Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

Court Orders Stay of New Arbitration Over Disputed Reinsurance Billings and Compels Parties to Proceed Before a Predecessor Arbitration Panel

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The case involved a “second layer special casualty excess agreement of reinsurance” under which reinsurers General Reinsurance Corp. and SCOR Reinsurance Co. agreed to cover a certain amount in excess of Chicago Insurance Co.’s $1 million per occurrence retention. An arbitration ensued after the reinsurers disputed reinsurance billings from Chicago Insurance arising out of certain asbestos insurance liability. The arbitration panel rejected Chicago Insurance’s attempt to bill its losses on the basis that each site where the insured had operated constituted an “occurrence” under the reinsurance agreement, and issued an award for the reinsurers. The award expressly retained the panel’s jurisdiction to “resolve any dispute arising out of [the] Final Award.”

Subsequent to the award, Chicago Insurance submitted a new billing to the reinsurers, which stated that the “loss allocation was prepared in accordance with the Award’s protocols.” The reinsurers disputed the new billing and alerted the prior arbitration panel. The umpire confirmed that it had retained jurisdiction but noted that Chicago Insurance’s appointed arbitrator disagreed and would not participate in the new dispute. Chicago Insurance then initiated a new separate arbitration, in which the reinsurers refused to participate, and filed a petition to compel the reinsurers’ participation and to stay the original arbitration. The reinsurers responded by filing a cross-petition to stay the new arbitration and for a declaration that the prior panel had jurisdiction to resolve the dispute.

The court denied Chicago Insurance’s petition and granted the reinsurers’ cross-petition to stay the new arbitration. The court rejected Chicago Insurance’s argument that the prior panel was functus officio by fully exercising their authority to adjudicate the issue submitted to them. The court found that the prior panel retained jurisdiction to resolve any dispute arising out of the prior award and that Chicago Insurance had consented to that by failing to dispute the award. The court also found that Chicago Insurance “repeatedly claimed that the new bill that it sent to the Reinsurers was offered pursuant to the ‘protocols’ set forth by” the prior award, and therefore, consistent with what the majority of the original panel determined, the current dispute “clearly” fell within the original arbitration jurisdiction. The court, therefore, ruled that the prior panel retained jurisdiction to adjudicate whether the new bill comported with its prior award.

Chicago Ins. Co. v. Gen. Reinsurance Corp., No. 1:18-cv-10450 (S.D.N.Y. Oct. 22, 2019).

Second Circuit Affirms Judgment Confirming Arbitration Award in Favor of Labor Union Involving Alleged Non-Signatory to Collective Bargaining Agreement

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The dispute involved a long-term health care provider and an assisted living services provider that was based in the same building. The union represented certain housekeeping employees at the location. The long-term health care provider was a signatory to the relevant collective bargaining agreements, and “for years” it applied the terms of the agreements to assisted living employees, including remitting union dues and health fund payments on their behalf. Another company began managing the housekeeping department at the property in 2013. The company signed an assumption agreement with respect to the operative collective bargaining agreement, under which the assisted living provider was not a signatory. The company ultimately stopped applying the 2008 collective bargaining agreement to the assisted living employees, and the union filed a grievance. Arbitration ensued, resulting in the issuance of the arbitration award at issue here.

On appeal, the defendants argued that the district court erred in confirming the arbitration award because the arbitrator exceeded his authority under the 2008 collective bargaining agreement, and, in doing so, the arbitrator violated public policy. The Second Circuit, however, affirmed the district court’s confirmation of the award based on the “strong presumption in favor of enforcing arbitration awards.” The Second Circuit relied on the fact that the collective bargaining agreement broadly authorized the arbitrator to resolve grievances, defined as “a dispute with regard to the application, interpretation or performance of an express term or condition” of the 2008 collective bargaining agreement. The court found that the arbitrator did resolve grievances within the meaning of the collective bargaining agreement here, as the arbitrator determined: (1) prior to 2013, the long-term health care and assisted living providers were treated as a single employer; (2) the assisted living provider was included in the “signatory employers list” of a prior collective bargaining agreement; (3) the long-term health care provider continued to provide those benefits under the 2008 collective bargaining agreement; and (4) the long-term health care provider and the management company violated the collective bargaining agreement by unilaterally removing assisted living employees from the bargaining unit.

The arbitrator also concluded that the long-term health care provider and assisted living provider’s single-employer status continued after the sale because the providers had interrelated operations, common management, centralized control of labor relations, and common ownership. The arbitrator’s determination of who was bound by the collective bargaining agreement by virtue of the parties’ conduct was within the scope of his authority and “an arguable construction of the agreement.” The Second Circuit rejected the defendants’ arguments that the award violated public policy by making the union the bargaining representative for assisted living employees and that the award did not draw its essence from the collective bargaining agreement.

