John Pitblado

DISTRICT COURT DISMISSES BREACH OF DUTY OF UTMOST GOOD FAITH CLAIMS UNRELATED TO BREACH OF CONTRACT IN REINSURANCE DISPUTE

July 7, 2015 by John Pitblado

The Middle District of Florida recently granted in part and denied in part plaintiff Stewart Title Guaranty Company’s (“Stewart Title”) motion to dismiss defendant First American Title Insurance Company’s (“First American”) counterclaim for breach of the utmost duty of good faith. As noted in a prior post, this case involves disputes regarding reinsurance agreements that First American entered into with Old Republic National Title Insurance Company (“Old Republic”) and Stewart Title. In these agreements, Old Republic and Stewart Title agreed to assume part of First American’s contractual liability under a title insurance policy.

When mechanic’s liens were discovered on the property at issue, First American negotiated a $41 million settlement of the claim before turning to Old Republic and Stewart Title to pay their proportionate share of that sum. While Old Republic paid under its reservation of rights, Stewart Title chose not to pay, and instead, sued First American for rescission, reformation, declaratory judgment, and negligence. First American countersued Stewart Title for breach of contract, breach of the utmost duty of good faith, and declaratory judgment.

Stewart Title moved to dismiss First American’s counterclaim for breach of the utmost duty of good faith on the same bases as a prior dismissal granted in favor of Old Republic. First American contended that Stewart Title’s breach of the reinsurance agreement differed from Old Republic’s alleged breach in that Stewart Title did not pay under its reservation of rights. First American’s counterclaim alleged that Stewart Title breached the utmost duty of good faith in the following four ways: (1) failing to pay the claim as required under the insurance contract; (2) engaging in delay tactics; (3) using First American’s documents against it in support of its allegations and preemptively filing suit against First American; and (4) accusing First American of making misrepresentations and omissions. While the district court held that the first two claims necessarily could be tied to breach of the reinsurance contract, the latter two claims could not and, consequently, the latter two were dismissed.

Old Republic Nat. Title Ins. Co. v. First American Title Ins. Co., No. 8:15-cv-126-T-30EAJ, 2015 WL 1530611 (USDC M.D. Fla. June 8, 2015)

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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SIXTH CIRCUIT DENIES ADDITIONAL ATTORNEYS’ FEES FOR POST-ARBITRATION CONFIRMATION PROCEEDING, FINDING THEM BEYOND THE SCOPE OF PARTIES’ AGREEMENT

July 6, 2015 by John Pitblado

The Sixth Circuit affirmed the district court’s denial of a motion for attorneys’ fees and enhancement of fees resulting from post-arbitration confirmation proceedings. The issue before the court was whether the agreement between Crossville Medical Oncology and Glenwood Systems permitted the court to award the additional attorneys’ fees.

Crossville Medical Oncology and its single shareholder Dr. Tabor sued Glenwood Systems for breach of contract. The agreement was determined to have an enforceable arbitration clause, and following arbitration, Dr. Tabor was found to have signed the agreement in his individual capacity and to have breached. After an interlocutory appeal regarding Dr. Tabor’s personal consent to arbitration, the district court entered a judgment confirming the arbitration award. Glenwood moved for attorneys’ fees resulting from the post-arbitration litigation proceedings, which the district court denied for lack of authority.

The appellate court affirmed, finding that neither the Federal Arbitration Act nor the parties’ agreement authorized the court to grant attorneys’ fees for post-arbitration confirmation proceedings. The court reasoned that it could only award attorneys’ fees if it was authorized by statute or by the specific language of the parties’ agreement. While the agreement subjected “[a]ny dispute arising out of or in connection with” the agreement to arbitration and provided for attorneys’ fees for the prevailing party, the only jurisdiction given to the courts in the agreement was to “enter [the award] as a judgment.” The court construed the agreement to authorize “an arbitrator to award attorneys’ fees and costs during arbitration,” but merely authorized “the district court to enter the award as a judgment.” The court distinguished the case from others in which parties’ broad agreements contemplated fees for the prevailing party in “any action at law or in equity,” emphasizing that this agreement included attorneys’ fees from arbitration in the “award” to be entered as a judgment by the court, thereby limiting the court’s authority to award any additional attorneys’ fees.

The appellate court similarly rejected a bad-faith argument for additional attorneys’ fees, but remanded the case to the district court on the issue of prejudgment interest, finding the lower court’s short, handwritten opinion devoid of analysis relevant to the appropriateness of that interest. Crossville Med. Oncology, P.C. v. Glenwood Sys., LLC, No. 14-5444 (6th Cir. May 1, 2015).

This post written by Rollie Goss.

