Carlton Fields

EXPENSES ONCE AGAIN FOUND TO BE PART OF COVERAGE LIMIT IN BATTLE AGAINST REINSURER

December 30, 2014 by Carlton Fields

In November, an Illinois appellate court affirmed an order granting defendant MidStates Reinsurance Corporation’s (“MidStates”) motion for judgment on the pleadings because the reinsurer had fulfilled its obligation to pay up to the policy limits of various unambiguous facultative contracts.

Continental Casualty Company (“Continental”) sought reinsurance coverage for excess third-party liability and commercial casualty policies issued for RSR Corporation and Borg-Warner Corporation. In the 1990s and early 2000s, environmental claims arose from injuries linked to asbestos and hazardous waste at these insured facilities. MidStates alleged that subsequent remittances to Continental were in line with the limits provided in the reinsurance certificates. Continental alleged that MidStates breached their contract as the reinsurance certificates did not include limits on expenses.

Relying on Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and its progeny, the court found that the reinsurance certificates placed a limit on indemnity costs and expenses. Looking at the four corners of the contracts, the court found no indication that expenses were removed from the liability limit. The court found that even though only two of the five certificates included the language “inclusive of expenses,” this did not create an ambiguity. Instead, “this inclusion clearly appears to be an abundance of caution rather than an intention to exclude expenses from the liability cap.” Continental Cas. Co. v. MidStates Reinsurance Corp., No. 1-13-3090 (Ill. App. Ct. Nov. 4, 2014).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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SPECIAL FOCUS: DISCLOSURE OF REINSURANCE AGREEMENTS UNDER FEDERAL RULE OF CIVIL PROCEDURE 26

December 29, 2014 by Carlton Fields

Federal Rule of Civil Procedure 26(a)(1)(A)(iv) requires the disclosure of certain insurance agreements as part of the obligations of a party to make required initial disclosures. Under what circumstances might that provision require the disclosure of reinsurance agreements? John Camp discusses that issue in a Special Focus feature.

This post written by Rollie Goss.

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FIRST CIRCUIT CONCLUDES PLAINTIFF’S DELAY WAIVED ARBITRATION CLAUSE

December 26, 2014 by Carlton Fields

Joca-Roca Real Estate, LLC sued Robert T. Brennan asserting claims of fraud and breach of contract arising out of an agreement between the two parties which contained an arbitration clause. Although Brennan raised the failure to arbitrate as an affirmative defense, it never pursued arbitration. Instead, the parties engaged in significant discovery. On the eve of trial, Joca-Roca moved to stay the proceedings pending arbitration. Both the magistrate judge and the district court denied the motion to stay, finding that Joca-Roca waived its arbitral rights.

On appeal, the First Circuit noted that, while federal law favors agreements to arbitrate, arbitration clauses can be waived expressly or through conduct. In determining whether a conduct-based waiver occurred, a court must ascertain whether there has been undue delay in the assertion of arbitral rights and whether, if arbitration supplanted litigation, the other party would suffer unfair prejudice. The longer the delay and the more extensive the litigation-related activities that have taken place, the stronger the inference of prejudice. Joca-Roca’s attempt to invoke the arbitration was deemed not only untimely, but unsupported by an explanation for the belated request. Moreover, during this time, Brennan was prejudiced because he was forced to engage in discovery which would not have been required in arbitration. The prejudice to Brennan was even greater given the looming trial date. On this basis, the First Circuit affirmed the lower court’s ruling denying Joca-Roca’s motion to stay the proceedings pending arbitration. Joca-Roca Real Estate, LLC v. Brennan, No. 14-1353 (1st Cir. Dec. 1, 2014).

This post written by Leonor Lagomasino.

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DISTRICT OF COLUMBIA APPROVES AMENDMENTS TO CAPTIVE INSURANCE COMPANY ACT OF 2004

December 24, 2014 by Carlton Fields

The Council and Mayor of the District of Columbia have approved enacting amendments to the Captive Insurance Company Act of 2004 to, in part, strike references to segregated accounts; clarify certain statutory requirements for protected cell captive insurers and protected cells; confirm the confidentiality of capital insurers’ license application materials and clarify when they may be shared; and permit the Commissioner of the Department of Insurance, Securities and Banking to extend or waive the requirement to conduct a financial examination of captive insurers every 5 years upon the satisfaction of specified criteria. The amendments will take effect following a 30-day period of congressional review and will be cited as the “Captive Insurance Company Amendment Act of 2014.” D.C. Act 20-497 (Dec. 8, 2014).

This post written by Renee Schimkat.

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CALIFORNIA FEDERAL DISTRICT COURT COMPELS ARBITRATION IN REINSURANCE DISPUTE

December 23, 2014 by Carlton Fields

Randazzo Enterprises sued its reinsurer, Applied Underwriters Captive Risk Assurance Company, Inc. in California federal court over Applied’s calculation of premiums of the reinsurance agreement entered between them. Invoking the arbitration clause set forth in the reinsurance agreement, Applied filed a demand for arbitration and, in the pending federal case, moved to compel arbitration and to dismiss Randazzo’s complaint. The court determined it must first consider whether a valid arbitration clause exists and, if so, whether the arbitration encompasses the dispute at issue. To do so, the court found it must apply ordinary state law principles governing the formation and construction of contracts. Applying these principles to the facts before it, the court first rejected Randazo’s argument that the arbitration clause was unenforceable under Nebraska law which the parties agreed would govern. Nebraska law only applied to issues of substantive law and not to arbitration. Moreover, even if Nebraska law were to apply, it was preempted by the Federal Arbitration Act.

The court then turned to Randazzo’s argument that the arbitration agreement was unconscionable. Under California law, a contract must be unconscionable both procedurally and substantively in order to be rendered invalid. Here, because Randazzo had no opportunity to negotiate the arbitration provision, the agreement was an adhesion contract and therefore procedurally unconscionable. The Court then analyzed whether two specific provisions were substantively unconscionable. Under California law, a contract is substantively unconscionable when it is so one-sided that “it shocks the conscience.” The provision regarding the choice of arbitrator, requiring the arbitrators to be active or retired disinterested officials of insurance or reinsurance companies, was not substantively unconscionable. However, the provision which allowed only Applied to seek injunctive relief in Court was found substantively unconscionable, since it exceeded the rights afforded parties in an arbitration under California law and was so one-sided that it could not be justified as a legitimate commercial need. However, because California law permits a court to sever an unconscionable provision from an agreement, the parties’ agreement was not invalid because that one clause could easily be stricken without the need to reform the agreement. Finally, the court concluded that Randazzo’s claims related to the execution, delivery, construction or enforceability of the reinsurance contract, such that all of Randazzo’s claims were subject to arbitration. Randazzo Enterprises, Inc. v. Applied Underwriters Captive Risk Assurance Company, Case No. 5:14-CV-02374-EJD (USDC N.D. Cal. Dec. 11, 2014).

This post written by Leonor Lagomasino.

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