Contract Interpretation

DISTRICT COURT DECLINES TO CONSOLIDATE DISPUTES ARISING OUT OF TWO REINSURANCE CONTRACTS

March 25, 2014 by Carlton Fields

Plaintiff Georgia Casualty & Surety Company entered into two reinsurance contracts with Defendant Excalibur Reinsurance Corporation, formerly known as PMA Capital Insurance Company. Both reinsurance contracts contained arbitration clauses. The First Excess Reinsurance Contract contained a choice of law provision but no forum selection clause, and the Second Excess Reinsurance Contract contained a forum selection clause but no choice of law provision. In 2006, Douglas Asphalt Company sued Applied Technical Services, Inc., a Georgia Casualty insured. Applied was found liable. While that judgment was on appeal, a high-low agreement was entered, which guaranteed that Georgia Casualty would pay Applied no less than $3 million and no more than $12 million. Thereafter, the Eleventh Circuit vacated the judgment against Applied. Georgia Casualty claimed that it was owed $1,418,708 under the two reinsurance contracts. In response, Excalibur argued that Georgia Casualty promised to seek malpractice damages against defense counsel for Applied and that this lawsuit would be a prerequisite to determining Excalibur’s liability. Additionally, Excalibur claimed that it did not consent to the high-low agreement. Georgia Casualty demanded arbitration of Excalibur’s alleged breach of the reinsurance contracts. Excalibur demanded arbitration on a counterclaim for unpaid premiums. Excalibur refused to consolidate the arbitration of all claims under both reinsurance contracts and requested that the arbitrators stay the arbitration pending the resolution of the malpractice claims. Georgia Casualty claimed this was a delay tactic and sued Excalibur.

The court found that if the Federal Arbitration Act or a state arbitration act lacking a statutory consolidation provision applied, then a court may consolidate arbitration only if the contracts expressly permit. Alternatively, if a state arbitration act that allows courts to impose consolidation regardless of the contracts’ terms governs the contracts, then a court may order consolidation where the statutory requirements are satisfied. Because the Second Excess Reinsurance Contract lacked a choice of law provision, it was governed by the FAA. Thus, the court could not order consolidation. Because the court could not order consolidation, it also could not designate a forum for that consolidated arbitration. With respect to a potential stay, the court believed it had to tread carefully to not violate the principle that, in determining whether a dispute is arbitrable, a court should not rule on the merits of the underlying claims. The court could not order the arbitrators not to stay the arbitration pending any potential malpractice recovery. The court also could not delve into the contract to determine if the contract required Excalibur to post security (in response to Georgia Casualty’s claim that Excalibur was delaying the proceedings). Georgia Casualty & Surety Co. v. Excalibur Reinsurance Corp., Case No. 1:13-CV-00456-JEC (USDC N.D. Ga. Mar. 13, 2014).

FEDERAL COURT REFUSES TO DISMISS PLAINTIFFS’ PUTATIVE CLASS ACTION IN CAPTIVE REINSURANCE CASE

March 20, 2014 by Carlton Fields

On their third attempt to state a claim for mortgage services fraud pursuant to the Real Estate Services Settlement and Procedures Act (“RESPA”), Plaintiffs in a putative class action overcame defendants’ motion to dismiss on the grounds that plaintiffs claims were untimely because they were brought outside of RESPA’s one-year statute of limitation. Linda Menichino, on behalf of herself and others similarly situated (“Plaintiffs”), sued various primary mortgage insurers (“PMI’s”) for mortgage fraud arising from alleged unlawful fee-splitting and kickback arrangements in connection with their mortgages. Specifically, Plaintiffs alleged that the portions of their monthly mortgage premiums that were supposed to pay for reinsurance services were actually disguised kickbacks remitted by the captive PMI’s to the mortgagees in exchange for the mortgagees’ continual flow of business back to the PMI’s. In an earlier opinion the court dismissed the case, holding that Plaintiff had not adequately alleged the basis for tolling the running of the limitation period, but permitted Plaintiff to amend to attempt to cure that deficiency. Conceding that the suit fell outside RESPA’s one year statute of limitation, Plaintiffs argued their factual allegations sufficiently alleged grounds for equitable tolling by showing how Plaintiffs were prevented from learning of the existence of their claims as a result of the PMI’s fraudulent concealment of the true purpose of their arrangement with the mortgagees. This decision follows a line of other decisions earlier reported in Reinsurance Focus on the recent developments in the cases involving RESPA violations and its one-year statute of limitations.

The Menichino Court agreed, further finding that Plaintiffs had now sufficiently alleged (1) they were not on inquiry notice of the possible existence of the claim during the limitations period; and (2) their ignorance of the true facts was not due to lack of reasonable due diligence. The Court also refused to dismiss Plaintiffs’ substantive claims of illegal kickbacks under RESPA as well as Plaintiffs’ claims for unjust enrichment under the laws of the six states where the Plaintiffs reside. Linda Menichino v. Citibank, N.A., et. al., Civil Action No. 2:12-cv-00058 (USDC W.D. Pa. Feb. 5, 2014).

This post written by Leonor Lagomasino.