1199 SEIU United Healthcare Workers E. v. Alaris Health at Hamilton Park, No. 18‐2898 (2d Cir. Sept. 17, 2019).

Employment Discrimination Claim Compelled to Arbitration Despite Arguments That “Clickwrap” Stock Incentive Agreement and Discovery Limitations Were Unconscionable

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The court granted Aetna’s motion to compel arbitration of a former employee’s age and disability wrongful termination claims that alleged violations of the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the New Jersey Law Against Discrimination. The plaintiff argued that the arbitration provision in a stock option web-based clickwrap agreement to which he agreed was invalid on the grounds of both procedural and substantive unconscionability. The court, however, found that clickwrap agreements are valid and enforceable under applicable New Jersey law and that Aetna provided sufficient evidence illustrating that acceptance of the terms of the stock agreement through the website was a necessary precondition to the plaintiff’s receipt of stock options in each year. The court held that the contract was not procedurally unconscionable because even assuming the stock agreement was presented on a “take-it-or-leave-it basis,” the plaintiff was free to decline it and would not have suffered negative consequences.

The court also rejected the plaintiff’s argument that the contract was substantively unconscionable. The court disagreed with the plaintiff’s contention that the arbitration provision mandated submission of the plaintiff’s claims to an “inherently unfair and biased arbitral forum,” noting that the U.S. Supreme Court has repeatedly rejected this idea. Additionally, the court rejected the plaintiff’s argument that a contract provision limiting discovery during arbitration was substantively unconscionable. The court determined that the discovery provision was “less severe” than the provisions found by other New Jersey courts to be unconscionable. The discovery provision was not overly restrictive because it authorized the arbitrator to permit further discovery, which was not tied to an “impossibly high burden.” The court further noted that the plaintiff did not demonstrate how the discovery provision impaired his ability to litigate his case fairly. The plaintiff merely stated that “discovery is particularly important in the employment discrimination context.” Such contentions, however, are insufficient.

Falk v. Aetna Life Ins. Co., No. 3:19-cv-00434 (D.N.J. Aug. 31, 2019).

After Reviewing the Arbitration Record, Court Enters Default Judgment Confirming Default Arbitration Award

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Plaintiff Choice Hotels International Inc. filed an application to confirm arbitration award and a motion for default judgment against a fanchisee company and its owner in connection with an arbitration initiated before the AAA as a result of the franchisees’ failure to pay royalties and fees under the governing franchise agreement. Choice Hotels alleged that it sent notices of the arbitration to the defendants “by regular mail, certified mail and/or overnight FedEx delivery,” but “Defendants failed to appear or participate during any proceeding.” The arbitrator noted that the defendants had “failed to respond” and “failed to submit documents after due notice by mail in accordance with the Rules.” The arbitrator awarded $83,726.63 in damages, and $2,750 for reimbursement of fees.

The court found that Choice Hotels was entitled to a default judgment because it met its obligation under the FAA to show that it was entitled to confirmation of the award as a matter of law. The court explained that Choice Hotels’ claims were properly before the AAA pursuant to the arbitration clause in the parties’ franchise agreement and that Choice Hotels was authorized under the AAA’s rules to present its evidence by supporting documentation and the submission of an affidavit. The court found that, after “having fully reviewed and considered” this evidence, the arbitrator entered its award, and there was “no reason in the record” to question its validity. The court therefore ruled that the confirmation of the award was proper and granted the default judgment in favor of Choice Hotels.

Choice Hotels Int’l, Inc. v. Laxmee, Inc., No. 8:18-cv-01818 (D. Md. Aug. 9, 2019).

Applied Underwriters Overcomes Bid for Renewed Motion for Class Certification in Workers’ Compensation Reinsurance Dispute

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We have been tracking certain class actions filed against Applied Underwriters Inc. and Applied Risk Services Inc. alleging that the companies fraudulently marketed and sold workers’ compensation insurance programs to California employers in violation of state and federal law. The case involves a disputed reinsurance participation agreement used to control workers’ compensation rates. As we previously reported, on January 29, 2019, the court denied class certification, holding that the plaintiffs failed to demonstrate that a class action would be “superior” to individual actions, as required by Federal Rule of Civil Procedure 23(b)(3).

Subsequent to that ruling, the plaintiffs requested a status conference, which the court granted. The conference addressed a number of issues, including whether one of the plaintiffs could file a renewed motion for class certification based on a more limited proposed class, whether plaintiffs could communicate with putative class members, and whether the court would set a settlement conference. The new proposed class “would consist of all California participants in defendants’ insurance programs that paid more under defendants’ Reinsurance Participation Agreement than they would have under guaranteed cost workers’ compensation insurance policies issued by California Insurance Company.” Class certification would be sought only on the plaintiff’s claim “under the unlawful prong of California’s Unfair Competition Law.”

The court denied the requests for a renewed motion for class certification and for leave to communicate with putative class members. The court noted that the relevant plaintiff failed to provide “the court with any explanation for why it could not have pursued this narrowed class definition in the initial motion for class certification.” The court observed that the plaintiffs were seeking certification of essentially the same class in a separate New York proceeding. The court also held that the proposed narrower class still would “not resolve the court’s concerns identified in the prior order denying class certification.” The court did decide to consolidate for trial the related cases before the court, and further ordered the cases to the court’s Voluntary Dispute Resolution Program.

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., No. 2:16-cv-01211 (E.D. Cal. Apr. 17, 2019).