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New reinsurance-related and arbitration developments from Carlton Fields

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COURT DECLINES TO DISMISS COMPLAINT REGARDING LETTER OF CREDIT POSTED AS SECURITY FOR REINSURANCE

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Letters of credit were posted as security for a loss fund in an off-short based rent-a-captive reinsurance program. When the reinsurance program ended, and the remaining claims were finalized, it was agreed that the obligors on the letters of credit had satisfied their obligations under the program and that the letters of credit should be returned. The party holding the letters of credit contended, however, that they were legally entitled to retain the letters of credit for use in unrelated rent-a-captive programs. The obligors sued, seeking damages for the failure to release the letters of credit, alleging breach of fiduciary duty and violation of Connecticut’s Unfair Trade Practices Act. The district court denied a motion to dismiss, relying upon the fact that the letters of credit were the property of the obligors, but that the holder was exercising complete control over the instruments. WEB Management LLC v. Arrowood Indemnity Co., Case No. 07-424 (USDC D. Conn. Mar. 5, 2008).

This post written by Rollie Goss.

CALIFORNIA APPELLATE COURT AFFIRMS DECISION TO DISQUALIFY ARBITRATOR in dispute involving lloyd's syndicates

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A California appellate court has affirmed a trial court’s decision to disqualify an arbitrator and vacate an arbitration award based on the arbitrator’s failure to disclose his ties to the plaintiffs’ insurer. Plaintiff, Advantage Medical Services (“AMS”) was insured by two Lloyd’s of London syndicates. The arbitrator and his law firm represented several protection and indemnity clubs that obtained reinsurance through various Lloyd’s of London syndicates.

The court held that disclosure of the arbitrator’s ties to AMS’s insurer “could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” As such, the court affirmed the trial court’s decision to vacate the arbitrator’s interim award in favor of the plaintiffs. Additionally, the appellate court held that “the statutory right to petition a trial court to vacate an arbitration award based on an arbitrator’s failure to make required disclosure cannot be waived by the [AAA] rule stating its determinations regarding disqualification are conclusive.” Advantage Medical Services v. Hoffman, No. 05CC7459 (Cal. Ct. App. March 3, 2008).

This post written by Lynn Hawkins.

CALIFORNIA APPELLATE COURT AFFIRMS DECISION TO DISQUALIFY ARBITRATOR in dispute involving lloyd’s syndicates

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A California appellate court has affirmed a trial court’s decision to disqualify an arbitrator and vacate an arbitration award based on the arbitrator’s failure to disclose his ties to the plaintiffs’ insurer. Plaintiff, Advantage Medical Services (“AMS”) was insured by two Lloyd’s of London syndicates. The arbitrator and his law firm represented several protection and indemnity clubs that obtained reinsurance through various Lloyd’s of London syndicates.

The court held that disclosure of the arbitrator’s ties to AMS’s insurer “could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” As such, the court affirmed the trial court’s decision to vacate the arbitrator’s interim award in favor of the plaintiffs. Additionally, the appellate court held that “the statutory right to petition a trial court to vacate an arbitration award based on an arbitrator’s failure to make required disclosure cannot be waived by the [AAA] rule stating its determinations regarding disqualification are conclusive.” Advantage Medical Services v. Hoffman, No. 05CC7459 (Cal. Ct. App. March 3, 2008).

This post written by Lynn Hawkins.

MOTION TO COMPEL DISCOVERY OF LOSS RESERVES AND REINSURANCE GRANTED IN PART AND DENIED IN PART

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A plaintiff seeking to compel a defendant insurance company’s disclosure of loss reserves in connection with the plaintiff’s claims of bad faith, breach of contract, and violation of the Washington consumer protection act was not permitted to discover that information, since the plaintiff failed to assert how loss reserve information would be relevant to its claims. The plaintiff was entitled to the production of a reinsurance treaty, which the court held must be produced as part of the “initial disclosures” required by the Federal Rules of Civil Procedure. However, the plaintiff was not permitted to obtain discovery of communications between the defendant and its reinsurer regarding the treaty. The court determined that such communications were irrelevant to the interpretation of the underlying policy. Heights at Issaquah Ridge Owners Ass’n v. Steadfast Insurance Co., Case No. C07-1045RSM (USDC W.D. Wash. Dec. 13, 2007).

This post written by Brian Perryman.

NONSIGNATORY TO ARBITRATION AGREEMENT NOT PERMITTED TO COMPEL ARBITRATION AGAINST REINSURER

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The California Court of Appeal recently answered the question of when a nonsignatory to a reinsurance treaty containing an arbitration clause can compel arbitration against a signatory to that agreement. In 1979 and 1980, respectively, Allianz Global Corporate and Specialty Company (AIC Global) issued excess umbrella insurance policies to its insured (MacArthur Company). Thereafter, Clearwater Insurance issued two facultative certificates to AIC Global reinsuring the MacArthur policies. The facultative certificates did not contain an arbitration clause. In 1982, Clearwater entered into two excess reinsurance treaties with AIC Global’s sister company, Allianz Underwriters Insurance Company (AUIC Underwriters). Both of these treaties contained arbitration clauses. AIC Global and AUIC Underwriters subsequently settled asbestos liability claims made against MacArthur, and made a cash call to Clearwater, which refused to pay. AUIC Underwriters then filed an arbitration demand against Clearwater, adding AIC Global as a co-petitioner. After Clearwater contested the arbitration vis-à-vis AIC Global and filed a counterdemand, AUIC Underwriters and AIC Global petitioned a California trial court to compel arbitration. The trial court granted the petition, and Clearwater appealed.

On appeal, the parties disputed the application of the doctrine of equitable estoppel, which sometimes allows nonsignatories to invoke arbitration clauses to compel signatories into arbitration when the signing party has signed an agreement to arbitrate but attempts to avoid arbitration by suing the nonsignatory defendant for claims that are based on the same facts and are inherently inseparable from claims against a signatory defendant. The Court of Appeal determined that the evidence submitted insufficiently substantiated an “integral relationship” between AIC Global and AUIC Underwriters, since there was no showing of how these two companies were jointly involved in the negotiation of either the MacArthur policies or the Clearwater reinsurance agreements. The court also determined that there had not been a showing that AIC Global’s claim was “intertwined” with the 1982 treaties containing the arbitration clause. On this record, the Court of Appeal reversed and directed the trial court to set aside its order compelling Clearwater to arbitrate with AIC Global. Clearwater Insurance Co. v. Superior Court, Case No. B200692 (Cal. Ct. App. Jan. 31, 2008).

This post written by Brian Perryman.