Arbitration / Court Decisions

Fourth Circuit Holds Reinsurance Participation Agreement Is Insurance Contract Under Virginia Statute, Effectively Voiding Its Arbitration Clause

February 4, 2019 by Carlton Fields

On September 14, 2017, we reported on the Fourth Circuit’s reversal of a district court’s denial of a motion to compel arbitration, which found that a party was judicially estopped from arguing that a Reinsurance Participation Agreement (“RPA”) was not an insurance contract. (If the RPA is an insurance contract, its arbitration provision becomes invalid under state law.) Subsequent to that ruling, on remand, the district court held that the RPA is indeed an insurance contract and that the RPA’s arbitration clause is void.

The Fourth Circuit has now affirmed the district court. The circuit court explained that the RPA was part of a workers’ compensation insurance program that Appellee Minnieland Private Day School purchased from Appellant Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA) and its affiliated entities. Under this “EquityComp” program, the pooled companies provide workers’ compensation insurance coverage to employers and also mutually reinsure each other’s insurance business. A layer of reinsurance is also provided by AUCRA. AUCRA in turn enters into RPAs with EquityComp customers, under the terms of which each customer pays into a segregated “cell” or account that is then used to fund AUCRA’s liabilities. In this fashion, EquityComp customers participate in underwriting the risk of their own workers’ compensation insurance policies. Minneland sued AUCRA alleging that AUCRA was not authorized or licensed to act as an insurance company under Virginia law; that the RPA was an “insurance contract” and not a “reinsurance” agreement; and that AUCRA misrepresented the EquityComp program, and the RPA specifically, to circumvent Virginia insurance and workers’ compensation laws.

In affirming the denial of arbitration, the Fourth Circuit rejected AUCRA’s argument that the RPA was a standalone contract. Instead, the panel determined that the RPA was but one component of an integrated insurance sale because the documents, including the RPA, were intended to provide Minnieland with workers’ compensation insurance coverage.

Minnieland Private Day School v. Applied Underwriters Captive Risk Assurance Co. Inc., Case No. 17-2385 (4th Cir. Jan. 14, 2019).

Post-Judgment Collection Efforts of Reinsurer Continue in California Federal Court

January 30, 2019 by Jeanne Kohler

We have previously reported on Odyssey Reinsurance’s Continuing efforts to collect a $3.2 million default judgment against Richard And Diane Nagby in our blog on numerous occasions. See

https://www.reinsurancefocus.com/archives/13102
https://www.reinsurancefocus.com/archives/13254
https://www.reinsurancefocus.com/archives/12645

Odyssey’s efforts continue in the California federal court. On November 7, 2018, the court issued a temporary restraining order and order to show cause regarding certain California property. See November 7, 2018 Temporary Restraining Order. More recently, on January 4, 2019, the court issued an order compelling transfer of funds from a bank account. See January 4, 2019 Order.

Odyssey Reinsurance Co. v. Nagby, No. 16-CV-3038-BTM (S.D. Cal. Nov. 7, 2018 and Jan. 4, 2019).

This post written by Jeanne Kohler.
See our disclaimer.

U.S. Supreme Court Holds Arbitrability Questions Not Subject to A “Wholly Groundless” Exception

January 29, 2019 by Alex Silverman

Archer & White Sales, Inc. (“Archer”) sued Henry Schein, Inc. (“Schein”) in federal court seeking both monetary and injunctive relief. A contract between the parties required arbitration of all claims arising from the agreement, except those seeking injunctive relief. Schein moved to compel arbitration based on the request for monetary damages. Archer objected, pointing to its demand for injunctive relief. The issue thus became one of arbitrability—who decides whether the dispute is subject to arbitration, the court or an arbitrator? The contract at issue incorporated the rules of the American Arbitration Association, under which arbitrators are to decide arbitrability issues. The district court nonetheless decided the issue and denied Schein’s motion, holding it was “wholly groundless” because an arbitrator would inevitably conclude that the dispute is not arbitrable and refer it back to the district court. The Fifth Circuit affirmed, but the U.S. Supreme Court unanimously vacated the judgment.

Even where a contract expressly delegates the arbitrability question to an arbitrator, the Supreme Court explained that several federal courts “short-circuit” the process and decide the question themselves when they think a request for arbitration is “wholly groundless.” To these courts, this “wholly groundless” exception is a means of blocking “frivolous” attempts to transfer cases out of the court system. But the Supreme Court found the exception to be inconsistent with the Federal Arbitration Act (“FAA”) and Supreme Court precedent. The FAA, Justice Kavanaugh wrote, does not contain a “wholly groundless” exception, and the Court must interpret the FAA as written. The FAA, in turn, requires interpreting the relevant contract as written. As a result, if a contract delegates the arbitrability issue to an arbitrator, courts have no power to decide the issue, even if they think a particular dispute is not ultimately arbitrable. The Court held that the wholly groundless exception therefore “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” And such was the case here, where neither of the lower courts actually decided whether the Archer/Schein contract delegated the arbitrability question to an arbitrator, instead short-circuiting the issue based on the wholly groundless exception. Having rejected the applicability of such exception, the Court vacated the judgment and remanded for this threshold determination.

Schein v. Archer & White Sales, Inc., No. 17–1272, 586 U. S. ____ (Jan. 8, 2019) (Slip Op.)

This post written by Alex Silverman.
See our disclaimer.

