Rob DiUbaldo

Michigan Amends Reinsurance Credit Statute To Conform To NAIC Model Law

April 25, 2018 by Rob DiUbaldo

On April 10, 2018 Michigan Governor Rick Snyder (R) signed Michigan Senate Bill 638 into law to amend the state’s insurance code to conform to the National Association of Insurance Commissioner (“NAIC”)’s model law on reinsurance regarding when ceding insurers may claim credit for reinsurance. The Michigan legislative staff has published an analysis of the bill. The Michigan Insurance Code previously authorized reinsurance credit where the reinsurance is ceded to a reinsurer authorized in Michigan or met one of three different sets of requirements. Senate Bill 638 amends those three requirements as follows:

Where the Code allows reinsurance credit if the reinsurer is accredited as a Michigan reinsurer, the bill removes a prohibition on receiving credit where the reinsurer’s accreditation was revoked, requires the reinsurer to bear the expense of the state’s examination of its books and records to gain accreditation, removes the specific surplus requirement of $20 million required for accreditation, and institutes instead a requirement that the reinsurer satisfy the state that it has “adequate financial capacity” to meet its reinsurance obligations.
Where the Code allows reinsurance credit if the reinsurer maintains a qualified trust fund for reinsurance claims payments, the bill adds provisions regarding single assuming insurers that permanently discontinue writing new business secured by the trust, changes the dates for various criteria of the trusts maintained by groups of underwriters, and adds requirements for groups of unincorporated underwriters under common administration.
The bill maintains the Code’s provisions for reinsurance credit if the insured risks are located in jurisdictions where reinsurance is required under local laws and regulations.

The bill also adds two new scenarios that qualify for reinsurance credit:

Where the reinsurer is domiciled in or entered through a state that employs standards regarding reinsurance credit “substantially similar” to Michigan’s standards, provided that the reinsurer maintains a surplus of $20 million and submits to Michigan’s books and records examination authority and bears the expense thereof.
Where the reinsurer has been certified as a certified reinsurer in Michigan and secures its obligations as provided in the bill and the Code, provided that it meets certain certification requirements.

Additionally, the bill adds provisions governing the suspension and revocation of accreditation and certification under the Code, requiring ceding insurers to manage reinsured assets in proportion to its business and diversify their reinsurance programs, and granting the state Director of Insurance and Financial Services authority to promulgate reinsurance regulations under the Administrative Procedure Act.

The bill takes effect July 9, 2018.

This post written by Thaddeus Ewald .

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Arbitrator’s Decision Not Based On Manifest Disregard Of The Law, But Challenge To That Decision Was Not So Meritless As To Warrant Sanctions

April 24, 2018 by Rob DiUbaldo

Jonathan Kessler brought a claim in arbitration against his former employer, Kent Building Services, after he was fired from his job as Kent’s president, asserting that he had not been fired for cause and was thus owed severance. The arbitrator determined that Kent breached Kessler’s contract by firing him without cause, a decision the arbitrator found was arbitrary and irrational and thus a breach of the implied covenant of good faith and fair dealing, and thus awarded him six month’s severance pay.

Kent challenged this award in federal court, arguing that the arbitrator’s decision on good faith and fair dealing demonstrated a manifest disregard of New York contract law. Kent based this argument on a New York trial court decision holding that termination of employment only breaches the implied covenant of good faith and fair dealing if it results from a “constitutionally impermissible purpose or [violates] statutory or decisional law,” something not shown during the arbitration. The court rejected this argument, finding that other case law makes it clear that unconstitutionality or illegality are “sufficient but not necessary” to support a claim based on the breach of the implied covenant of good faith and fair dealing. Further, the court found that the arbitrator applied the correct law in finding that Kent had discretion regarding whether to fire Kessler and that the irrational exercise of this discretion could support a breach of the implied covenant of good faith and fair dealing. The court therefore found that the arbitrator had not acted in manifest disregard of the law.

