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New reinsurance-related and arbitration developments from Carlton Fields

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COURT DISTINGUISHES BETWEEN CLAIMS FOR RELIEF AND AFFIRMATIVE DEFENSES IN DENYING REHEARING OF ORDER COMPELLING ARBITRATION

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On May 11, 2016 we reported on a dispute between certain captive insurance administrative service providers (Capstone) against various defendants concerning the rights to certain intellectual property related to a captive insurance arrangement. Following a mediation and a settlement between the parties of other claims between them (excluding the intellectual property claims), a dispute arose regarding whether the defendants’ affirmative defenses were released in the settlement. To resolve that issue, Capstone sought arbitration pursuant to an engagement letter that was part of the operative administrative services contract they and their attorneys entered into with the defendants as part of the captive insurance arrangement. The defendants opposed arbitration under the engagement letter, arguing that the parties’ claims and affirmative defenses were not arbitrable. The court compelled arbitration, holding that arbitrability was to be decided in arbitration under the terms of the arbitration clause in the engagement letter.

The defendants then filed the instant motion for rehearing, arguing that an order in a related case which denied arbitration under the same engagement letter, precluded arbitration in this case under res judicata. The court rejected that argument and denied rehearing, distinguishing between the claims for relief at issue in the order in the related case, and the affirmative defenses to those claims at issue in this case. While the claims for relief implicate a particular section of the administrative services agreement based on which the related order denied arbitration, the defenses at issue in this case do not directly implicate that section of the agreement. Consequently, the court ruled, the related order denying arbitration “did not decide the issue before the Court,” res judicata did not apply, and the court correctly compelled arbitration to decide arbitrability. Capstone Associated Services, Ltd., et al. v. Organizational Strategies, Inc., et al., No. H-15-3233 (USDC S.D.Tex. May 20, 2016).

This post written by Michael Wolgin.

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SURPLUS LINES CLEARINGHOUSE PROVIDES INSTRUCTIONS FOLLOWING THE DISSOLUTION OF THE NON-ADMITTED INSURANCE MULTISTATE AGREEMENT (NIMA)

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In a Special Focus article posted on May 2, 2016, we addressed the uncertain future of the multi-state allocation of non-admitted premium tax revenue. The Non-admitted and Reinsurance Reform Act (NRRA) provides for individual states to determine the allocation of premium taxes collected for risks outside of the home state of the insured; only the insured’s home state may regulate and tax non-admitted insurance. Two groups (NIMA and SLIMPACT) were then established to address how states should allocate the tax revenue. We previously addressed how both groups have proven to be ineffective at engaging enough state membership and have failed to address the allocation concerns. Earlier this year, the Board of Directors of NIMA decided to discontinue its operations and dissolve the organization after seeing its membership dwindle from 12 members to five. On June 30, 2016, the Surplus Lines Clearinghouse, a division of the Florida Surplus Lines Service Office, issued a bulletin providing the following instructions: (1) no multistate new business, renewal or reinstatement transactions effective on or after October 1, 2016 will be accepted through the Surplus Lines Clearinghouse multistate reporting platform (after that date, relevant exposures in more than one jurisdiction should be reported directly to the home state); (2) additional premium, return premium and cancellation endorsements on multistate policies effective prior to October 1, 2016 should be filed through the Surplus Lines Clearinghouse multistate reporting platform through September 30, 2017; and (3) the Surplus Lines Clearinghouse will continue to accept surplus lines filings and payments for South Dakota and Wyoming policies effective October 1, 2016 and after, but at that time all new and renewal multistate policies will be reported as single state policies with 100% of the premium being reported to and taxed by the respective home state.

This post written by Joshua S. Wirth.

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PANEL DID NOT COMMIT MANIFEST DISREGARD OF THE LAW WHEN IT REJECTED RES JUDICATA DEFENSE

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A construction company appealed an order confirming an international arbitration award, which had denied the company’s demand for unpaid monies against an Antiguan medical school. The award also granted the medical school’s counterclaim, which had sought a refund of certain tax payments it had made to the company during the project that were earmarked for the company to pay the Antiguan and Barbudan tax authorities, but which the company never paid. In upholding the arbitration award, the Second Circuit rejected the company’s argument that the panel had committed a manifest disregard of the law by declining to apply res judicata and related claim or issue preclusion defenses due to a prior litigation between the parties. The court “correctly concluded that the arbitral panel ‘manifestly did not ‘ignore’ or ‘pay no attention to’ these doctrines; instead, it explicitly considered and rejected applying both doctrines, and in each case had more than ‘barely colorable justification.’” American University of Antigua-College of Medicine v. Leeward Construction Co., Ltd., Case No. 15-1595-cv (2d Cir. June 24, 2016).

