John Pitblado

CALIFORNIA FEDERAL COURT CONFIRMS ARBITRATION AWARD BENEFITTING THIRD-PARTY

February 28, 2018 by John Pitblado

The U.S. District Court for the Northern District of California denied a petitioner’s motion to vacate an arbitration award on the grounds of the award being “irrational and illogical,” erroneous, and that the arbitrator manifestly disregarded the law and engaged in prejudicial misconduct.

The Court found the arbitration award was not irrational or erroneous because the parties’ agreement provided authority for the arbitrator’s decision to order petitioner to pay money to a third-party (which was an affiliate of the respondent). With respect to the argument that the arbitration award was erroneous, the Court noted that “neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award under the [Federal Arbitration Act] statute, which is unambiguous in this regard.”

The Court also found the arbitrator did not manifestly disregard the law, as petitioner did “not cite any clear and established law that prohibits arbitrators from issuing awards that benefit third parties. Moreover, even if there were an applicable law prohibiting arbitration awards to third parties, [petitioner] does not show that the arbitrator ‘recognized’ and ‘ignored’ that law.”

Lastly, the Court found the arbitrator did not engage in prejudicial misconduct or misbehavior, finding that the parties received a fundamentally fair hearing. While petitioner argued that it was prejudiced because it did not have notice of the third-party claims against it for unpaid premiums, the Court noted that petitioner did “not identify any other evidence it would have attempted to introduce, or other arguments it would have made, had it known that the arbitrator contemplated ordering [petitioner] to pay [the third-party] for the outstanding premiums. In essence, [petitioner] takes issue with the arbitrator’s factual findings and legal conclusions, and not the fairness of the proceeding.”

American, Etc., Inc., v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 17-cv-03660-DMR (USDC N.D. Cal. Dec. 28, 2017)

This post written by Nora A. Valenza-Frost.

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COURT ENFORCES ARBITRATION AWARD, FINDS REINSURER MUST PAY SETTLEMENT BETWEEN RETROCESSIONAIRE AND POLICYHOLDER

February 27, 2018 by John Pitblado

Granting a motion to enforce an arbitration award, the U.S. District Court for the Southern District of New York has held that a reinsurer is liable for a $5 million settlement entered into between a policyholder and the reinsurer’s retrocessionaire.

The action arises out of insurance policies issued to Companhia Siderurgica Nacional S.A. (“CSN”), which were reinsured by defendant, IRB Brasil Resseguros S.A. (“IRB”), and retroceded to plaintiff, National Indemnity Company (“NICO”). In settlement of an action between CSN and IRB arising out of a large loss suffered by CSN, the two executed an agreement in which they agreed that IRB had not retroceded CSN-related risks to NICO, and that IRB would cooperate in CSN’s effort to recoup a $9 million Premium that CSN had paid to NICO for the retrocessional coverage (the “Premium”). In a related arbitration between NICO and IRB, however, the panel subsequently issued an award holding that NICO was entitled to retain the Premium, and that IRB must hold harmless and indemnify NICO against CSN’s claim for repayment thereof (the “Award”). The Award was subsequently confirmed by the S.D.N.Y. and affirmed by the Second Circuit. While confirmation of the Award was pending, CSN filed an action against NICO in New Jersey District Court regarding liability for the Premium. CSN and NICO later settled that action for $5 million and agreed that, instead of NICO paying the $5 million from its own funds, NICO would seek a judgment against IRB based on its hold harmless and indemnity rights against IRB under the Award. The instant action followed.

On NICO’s motion to enforce the Award, IRB argued that the $5 million CSN-NICO settlement was not subject to the Award because it did not require NICO to pay CSN $5 million from its own funds. IRB argued that, under New York law, an insurer’s obligation to indemnify extends only to the damages the insured is legally obligated to pay. But the court rejected the argument, reasoning that IRB’s obligation to pay any amount NICO owed to CSN was embodied in a court-ordered judgment predating the CSN-NICO settlement. As such, it was irrelevant that the CSN-NICO settlement released NICO from any liability for the $5 million settlement. In addition, the court rejected IRB’s argument that the CSN-NICO settlement was unreasonable or was reached in bad faith, emphasizing that the $5 million was $4 million less than the $9 million Premium that IRB was actually required to indemnify.

National Indemnity Co. v. IRB Brasil Resseguros S.A., No. 15-3975 (USDC S.D.N.Y. Jan. 23, 2008)

This post written by Alex Silverman.

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FOURTH CIRCUIT FINDS INCORPORATION OF JAMS RULES CONSTITUTES PARTIES’ INTENT TO DELEGATE QUESTION OF ARBITRABILITY TO ARBITRATOR

February 26, 2018 by John Pitblado

The Fourth Circuit, noting that expansive general arbitration clauses will not suffice to force the arbitration of arbitrability disputes, looked at whether the parties’ express incorporation of JAMS Rules constituted “clear and unmistakable evidence of the parties’ intent to delegate to the arbitrator questions of arbitrability.”

