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Contract Interpretation

Fireman’s Fund Obtains Second Circuit Reversal in Long-Running Reinsurance Dispute Involving Asbestos Claims and Policies Without Aggregate Limits

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The Second Circuit has reversed a $64 million judgment against Fireman’s Fund Insurance Co. in the latest ruling in a long-running dispute related to primary and excess policies that Utica Mutual Insurance Co. issued to a company later embroiled in asbestos claims.

We’ve been closely following this dispute at the district court level. For a full recap, see our posts noting that the district court refused to seal summary judgment exhibits, allowed “follow-the-fortunes” (also known as “follow-the-settlements”) evidence, and refused to change a credibility determination. We’ve also covered a companion case on several occasions.

To recap, Utica Mutual Insurance Co. issued primary and excess policies to Goulds Pump Inc. Utica reinsured a portion of the excess policies with Fireman’s Fund Insurance Co. Goulds subsequently faced thousands of asbestos claims related to its products. Utica defended and indemnified those claims pursuant to its policies.

A dispute arose between Utica and Goulds because Utica’s policies allegedly did not contain aggregate limits. To avoid potentially catastrophic losses as a result of that purported omission, Utica settled its dispute with Goulds. The parties agreed, among other things, that the primary policies contained aggregate limits and that Goulds’ umbrella policies would cover losses that exceeded the primary policies’ aggregate limits. They also stipulated the settlement was fair, just, and reasonable and resolved within the terms of the policies.

Utica subsequently sought reimbursement from Fireman’s Fund pursuant to the reinsurance contracts. In short, the district court denied cross-motions for summary judgment, and a jury subsequently returned a $64 million verdict in favor of Utica following a 12-day trial.

Fireman’s Fund appealed to the Second Circuit. It argued that it did not owe anything to Utica because the reinsurance certificates contained a “follow form” clause that provided that Fireman’s Fund’s liability “shall follow that of [Utica] and … shall be subject in all respects to all the terms and conditions of [the umbrella policies]” and the umbrella policies provided they only applied in excess of the limits stated in the schedules accompanying the umbrella policies, which Fireman’s Fund claimed did not contain any aggregate limits for bodily injury claims.

Applying New York law, the Second Circuit agreed. It explained that the plain language of the excess policies provided that they only applied “in excess of … the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies,” and “the limits of liability listed in [those] Schedules for bodily injury d[id] not include aggregate limits.” The court rejected Utica’s argument that the language in the excess policies only required occurrence limits, not aggregate limits, to be listed as inconsistent with the plain language of the excess policies and New York’s principles of contract interpretation.

Utica argued, however, that Fireman’s Fund was obligated to reimburse it pursuant to the reinsurance contracts because those contracts contained a “follow-the-settlements” clause that provided that all “claims involving this reinsurance, when settled by [Utica], shall be binding on [Fireman’s Fund].” The Second Circuit explained that follow-the-settlements clauses may “not alter the terms or override the language of reinsurance policies.” Adopting Utica’s argument would “render the follow form clause in the reinsurance contract and the umbrella policy language defining Utica’s loss meaningless” and would contradict the parties’ expressed agreement.

The Second Circuit therefore reversed the judgment against Fireman’s Fund.

Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 18-828 (2d Cir. Apr. 28, 2020).

District Court Compels Arbitration for Claims Against Supervisor Despite Plaintiff’s Claims Regarding Never Seeing or Signing Agreement Containing Arbitration Clause

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The U.S. District Court for the District of Nebraska recently granted a defendant’s motion to compel arbitration despite a plaintiff’s claims that she had never seen or signed the employment agreement containing the arbitration clause and that the agreement did not cover certain claims and could not be invoked by a defendant who was not a party to the agreement.

Barbara Nelson worked as an assistant manager in a restaurant owned by American Blue Ribbon Holdings LLC. Julie Kunkle was Nelson’s supervisor. Nelson filed a number of claims related to her employment against American Blue Ribbon Holdings and Kunkle, including a defamation claim related to purported statements Kunkle made to restaurant employees and others.

