Contract Formation

Fourth Circuit Holds That Arbitrator Exceeded Powers

April 19, 2019 by Carlton Fields

Williamson Farm challenged the district court’s decision to vacate an arbitration award that Williamson won against Diversified Crop Insurance, a private insurance company that sold a federal crop insurance policy to Williamson. Federal crop insurance policies are sold pursuant to the Federal Crop Insurance Act (FCIA). The FCIA established the FCIC, a government corporation that administers the federal crop insurance program. The FCIC relies on approved insurance providers, such as Diversified Crop, to issue federal crop insurance policies to farmers. The FCIC reinsures the approved insurance providers’ losses and reimburses their administrative and operating costs. The approved insurance providers must comply with FCIA and other regulations.

In this instance, Williamson made two separate claims under its policy for crop loss and prevention of planting, both of which were denied by Diversified Crop. Williamson then sought arbitration pursuant to the policy. After the arbitrator issued its award, Williamson filed a motion to confirm the award in the U.S. District Court for the Eastern District of North Carolina. Diversified Crop simultaneously filed a motion to vacate the award. The district court granted Diversified Crop’s motion to vacate the award and denied Williamson’s motion to confirm the award. The Fourth Circuit affirmed the district court’s decision, holding that the arbitrator exceeded her powers by: (1) impermissibly interpreting the policy rather than obtaining an interpretation from the FCIC; and (2) awarding extracontractual damages. The court explained that both the policy and FCIC regulations provide that only the FCIC, and not the arbitrator, may interpret the policy, and therefore the arbitrator exceeded her powers by interpreting the policy herself without obtaining an FCIC interpretation for the disputed policy provisions. Further, the court explained that the FCIC has conclusively stated in multiple final agency determinations that extracontractual damages cannot be awarded in arbitration and can only be sought through judicial review and therefore, by awarding extra-contractual damages, she exceeded her powers.

Williamson Farm v. Diversified Crop Ins. Servs., No. 18-1463 (4th Cir. Feb. 27, 2019)

Connecticut Superior Court Holds That Consolidation Is a Procedural Question to Be Considered by an Arbitrator

April 18, 2019 by Carlton Fields

The Hartford and Employers Insurance Co. of Wausau entered into a Non-Obligatory Casualty Excess of Loss Reinsurance Agreement (the “Agreement”). The Agreement contained an arbitration provision that provides that the arbitration panel should consist of three arbitrators, one chosen by each party and then the third chosen by the two chosen.

Hartford demanded arbitration under the Agreement and 18 other contracts arising out of eight different reinsurance programs between Wausau and four subsidiaries of Hartford. Wausau responded to the arbitration demand arguing that each contract required separate arbitrators and to avoid this Wausau proposed consolidating the arbitrations into three separate proceedings against Hartford and its subsidiaries. Hartford would not proceed with Wausau’s proposal, arguing that any consolidation was for the arbitrators to determine, not the parties.

Wausau filed a summons with the Connecticut Superior Court demanding that Hartford appoint an arbitrator under the Agreement, and Hartford responded by filing a cross-motion to compel arbitration in this action. The court explained that if the parties have an agreement to arbitrate and one of the parties refuses to submit to arbitration, the party seeking arbitration may petition a court for an order compelling arbitration. Whether a dispute is subject to arbitration is a question for the court; however, “procedural questions which grow out of the [parties’] dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Further, whether an arbitration proceeding should be consolidated with one or more other arbitration proceedings is a question for the arbitrator.

In this case, the parties did not dispute that they entered into a valid arbitration agreement and that their dispute fell within the scope of the agreement. Therefore, the court held that the procedural question of consolidation is for the arbitrators and not for the court to decide.

Employers Ins. Co. of Wausau v. The Hartford, No. HHD CV 18 6099158 S (Conn. Super. Ct. Feb. 13, 2019)

District Court Denies Summary Judgment to Trustee of Trust Account Maintained for Beneficiary of “Fronted” Reinsurance Program

April 16, 2019 by Alex Silverman

The U.S. District Court for the District of South Carolina denied summary judgment to the trustee of an account established pursuant to a “fronted” reinsurance program. The plaintiff, Accident Insurance Co. (AIC), participated in the program with non-party Freestone Insurance Co. Freestone paid AIC a fee to use its name and paper as a “front,” while bearing the actual risk of the fronted policies by reinsuring them under a “Program Agreement” with AIC. That agreement required Freestone to deposit funds into a separate trust account to be maintained by a trustee for AIC’s benefit. The defendant, U.S. Bank National Association, was the trustee. After Freeman went into receivership, AIC sued U.S. Bank for civil conspiracy and breach of fiduciary duty, among other things, after learning that nearly $7 million in trust assets seemingly disappeared. U.S. Bank moved for summary judgment on the civil conspiracy claim, arguing AIC could not have conspired with its wholly owned subsidiaries, and had no evidence of a “meeting of the minds” between these entities to “illegally transfer” trust assets. The court denied the motion, finding a genuine issue of fact as to each element of the civil conspiracy claim, and that breach of fiduciary duty is an independent tort that can give rise to a civil conspiracy claim under Delaware law.

