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Minnesota Federal Mutual Court Adopts “Look Through” Basis for Federal Question Jurisdiction in FAA Section 9 Disputes

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The District of Minnesota issued several opinions this summer in a dispute between two insurance companies, Federated Mutual Insurance Co. (“Federated Mutual”) and Federated National Holding Co. (“Federated National”), regarding the similarities between the two companies’ names. Federated Mutual owned the trademark rights to several iterations of the word “Federated” related to insurance. The parties resolved their trademark dispute in 2013 with a co-existence agreement under which Federated National agreed to stop using the term “Federated” in its name within 7 years and minimize industry confusion. By 2016 Federated Mutual initiated arbitration against Federated National because of the latter’s failure to abide by the agreement. An arbitrator concluded that Federated National had indeed breached the agreement but denied a trademark infringement claim asserted by Federated Mutual. Federated Mutual moved to confirm the arbitral award and Federated National responded by moving to confirm the award related to the denial of the trademark infringement claim and to vacate the award otherwise. On June 22, 2018, the court issued a decision on Federated National’s motion to dismiss the petition and Federated Mutual’s petition to confirm.

First, the district court resolved a circuit split on the appropriate approach when courts assess subject matter jurisdiction in the context of FAA Section 9 petitions. Rejecting the approach that courts should consider the face of the petition alone, the court concluded it should “look through” the petition to the underlying arbitration to determine whether a federal question exists. Here, the court “looked through” the petition and because the underlying arbitration involved a federal trademark claim, federal question jurisdiction existed.

Second, the court held that even if federal question jurisdiction did not exist, the court had diversity jurisdiction over the dispute. Even though Federal Mutual primarily sought injunctive relief, the court decided the value of the “object of the litigation”—resolving the confusion surrounding the names in the insurance industry—satisfied the $75,000 jurisdictional minimum.

Third, the court determined it could not exercise general jurisdiction over Federated National but it could exercise specific jurisdiction based on the particular contacts with Minnesota regarding the co-existence agreement. While Federated National did not exercise sufficient control or domination over its subsidiaries with Minnesota contacts to warrant general jurisdiction, the court found specific jurisdiction because the co-existence agreement was governed by Minnesota law and contemplated performance that affected Federated Mutual’s business in the state.

Fourth, the court found proper venue in Minnesota where Federated National was subject to personal jurisdiction there, and therefore deemed to reside in the state. Likewise, the court rejected Federated National’s request to transfer the case to Illinois where it had filed a case to vacate the award.

Fifth, the court confirmed the arbitral award. It noted the limited circumstances under which a court can vacate an award pursuant to the FAA and that Federated National did not assert any of the applicable bases—instead, the court dismissed the argument as Federated National merely disagreeing with the arbitrator’s analysis.

After the court issued its June 22, 2018 opinion, Federated National appealed and moved to stay the court’s decision pending appeal.  In a September 11, 2018 opinion, the District of Minnesota denied that motion. Federated National moved on the grounds that there were substantial questions of law regarding the “look through” basis for Federated Mutual question jurisdiction, doubt that the injunctive relief satisfies the amount in controversy requirement, and whether Federated National had sufficient Minnesota contacts. The court denied the motion largely because Federated National failed to make a strong showing that it was likely to succeed on the merits. All of Federated National’s arguments regarding “substantial questions of law” presented merely the possibility of success on the merits that fail to satisfy the high burden to warrant a stay pending appeal. Additionally, Federated National did not establish any irreparable injury absent a stay, a stay would further injure Federated Mutual by delaying resolution, and the public interest did not support a stay.

This post written by Thaddeus Ewald .

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Second Circuit partially vacates summary judgment ruling in asbestos risk reinsurance case

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The Second Circuit has partially vacated summary judgment rulings in a case involving the reinsurance of asbestos-related risks. The case involves Utica Mutual Insurance Company and it reinsurer Clearwater Insurance Company, regarding Clearwater’s reinsurance obligations arising from claims of Utica’s insured, Goulds Pumps, Inc. Utica had issued various primary and umbrella liability insurance policies to Goulds from the 1950s to the 1990s.  In the 1990s, Goulds faced many thousands of asbestos-related person injury claims, for which it turned to Utica for coverage.  Clearwater had reinsured the 1978 and 1979 umbrella policies under two reinsurance certificates (the “Clearwater Certificates”) and the 1979-1981 umbrella policies under three reinsurance contacts as part of a pool of reinsurers managed by Towers, Perrin, Forster & Crosby, Inc. (the “TPF&C Memoranda”). When Utica sought coverage from Clearwater, Clearwater objected on three grounds: (1) Utica had no liability for the asbestos-related claims under the umbrella policies reinsured by Clearwater; (2) Clearwater’s liability under the Clearwater Certificates was capped at $5 million and $2 million for 1978 and 1979, inclusive of expenses; and (3) Clearwater was not obligated to pay amounts Utica had voluntarily paid Goulds through settlements.

