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New reinsurance-related and arbitration developments from Carlton Fields

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Michael Wolgin

COURT FINDS NO EXCEEDING OF POWERS OR MANIFEST DISREGARD OF THE LAW IN CONFIRMING ALLEGEDLY SPECULATIVE ARBITRATION AWARD

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This case concerned an agreement by which Clos La Chance Wines, Inc., a wine producer, appointed AV Brands, Inc., a wine importer and wholesaler, as the exclusive brand agent and distributor of its wine products for the United States and Puerto Rico for a five year period. Pursuant to the agreement, AV Brands was required to use “best efforts” and “commercially reasonable efforts” in staffing the account and selling product, and was subject to yearly goals dictating the number of wine cases it was required to purchase. Several years into the arrangement and pursuant to the agreement’s dispute resolution provision, Clos La Chance Wines filed a demand for arbitration alleging that AV Brands breached the agreement by failing to meet those marketing requirements.

In a final arbitration award, Retired Judge William J. Cahill found, among other things, that Clos La Chance Wines was entitled to damages in the amount of $1,739,681, which included $200,000 to compensate it for future time and costs associated with recapturing its market position. Clos La Chance Wines then sought confirmation of the award and this decision followed.

AV Brands challenged Judge Cahill’s $200,000 award for lost market share, primarily arguing that in doing so, Judge Cahill (1) exceeded his powers, since contracts generally permit only the recovery of foreseeable damages, and (2) manifestly disregarded California law prohibiting breach of contract damages based on speculative evidence. With regard to the first ground, the court rejected AV Brands’ argument, likening it to a claim that Judge Cahill misunderstood the applicable law, which the Court stated is not a valid reason for vacatur. Regarding the latter ground, the Court found that AV Brands overlooked Judge Cahill’s finding that while much of the testimony regarding market share damages was speculative, some was not speculative and thus persuasive. Therefore, the Court refused to “re-weigh the evidence” and confirmed the award. Clos La Chance Wines, Inc. v. AV Brands, Inc., Case No. 5:16-cv-04047 (USDC N.D. Cal. June 23, 2017).

This post written by Gail Jankowski.
See our disclaimer.

TEXAS AND WISCONSIN JOIN LIST OF STATES PERMITTING DOMESTIC SURPLUS LINES INSURANCE

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On June 15 and 22, 2017, respectively, the Governors of Texas and Wisconsin approved new laws permitting domestic surplus lines insurers in those states (i.e., insurers domiciled in Texas and Wisconsin) to conduct business within those states. Texas and Wisconsin join a growing list of states, including Arizona, Arkansas, Delaware, Illinois, Louisiana, Missouri, North Dakota, New Hampshire, New Jersey, and Oklahoma, that have passed similar legislation. Previously, a surplus lines carrier would be admitted in one state and be eligible to sell surplus lines coverage only in the other 49 states. This model is gradually changing. Domestic surplus lines insurers in states with laws similar to Texas and Wisconsin are now authorized to issue domestic coverage provided that they satisfy certain eligibility requirements, including minimum capital and surplus requirements. Domestic surplus lines carriers may still not issue coverage in admitted markets. The Texas law is effective January 1, 2018, and the Wisconsin law was effective on June 22, 2017. Texas H.B. No. 2492; Wisconsin 2017 S.B. No. 77.

This post written by Michael Wolgin.

See our disclaimer.

COURT FINDS CALIFORNIA INSURANCE CODE SECTION 11658.5 REVERSE-PREEMPTS SECTION 4 OF THE FAA

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National Union Fire Insurance Company of Pittsburgh, PA provided Seneca Family of Agencies with workers’ compensation and employers’ liability insurance for Seneca’s operations in California from 2004 to 2013. The parties entered into a payment agreement that governed the parties’ financing and credit obligations with respect to the insurance policies. The agreement’s arbitration provision provided that, among other things, “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.” In 2013, the parties amended the arbitration provision to include: “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.”

Years later, a dispute over the amount of collateral to be paid under the payment agreement arose and National Union moved to compel arbitration. At issue before the court was Seneca’s objection based on the application of Cal. Ins. Code § 11658.5, which requires arbitration provisions in workers’ compensation policies to be disclosed to potential insureds. The court approached this issue in two parts— first, addressing claims related to policies issued on or after July 1, 2012, the effective date of § 11658.5, (the “Post-July 2012 policies”) and second, addressing claims related to policies issued prior to July 1, 2012 (the “Pre-July 2012 policies”).

