Michael Wolgin

FOLLOWING CUNNINGHAM, PENNSYLVANIA DISTRICT COURT FINDS CAPTIVE REINSURANCE PUTATIVE CLASS ACTION CLAIMS ARE TIME-BARRED

February 13, 2018 by Michael Wolgin

In this putative class action, plaintiffs alleged unlawful practices related to mortgage insurance practices, including a violation of the Real Estate Settlement Procedures Act of 1974 (“RESPA”). This case was stayed pending ultimate resolution of a factually-similar case, Cunningham v. MT&T, on appeal in the Third Circuit. In both cases, the plaintiffs purchased primary mortgage insurance (“PMI”) from specific insurers, which in turn purchased reinsurance from their respective mortgagees’ captive reinsurance subsidiaries. Plaintiffs in both suits alleged that this scheme (between the mortgagee and the PMI insurer) violated RESPA’s anti-kickback and anti-fee splitting provisions between the mortgagee and the PMI insurer.

As we previously reported here, in 2016, the Third Circuit affirmed summary judgment in favor of the defendants in Cunningham, upholding its finding that plaintiffs’ claims were time-barred and that plaintiffs could not equitably toll the limitations period because they had not exercised reasonable diligence in investigating any potential RESPA claims within the statute of limitations.

The District Court for the Western District of Pennsylvania, like the Third Circuit in Cunningham, found significant that the homeowners were made aware of the captive reinsurance program through disclosures at the time of closing and did not elect to opt out, did not ask questions of the challenged scheme at or prior to closing, and did not investigate their mortgage until they were solicited by their current counsel. Moreover, the Court rejected the plaintiffs’ attempts to differentiate their case from Cunningham, which was decided at the summary judgment phase after limited discovery, and not, as in this case, on a motion for judgment on the pleadings. The Court went on to state, “[u]nfortunately for Plaintiffs, there are no answers to be had from discovery because there are no questions to ask. The similarities between this case and Cunningham cannot be overstated… Just like the plaintiffs in Cunningham, Plaintiffs had all the facts at the time of closing to allege their claim under RESPA, but their inaction during the limitations period bars the application of equitable tolling under a theory of fraudulent concealment.” The court therefore found the above claims to be time-barred, and also precluded the remaining claims under the filed-rate doctrine, which provides that a rate, such as that for PMI, filed with and approved by a governing regulatory agency is unassailable in judicial proceedings brought by ratepayers. The District Court granted defendants’ motion for judgment on the pleadings. Menichino v. Citibank, N.A., Case No. 2:12-cv-00058 (USDC W.D. Pa. Jan. 19, 2018).

This post written by Gail Jankowski.
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INSURANCE RECEIVER’S PREEMPTION ARGUMENT UNDER MCCARRAN-FERGUSON FAILS TO AVOID ARBITRATION OF REINSURANCE DISPUTE

February 12, 2018 by Michael Wolgin

The receiver for Gramercy Insurance Company sought to avoid arbitration of a reinsurance dispute with Contractor’s Bonding, Ltd., by arguing the FAA was reverse preempted under the McCarran-Ferguson Act. The receiver argued the federal court should abstain from exercising jurisdiction and remand the case to state court under Burford v. Sun Oil Co. The court noted, however, that Burford abstention is appropriate only when the district court has discretion to grant or deny relief. CBL argued the court lacked discretion regarding whether to compel arbitration under the FAA. The receiver argued the FAA was inapplicable because it was reverse preempted by the McCarran-Ferguson Act.

A state law may only reverse preempt a federal statute where, among other things, the “federal statute operates to invalidate, impair, or supersede the state law.” The FAA did not impair or supersede the relevant state statute because the statute expressly provided that it did not “deprive[] a party of any contractual right to pursue arbitration.” As such, the court denied the receiver’s motion to remand and enforced the forum selection clause contained within the party’s agreement by transferring the case pursuant to CBL’s motion. Gramercy Ins. Co. v. Contractor’s Bonding, Ltd. No. AU-17-CA-00723-SS (USDC W.D. Tex. Jan. 19, 2018).

This post written by Benjamin E. Stearns.
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MISSOURI COURT FINDS INSURANCE CONTRACT’S ARBITRATION CLAUSE UNENFORCEABLE AS AGAINST PUBLIC POLICY

January 25, 2018 by Michael Wolgin

This case arose from an accident at the General Motors plant in Kansas City, Kansas, where an electrician employed by Capital Electric Construction Company, Inc. was severely injured due to negligence by Solaris Power Services, LLC in failing to de-energize equipment on which he was working. Capital was insured by Liberty Mutual Fire Insurance Company. Associate Electric & Gas Insurance Services, LTD. (AEGIS), provided excess liability insurance to Capital. A coverage dispute arose after an uncontested $44 million judgment was entered against Solaris. Solaris alleged it was or should have been an additional insured under both policies, but that both insurance companies wrongly denied it coverage.