The Second Circuit found that Clearwater’s first objection turned on language in the Utica umbrella policies stating that Utica would cover expenses “not covered by” the primary policies. Clearwater argued this meant that the umbrella policies did not cover asbestos-related claims because such claims were covered by the primary polices, but Utica said it meant the umbrella policies had to cover amounts that Utica did not pay under the primary policies because it interpreted those policies to have aggregate limits of liability that were exceeded. The trial court, which had granted Clearwater summary judgment on other grounds, had not decided what “not covered” meant in this context, and the Second Circuit remanded the matter so the trial court could rule on this issue.

The Second Circuit rejected Clearwater’s second objection, because the Clearwater Certificates contained “follow the form” clauses, the umbrella policies specifically stated that Utica would “reimburse the insured for all reasonable expenses . . . in addition to the applicable limit of liability of this policy,” and the Clearwater Certificates contained nothing inconsistent with an obligation to cover expenses in addition to the limits of liability contained in those Certificates.

Finally, the Second Circuit agreed with Clearwater’s third objection, finding that Clearwater was not obligated to reimburse Utica for its voluntary settlements with Goulds because the Clearwater Certificates did not contain an express follow-the-settlements clause and no such obligation was implied under New York Law. Further, it found that the TPF&C Memoranda only required Clearwater to reimburse Utica for settlements that were authorized by TPF&C, which authorization had never been requested or given.  Utica objected that this condition was excused because it was impossible, as TPF&C had stopped managing the reinsurance pools decades ago, but the court found that, regardless of impossibility, such prior approval was still a condition precedent to Clearwater’s obligation to reimburse Utica for the settlements.

Utica Mutual Insurance Company v. Clearwater Insurance Company, Nos. 16-2535 (L), 16-2824 (XAP) (2d Cir. Sep. 25, 2018).

This post written by Jason Brost.
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New York Federal Court Dismissed Action, Finding That Insurer’s Reimbursement Under Insured’s Captive Reinsurance Agreement Did Not Breach Its Contracts With Insureds

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In this case, plaintiffs Keller Foundations LLC, a limited liability construction company (“Keller”), Hayward Baker Inc., a construction services corporation (“HBI”), and their parent Keller Group PLC (“Keller Group”) brought a suit in New York federal court against Zurich American Insurance Company (“Zurich”) for breach of contract and breach of the contractual and statutory implied covenants of good faith and fair dealing. Zurich had issued a policy to Keller and HBI. Keller Group is also the parent company of Capital Insurance Company, a captive reinsurer that covered a portion of Zurich’s risk under a captive reinsurance agreement that provided that Capital would reimburse $450,000 per loss on the policy in excess of a $50,000 deductible.

The dispute concerns a settlement Zurich entered into with Diaz Fritz Isabel (“Diaz”). In 2009, HBI was hired by Diaz to serve as a subcontractor at an expansion project at a hospital in Florida. Groundwater seeped into the existing portions of the hospital, causing damage to the project. Diaz then sued HBI in Florida state court for breach of contract relating to the flood damage, to which HBI counterclaimed for money that it was owed for its work as subcontractor (the “Diaz/HBI Lawsuit”). Diaz also sought additional insured coverage under the Zurich policy, which was denied by Zurich. Diaz then sued Zurich in Florida federal court, alleging that it was entitled to additional insured coverage with respect to the damages allegedly caused by HBI’s breach (the “Diaz/Zurich Lawsuit”). Zurich counterclaimed, seeking a declaration that it had no duty under the policy to defend or indemnify Diaz. The parties mediated their dispute, which resulted in a settlement under which Zurich agreed to pay Diaz $450,000. Zurich paid Diaz, and then sought reinsurance reimbursement from Capital under the reinsurance agreement, which was paid by Capital. In the New York litigation, plaintiffs claimed that Zurich did not have the authority to enter into the settlement agreement with Diaz and that Zurich unlawfully damaged them by doing so. Zurich initially moved to dismiss the complaint, which the court granted, but without prejudice to the plaintiffs’ ability to bring an amended complaint or a new lawsuit against Zurich. Plaintiffs then filed an amended complaint, which Zurich again sought to dismiss.

