Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Rob DiUbaldo

Rob DiUbaldo

District Court Finds that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards is Not Preempted By State Law Prohibiting Arbitration of Insurance Disputes

by

A district court judge in the U.S. District Court for the Eastern District of Louisiana has issued an order attempting to resolve the apparent tension created by Louisiana law barring compulsory arbitration provisions in insurance contracts, a contract containing both an arbitration provision and a “conformity to statute” clause, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), and the McCarran-Ferguson Act.

The matter arose out of the defendant’s refusal to pay claims under an insurance policy covering hail and wind damage. Plaintiffs sued in Louisiana state court, but defendant, which is a citizen of the United Kingdom, removed the matter to federal court pursuant to the Convention. Plaintiff Pannagl then moved to remand on several grounds.

First, plaintiff argued that the removal was untimely, as it was not filed within 30 days after service of the complaint, as is required for removal based on diversity jurisdiction. The court found that the timeliness argument would not apply if the Convention applied, as removal under the Convention may occur at any time before trial. The court further found that the basic requirements for application of the convention— (1) an agreement arising out of a commercial legal relationship, (2) a written agreement to arbitrate in the territory of a Convention signatory, and (3) a party that is not an American citizen—were all met.

Second, plaintiff argued that the Convention only applies to the recognition of arbitral awards, but the court held that the plain language of the statute implementing the Convention requires its application to attempts to enforce covered arbitration agreements.
Third, plaintiff argued that the policy’s “conformity to statute” clause required the policy to be amended to remove the arbitration provision in order to comply with Louisiana law barring compulsory arbitration provisions in insurance contracts. The court held, however, that the Convention preempts state law, such that the policy could not be amended to remove an arbitration provision covered by the Convention.

Finally, plaintiff argued that Louisiana’s prohibition of arbitration in insurance disputes reverse-preempts the Convention under the McCarran-Ferguson Act, as the Convention as applied is contrary to a Louisiana public policy enacted for the purpose of regulating the business of insurance. But the court held that while the McCarran-Ferguson Act applies generally to federal statutes, it does not apply to treaties such as the Convention. As a result, the court denied the motion to remand.

Plaintiff immediately appealed this ruling to the Fifth Circuit Court of Appeals, which denied the appeal on the basis that denial of a motion to remand is interlocutory and not appealable unless the district court certifies the issue, which had not occurred in this case.

Gulledge and Pannagl v. Certain Underwriters at Lloyds, London, Case No. 18-6657 (USDC E.D. La. Sept. 27, 2018)

This post written by Jason Brost.
See our disclaimer.

Seventh Circuit Joins Five Other Circuits, Holds Availability of Class or Collective Arbitration is a Gateway Issue of Arbitrability to be Decided by Courts, Not Arbitrators

by

A former employee of Waterstone Mortgage Corporation filed a class action against Waterstone in Wisconsin federal court in 2011 alleging wage violations and breach of contract. The District Court for the Western District of Wisconsin compelled arbitration pursuant to an agreement between the plaintiff and Waterstone, but it struck as unlawful a waiver clause that appeared to forbid class or collective arbitration of her claims, reasoning that the plaintiff could not waive her right to bring a class action under the National Labor Relations Act. The arbitrator conducted a collective arbitration over Waterstone’s objection and ultimately awarded more than $10 million in damages and fees to the plaintiff and 174 similarly situated employees. On appeal, the Seventh Circuit was faced with reconciling the district court’s decision with a subsequently-decided U.S. Supreme Court case, Epic Systems Corporation v. Lewis. Specifically, Epic Systems upheld the validity of waiver provisions like the one at issue here, and therefore, if the district court’s imposition of collective arbitration on Waterstone violated that waiver, the Seventh Circuit would be required to instruct the district court to vacate the award.