However, the court rejected Kessler’s motion for sanctions under 28 U.S.C. § 1927 for filing a meritless petition to vacate. While the court disagreed with Kent’s argument regarding the requirements of good faith and fair dealing claims under New York law, it found that making argument was not unreasonable. Kessler had also argued that Kent had acted in bad faith when it included in its petition allegations of numerous failures by Kessler in his job performance while failing to mention that the arbitrator had specifically found that these failures were not the basis for Kent’s decision to fire Kessler. The court found that this should be interpreted as simply an attempt by Kent “to provide greater context for the parties’ employment dispute,” rather than a bad faith attempt to mislead the court. Finding no frivolous argument and no bad faith, the court declined to award sanctions.

Kent Building Services, LLC v. Kessler, 17-CV-3509 (JPO) (S.D.N.Y. Mar. 14, 2018)

This post written by Jason Brost.

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Minor Not Bound—Directly Or Indirectly—By Arbitration Agreement In Mother’s Credit Card Agreement

April 23, 2018 by Rob DiUbaldo

Last month the Seventh Circuit reversed a lower court order enforcing an arbitration agreement contained in cardholder agreement as applied against the minor daughter (“A.D.”) of the cardholder, rejecting the bank’s attempt to compel arbitration of the daughter’s Telephone Consumer Protection Act (“TCPA”) putative class action lawsuit. The trial court ruled A.D. was bound by the arbitration agreement as an “authorized user” of the card—where she, on at least one occasion, used the credit card to make a purchase as instructed by her mother—and was bound under the direct benefits estoppel theory.

First, the Seventh Circuit held A.D. was not bound by the cardholder agreement and its arbitration clause. The court emphasized the specific procedures in the cardholder agreement for designating authorized users which the parties did not follow: A.D.’s mother never notified the bank or paid an annual fee, the bank never issued a new card, and A.D. was not even old enough at the time to qualify as an authorized user. The court also found A.D. never manifested consent to be bound by the arbitration agreement, did not have legal capacity as a minor to enter into a contract, and actively disaffirmed consent by filing a lawsuit.

Second, the court concluded equitable estoppel was inapplicable and did not bind A.D. to the cardholder agreement. Any benefit A.D. received was derived from her relationship with her mother, not any relationship with the bank. Nor, the court held, did A.D.’s lawsuit center on rights or benefits under the cardholder agreement. The court rejected the bank’s argument that its affirmative defense based on A.D.’s mother’s consent qualified the case as one “relying” on the agreement because the bank, not A.D., bore the burden of establishing that defense. Simply put, A.D.’s lawsuit asserted rights under the TCPA and was therefore not premised on the cardholder agreement.

Because A.D. was not bound to the cardholder agreement directly as a signatory nor indirectly through estoppel, the court reversed and refused to compel arbitration.

A.D. v. Credit One Bank, N.A., No. 17-1486 (7th Cir. Mar. 22, 2018).

This post written by Thaddeus Ewald .

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CASE ALLEGING THAT BARNES & NOBLE WRONGFULLY SHARED CUSTOMER INFORMATION WITH FACEBOOK ORDERED TO ARBITRATION

April 5, 2018 by Rob DiUbaldo

Plaintiff filed a class action against Barnes & Noble in the Southern District of New York, alleging that it violated her privacy by sharing information about her purchases with Facebook. Barnes & Noble moved to compel arbitration based on an agreement to arbitrate contained in its Terms of Use. Plaintiff denied agreeing to the Terms of Use and argued that the arbitration provision was unconscionable.