The New York federal court again dismissed the amended complaint in its entirety for failure to state a claim. First, the court held that there are no adequate allegations that Zurich breached its duties in the Diaz/HBI Lawsuit as Zurich has paid, and continues to pay, for HBI’s defense in that action. As for the Diaz/Zurich Lawsuit, the court held that since none of the plaintiffs in the New York action were a party to that case, Zurich could not have violated a duty to defend them. The court also noted that plaintiffs did not allege that Zurich failed to repay ‘‘sums’’ for ‘‘damages’’ covered by the Zurich policy to which HBI and Keller are parties. Rather, the court noted that the New York litigation involved Capital’s reimbursement under the captive reinsurance agreement, to which none of the plaintiffs was a party. Thus, the court held “[t]o the extent Keller and HBI are aggrieved by this chain of events, their grievances do not arise under the Policy, but under the Captive Reinsurance Agreement, to which plaintiffs are not parties. And plaintiffs’ grievances are ultimately not with Zurich, but with Capital.” Thus, the court granted the motion to dismiss Keller and HBI’s breach of contract claims, and as for Keller Group, the court ruled that it lacks standing to sue Zurich under the policy. The court also dismissed plaintiffs’ claims for breach of good faith and fair dealing.

Keller Foundations LLC, et al. v. Zurich American Insurance Co., No. 16-6751 (USDC S.D.N.Y. Mar. 29, 2018).

This post written by Jeanne Kohler.
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Colorado Federal Court Adopts Report & Recommendation to Compel Arbitration Despite Challenge

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Plaintiff sought to compel arbitration and enjoin defendant from pursuing claims of negligence and violations of the Colorado Consumer Protection Act (“CCPA”) in state court. Defendant argued the Court should abstain from ruling and allow the state court to address the arbitration issue or dismiss the complaint since the arbitration agreement is unenforceable under state law. As to the abstention argument, the Court applied the Colorado River factors.  It found the state and federal actions to be parallel, but there were no exceptional “factors supporting Defendant’s position in favor of abstention, and since there are several factors that are neutral (or point the other way), the court has little choice but to exercise jurisdiction.” The arbitration agreement’s enforceability was largely dictated by whether Colorado’s Health Care Availability Act (“HCAA”) is preempted by the Federal Arbitration Act (“FAA”). Finding the HCAA was preempted by the FAA, the arbitration agreement was found to be valid and enforceable.

The District Court adopted the Magistrate’s Report & Recommendation, granting the motion to compel and staying the state court proceeding.

Watermark Harvard Square, LLC, et al. v. Willie Lee Calvin, Case No. 1:17-cv-00446 (USDC D. Colo. Mar. 29, 2018).

This post written by Nora A. Valenza-Frost.

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Missouri Federal Court Remands Action To State Court Because Missouri Law “Reverse Preempts” The New York Convention Based On The McCarran-Ferguson Act

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Foresight Energy, LLC (“Foresight”) brought an action in Missouri state court against various domestic and Bermuda and London market insurers for declaratory judgment, breach of contract and statutory vexatious refusal to pay a claim related to an event at a coal mine in Hillsboro, Illinois. The policies at issue provided for an arbitration in London and that the policies were to be governed by Missouri law. One of the insurers removed the action to Missouri federal court, asserting that federal subject matter jurisdiction existed under Chapter 2 of the Federal Arbitration Act (the “New York Convention”) because the agreement did not arise out of a relationship “entirely between citizens of the United States,” given the involvement of the non-U.S. insurers/defendants. Foresight then moved in Missouri federal court to remand the action back to state court because the federal court lacked subject matter jurisdiction, arguing that Missouri law, the law governing the policies, prohibits mandatory arbitration clauses in insurance policies and that Missouri law “reverse preempts” the New York Convention in light of the McCarran-Ferguson Act.

The Missouri federal court noted that McCarran-Ferguson states that “[n]o act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance.” The court then found that the New York Convention, an act of Congress, was not a self-executing treaty and could not itself provide the rule of decision, and that the Missouri anti-arbitration statute was a state law regulating the business of insurance. The court also found that application of the New York Convention to enforce the arbitration agreement in the policies at issue would “invalidate, impair or supersede” the Missouri anti-arbitration statute. The court then held that because the New York Convention was an act of Congress and was not self-executing, McCarran-Ferguson “reverse preempted” the New York Convention, which thus eliminated the basis for federal subject matter jurisdiction. Thus, the Missouri federal court granted Foresight’s motion to remand the action to state court.

Foresight Energy, LLC. v. Certain London Market Ins. Cos., No. 17-CV-2266 (USDC E.D. Mo. Apr. 25, 2018).

This post written by Jeanne Kohler.
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