American Blue Ribbon Holdings obtained a stay with respect to Nelson’s claims related to potential bankruptcy proceedings. Kunkle moved to compel arbitration, claiming that Nelson’s claims were within the scope of an arbitration clause Nelson signed when she was hired by American Blue Ribbon Holdings.

The district court granted Kunkle’s request despite Nelson’s claims that (1) she had never signed the employment agreement in question and (2) even if she had, the arbitration clause did not cover her claims against Kunkle, who was not a signatory to the agreement with American Blue Ribbon Holdings.

First, the court rejected Nelson’s “self-serving” affidavit that she had never seen nor signed the arbitration clause. The evidence established that someone had to access the agreement containing the clause via an emailed link sent to Nelson’s email account, enter Nelson’s email address as a username, use Nelson’s zip code as the password, and subsequently enter Nelson’s “address, telephone number, date of birth, Social Security number, gender, marital status, and direct deposit banking information.” The evidence further established that American Blue Ribbon Holdings did not otherwise collect this information and that Nelson signed the agreement again when she started.

Second, the court concluded that Nelson’s claim against Kunkle was within the scope of the arbitration agreement and that Kunkle could invoke that agreement even though she was not a signatory to it. The agreement was broad and covered, among other things, “disputes regarding the employment relationship” brought under certain employment statutes “and all other state statutory and common law claims.” The fact that (1) Kunkle was an agent of American Blue Ribbon Holdings; (2) allowing Nelson to sue Kunkle for employment-related claims covered by the agreement would limit the agreement’s effectiveness; and (3) many of Nelson’s claims against Kunkle were synonymous or intertwined with her claims against American Blue Ribbon Holdings was sufficient for the clause to cover Nelson’s defamation claim, as well as claims that Kunkle violated Nelson’s rights under the Family and Medical Leave Act.

The court therefore stayed Nelson’s action pending arbitration proceedings.

Nelson v. Kunkle, No. 8:19-cv-00329 (D. Neb. Mar. 20, 2020).

Third Circuit Addresses Interplay Between LMRA and FAA and Affirms Arbitration Award in Favor of Union Under Collective Bargaining Agreement

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The case relates to the disposition of accrued vacation time of unionized nurses after a new employer (Prospect) assumed a collective bargaining agreement. Prospect construed the collective bargaining agreement differently than the prior employer and refused to allow more than 200% of the annual vacation time limit. An arbitrator ultimately decided in favor of the nurses’ ability to maintain the full amounts of their previously accrued vacation time, determining that the collective bargaining agreement did not curtail the nurses’ right to the full amount of their accumulated leave. The arbitrator further found that Prospect assumed the collective bargaining agreement and that Prospect, therefore, was obligated to honor the excess accumulated leave. After the district court upheld the arbitration award, Prospect appealed to the Third Circuit.

As an initial matter, the Third Circuit found that Prospect’s attempt to vacate the award was timely, rejecting the union’s argument that the state 30-day statute of limitations period authorized by the Labor Management Relations Act applied. Because Prospect was entitled to sue under the Federal Arbitration Act, which applies to collective bargaining agreements, it could rely on the lengthier three-month limitations period of the FAA.

Next, the Third Circuit rejected Prospect’s three arguments attempting to show that the award should be vacated under the FAA. First, the court rejected Prospect’s argument that the award was in excess of the arbitrator’s powers because the arbitrator failed to arguably interpret the collective bargaining agreement. The court found that the arbitrator’s ruling could be supported by a canon of contract construction and that “[w]hether or not that is the best reading of the CBA, it is certainly sufficient to uphold the arbitrator’s award.” Second, the court rejected Prospect’s argument that the arbitrator manifestly disregarded federal labor law pertaining to successor employers. Because the arbitrator “did not foreclose the possibility that Prospect, as a successor employer, could have, as an initial condition of employment, capped the nurses’ carry-over of vacation time” but, instead, found only that there was “no evidence that Prospect did so in time” it was not a manifest disregard of the principles of successor employment. And third, the court rejected Prospect’s argument that the arbitrator was guilty of misconduct in “refusing to hear evidence pertinent and material to the controversy” about a similar National Labor Relations Board decision in a different case. The Third Circuit ruled that the evidentiary ruling was “not patently incorrect,” and it was “certainly not an error that deprived Prospect of a fair hearing.” The Third Circuit, therefore, affirmed the order confirming the award.