AEGIS moved to stay the litigation and compel arbitration on the grounds that its policy contained a mandatory arbitration clause. AEGIS argued that North Dakota law, rather than Missouri law, should apply to the dispute. While Section 435.350 of the Missouri Arbitration Act prohibits mandatory arbitration provisions in insurance contracts, AEGIS argued that under North Dakota law, the policy’s arbitration clause was valid and enforceable. The Court disagreed, reasoning that a Missouri court would apply the law of another jurisdiction only where “not contrary to a fundamental policy of Missouri.” The Court refused to do so here because the arbitration clause at issue directly contravened Missouri public policy. Alternatively, the Court found that the arbitration provision would still be found unenforceable even if it were to apply Kansas law per the policy’s choice of law provision. Simon v. Liberty Mut. Fire Ins. Co., Case No. 17-cv-0152 (USDC W.D. Mo. Dec. 8, 2017)

This post written by Gail Jankowski.

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ENGLISH HIGH COURT OF JUSTICE ORDERS DISCLOSURE OF BANK’S RECORDS RELATED TO MISDIRECTED REINSURANCE PREMIUMS

January 24, 2018 by Michael Wolgin

In a proceeding seeking an order for disclosure of documents from Barclays Bank, the English High Court of Justice considered the scope of the agency involved in a run-off agreement between a reinsurance broker and another entity (“SMP”) in connection with collecting and transmitting of premiums under an Excess of Loss reinsurance policy issued by a Lloyd’s consortium. After SMP allegedly failed to pay $541,884.90 in premiums that it had received, a dispute arose whether the broker was responsible to repay the missing funds, or alternatively, whether the broker itself was damaged by SMP’s misuse of the funds. The consortium contended that the SMP was the agent of the broker, while the broker contended that SMP was simply entitled to collect the premiums due under the policy and pay them to the consortium, but that no agency relationship existed in that regard.

The court analyzed the run-off agreement and determined that the broker was entitled to assert that it was the beneficial owner of the premiums held in the account, even if it held those premiums on trust for the reinsured or was itself subject to obligations to pay them to the Consortium. The court therefore ruled that the order of disclosure from the bank was needed to enable the broker to identify the persons responsible for instructing the bank to pay the monies away, and to defend itself from the consortium’s potential claim. The court further found that the bank may have some culpability, which further supports its production of the documents. Miles Smith Broking Ltd. v. Barclays Bank PLC [2017] EWHC 3338 (Ch) (Dec. 15, 2017).

This post written by Michael Wolgin.

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NINTH CIRCUIT AFFIRMS ORDER REJECTING FIRST AMENDMENT CHALLENGE TO MOTION TO COMPEL ARBITRATION

January 23, 2018 by Michael Wolgin

Consumers filed a putative class action alleging statutory and common law consumer protection and false advertising claims under California and Alabama law, specifically alleging that AT&T falsely advertised their mobile service plans as “unlimited” when in fact it intentionally slowed data at certain usage levels. AT&T moved to compel arbitration pursuant the arbitration agreements included in their wireless data service plans and in light of the Supreme Court’s 2011 ruling in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act preempts state law deeming AT&T’s arbitration provision to be unconscionable.

Plaintiffs opposed the motion on First Amendment grounds, arguing that an order forcing arbitration would violate the Petition Clause because they “did not knowingly and voluntarily give up their right to have a court adjudicate their claims” and could not “bring their claims in small claims court.” The district court granted AT&T’s motion to compel arbitration, finding that there was no state action in this case to bring the dispute within the ambit of the First Amendment. After denying reconsideration, the district court granted plaintiffs’ motion to certify the order compelling arbitration for immediate interlocutory appeal, finding that there was substantial ground for difference of opinion as to whether state action existed under (1) Denver Area Edu. Telecom. Consortium, Inc. v. FCC or (2) the “encouragement” test. The Ninth Circuit granted permission to appeal.

On appeal, the Ninth Circuit read Denver Area narrowly, reasoning that the case “did not broadly rule that the government is the relevant state actor whenever there is a direct constitutional challenge to a “permissive” statute. The court also found unpersuasive plaintiffs’ argument that the Federal Arbitration Act, including judicial interpretations thereof, “encourages” arbitration such that AT&T’s actions are attributable to the state. The panel concluded, “[p]ermission of a private choice cannot support a finding of state action,” and “private parties [do not] face constitutional litigation whenever they seek to rely on some [statute] governing their interactions with the community surrounding them.” The Ninth Circuit affirmed the district court’s ruling. Roberts v. AT&T Mobility, Case No. 16-16915 (9th Cir. Dec. 11, 2017).

This post written by Gail Jankowski.

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