In Dispute Over Consolidation, California Federal Court Grants Petition to Compel Appointment of an Arbitrator in One of the Actions, and Denies Other Party’s Motion to Compel the Appointment of a Single Panel to Decide Consolidation Issue

January 28, 2019 by Jeanne Kohler

The background of this case in California federal court is that The Hartford (“Hartford”) issued reinsurance billings to Employers Insurance Company of Wausau (“Wausau”) for settlement payments made to one insured under nineteen different reinsurance treaties between Wausau and three of Hartford’s affiliates, which billings were denied by Wausau. In response, Hartford demanded arbitration and requested that the parties consolidate all the related disputes in a single arbitration. Wausau, in response, proposed that the parties agree to three arbitrations and identified three arbitrators for three separate panels for each of the three Hartford affiliates involved. Hartford refused and identified one arbitrator for a single arbitration and if other arbitrations were necessary, the same arbitrator was identified as arbitrator for such other arbitrations. Wausau’s arbitrators then requested that Hartford’s arbitrator select umpires for three separate arbitrations. In response, Hartford again requested that the parties agree to a methodology to select a single panel to decide how the matter should be consolidated. Wausau then filed four separate petitions in three jurisdictions to compel arbitration: one in California federal court, two in Massachusetts state court and one in Connecticut state court. In the California action, which involved one treaty, Hartford cross-moved to compel a single arbitration in order to adjudicate the parties’ dispute regarding consolidation and, in the alternative, a motion to stay pending arbitration of related proceedings.

As an initial matter, the California federal court noted that the issue of whether arbitrations may be consolidated is a question for the arbitrators and not the court to decide. However, the court noted that the parties remained at an impasse due to Hartford’s insistence of one consolidated arbitration. The court then rejected Hartford’s argument that its three affiliates who had entered into the nineteen treaties could act as a single party for the purpose of seeking reimbursement from Wausau. Noting that it was limited to the terms of the agreements, the court stated that Hartford was only named in two of the nineteen treaties, that the treaties entered into by two of the affiliates required arbitration in Massachusetts and the others required arbitration in Los Angeles. The court also noted that each of the treaties was a separate agreement, with different arbitration clauses. The California federal court then found that the treaty before it contained an arbitration clause which provided a procedure for selecting an umpire, and that once that panel is in place, it can decide the issue of consolidation. Accordingly, the court granted Wausau’s petition to compel appointment of an arbitrator, and denied Hartford’s motions to compel and stay pending arbitration of related proceedings.

Employers Ins. Co. of Wausau v. The Hartford, No. 2:18-cv-07240 (USDC C.D. Cal. Dec. 3, 2018)

This post written by Jeanne Kohler.

See our disclaimer.

California Appellate Court Holds Arbitration Agreement and Delegation Clause Unenforceable for Failure to File with State Regulators

January 23, 2019 by Carlton Fields

The California Court of Appeals became the latest court to determine that a common arbitration agreement related to the EquityComp workers’ compensation insurance program and accompanying reinsurance agreements is unenforceable because it was not filed with appropriate state regulatory authorities. This dispute arose from Luxor Cabs’s lawsuit over its workers’ compensation insurance, and the reinsurers’ motion to compel arbitration thereof pursuant to a reinsurance agreement it entered into with Luxor. Luxor challenged the enforceability of the arbitration agreement and delegation clause, and the trial court ultimately agreed and denied the motion to compel arbitration.

This case follows on the heels of a California insurance administrative decision declaring the EquityComp program violated state insurance laws and a reinsurance agreement (and arbitration clause) between the same reinsurers in this case and another insured were void and a case “essentially identical to this one” regarding arbitrability under a reinsurance agreement. On appeal, the court agreed with those recent precedents and the lower court, holding the arbitration clause was unenforceable.

First, the court upheld the trial court’s determination that the arbitration clause was unenforceable against claims that the arbitrability of the dispute should have been decided by the arbitrator pursuant to a delegation clause. The reinsurers argued that Luxor failed to “specifically and directly” challenge the delegation clause as required by the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson . The court dismissed that contention, finding Luxor sufficiently challenged the clause when it argued that the delegation clause was unfiled and unapproved by state regulators and that Nebraska law prohibited arbitration of insurance policy disputes. It likewise rejected the argument that Luxor’s challenge was insufficiently targeted at the delegation clause where Luxor made the same arguments against the delegation clause as against the arbitration clause more generally.

Second, the court agreed with the lower court that the reinsurance agreement (containing the arbitration and delegation clauses) should have been filed with state regulators and, because they weren’t, were unenforceable. The specifics of the agreement, and the arbitration and delegation clauses in particular, made clear that they were “collateral agreement[s]” that modified the underlying insurance policy’s dispute resolution procedures and therefore which required regulatory approval. In so concluding, the court referenced the recent precedents and how both reached similar conclusions with respect to “the specific RPA at issue in this case.”

Finally, the court concluded that the application of Nebraska substantive law provided an additional basis to hold the arbitration agreement unenforceable. Nebraska law, the law designated in the reinsurance agreement, explicitly prohibits arbitration of insurance policy disputes. Even though the lower court punted this issue, the court held that the Nebraska law reverse preempted the Federal Arbitration Act under McCarran-Ferguson.

Luxor Cabs, Inc. v. Applied Underwriters Captive Risk Assurance, Co., A147962 (Cal. Ct. App. Dec. 4, 2018).