Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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John Pitblado

Puerto Rico Addresses Impact of the NRRA

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The Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”) provisions are applicable in Puerto Rico. The Office of the Commissioner of Insurance issued a circular letter setting forth the standards for the placement of surplus lines insurance for exempt commercial purchasers (as established by the NRRA). The definition of an exempt commercial customer is set forth in the letter.

Additionally, the letter states that “in order for a nonadmitted insurer domiciled in the United States to be considered an insurer that is eligible to write surplus lines insurance in Puerto Rico, such insurer must be admitted in the insurer’s home state to enter into insurance contracts for the class or classes of insurers which it proposes to contract as surplus lines insurance and shall maintain a minimum capital and surplus in the amount of $15 million.”

Government of Puerto Rico Office of the Commissioner of Insurance Circular Letter CC-2018-1936-D, August 16, 2018.

This post written by Nora A. Valenza-Frost.

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Eleventh Circuit Reverses Order Compelling Arbitration between Non-Signatories

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Plaintiff Outokumpu Stainless USA, LLC (“Outokumpu”) contracted with F.L. Industries, Inc. “”FLI”), a German company, to provide cold rolling mills (“CRMs”), which are used in the production of certain steel products. FLI later contracted with GE Energy Conversion France SAS (“GE Energy”). Both contracts contained arbitration agreements.

Outokumpu and GE Energy became involved in a dispute over failed CRMs. Outokumpu filed suit in Alabama state court and GE Energy removed to Alabama federal court, and moved to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Outokumpu sought to remand to state court. The District Court denied remand and granted GE Energy’s motion to compel arbitration. Outokumpu appealed.

The Eleventh Circuit reversed, finding that, while the District Court properly maintained jurisdiction because the dispute “related to” the arbitration agreement at issue, it reversed the granting of the motion to compel arbitration, as the New York Convention requires that the parties signed a written agreement to arbitrate. Here, no agreement was “signed” by both parties, as, at the time Outokumpu entered into the contract with FLI, GE Energy was a stranger to that contract, and had not yet entered into its own contract with GE Energy, through which it ultimately sought to enforce the Outokumpu – FLI arbitration agreement.

The Court remanded for further proceedings before the Alabama federal district court.

Outokumpu Stainless USA, LLC v. Converteam SAS, No. 17-10944 (11th Cir. Aug. 30, 2018)

This post written by John Pitblado.

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Financial Stability Oversight Council Determines Bank Holding Company Will Not Be Treated As a Nonbank Financial Company Post Merger

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Following its impending merger, Zions Bankcorporation requested the Financial Stability Oversight Council not treat the bank holding company, as a nonbank financial company supervised by the Board of Governors of the Federal Reserve System (“Board of Governors”). The company argued, among other things that:

  • Any material financial distress at the company would not pose a risk to U.S. financial stability;
  • The company was relatively small, lacked complexity and had low levels of interconnectedness; and
  • The company was a source of credit for low interest, minority, and underserved communities.

The Council scrutinized the company and resolved that “if the company were to fail, its expected post-merger legal and operational structure does not appear to have features that would have the likelihood of a disorderly resolution that would pose a threat to U.S. financial stability.”

In determining whether to grant the request, the Council considered the extent to which the company would be subject to regulation and supervision if it were not treated as a nonbank financial institution. It looked at: (1) whether regulators could impose capital and liquidity requirements; (2) whether regulators would have the authority to bring enforcement actions; (3) impose detailed and timely reporting obligations; (4) whether regulators would have the ability to dissolve the company; and (5) the existence and effectiveness of consolidated supervision. Finding there to be sufficient oversight and regulation, the Council granted the company’s request to not be treated as a nonbank financial company post-merger.

FSOC has been criticized in the past for imposing “bank centric” requirements and analyses on insurance companies and other nonbank financial companies.  It remains to be seen whether the analysis in this decision, which focuses more than previous decisions on the activities at issue, marks a departure from the “bank centric” approach to FSOC’s decision making with respect to nonbank financial companies.

Final Decision of the Financial Stability Oversight Council Regarding the Appeal of Zions Bankcorporation, September 12, 2018.

This post written by Nora A. Valenza-Frost.

See our disclaimer.

Eighth Circuit Finds All Claims Involving Consumer Credit Dispute Subject to Arbitration

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A federal court in Minnesota determined that three of Plaintiffs’ claims were not subject to the applicable arbitration clause: (1) state-law usury claims; (2) state and federal financial disclosure claims; and (3) state-law unjust enrichment counts. The Eighth Circuit reversed, directing the District Court to compel arbitration of all claims.

The Circuit Court first looked at whether the arbitration clause was broad or narrow, given that arbitration clauses which cover claims “arising out of” or “relating to” an agreement are treated broadly, so the clause at issue here, which contained both terms, was broad.

The Circuit Court then looked at whether “the underlying factual allegations simply touch matters covered by the arbitration provision.” Looking at the three claims, the Court found that “each claim implicates the credit offered or provided to the consumers because the facts underlying every claim overwhelmingly detail the financing relationship between the consumers and Bluestem.”

Lastly, the Circuit Court noted that the district court had “flipped the inquiry. The question is not whether there was a way to interpret the claims as falling outside the scope of the agreements; instead, where a valid arbitration agreement exists, the claims are arbitrable unless it may be said with positive assurance that the arbitration clause is not susceptible of any interpretation that covers the asserted dispute.”

Parm v. Bluestem Brands, Inc., No. 17-1931, 17-1932 (8th Cir. Aug. 7, 2018)

This post written by Nora A. Valenza-Frost.

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Promissory Note Issued In Satisfaction of Unpaid Insurance Premiums Is Valid And Enforceable, Even If Allegedly Derived From Unapproved Reinsurance Agreement

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Plaintiff sells workers’ compensation insurance through its “EquityComp” program approved by New Jersey law. Defendant purchased an EquityComp policy. Unable to pay its insurance premiums, defendant executed a promissory note acknowledging its indebtedness and promising to pay plaintiff a stated amount in full settlement. Defendant made no payments toward the note, however, leading plaintiff to commence a lawsuit.

Defendant argued that the note was void as against public policy because it derived from a Reinsurance Participation Agreement (RPA) that was executed as part of the EquityComp program, but which was not itself approved by New Jersey regulators. According to defendant, plaintiff used the RPA to unlawfully circumvent state regulations governing policies issued with guaranteed versus loss-sensitive premiums. According to the court, however, the note was valid and enforceable regardless of whether it violated New Jersey insurance regulations. Citing Nebraska law, the court determined that the note was a distinct, unconditional agreement to “settle” a delinquent account. The court refused to “look behind” and nullify that agreement based on defendant’s allegations, particularly where there were no allegations of fraud or mistake in the issuance of the note.

Applied Underwriters, Inc. v. Top’s Personnel, Inc., No. 8:15-cv-00090-JMG-CRZ (USDC D. Neb. Aug. 2, 2018)

This post written by Alex Silverman.
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