Jurisdiction Issues

REINSURER’S AGENT IMPROPERLY JOINED IN INSURED’S ACTION AGAINST REINSURER

April 14, 2008 by Carlton Fields

Plaintiff, First Automotive Service Corporation (“FASC”), insures extended vehicle service contracts sold to automobile dealers and vehicle owners. Defendant, Northbrook Indemnity Company, is the reinsurer for a portion of that risk, and defendant, First Colonial Insurance Company (“First Colonial”), acts as “agent” and “manager” for Northbrook. FASC filed this lawsuit in state court in mid-2007 alleging that Northbrook owed FASC in excess of $10 million for claims arising under the four placement slips. Northbrook removed the case to federal court based upon diversity jurisdiction, contending that First Colonial corporation (a Florida corporation), had been fraudulently joined to defeat diversity. In their motion to remand, plaintiffs asserted that the parties were properly named.

The Court denied plaintiffs’ motion to remand, finding that “plaintiffs provide no basis for the Court to find that First Colonial acted as other than agent for Northbrook as it pertains to the placement slips,” and that “[t]here was no express agreement alleged or established by evidence that First Colonial would be personally liable to . . . FASC as reinsurer.” As such, the court concluded that “First Colonial, as agent to insurer Northbrook, is not a proper party in plaintiffs’ declaratory judgment action because as agent it is not a party to the contract between the insured and the insurer.” First Automotive Services Corp. v. First Colonial Ins. Co., Case No. 07-682 (USDC M.D. Fla. March 25, 2008).

This post written by Lynn Hawkins.

BARBADOS REINSURER SUBJECT TO U.S. JURISDICTION

March 13, 2008 by Carlton Fields

Phencorp is a reinsurance company organized under the laws of Barbados. Phencorp is a wholly owned subsidiary of Philip Services Corporation (“PSC”), a Delaware corporation. In 2004, Central States sued Phencorp to recover funds allegedly owed to it by PSC under ERISA. After improperly serving the complaint on one of Phencorp’s former employees, the court directed that Phencorp could be properly served through its attorneys. The parties were permitted to conduct discovery on the issue of jurisdiction. This matter came before the court on Phencorp’s motion to dismiss the Complaint for lack of personal jurisdiction.

The court denied Phencorp’s motion to dismiss, concluding that although Phencorp had no employees, physical place of business or real estate in the U.S., it had sufficient contacts to support personal jurisdiction. Specifically, the court found that Phencorp had entered into at least five reinsurance agreements with fronting companies that have operations in the U.S., and that Phencorp agreed to submit disputes arising under the reinsurance contracts to arbitration in New York. Additionally, Phencorp maintained a post office box in Florida through an agent. Lastly, the court noted that Phencorp maintained a bank account in the U.S. and requested to be treated as a domestic corporation for U.S. tax purposes. Central States v. Phencorp Reinsurance Company, Case No. 04 C 5655 (USDC N.D. Ill. Jan. 11, 2008).

This post written by Lynn Hawkins.

DISTRICT COURT FINDS COMMERCIAL ACTIVITY EXCEPTION TO FOREIGN SOVEREIGN IMMUNITIES ACT NOT APPLICABLE TO ALLEGED REINSURANCE SCHEME

February 28, 2008 by Carlton Fields

In a June 7, 2007 post, we reported on a decision of the US Court of Appeals for the Second Circuit which affirmed the dismissal of claims alleging that an Indonesia state-owned social security insurer operated a reinsurance scam. The district court dismissed the claims after finding that the alleged activity was covered by the Foreign Sovereign Immunities Act, and the “commercial activity” exception to immunity did not apply. The Court of Appeals affirmed, but remanded the case for reconsideration of whether a negligent supervision claim was covered by the “commercial activity” exception. On remand, the district court has found that the negligent supervision claim does not come within the bounds of the “commercial activity” exception to immunity, and is therefore barred by the doctrine of sovereign immunity. The district court accordingly dismissed the remaining claim. Anglo-Iberia Underwriting Management Co. v. Lodderhose, Case No. 9700084 (USDC S.D. N.Y. Jan. 22, 2008).

This post written by Rollie Goss.

NEW YORK COURTS ADDRESS DISCOVERY AND VENUE DISPUTES IN CONTRACT RESCISSION CASE INVOLVING ALLEGED FINITE REINSURANCE TRANSACTION

January 22, 2008 by Carlton Fields

In a recent discovery dispute between Udayan Ghose (the former Chairman of the Board of Directors of New Cap Reinsurance Corporation ) and CNA Reinsurance, a New York trial court compelled CNA to produce underwriting manuals and guidelines, claims handling manuals, and documents concerning whether it sold finite reinsurance. Plaintiffs argued that the underwriting manuals and other such documents were necessary to disprove defendants’ defense of rescission of the D&O liability policy at issue in the litigation. CNA argued that its underwriting materials were irrelevant since a third party (Encon Underwriting) was responsible for underwriting the policy. Because the defendants were arguing that they would not have issued the policy if they had known of certain misrepresentations made by New Cap, the court concluded that the requested documents were discoverable as being relevant to the issue of materiality. Ghose v. CNA Reinsurance Co. Ltd, No. 108121/04 (N.Y. Sup. Ct., Aug. 20, 2007).

Just a few weeks later, the New York Supreme Court Appellate Division issued an opinion on defendants’ appeal of an order denying a motion to dismiss on forum non conveniens grounds. In a unanimous decision, the Appellate court reversed and granted the motion to dismiss on the condition that the defendants consent to jurisdiction in either Australia, England, or Bermuda, and to waive any statute of limitations defense. The court noted in dicta that if the case had remained in New York state court, it would have sustained an interim award of defense costs, pending resolution of the insurers’ attempt unilaterally to rescind the underlying policy. Ghose v. CNA Reinsurance Co. Ltd, 2007 NY Slip Op 06572 (NY App. Div. Sept. 6, 2007).

This post written by Lynn Hawkins.

SUPREME COURT HEARS ORAL ARGUMENT ON WHETHER PARTIES MAY SUPPLEMENT ARBITRATION AGREEMENTS BEYOND FAA’S VACATUR STANDARDS

January 3, 2008 by Carlton Fields

The Supreme Court recently heard oral arguments on whether an arbitration agreement may provide for more expansive judicial review of an arbitration award than the narrow standard of review provided for in the Federal Arbitration Act. This case arose out of a property lease dispute between Mattel, the well-known toy manufacturer, and its landlord, Hall Street Associates. The parties agreed to arbitrate the dispute pursuant to the FAA procedures, but also agreed that a district court could overrule the arbitrator’s decision if the arbitrator’s “conclusions of law [we]re erroneous.”

The Ninth Circuit barred this type of court review, reasoning that private parties cannot expand the Congressionally-determined role of courts in reviewing arbitration awards. In contrast, the First, Third, Fourth, Fifth, and Sixth Circuits appear to have interpreted the FAA’s vacatur standards as non-exclusive standards which parties may supplement by agreement. While the Seventh Circuit has not squarely addressed the issue, it stated in dicta that the parties “cannot contract for a judicial review” of a labor arbitration award “because federal jurisdiction cannot be created by contract.”

After hearing oral arguments on the issue, the Supreme Court asked for additional briefing on three issues: (1) whether authority exists outside the FAA under which a party to litigation begun without reliance on the FAA may enforce a provision for judicial review of an arbitration award; (2) if such authority does exist, did the parties, in agreeing to arbitrate, rely in whole or part on that authority; and (3) whether the petitioner waived any reliance on authority outside the FAA for enforcing the judicial review provision of the parties’ arbitration agreement.