In a report and recommendation, a magistrate judge found that the Terms of Use were an example of a “sign-in-wrap” agreement, in which a website notifies users of the existence and applicability of its terms of use “when proceeding through the website’s sign-in or login process.” Under Second Circuit precedent, arbitration clauses in such sign-in-wrap agreements may be enforced “where the notice of the arbitration provision was reasonably conspicuous and manifestation of assent unambiguous as a matter of law.” The magistrate examined evidence regarding the appearance and functioning of the website in detail, including evidence that, at the time plaintiff placed her DVD order, users of the website “had to click on a ‘Submit Order’ button with the language ‘[b]y making this purchase you are agreeing to our Terms of Use and Privacy Policy’ immediately below it” in order to make purchases, and that the actual Terms of Use could be accessed by clicking on those words. The magistrate found that this evidence, countered only by plaintiff’s testimony that she did not recall seeing the Terms of Use notice, was sufficient for Barnes & Noble to show “by a preponderance of credible evidence” that the notice was “reasonably conspicuous” and that plaintiff had unambiguously manifested her assent, such that an agreement to arbitrate existed. The magistrate also found that the arbitration agreement was not procedurally or substantively unconscionable.

In considering plaintiff’s objections to the magistrate report and recommendation, the district judge found that the magistrate was wrong to describe Barnes & Noble’s burden as making a showing “by a preponderance of credible evidence,” finding instead that it had to show that “no trier of fact reasonably could have found that an agreement to arbitrate did not exist between the parties.” This court found this error to be harmless, however, as the evidence was sufficient to meet the correct standard, and it granted Barnes & Noble’s motion to compel arbitration.

Bernardino v. Barnes & Noble Booksellers, Inc., Case No. 1:17-cv-04570 (S.D.N.Y. Jan. 31, 2018)

This post written by Jason Brost.

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ON RECONSIDERATION, APPLIED UNDERWRITERS AGAIN LOSES ARGUMENT TO ENFORCE MANDATORY FORUM SELECTION CLAUSE IN REINSURANCE CONTRACT

April 4, 2018 by Rob DiUbaldo

As we previously reported, the District of Connecticut in September denied a motion to transfer based on a mandatory forum selection clause in a reinsurance contract in a dispute between Applied Underwriters, Inc. and its affiliates, and Aiello Home Services (“Aiello”), over a workers’ compensation insurance product. There, the court held the forum selection clause did not bind Aiello relative to defendants other than Applied affiliate Applied Underwriters Captive Risk Assurance Company (“AUCRAC”), did not apply to Aiello’s specific claims against AUCRAC, and was generally unenforceable under Nebraska and federal law. In the present opinion, the court granted a motion for reconsideration to clarify its prior ruling, but denied the requested relief.

The court addressed whether the claims and parties are subject to the forum selection clause and whether the resisting party showed that the enforcement of the clause would be unjust or the clause was otherwise invalid.

On reconsideration, AUCRAC first argued that the claims, while not “arising out of” the contract, are “related to” the reinsurance contract. Noting that the Second Circuit interprets the language “related to” broadly, the court reaffirmed its original ruling the claims fall outside the scope of the forum selection clause. Aiello’s statutory claims concern deceptive behavior that predated the reinsurance contract and the court was unable to determine the extent to which the alleged misrepresentations induced the parties to agree to the contract, concluding that those claims were not “related to” the contract.

Despite not needing to reach the enforceability of the forum selection clause because the court held Aiello’s claims did not “relate to” the reinsurance contract, the court analyzed the clause’s enforceability to clarify statements from its September ruling. Because Second Circuit precedent for evaluating enforceability provides that federal law controls, the court clarified that although it found the forum selection clause is unenforceable under Nebraska law, it did not ground the decision on the motion to transfer on state law. The court then doubled-down on its assessment that the forum selection clause was unenforceable under federal law because of the accompanying inefficiencies and risk of inconsistent judgments. However, it specified that it was not suggesting inefficiency alone renders the clause unenforceable, but rather in the circumstances here the inefficiency constituted sufficient injustice.

Charter Oak Oil Co. v. Aiello Home Servs., Case No. 17-689 (D. Conn. Feb. 26, 2018).

This post written by Thaddeus Ewald .

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