Accident Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:16-cv-02621-JMC (D. S.C. Mar. 22, 2019).

Fifth Circuit Affirms Order Compelling Arbitration of Employment Discrimination Claims by Physician Against Medical Center

February 28, 2019 by Carlton Fields

Plaintiff, an emergency room physician, was employed by Defendants, a hospital and its affiliates, pursuant to an employment agreement and subsequent independent contractor agreement, both of which contained an arbitration clause providing for the arbitration of disputes arising out of those agreements. Following the termination of her employment, Plaintiff filed suit in the Northern District of Mississippi alleging claims under Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act, as well as several state law claims including wrongful termination, intentional interference with contract, intentional interference with business relations, and fraud. Defendants filed a motion to compel arbitration, which the district court granted, rejecting Plaintiff’s arguments that the arbitration requirements were unconscionable, that further discovery was required, and that her wrongful termination claims were not subject to arbitration.

On appeal, the Fifth Circuit agreed with the district court and consequently affirmed, compelling arbitration of Plaintiff’s claims. Concerning Plaintiff’s procedural unconscionability allegation, the panel rejected Plaintiff’s claim that the inconsistency between the term sheet (which did not mention the arbitration provision) and the employment agreements (which contained the arbitration provision) rendered the arbitration provision unconscionable, deeming it “an issue that would have been remedied by simply reading the contract.” The panel also rejected Plaintiff’s argument that the arbitration clause was rendered substantively unconscionable due to the fact that the parties conceded that another provision in the employment agreement, the punitive damages waiver, was unconscionable. Instead, the panel found that the punitive damages waiver provision was severable and therefore the arbitration provision was unaffected. In addition, the panel found that Plaintiff’s wrongful termination claim was predicated on her contractual relationship with Defendants and therefore arose “out of” or “under” those contracts and subject to arbitration. Last, the panel rejected Plaintiff’s equitable estoppel argument that her tort claims against her supervising physician were not subject to arbitration because he was a non-signatory to the agreements containing arbitration provisions. The Panel reasoned that those claims similarly centered around interference with her contractual, employment relationship with Defendants.

Begole v. North Mississippi Med. Ctr. Inc., Case No. 18-60369 (5th Cir. Feb. 7, 2019).

Dismissal of Forced-Placed Insurance Cases Pursuant to Filed-Rate Doctrine Upheld by Eleventh Circuit

October 17, 2018 by John Pitblado

Borrowers’ complaints alleging their mortgage servicers breached loan contracts and the implied covenant of good faith and fair dealing by charging “inflated amounts” for “force-placed” or “lender-placed” insurance and receiving “rebates” or “kickbacks” from the force-placed insurer, which savings were not passed on to the borrowers, were dismissed as the insurance rates were filed with and approved by the relevant state regulators.

“The filed-rate doctrine forbids a regulated entity from charging rates for its services other than those properly filed with the appropriate regulatory authority. As a result, where the legislature has conferred power upon an administrative agency to determine the reasonableness of a rate, the rate-payer can claim no rate as a legal right that is other than the filed rate.” Thus, the filed-rate doctrine precludes suits: (1) directly challenging a filed-rate; and (2) facially-neutral challenges – “i.e., any cause of action that is not worded as a challenge to the rate itself” but where the damages awarded “would, effectively, change the rate paid by the customer… to one below the filed rate by other customers or would, in effect, result in a judicial determination of the reasonableness of that rate.”

Despite the borrowers’ assertions that they are not challenging the reasonableness of the insurance rates, they repeatedly stated they were challenging the premiums charged. As the Court noted, “since these premiums are based upon rates filed with the state regulators, [the borrowers] are directly attacking those rates as being unreasonable as well… Their complaints therefore contain textbook examples of the sort of claims that we have previously held are barred by the non-justiciabilty principle.”

Carlton Fields Jorden Burt, P.A. represented American Security Insurance Company in this matter.

Patel v. Specialized Loan Servicing, LLC, 16-12100, 16-6585 (USCA 11th Cir. Sept. 24, 2018)

This post written by Nora A. Valenza-Frost.

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