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Contract Interpretation

Fourth Circuit Holds That Arbitrator Exceeded Powers

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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

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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)

California Appellate Court Holds U.S. Supreme Court’s Epic Systems Ruling Does Not Authorize Waiver of Class Relief or Arbitration of PAGA Claims Absent Consent From California

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Former employees sued their former employer, alleging wage and hour violations and seeking civil penalties under the California Private Attorneys General Act of 2004 (PAGA). In response, the employer petitioned for arbitration under the parties’ arbitration agreement. The agreement provided that arbitration shall be the exclusive forum for any dispute and prohibited employees from bringing a “representative action.”

The trial court granted the arbitration petition on all causes of action except for the PAGA claim, relying on the California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles LLC, which held that agreements that waived the right to bring PAGA representative actions in any forum were unenforceable. The trial court stayed the PAGA claim pending the conclusion of the arbitration.

On appeal, the employer argued that the court erred because Iskanian is inconsistent with a recent Epic Systems decision by the U.S. Supreme Court. The appellate court rejected this argument, finding that Epic Systems did not address the scenario in Iskanian, which involved a claim under PAGA brought on behalf of the government, and the enforceability of an agreement barring a PAGA representative action in any forum. The court concluded that the trial court properly ruled that the waiver of representative claims in any forum is unenforceable. The appellate court agreed with other California court rulings that held that Iskanian’s view of a PAGA representative action — that a PAGA litigant is an agent of the state — means that this claim cannot be compelled to arbitration based on an employee’s arbitration agreement absent some evidence that the state consented to the waiver of the right to bring the PAGA claim in court. There was no such evidence in this case.

The employer also argued that the parties’ arbitration agreement should be interpreted to mean that if the representative-action waiver is unenforceable, the PAGA claim for statutory penalties remains subject to arbitration. The court rejected this argument on the basis that several California courts of appeal have held that a PAGA arbitration requirement is unenforceable based on Iskanian’s view that the state is the real party in interest in a PAGA claim for penalties.

The court also distinguished federal courts that have reached a different conclusion regarding the arbitrability of a PAGA representative claim, finding that these decisions were unpersuasive because the courts did not fully consider the implications of the qui tam nature of a PAGA claim on the enforceability of an employer-employee arbitration agreement.

Correia v. NB Baker Elec., Inc., No. D073798 (Cal. Ct. App. Feb. 25, 2019).

Second Circuit Rejects Claims Against Insurer for Settlement Using Policy Funds

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Three plaintiffs—a subcontractor (HBI), an affiliated entity (Keller Foundations), and their parent (Keller Group)—brought a claim against Zurich, which had issued a liability policy (the Policy) to the Keller Foundations for which HBI was an additional insured. A general contractor (Diaz) sued HBI in one lawsuit and Zurich in another, claiming that Zurich should defend it in the first lawsuit because it was an additional insured under the Policy. Zurich settled the lawsuit by paying Diaz $450,000. Zurich then sought and received reimbursement from Capital, a captive reinsurer owned by plaintiff Keller Group. Claiming that Zurich’s payment to Diaz was not covered by the Policy, plaintiff brought causes of action for breach of contract, breach of the duty of good faith, and declaratory relief. Zurich filed a motion to dismiss all claims, which the trial court granted, and plaintiffs appealed.

The Second Circuit affirmed the dismissal. First, the court found that plaintiffs had not plausibly alleged a breach of the Policy, as Zurich had broad discretion to settle claims and plaintiffs were not directly harmed by Zurich’s decision to settle the claim, even if they had to reimburse Capital for its reimbursement of Zurich. As the court explained, plaintiffs’ payments to Capital did not relate to Zurich’s duties under the Policy, but instead “flow from Capital’s choice to reimburse Zurich under the Reinsurance Agreement, as well as whatever arrangements exist for inter-company reimbursements between Keller Group and its subsidiaries.” Any complaint regarding Capital’s obligation to reimburse Zurich was Capitals’ to make, not Plaintiffs’.

Second, as to the claim for breach of the duty of good faith, the court found that Zurich’s decision to settle the Diaz claim was not arbitrary and unreasonable, and again emphasized that plaintiffs had not plausibly alleged that this decision deprived them of the benefits of the Policy. Finally, the court rejected the request for declaratory relief, finding that plaintiffs had failed to plead any facts demonstrating even a possibility that Zurich’s payment to Diaz would cause the Policy’s $5 million cap to be exhausted and thus cause plaintiffs to lose the benefit of the Policy.

Keller Foundations, LLC et. al v. Zurich American Insurance Company, 18-1280-cv (2d Cir. Dec. 6, 2018)

Applied Underwriters Defeats Class Certification in Long-Running Worker’s Compensation Reinsurance Dispute

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Applied Underwriters beat back an attempt by plaintiffs to certify a class in their lawsuit related to Applied Underwriters’ “EquityComp” and “SolutionOne” workers’ compensation programs. We previously reported on this case, which involves a disputed Reinsurance Participation Agreement used to control worker’s compensation rates, on July 21, 2016, December 1, 2016, November 15, 2017, January 31, 2018, and August 30, 2018. The court has now determined that plaintiffs failed to demonstrate that a class action would be “superior” to individual actions, as required by four factors under Federal Rule 23(b)(3), and denied class certification.

In determining that the first factor of the class members’ interest in individually controlling the litigation, weighed against certification, the court noted that the individual damages alleged by claimants in this action were large and there was no evidence that any class member would be unable to bring an action absent class certification. The second factor of the extent and nature of any litigation concerning the controversy already begun by class members, weighed “strongly” against certification, as more than “100 separate arbitrations, lawsuits, and California Department Insurance appeals involving 67 California participants in the program” were already pending. On that basis, the court determined that a substantial number of putative class members had an interest in controlling their own litigation and that “realistic alternatives” to a class action exist.

The third factor of the desirability of concentrating the litigation in the particular forum, weighed “slightly” against certification, where the remaining claims were all brought under California law (which weighed in favor of certification), but the many potential claimants were “located throughout the state,” including some that were “far from this court.” Additionally, certifying the class would automatically select federal court as the preferred forum for all class members even though the previously filed actions discussed above had demonstrated otherwise.

Finally, the court determined the “manageability” factor of the likely difficulties in managing a class action, also weighed against certification, where the court would have to determine the extent of overlap between the class action and the many previously filed actions, as well as how to properly formulate a class notice that accounts for the potentially overlapping and differing claims brought in the various actions and the class action. “These difficulties would only be magnified where many similar actions have already concluded and others have progressed substantially.”

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-1222-WBS-AC (USDC E.D. Cal. Jan. 29, 2019).