Prospect CCMC LLC v. Crozer-Chester Nurses Association, Nos. 19-1439 & 19-1440 (3d Cir. Feb. 26, 2020).

Court Upholds Arbitration Provision Despite Allegations of Fraud in Contract’s Execution

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The dispute involved the potential trade-in of a car and the purchase of a pickup truck by two customers at a car dealership. During the course of the transaction, one of the customers signed a document that he later learned was a contract including an arbitration provision. Before the transaction was completed, the customers had second thoughts and requested the return of their trade-in and deposit. The dealership refused, insisting that the customers had a binding contract to buy the truck. The customers sued the dealership and certain employees, alleging common law fraud and violations of state consumer protection laws. The defendants moved to dismiss and compel arbitration.

The court granted the motion to compel arbitration and stayed the case. As to the customer who signed the contract containing the arbitration provision, the court found that, although the customer contended that he was deceived into signing the contract, the arbitration provision would be enforced. The provision included a delegation of issues involving arbitrability to the arbitrator. Upon review of New Jersey and federal case law, the court held that unless a plaintiff challenges the validity of the arbitration provision itself, the dispute over the validity of the contract as a whole must be arbitrated. The court found that “precedent compels only one conclusion,” namely, that the arbitrator must decide the validity of their sales contracts and the arbitrability of the dispute.

The court also rejected the argument that the court should permit discovery on the issue of whether the signing customer was fraudulently induced into signing the contract. The court observed, “Importantly, [the customer] is arguing he was fraudulently induced into entering the entire contract, and not just the arbitration provision. A challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, while a challenge based on the lack of mutuality of the arbitration clause would be for the court.”

Last, the court stayed the second customer’s claims that were not subject to arbitration because if “the arbitrator finds that the contract, including the arbitration agreement, is invalid, then he will likely return to litigate in this Court, where his action is stayed. In the event that this occurs, it would be sensible for [the two customers] to litigate their claims together, as they initially attempted to do, to avoid inconsistent rulings.” The court therefore stayed the entire case.

Lomonico v. Foulke Management Corp., No. 1:18-cv-11511 (D.N.J. Feb. 20, 2020).

Court Declines to Compel Arbitration Based on Third-Party Agreement

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The U.S. District Court for the Southern District of Florida recently refused to compel arbitration in a putative class action based on an arbitration clause a plaintiff agreed to on a third party’s website he used to book a rental car from the defendant.

Ancizar Marin used Orbitz to book a rental car from rental car company Sixt. During that process, he agreed to Orbitz’s terms of use. Those terms included an arbitration clause that provided: “You and Orbitz agree that any and all Claims will be resolved by binding arbitration, rather than in court.” Marin subsequently picked up and returned his rental car from Sixt. After he returned his car, he received an email claiming that the car had been damaged. Marin filed a putative class action against Sixt claiming violations of Florida’s Deceptive and Unfair Trade Practices Act and Consumer Collection Practices Act. Sixt sought to compel arbitration.

The district court denied Sixt’s motion.

The court explained that Sixt was not a party to the arbitration clause between Orbitz and Marin. The clause said: “You and Orbitz agree …” Nor was Sixt a third-party beneficiary to that agreement. Although Sixt argued that it was a “supplier” under Orbitz’s terms of use and that this rendered it a beneficiary, the court concluded that Sixt was included in a different category of companies that worked with Orbitz (travel services), and that category was not mentioned in the arbitration clause. Therefore, Sixt could not invoke the arbitration clause.

Even if Sixt could invoke the arbitration clause, the clause did not cover the dispute between Marin and Sixt. Rather, it “cover[ed] disputes between Orbitz’s customers and Orbitz.” Marin’s dispute concerned alleged misconduct by Sixt unrelated to Orbitz.

Calderon v. Sixt Rent A Car, LLC, No. 0:19-cv-62408 (S.D. Fla. Feb. 12, 2020).