Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Arbitration / Court Decisions

Arbitration / Court Decisions

Munich Re Prevails in Alabama Reinsurance Dispute

by

A federal court recently agreed with Munich Re that it was not obligated to reimburse an insurer for losses and fees the insurer incurred in litigation with its professional liability carrier regarding a bad faith claim stemming from a personal injury suit subject to the reinsurance treaty.

Alabama Municipal Insurance Corp. (AMIC) issued a commercial automobile insurance policy to the town of Woodland, Alabama. A Woodland employee driving a Woodland vehicle was subsequently involved in an accident in which two passengers were seriously injured. The passengers sued Woodland. AMIC defended Woodland against those claims. The passengers obtained jury awards that exceeded AMIC’s applicable policy limits.

The passengers then sued AMIC claiming AMIC acted in bad faith when it failed to settle within policy limits. AMIC tendered the bad faith claim to Scottsdale Insurance Co., which had issued a professional liability errors and omissions policy to AMIC. Scottsdale and AMIC settled the bad faith suit, but Scottsdale then filed a declaratory judgment action seeking a declaration that it had not been obligated to pay any part of the settlement. AMIC counterclaimed for breach of contract and bad faith. Scottsdale prevailed in the declaratory judgment action, AMIC lost on its counterclaims, and Scottsdale obtained its costs and fees.

AMIC requested partial reimbursement for all of this litigation from its reinsurer, Munich Re. Munich Re reimbursed most of the requested sum but concluded that it was not required to reimburse AMIC for AMIC’s costs and fees and Scottsdale’s costs and fees, which AMIC had been ordered to pay, in AMIC’s litigation with Scottsdale (the declaratory judgment action). AMIC sued, claiming that Munich Re was required to reimburse it for those sums as well.

The U.S. District Court for the Middle District of Alabama disagreed with AMIC and held that Munich Re did not owe AMIC any money for AMIC’s losses to Scottsdale.

The district court analyzed the applicable treaties and concluded that Munich Re was “not generally liable for costs that AMIC decided to pay above and beyond its obligations to its insured clients (in this case, Woodland).” AMIC nevertheless maintained that the treaties “obligated AMIC to pursue any other reinsurances or insurances that might inure to Munich [Re]’s benefit, and that this obligation, in turn, further obligated Munich [Re] to reimburse AMIC for th[at] pursuit.” The district court disagreed, noting that the treaty language did not establish any such obligation. Moreover, although “AMIC would have been obligated to reimburse Munich [Re] for any amount of the Woodland settlement that it was able to recover from Scottsdale,” it did not follow (as AMIC claimed) that Munich Re was “obligated to reimburse AMIC for the money it spent while attempting to secure such a recovery.” The treaty did not support that.

This decision was one of several pending disputes between AMIC and Munich Re.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20-cv-00300 (M.D. Ala. Aug. 30, 2023).

Nevada Supreme Court Reverses Order Denying Motion to Compel Arbitration

by

The Nevada Supreme Court recently reversed the denial of a motion to compel arbitration, explaining that the plaintiff’s arguments that the contract at issue was illegal were not a valid basis to deny arbitration because those arguments did not challenge the validity of the arbitration clause or delegation clause specifically, as is required to preclude arbitration.

Several individuals sued a company that operates the Uber app, including Uber’s Uber Pool feature. They claimed that Uber Pool was operating in Nevada illegally, without required licenses.

The company, Rasier LLC, moved to compel arbitration under the Uber app’s terms of service. The district court denied that motion, holding that the Federal Arbitration Act did not apply and that the terms of service were void in light of the allegations that Uber Pool was operating illegally.

The Supreme Court of Nevada reversed. It noted that “the FAA applies to contracts evidencing a transaction involving interstate commerce” and that the FAA therefore applied here. The court also noted that a party must challenge an arbitration clause itself, not the validity of a contract generally, to avoid arbitration. The plaintiffs only “generally challenge the Terms of Service and not the arbitration agreement or delegation clause specifically.” The motion to compel therefore should have been granted for the arbitrator to consider the merits.

Rasier, LLC v. Boykin, No. 84814 (Nev. Aug. 24, 2023).

