLY AMEND “IMPRECISE” PLEADING DENIED DUE TO LACK OF DILIGENCE

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Employers Reinsurance Corporation was denied a request to correct “imprecise” language in its answer and counterclaim in a suit brought against it by a medical malpractice insurer for failing to fund a settlement of a lawsuit against one of the malpractice insurer’s covered physicians. ERC’s answer included a defense of “setoff” for a sum that it had paid allegedly in error in connection with the underlying malpractice lawsuit. After the court’s deadline for amending pleadings expired, ERC sought to amend its answer to seek “recoupment” in addition to “setoff” in order “to make the terminology of its pleadings more precisely fit” the facts of the case. The court held that ERC’s belated attempt to make its answer more precise showed a “lack of diligence.” The court denied ERC’s proposed amendment for failure to show the requisite good cause. Ohio Insurance Co. v. Employers Reinsurance Corp., Case No. 2:08-cv-83 (USDC S.D. Ohio July 15, 2011).

This post written by Michael Wolgin.

COURT OKAYS “BATHTUB” ALLOCATION METHOD UNDER “FOLLOW THE FORTUNES” DOCTRINE

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Lexington Insurance Company participated in a tower of coverage for Dresser Industries, a manufacturer of asbestos-containing products that was forced into bankruptcy by the multi-billion dollar exposure it faced arising from product liability litigation against it. In the context of the bankruptcy proceeding, Dresser commenced an insurance coverage action against its various liability insurers. The several insurers named as defendants, including Lexington, ultimately participated in a global settlement, at a figure determined by an outside consultant hired by the group of settling insurers. For its part, Lexington utilized its own “bathtub” method of allocation to determine which of its policies would contribute to its share of the settlement, and in what amounts. By this method, each of its exposed policies were layered (as though in a bathtub) according to their layers of coverage, and those that were “underwater” given the settlement structure were tendered to their limits. Based on this analysis, Lexington paid out the limits under two particular $10,000,000 policies. As a participating reinsurer on these two policies, Clearwater denied Lexington’s claim under the theory that Lexington’s use of the “bathtub” methodology was contrary to the recommendations of the outside consultant that determined the ultimate global settlement. Lexington sued and the parties cross-moved for summary judgment on the issue. The Court found in favor of Lexington under the “follow the fortunes” doctrine, noting that there was nothing inherently unreasonable about Lexington’s chosen allocation method. Lexington Ins. Co. v. Clearwater Ins. Co., No. 09-0234C (Mass. Super. Ct. July 26, 2011).

This post written by John Pitblado.