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ADMINISTRATIVE CLOSING OF EMPLOYMENT DISCRIMINATION CASE SUBJECT TO ARBITRATION AGREEMENT BARS APPELLATE REVIEW

June 18, 2015 by John Pitblado

In Walker v. TA Operating, LLC et. al., Case No. 14-41046 (5th Cir. May 22, 2015), the Fifth Circuit Court of Appeals dismissed an appeal of an employment discrimination case subject to an arbitration agreement due to lack of jurisdiction. In the underlying case, the district court granted the defendant’s motion to compel arbitration and administratively closed the case because the district court determined that the parties were subject to a valid and applicable arbitration agreement. The district court’s decision was dictated by the Federal Arbitration Act (the “FAA”), which grants district courts two powers: 1) the authority to issue an order directing that arbitration proceed in the manner provided for in such agreement; and 2) the authority to stay an arbitrable proceeding pending the outcome of the contractually-required arbitration. On appeal, the Fifth Circuit dismissed the cased due to lack of jurisdiction because an order by the district court administratively closing a case is tantamount to a stay, and bars appellate review. The Fifth Circuit explained that a district court has jurisdiction over final decisions of the district court and that Congress explicitly provided that appellate courts lack jurisdiction over a district court order granting a stay of any action under section 3 of the FAA or directing arbitration to proceed under section 4 of the FAA.

This post written by Kelly A. Cruz-Brown.

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TENTH CIRCUIT AFFIRMS LIFT OF ARBITRATION STAY FOR FAILURE TO PAY REQUISITE FEES

June 17, 2015 by John Pitblado

In late May, the Tenth Circuit Court of Appeals affirmed a district court decision to lift an arbitration stay for Plaintiff Pre-Paid Legal Services, Inc. (“Pre-Paid”) as Defendant Todd Cahill (“Cahill”) failed to pay his respective share of the arbitration fees.

Pre-Paid sells legal service contracts whereby members deal with a network of attorneys. Cahill was a sales associate for Pre-Paid. His employment contract contained an arbitration provision as well as several non-compete provisions. Pre-Paid sued Cahill alleging that Cahill used information from his prior employment to recruit new associates after he left the company. Cahill removed the state filed action to federal court whereby the action was stayed pending arbitration. Cahill failed to pay his respective share of the arbitration fees, however, and the arbitration was cancelled. On appeal, Pre-Paid argued that the appellate court did not have jurisdiction to hear the appeal. Cahill argued that arbitration must be heard on the merits before any stay could be lifted.

Federal arbitration laws requires a court to stay an action pending arbitration provided that “the applicant for the stay is not in default in proceeding with the arbitration.” The court reasoned that Cahill’s failure to pay the required arbitration fees made him in default and therefore the federal stay guarantee should not apply. The court also found that they had jurisdiction to review the district court’s lift to stay the proceedings, citing to circuit court and supreme court authorities.

Pre-Paid Legal Serv., Inc. v. Cahill, No. 14-7032, (10th Cir. May 26, 2015)

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

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SPECIAL FOCUS: CREDIT FOR REINSURANCE LAWS – 2015 LEGISLATIVE AND REGULATORY DEVELOPMENTS

June 16, 2015 by John Pitblado

During the first half of 2015, state legislatures and state insurance departments continued to revise state credit for reinsurance laws and regulations. The majority of these legislative and regulatory developments are due to states seeking to modernize their reinsurance laws and adopt the National Association of Insurance Commissioners’ (“NAIC”) Credit for Reinsurance Model Law. These changes are summarized below:

Arizona
House Bill 2352 approved by the Governor on March 30, 2015 and filed with the Secretary of State on March 31, 2015, amended Arizona Revised Statutes section 20-261.03 and created sections 20-261.05, 20-261.06, 20-261.07 and 20-261.08 to adopt the NAIC Credit for Reinsurance Model Law. House Bill 2352’s requirements for credit for reinsurance apply to all cessions after the effective date of the act under reinsurance agreements that have an inception, anniversary or renewal date that is not less than six months after the effective date of the act.

House Bill 2352 authorizes the Department of Insurance (the “Department”) to adopt rules to implement the credit for reinsurance provisions, including rules identifying the requirements for a jurisdiction to be considered a qualified jurisdiction by the director of the Department. However, the Department is exempt from the rulemaking requirements of title 41, chapter 6 Arizona Revised Statutes for two years after the effective date of House Bill 2352.