With regard to claims related to the Post-July 2012 policies, the Court denied National Union’s motion to compel arbitration. The Court analyzed an issue not previously addressed in the case of Monarch Consulting (see blog post dated March 15, 2016)— that is, whether the McCarran-Ferguson Act reverse-preempts the FAA with respect to § 11658.5. Applying the three-prong test to determine if a state statute reverse-preempts a federal statute, the Court found all prongs to be met: (1) the FAA did not specifically relate to insurance; (2) § 11658.5 was enacted to regulate the business of insurance; and (3) the FAA would invalidate, impair, or supersede § 11658.5 because § 4 of the FAA directly conflicted with § 11658.5 in this case.

With regard to the Pre-July 2012 policies, the Court found that any claims related to those policies must be arbitrated, primarily because § 11658.5 did not apply to those policies, and any claims related to Pre-July 2012 policies plainly fell within the scope of the payment agreement’s arbitration provision. As such, the Court granted National Union’s motion to compel arbitration of claims related to the Pre-July 2012 policies. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Seneca Family of Agencies, Case No: 17-cv-01061 (USDC S.D.N.Y. June 12, 2017).

This post written by Gail Jankowski.

See our disclaimer.

MONTANA ENACTS CAPTIVE INSURANCE LAW IMPACTING RECIPROCAL AND DORMANT INSURERS

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On May 4, 2017 Montana enacted a new law that will remove the requirement that reciprocal captive insurers have 25 or more persons domiciled in Montana. The law also permits captive insurers to go into dormancy. The certificate of dormancy is subject to expiration at the end of a five-year period and includes a $1,000 annual dormancy tax and a requirement to maintain paid-in capital and surplus of not less than $25,000. Previously, a captive that no longer desired to operate would terminate its license and pay no insurance premium tax after termination. The law also removes the requirements of examinations and investigations of companies existing under a certificate of dormancy. The law went into effect upon its approval on May 4, 2017. 2017 Montana S.B. 245.

This post written by Michael Wolgin.

See our disclaimer.

TENTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION AS TO THE CLAIMS OF NON-SIGNATORY PLAINTIFFS

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A buyer of a manufactured home sued the manufacturer, seller and lender in connection with toxic mold that was found in the home’s water system. The underlying retail installment contract contained an arbitration agreement which included a provision providing, “[t]his Arbitration Agreement also covers all co-signors and guarantors who sign this Contract and any occupants of the manufactured Home (as intended beneficiaries of this Arbitration Agreement).” Notwithstanding that provision, the buyer, along with her husband and children, brought a civil action for damages against the manufacturer, seller, and lender. The manufacturer and seller (the “Defendants”) moved to compel arbitration and stay the court proceedings pursuant to the arbitration agreement in the installment contract. The trial court granted the motion as to the buyer’s claims, but denied the motion as to her husband and children, finding that they were not parties to the installment contract, and as such, were not bound by the arbitration provision.

The Defendants appealed the denial of their motion to compel the claims of the husband and children to the Tenth Circuit, which affirmed. The court rejected both of Defendants’ arguments – first, that the husband and children were third party beneficiaries and were therefore bound to arbitrate, and second, that they were bound to arbitrate under the doctrine of equitable estoppel. As to the first argument, the court found unpersuasive Defendants’ reliance on the arbitration provision which defined occupants of the home as third party beneficiaries. Specifically, the court found that Defendants did not meet their burden of establishing that the non-signatory plaintiffs were bound to arbitrate and declined to bind “unwitting third parties” to a contract without their first knowing of its terms or ever realizing some benefit. As to Defendants’ second argument, the court rejected Defendants’ equitable estoppel theories asserting “intertwined claims” and “direct benefits.” The former does not govern a case “where a signatory-defendant seeks to compel arbitration with a non-signatory-plaintiff,” and the latter is not a recognized doctrine under Oklahoma law. Jacks v. CMH Homes, Case No. 15-6197 (10th Cir. May 17, 2017).

This post written by Gail Jankowski.

See our disclaimer.