This post written by Barry Weissman.

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D.C. COURT OF APPEALS REVERSES DISMISSAL AGAINST CZECH REPUBLIC, FINDING JURISDICTION UNDER NEW YORK CONVENTION

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In a divided opinion, the U.S. Court of Appeals for the D.C. Circuit reversed a district court ruling that dismissed a case against the Czech Republic on jurisdictional grounds. The Appeals Court revived the case, finding the conditions were satisfied for jurisdiction over a foreign arbitration award involving a sovereign: (1) there was a basis upon which the District Court could enforce the foreign arbitration award; and (2) the Czech Republic did not have sovereign immunity from the enforcement action.

The Court looked to the Foreign Sovereign Immunities Act (“FSIA”), which provides the “sole basis for obtaining jurisdiction over a foreign state” by the courts of the United States. The FSIA contains an arbitration exception to sovereign immunity. In order to fall within the exception, the Court must determine: (1) whether the parties had a defined legal relationship – whether contractual or not; and (2) whether the arbitration award “is or may be governed by a treaty or other international agreement in force for the United States.” The Appeals Court answered both questions in the affirmative. First, the agreement between the parties, though relatively informal, was enough to establish a legal relationship: the petitioner provided training, technology and coordination required for modernizing the Czech Republic’s plasma system, and the respondent, the Czech government, knew of and supported these efforts by providing necessary administrative permits.

Second, both the Czech Republic and the United States are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), 28 U.S.C. § 1605(a)(6), which provides jurisdiction to the district courts of the United States. However, the United States has adopted the commercial restriction to the enforcement of foreign arbitral awards, requiring the dispute to be “commercial in nature”. Looking to its treatment in the field of international arbitration, “commercial” was defined as a “matter of relationships, whether contractual or not, that arise out of or in connection with commerce.” Here, the parties were engaged in providing healthcare technology and medical services which the Court determined “has an obvious connection to commerce” and thus was “commercial in nature.” The fact the Czech Republic funded that technology “through a percentage of blood plasma collected rather than through an up-front payment does not change the commercial nature of the relationship, which turned in large part on the transmission of valuable commodities from one party to the other.”

As both a legal basis existed for the District Court to enforce the arbitration award, and the Czech Republic did not have sovereign immunity pursuant to the New York Convention and the nature of the parties’ agreement, the District Court’s sua sponte dismissal of the matter for lack of jurisdiction was reversed.

Diag Human v. Czech Republic Ministry of Health, No. 14-7142 (D.C. Cir. May 31, 2016)

This post written by Nora A. Valenza-Frost.
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CALIFORNIA FEDERAL COURT DISMISSES CLAIMS IN CLASS ACTION TO THE EXTENT PLAINTIFF’S CLAIMS ARE BASED ON THE THEORY THAT RATES WERE NOT FILED PURSUANT TO THE CALIFORNIA INSURANCE CODE

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In this class action lawsuit in a California federal court, Shasta Linen Company and all those similarly situated brought an action against Applied Underwriters, Inc. and its affiliate entities. Shasta Linen alleges that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated the California Insurance Code and Regulatory provisions by unlawfully using a Reinsurance Participation Agreement (“RPA”) to control workers’ compensation rates (and thus, charged higher rates) without first having the RPA filed and approved by the Department of Insurance as required by law.

Defendants filed a motion to dismiss Shasta Linen’s claims to the extent that they seek to invalidate the RPA’s rates on the theory that the RPA is an unfiled plan pursuant to Section 11735 of the California Insurance Code because according to the defendants, “an unfiled rate is not an unlawful rate.” The court noted that Section 11735 requires every insurer to “file with the Commissioner all rates, rating plans, and supplementary rate information that are to be used.” Section 11737 additionally provides that “[t]he Commissioner may disapprove a rate if the insurer fails to comply with the filing requirements under Section 11735.” The court then noted that under Section 11737, the use of a rate that has not been filed is not an unlawful rate unless and until the Commissioner conducts a hearing and disapproves a rate. As the Complaint did not allege that the Commissioner conducted a hearing and disapproved the RPA’s rates, the court held that Shasta Linen fails to state a claim that the RPA’s rates are void based on the defendants’ failure to comply with Section 11735, and thus dismissed the claims to the extent they seek to void the RPA’s rates on the theory that defendants did not comply with Section 11735. The court however noted that Shasta Linen’s claims based on California’s Unfair Competition Law and its fraud claims are not limited to the grounds that defendants did not comply with Section 11735, and thus defendants’ motion to dismiss was denied with regard to those claims.

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., et al., No. 2:16-158 (E. D. Cal. June 20, 2016).

This post written by Jeanne Kohler.

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