Arkansas
Senate Bill 881 (codified as Act 1223 of the 90^th Regular Session and effective April 7, 2015) conforms Arkansas’ Credit for Reinsurance Law in Sections 23-62-305 through 23-62-308 to the NAIC Credit for Reinsurance Model Law, effective six months after the effective date of Senate Bill 881. Senate Bill 881 also adds Section 23-62-309, entitled “Applicability – Reinsurance Agreements,” to clarify that Sections 23-62-305 through 23-62-307 apply to any cession of a reinsurance agreement if that reinsurance agreement has an inception, anniversary, or renewal date not less than six months after the effective date of Senate Bill 881.

Colorado
The Colorado Department of Insurance (the “Department”) adopted 3 CCR 702-3, entitled “Credit for Reinsurance” effective January 1, 2015, which sets forth the rules and procedural requirements that the Commissioner deems necessary to carry out the provisions of Section 10-3-701 et. seq., C.R.S., regarding the conditions and circumstances under which a domestic insurer may reduce their liabilities, or establish an asset associated with risks reinsured. Regulation 3 CCR 702-3 is part of the Insurance’s efforts to update its regulations to ensure they meet NAIC accreditation requirements. It is anticipated that the Department will continue rulemaking for regarding life and health reinsurance agreements and property and casualty reinsurance programs later in 2015.

Delaware
Regulation 1003 relating to Credit for Reinsurance (formerly Regulation 79) was amended effective January 11, 2015 for NAIC accreditation requirements.

District of Columbia
On March 11, 2015, District of Columbia Bill 20-0537 (“DC B 20-0537”), entitled the “Insurance Holding Company and Credit for Reinsurance Modernization Amendment Act of 2014” became effective. The District’s Law on Credit for Reinsurance Act of 1993 was amended to modernize reinsurance regulation, in coordination with the Nonadmitted and Reinsurance Reform Act of 2010 to establish requirements to regulate reinsurers, to grant, suspend, and revoke the accreditations of United States-based reinsurers and certifications of non-United States-based reinsurers for which credit for reinsurance will be allowed, to establish and publish a list of qualified non-United States domiciliary jurisdictions of assuming insurers, and to receive notice from, and monitor the concentration of risks of, ceding insurers.

Florida
The Florida Office of Insurance Regulation (“FOIR”) has initiated rulemaking to amend Rule 69O-144.005, entitled “Credit for Reinsurance” and Rule 69O-114.007, entitled “Credit for Reinsurance from Eligible Reinsurers” to conform with the NAIC Credit for Reinsurance Model Law for accreditation purposes. Proposed changes include:• Replacing references of “eligible reinsurer” with “certified reinsurer”;

Clarifying and expanding the documentation required to be filed with the FOIR for an insurer to obtain and maintain the status of a certified reinsurer;
Clarifying process and regulatory responsibilities when the certified reinsurer’s financial condition changes;
Clarifying disclosure requirements of the OIR when it receives an application from a reinsurer;
Adding reinsurance concentration disclosure requirements; and
Adding language that would allow the trusteed surplus of trusteed reinsurers to drop below $20 million if the trusteed reinsurer is no longer underwriting new business and demonstrates that surplus below $20 million was warranted.

During the rulemaking process, the OIR has filed notices of change to the proposed rules to address comments from the Joint Administrative Procedures Commission (“JAPC”) to reconsider clarification of standards and guidelines for the exercise of OIR’s judgment in determining that a certified insurer was unable or unwilling to meet its contractual obligations. A final public hearing on the proposed rule before the Financial Services Commission is scheduled for June 23, 2015.

Massachusetts
House Bill 4326, effective April 2, 2015, amends provisions of Massachusetts General Laws 175:20A regarding accreditation of assuming reinsurers. House Bill 4326 sets forth requirements concerning eligibility for certification, minimum capital and surplus requirements, certification application requirements, and criteria for the assignment of ratings to certified reinsurers by the Commissioner.

Nebraska
Legislative Bill 298 (“LB 298”) updates Nebraska’s statutes related to credit for reinsurance by reflecting the most recent version of the NAIC Credit for Reinsurance Model Law. LB 298 amends section 44-416.06, which establishes when credit for reinsurance is allowed and addresses concentration of risk. LB 292 also addresses:

Accredited reinsurers and clarifies what a reinsurer must demonstrate to the Director to become accredited.
Reinsurance ceded to an assuming reinsurer that maintains a trust in a qualified United States financial institution and situations when a principal regulator of the trust may allow for a reduction in the required trust surplus.
A new category of allowable credit for reinsurance from a certified reinsurer.
Associations of incorporated or individual unincorporated underwriters becoming certified reinsurers.
Assignment by the Director of a rating for each certified reinsurer and requires the director to publish a list of certified reinsurers and their ratings. A certified reinsurer is obligated to secure obligations at a level consistent with its rating as specified in rules and regulations. The bill provides direction to the certified reinsurer on how to secure its obligations in a variety of situations.
NAIC certified reinsurers and inactive certified reinsurers.
The process of the Director to suspend or revoke a reinsurer’s accreditation or certification. A reinsurer has a right to a hearing. It also addresses the credit for reinsurance after a suspension or revocation.
Concentration of risk by requiring a ceding insurer to take steps to manage its reinsurance recoverables proportionate to its own book of business and requires a ceding insurer to diversify its reinsurance program by placing duties to report to the Director when the amount of reinsurance in one reinsurer or group of affiliated reinsurers meets certain thresholds.