Though not previously addressed by the Fourth Circuit, both the Tenth and Fifth Circuits have concluded that the incorporation of JAMS Rules constitutes “clear and unmistakable” evidence of intent to delegate arbitrability to the arbitrator. Other circuits – the First, Second, Eighth, Ninth, Eleventh, D.C. and Federal circuits – “have concluded that the incorporation of arbitral rules substantively identical to those found in JAMS Rule 11(b) constitutes clear and unmistakable evidence of the parties’ intent to arbitrate arbitrability.”

Adopting its sister circuit courts’ reasoning, the Fourth Circuit similarly held that “the explicit incorporation of JAMS Rules serves as ‘clear and unmistakable’ evidence of the parties’ intent to arbitrate arbitrability. Because the JAMS Rules expressly delegate arbitrability questions to the arbitrator,” the matter should have been referred to the arbitrator on that basis.

Simply Wireless, Inc. v. T-Mobile US, Inc., No. 16-1123 (4th Cir. Dec. 13, 2017)

This post written by Nora A. Valenza-Frost.

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S.D.N.Y. DISMISSES INSURER’S CLAIMS AGAINST REINSURANCE BROKER UNDER ECONOMIC LOSS DOCTRINE, FINDS NO SPECIAL RELATIONSHIP

February 6, 2018 by John Pitblado

A New York federal court has dismissed a ceding insurer’s counterclaims against its reinsurance broker, finding the insurer’s claims for negligence and breach of fiduciary were barred by New York’s economic loss doctrine, and that there was no special relationship between the parties.

Sawgrass Mutual Insurance Company (Sawgrass) alleged that Holborn Corporation (Holborn) breached a fiduciary duty by failing to recommend that Sawgrass purchase a specific reinsurance product that Sawgrass claimed would have saved it hundreds of thousands of dollars. Holborn moved to dismiss the claims under the economic loss doctrine, which bars tort-based actions premised on purely economic injury that resulted from a breach of contract. Arguing that the law of the state in which the tort occurred should apply, Sawgrass contended that New York’s version of the economic loss doctrine was inapplicable because Florida law governed the dispute. But the court rejected this argument, holding that New York has the greatest interest in the litigation since it is the only state in which the wrongful conduct allegedly took place. The court also rejected Sawgrass’ argument that the “special relationship” exception to the economic loss doctrine applied. The court noted that, under New York law, brokers “have no continuing duty to advise, guide or direct a client to obtain additional coverage.” Therefore, absent allegations that the parties engaged in conversations regarding the specific reinsurance product at issue, general discussions between them about “the most advantageous” coverage for Sawgrass were insufficient to create a special relationship.

Holborn Corp. v. Sawgrass Mutual Insurance Co., No. 16-09147 (USDC S.D.N.Y. Jan. 17, 2018)

This post written by Alex Silverman.

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NEW YORK’S HIGH COURT SCALES BACK REINSURANCE LIABILITY CAP

January 15, 2018 by John Pitblado

In Excess Insurance Co. Ltd. v Factory Mutual Insurance Co., 3 NY3d 577 (N.Y. 2004), New York’s high court held that, under a facultative reinsurance agreement, the reinsurer’s liability was limited to a per occurrence cap, despite the fact that that the underlying policy covered expenses, such as underlying defense costs, in addition to indemnity for losses.

On a certified question from the Second Circuit Court of Appeals, that same court addressed the scope of its holding in Excess, finding that its prior decision does not impose a per se cap, but that rather the question of the limits of liability under a facultative reinsurance agreement is governed by the specific terms and provisions of the facultative agreement at issue. The Court noted that its decision in Excess was limited to the facts before it, and did not announce a presumption or rule of construction favoring a cap in all factual circumstances: “Under New York law generally, and in Excess in particular, there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured’s defense costs.”

It distinguished Excess on its facts, noting that in Excess, the loss adjustment expenses were incurred in litigation between the insurer and its policyholder, and they were not costs that the insurer was obligated to pay under the terms of the underlying policy itself. It thus held that, “[w]hether a similar (or even identical) limitation clause would apply to third-party defense costs, in a certificate reinsuring a liability insurance policy, was never at issue” in Excess.

Limiting its ruling to the certified question before it, the Court did not analyze the issue further to determine the ultimate outcome. Rather, the case now reverts back to the Second Circuit, given this guidance.

Global Reinsurance Corporation of America v. Century Indemnity Co., No. 124 (N.Y. Dec. 14, 2017).

This post written by John Pitblado.
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