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COURT DENIES MOTIONS TO DISMISS PUTATIVE CLASS ACTION ALLEGING UNLAWFUL REINSURANCE ARRANGEMENT

March 12, 2014 by Carlton Fields

A federal court in Pennsylvania denied defendants’ motion to dismiss in a putative class action based on purported mortgage services fraud. Defendants Fifth Third Bank, Fifth Third Mortgage Company, Fifth Third Mortgage Insurance Reinsurance Company, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation argued that plaintiffs’ claims were untimely because they were brought outside the Real Estate Settlement and Procedures Act’s one-year limitations period. Plaintiffs sufficiently pled facts to equitably toll the statute of limitations. The operative complaint, for instance, alleged that none of the disclosures, correspondence, or monthly billing statements that plaintiffs received from either their mortgagee or their primary mortgage insurers advised plaintiffs that a portion of their monthly mortgage payments were financing reinsurance premiums or indicated that mortgages were actually reinsured. The court further found that the complaint pled a RESPA violation plausible on its face. The allegations described that the primary mortgage insurers purportedly remitted kickbacks, dressed up as reinsurance premiums, in exchange for a steady stream of primary mortgage insurance business. In support of their allegation that no real risk was transferred between the primary mortgage insurers and the captive reinsurers, plaintiffs pointed to the terms of the reinsurance contracts, which they argued provided no recourse to the primary mortgage insurers in the event that the reinsurers did not maintain adequate reserves to pay claims. Plaintiffs also argued that the claims paid by the reinsurers were low dollar amounts compared to the premiums. Manners v. Fifth Third Bank, Case No. 2:12-cv-00442 (USDC W.D. Pa. Feb. 5, 2014).

This post written by Samantha Lemery.

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COURT ANALYZES MEANING OF “TREATY REINSURANCE” IN DENYING DISMISSAL OF REINSURER’S AFFIRMATIVE DEFENSES

February 10, 2014 by Carlton Fields

Insurers sued their reinsurer for breach of certain facultative reinsurance certificates when the reinsurer ceased paying claims made for underlying losses under excess liability coverage for asbestos-related personal injuries. The reinsurer defended its decision to stop paying claims by contending that the insurers violated the reinsurance certificates when they transferred losses to another company; warranties in the reinsurance certificates provided that the insurers would “retain for [their] own account, subject to treaty reinsurance only, if any, the amount specified on the face of” the certificates. The insurers moved to dismiss this defense, arguing that they did not breach the certificates because their transfer of liability constituted a purchase of “treaty reinsurance,” and thus met the stated exception in the warranties. The court rejected the insurers’ argument, holding that “treaty reinsurance is obtained in advance of actual coverage,” and here, it was undisputed that the transfer took place “some 30 years” after the insurer wrote the policies and after the losses occurred. The court also rejected a number of other arguments made by the insurers with respect to other defenses, with two exceptions: (1) that the insurers were correct that the defense of failure to settle promptly was without merit in light of the reinsurer’s duty to follow the settlements of the insurers, and (2) that the reinsurer’s uberrima fides defense was duplicative of the reinsurer’s breach of contract defense, and was therefore due to be dismissed. The court also denied a motion for summary judgment filed by one insurer, which attempted to argue that the reinsurer was liable as a matter of law under the doctrines of waiver and account stated. Granite State Insurance Co. v. Transatlantic Reinsurance Co., Case No. 652506/2012 (N.Y. Sup. Ct. Dec. 23, 2013).

This post written by Michael Wolgin.

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BACK TO INTERPRETATION BASICS: CONDITIONS PRECEDENT, PRESUMPTIONS, AND CHOICE OF LAW

February 6, 2014 by Carlton Fields

The Eastern District of New York recently adopted the recommendation of a magistrate judge to grant a defendant-insurer’s motion to stay adjudication and compel arbitration, whilst also providing a refresher course in arbitration clause interpretation principles. First, the court dissected the arbitration clause’s condition precedent, holding that a provision requiring arbitration following the request of either party is a mandatory arbitration clause. The requirement that a dispute be submitted to arbitration within thirty days of such request “merely sets a time limit for commencement of an arbitration proceeding.” Moreover, whether a condition precedent has been satisfied is a procedural question presumptively for an arbitrator to decide, not a substantive question, such as whether the clause applies to a particular type of controversy, for a judge. Second, the court held that whether the motion to compel complied with applicable arbitration rules was inapplicable because those rules “do not come into play until an order is entered compelling arbitration or the parties agree to do so.” Third, noting the presumption of arbitrability, the court distinguished Second Circuit case law addressing an instance where a subsequent agreement to adjudicate created ambiguity in the parties’ intentions, and held that, here, “there is no subsequent agreement that abrogates th[e] agreement to arbitrate.” Lastly, the court analyzed a New York choice-of-law provision to determine the arbitrability of a punitive damages claim, holding that the provision should be read to encompass substantive principles that New York would apply, not special rules in New York that may limit the authority of arbitrators with respect to claims such as punitive damages. MQDC, Inc. v. Steadfast Ins. Co., Case No. 12-CV-1424 (ERK) (MDG) (E.D.N.Y. Dec. 6, 2013).

This post written by Kyle Whitehead.

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