Finally, LB 292 amends section 44-416.07 by clarifying the securities the Director of Insurance may approve to secure obligations. LB 292 was approved by the Governor on March 12, 2015 and becomes effective 90 days after the adjournment of the Nebraska legislature, which occurred on May 29, 2015.

Nevada
Senate Bill 67 (SB 67), effective July 1, 2015, adopts various NAIC model laws and acts, including the NAIC Credit for Reinsurance Model Law. Specifically, SB 67 requires:

The Commissioner to assign a rating to each certified reinsurer, giving due consideration to the financial strength ratings that have been assigned by rating agencies deemed acceptable to the Commissioner pursuant to regulation. The Commissioner shall publish a list of all certified reinsurers and their ratings.
Sets forth the criteria a certified reinsurer must secure obligations assumed from U.S. ceding insurers at a level consistent with its rating, as specified in regulations promulgated by the Commissioner.

Texas
Senate Bill 1093, signed into law and effective September 1, 2015, amends Sections 492.104(b) and 493.104(b) of the Texas Insurance Code to remove the criteria that securities be readily marketable over a national exchange and have a maturity date of not later than one year to be acceptable as security for the payment of reinsurance obligations for life, health, and accident insurance companies and related entities or for property and casualty insurers, as applicable.

Vermont
The Vermont Department of Financial Regulation published proposed rules for Regulation 97-3 (Revised) Credit for Reinsurance (“Proposed Rule 15P006”) on January 28, 2015. Proposed Rule 15P006 sets forth rules and procedural requirements under which a domestic insurance company may take credit for insurance ceded to a reinsurer. It also imposes new notice requirements on ceding insurers regarding concentration of risk, and requires inclusion of certain clauses in the reinsurance agreement for ceding insurers to receive credit for reinsurance. A public hearing on Proposed Rule 15P006 was held on February 27, 2015. The deadline for public comment on Proposed Rule 15P006 was March 6, 2015.

Washington
House Bill 1077, effective July 24, 2015, revises the statutes regarding when a Washington domestic insurer may take credit for reinsurance ceded to another insurance company by adding the categories of an accredited reinsurer and a certified reinsurer. The bill requires the Commissioner to register assuming insurers meeting certain requirements either as an accredited assuming insurer or certified assuming insurer. House Bill 1077 provides the option that an insurance company may become an accredited reinsurer by filing certain information with the Commissioner. House Bill 1077 provides the option that the Commissioner may certify an insurance company as an eligible reinsurer by meeting certain requirements and filing information with the Commissioner. The Commissioner must create and publish a list of qualified jurisdictions under which an assuming insurer is licensed and domiciled is eligible to be considered for certification by the Commissioner. House Bill 1077 requires the Commissioner to assign a rating to each certified reinsurer and then publish a list of all certified reinsurers and their ratings. Finally, the Commissioner is authorized to engage in rulemaking to implement House Bill 1077.

Wisconsin
The Office of the Commissioner of Insurance published a statement of scope for a proposed rule to modernize Chapter Ins. 52 Wis. Adm. Code so that it aligns with the Nonadmitted and Reinsurance Reform Act of 2010 and the more recent amendments to the NAIC Credit for Reinsurance Model Law from which Wisconsin’s regulation is based.
The proposed amendments will allow the use of certified reinsurers. Reinsurers would be certified by the Commissioner at different levels based on their financial strength ratings. The collateral requirements for certified reinsurers would differ based on the reinsurer’s certification level. Reinsurers with a higher level of certification would have lower collateral requirements than are traditionally required to be credited. Reinsurers certified at lower levels would have the same collateral requirements as current law to be credited. By making these revisions, Wisconsin would modernize its reinsurance provisions and these changes would be consistent with changes made or in the process of being made in other states.

Conclusion
Insurers and reinsurers will continue to face an evolving regulatory landscape concerning state credit for reinsurance laws as more states continue to amend their statutes and engage in rulemaking to implements those statutory changes.

This post written by Kelly A. Cruz-Brown.

See our disclaimer.