The primary issue on appeal was whether the district court incorrectly struck the subject waiver from the parties’ arbitration agreement. Because the plaintiff did not concede that collective arbitration violated the waiver, the Seventh Circuit framed the issue as such: “If the availability of class or collective arbitration is a threshold question of arbitrability, the district court has to decide it. Otherwise, it falls to the arbitrator.” Ultimately, the Panel concluded that the availability of class or collective arbitration is a threshold question of arbitrability. In so finding, the court reasoned that “[d]etermining whether [an] agreement reflects the parties’ consent to class or collective arbitration requires the decisionmaker to determine whether the parties agreed to arbitrate those disputes as well. And that is a gateway matter for the court to decide.” In addition, the court reasoned that such “fundamental” questions belong in the “gateway” category in part due to the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation, which found that class arbitration is available only if an arbitration agreement contains evidence that the parties affirmatively consented to that procedure. As such, the court noted that the structural features of class arbitration make it a “fundamental” change from the norm of bilateral arbitration. As such, the Seventh Circuit’s ruling meant that on remand, the district court, rather than the arbitrator, must evaluate the plaintiff’s contract with Waterstone to determine whether it permits class or collective arbitration.

Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018).

This post written by Gail Jankowski.

See our disclaimer.

Southern District of New York Confirms Arbitration Award Despite Allegation of Undisclosed Real Party in Interest

by

After Hurricane Sandy hit the east coast in 2012, the Army Corps of Engineers contracted with Environmental Chemical Corp. (ECC) to conduct clean up on Fire Island, New York. ECC subcontracted most of the work to Coastal Environmental Group, Inc. (Coastal). Both entities incurred unexpected costs, which ECC blamed on Coastal and Coastal blamed on factors outside of its control. ECC then refused to pay Coastal a portion of the money it was otherwise due under the contract, and Coastal commenced an arbitration that ended with an award in Coastal’s favor.

ECC moved to vacate the award, focusing on two main issues: (1) Coastal’s failure to disclose the interest of its creditor Signature Bank in the matter; and (2) the arbitrator’s decision that ECC was estopped from challenging certain calculations of costs that Coastal had provided during the litigation because ECC has used those same calculations in submissions to the Army Corps of Engineers.

Documents filed after the award was issued showed that all of Coastal’s rights to payment under its agreement with ECC had been assigned to Signature Bank, which had agreed to take over all efforts to collect amounts due under the contract. ECC argued that Signature Bank was thus the real party in interest, and that Coastal’s failure to disclose this assignment of claims tainted the entire proceeding, including because this prevented the arbitrator from performing a proper conflict check. However, the court found that ECC had presented no evidence that Coastal or its attorneys ever made any affirmative misrepresentations on the question of Signature Bank’s role in the matter and that Coastal had informed ECC prior to the arbitration that one of its attorneys was also an attorney for Signature Bank. The court also found that ECC presented no evidence that a conflict check that included Signature Bank would have led the arbitrator to be conflicted out of the matter, and that “raising only the specter of potential but totally unknown conflicts” was not enough to show objective facts inconsistent with impartiality, as is needed to vacate an award on the basis of “evident partiality.”

Regarding the arbitrator’s invocation of equitable estoppel, ECC argued that, by raising the issue sua sponte and without briefing from the parties, the arbitrator exceeded his authority. The court disagreed, finding that the relevant portion of the contract specifically said that Coastal’s rights to certain compensation should be based on what “is equitable under all of the circumstances,” thus inviting the arbitrator to consider the equitable doctrine of estoppel. The court also noted that ECC had provided no authority suggesting that an arbitrator cannot consider an issue that was not briefed by the parties. Thus, the court confirmed the award.

Environmental Chemical Corp. v. Coastal Environmental Group, Inc., 18 Civ. 3082 (S.D.N.Y. Sept. 14, 2018).

This post written by Jason Brost.

See our disclaimer.

Illinois Appellate Court Holds Nebraska Arbitration Act Reverse Preempts Federal Arbitration Act and Renders Arbitration Clause in Reinsurance Agreement Unenforceable

by

An Illinois appellate court recently affirmed a lower court decision granting summary judgment and denying defendant insurers’ motion to compel arbitration where Nebraska law governed, reverse preempted the Federal Arbitration Act (FAA), and rendered a mandatory arbitration provision in a reinsurance agreement unenforceable. Plaintiffs were required to enter reinsurance agreements to obtain workers’ compensation insurance and the agreement at issue contained provisions requiring mandatory arbitration of disputes and the application of Nebraska law. A dispute arose over the cost of the insurance policies and plaintiffs filed suit for various unfair and deceptive business practices violations. Defendants served an arbitration demand on plaintiffs, who refused to arbitrate. The lower court accepted plaintiffs’ argument that the arbitration clause was invalid under the Nebraska Arbitration Act (NAA) and therefore denied defendants’ motion to compel arbitration and granted summary judgment to plaintiffs.

