California has adopted amendments to its insurance code making changes regarding credit for reinsurance, insolvency of a ceding company, assets or deductions for reinsurance and foreign ceding insurers, and requirements with respect to the examination of reinsurance intermediaries. The new statute also requires that reinsurance intermediaries respond to subpoenas issued by arbitration panels. California Assembly Bill No. 2400, effective January1, 2007.
Arbitration Process Issues
A reinsurer (Sphere Drake Insurance Limited) which successfully persuaded an arbitration panel to accord collateral estoppel effect to a decision of the London, England, Commercial Court, has convinced a , which avoided four excess of loss reinsurance slips. The London Commercial Court had determined that the four slips at issue in the arbitration had been procured through fraud by the reinsurer’s broker, and were void. The startling aspect of this decision is that the reinsured in the arbitration, Lincoln National Life Insurance Company, had not been a party to the London case. The Court found that the decision did not violate due process, since Lincoln was in “privity” with the broker party to the London case due to a similarity of interests. Sphere Drake Insurance Limited v. Lincoln National Life Insurance Co., Case no. 05-6411 (N.D. Ill. Sept. 13, 2006). Given the deference given to arbitration awards, it may be very difficult for Lincoln to obtain reversal of this decision on appeal. Further background is provided in Sphere Drake’s . The London Commercial Court decision (Sphere Drake v. EIU) was the subject of an earlier entry in this blog.
In the massive criminal tax case against seventeen former partners and employees of KPMG, KPMG declined, under severe pressure from the government, to pay the attorneys' fees of the defendants. The District Court permitted the defendants to add KPMG as a defendant, and assert a claim against it for fees. The Court recently denied KPMG's motion for summary judgment, and set the claims seeking the advancement of fees for trial on an expedited basis. , Case No. 05-crim-0888 and 06-civ-5007 (USDC S.D. N.Y. Sept. 6, 2006). The Court rejected KPMG’s contention that the fee issue was subject to arbitration under the partnership agreement, in part because not all of the defendants had been partners, but also on public policy grounds, due to the severe disruption that such a course would necessarily have had on the pending criminal case. This opinion may become of interest to reinsurers to the extent that there are criminal charges filed relating to finite reinsurance matters.
The Connecticut Supreme Court, following one of its own 1999 decisions, has held that an arbitration panel is not required to give preclusive collateral estoppel effect to a prior arbitration award, even where the prior award involved the interpretation of the same provision of a contract between the same parties. LaSalla v. Doctor's Associates, Inc., SC 17483 (Conn. June 13, 2006). The Court held that the desire to maintain the flexibility of the arbitral process was more important than the desire to promote the stability and finality of judgments in this context, noting in dicta that a specific provision in the contract to the contrary might have led to a different result.
Courts are sometimes asked to consolidate mutliple arbitrations relating to insurance and reinsurance matters. This issue has been the topic of three recent court opinions.
- In , Case No. 05-5522 (Aug. 10, 2006), the United States District Court for the District of New Jersey found that since the issue of the type of arbitration proceeding, including whether multiple arbitrations should be consolidated, was not a “gateway” issue under the Supreme Court’s analysis in Green Tree Financial Corp. v. Bazzle, 539, U.S. 444 (2003), the arbitrators, rather than the courts, should decide whether to use multiple arbitration panels or a consolidated panel.
- In , Case No. 06-4419 (Aug. 8, 2006), the United States District Court for the Southern District of New York held that arbitrators should decide whether to consolidate two arbitrations related to two facultative reinsurance certificates. The Court strongly implied that if the reinsurance agreements contained a provision relating to consolidated arbitrations, that the Court could have acted to enforce whatever the parties had agreed to in that regard.
- In Certain Underwriters at Lloyd’s v. Westchester Fire Ins., Case No. 06-1457, the United States Court of Appeals for the Third Circuit currently is accepting briefing of an appeal of a decision of a in multiple arbitrations. The briefs suggest that conflict exists on this issue between a pre-Bazzle unreported Third Circuit opinion and a post-Bazzle Seventh Circuit opinion.
Expect further developments in this area.