On appeal, the appellate court affirmed. First, the court rejected defendants’ argument that plaintiffs were required to arbitrate because they failed to “specifically and directly” challenge delegation clauses in the reinsurance agreement. In defendants’ view, the delegation clauses precluded judicial determination of arbitrability based in part on the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson. The court ultimately concluded that the plaintiffs had challenged the delegation clauses specifically enough via their arguments on the arbitration provision, and therefore the lower court was entitled to consider the arbitrability challenge rather than compel arbitration on that issue.

Second, the court found the NAA applied and invalidated the arbitration clause of the reinsurance agreement. The court applied the three-part test to determine whether the McCarran-Ferguson Act allows a state law to reverse preempt a federal statute and concluded that: (1) the FAA does not specifically relate to the business of insurance, (2) the relevant provision of the NAA was enacted to regulate the business of insurance, and (3) the NAA applied in this case; thus the NAA reverse preempted the FAA. Because the NAA prohibits arbitration of agreements concerning or relating to insurance, the court held the arbitration clause was unenforceable and the lower court did not err in denying defendants’ motion to compel arbitration.

Onken’s Am. Recyclers, Inc. v. Cal. Ins. Co., Case No. 4-18-0240 (Ill. App. Ct. Sept. 10, 2018).

This post written by Thaddeus Ewald .

See our disclaimer.

UK Court Considers Whether Payment of Insurance Claim Violates Iran Sanctions

by

A court in the United Kingdom has issued a ruling considering the intersection of a clause in an insurance agreement meant to protect the insurer from obligations that would violate international sanctions regimes and the rapidly changing realities of US sanctions against Iran.

At the heart of the case was an insurance agreement providing coverage for cargo carried on two ships that transported goods to Iran in August 2012. Upon arrival in Iran, certain cargo covered by the insurance agreement was put into storage, from which it was stolen in September or October 2012. The insured made a claim based on this loss in March 2013, but the insurer denied coverage on the basis of clause in the agreement providing that “no (re)insurer shall be liable to pay any claim . . . to the extent that the . . . payment of such claim . . . would expose that (re)insurer to any sanction, prohibition or restriction under . . . the trade or economic sanctions, laws, or regulations of . . . the United States of America.”

The insurer argued that paying this claim would expose it to sanctions based on US sanctions barring the provision of services to Iran. The parties agreed that insurance is a covered service and that the insurer was prohibited by these sanctions from paying this claim when it was made in March 2013. The insurer argued that its obligations were extinguished at that time, but the insured argued that later developments allowed the insurer to pay the claim. Specifically, in 2015, the US entered in an agreement with Iran called the Joint Comprehensive Plan of Action (JCPOA) under which the sanctions were relaxed. Under provisions of the JCPOA that went into effect in January 2016, the insurer could have paid the claim but delayed doing so while awaiting confirmation from the US and UK governments that this was allowed. Then, in May 2018, President Trump announced that the US was withdrawing from the JCPOA effective June 27, 2018, with a wind down provision allowing certain transactions to take place through November 4, 2018, and the parties disagreed regarding whether paying this claim was among the permitted transactions.

The court made several significant findings. First, it found that the fact that payment was prohibited at the time the claim was made in 2013 did not extinguish the insurer’s obligation to pay the claim, but instead only suspended that obligation until such time as the law changed to allow such payment to be made, as happened in 2016. Second, it found that payment of the claim was a permitted transaction under the wind down provision of the US withdrawal from the JCPOA. Finally, it interpreted the provision excusing the payment of the claim to the extent it “would expose” the insurer to sanctions to mean that the insurer had the burden to show that the payment was prohibited under the sanctions law, and not merely that there was a risk that a relevant government entity would interpret the payment to be prohibited. The court therefore decided that the insured was entitled to payment of the claim.

Mamancochet Mining Ltd. v. Aegis Managing Agency Ltd., [2018] EWHC 2643 (Comm)

This post written by Jason Brost.

See our disclaimer.