Texas Supreme Court Remands Case in Light of Recent Ruling That Arbitrator Must Determine Arbitrability for AAA Arbitration Agreements

by

In a lawsuit brought by a car dealership (Lone Star) against a car auction company (Alliance), the latter moved to compel arbitration as a third-party beneficiary of an agreement between Lone Star and a separate company that Alliance used to verify and authorize Lone Star to buy and sell in Alliance’s auctions. Lone Star opposed the motion, contending that its claims fell outside the scope of the arbitration agreement.

After the trial court denied Alliance’s motion to compel arbitration, Alliance appealed to the intermediate court of appeals. That court affirmed, in part premised on its determination that arbitrability is a “gateway issue that courts must decide at the outset of litigation.” (Emphasis added.)

Alliance petitioned the Texas Supreme Court for a review of the denial of arbitration. While the petition was pending, the Texas Supreme Court issued TotalEnergies E&P USA Inc. v. MP Gulf of Mexico LLC, which held that “as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.” (Emphasis added.) This holding, the court noted, is inconsistent with the holding of the intermediate court of appeals in this case.

The Texas Supreme Court accordingly reversed the intermediate court of appeals’ judgment and remanded the case to the intermediate court of appeals to reevaluate the appeal in light of TotalEnergies. The court deferred to the intermediate court to consider Lone Star’s arguments that this case is distinguishable because, here, (1) the parties agreed to arbitrate under the AAA rules only if they are unable to agree on a different ADR firm and (2) Alliance is not a party to the arbitration agreement but is instead a third-party beneficiary.

Alliance Auto Auction of Dallas, Inc. v. Lone Star Cleburne Autoplex, Inc., No. 22-0191 (Tex. Sept. 1, 2023).

FAA’s “Transportation Worker” Exemption Does Not Apply to Contracts Between Businesses

by

After a dispute arose between Amazon and one of its “delivery service partners,” Amazon sought to compel arbitration pursuant to an arbitration agreement in the companies’ contract. The district court ordered the parties to arbitrate, and the delivery service partner appealed to the Fourth Circuit Court of Appeals, arguing that arbitration was not required due to the Federal Arbitration Act’s exemption for “contracts of employment” with “transportation workers.” The Fourth Circuit affirmed and compelled the parties to arbitrate.

The FAA’s “transportation worker” exemption specifies that the statute’s arbitration mandate does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The Fourth Circuit found that the exemption did not apply here for three reasons.

First, the agreement at issue was not a “contract of employment,” as it did not promise work and compensation to an individual employee, or contain any of the hallmarks of a traditional employment contract (i.e., salary, benefits, leave time). Rather, the agreement provided for one business to provide services to another business, and furthermore, both of the parties to the contract were “sizable employers.” The transportation exemption applies to agreements with individual “workers performing work,” not businesses.

Second, the delivery service partner was not within the “class of workers” eligible to benefit from the exemption, which, again, was intended to apply to “individual workers carrying out work.” “Sizable corporate entities are not ‘similar in nature’ to the actual human workers enumerated by the text of the ‘transportation worker’ exemption, and so the arbitration clause at issue here is once again unaffected by the exemption.”

Lastly, the president of the delivery service partner was not a party to the contractual agreement with Amazon, and therefore, she could not claim that she was a “transportation worker” who had a “contract of employment” with Amazon. Here, the relevant contract from which the dispute arose (and which contained the arbitration agreement) was between two business entities. It was the delivery service partner’s status that mattered with regard to the enforceability of the arbitration agreement, not that of its president. As a result, the “transportation worker” exemption of the FAA did not apply.

Amos v. Amazon Logistics, Inc., No. 22-1748 (4th Cir. July 25, 2023).

Third Circuit Reverses District Court Order Compelling Arbitration, Highlighting That Arbitration and “Expert Determinations” Are Different Forms of Dispute Resolution

by

The Third Circuit Court of Appeals has reversed a district court decision compelling arbitration, finding that the parties’ designation of an accounting expert to resolve certain issues did not constitute an agreement to arbitrate their claims.

Kevin Sapp and Jamie Hopper entered into an asset purchase agreement with Industrial Action Services (IAS) memorializing the terms of Sapp and Hopper’s sale of their industrial businesses to IAS. The agreement included an “earn-out consideration” provision as part of the sale proceeds to be paid to Sapp and Hopper depending upon the performance of IAS over a three-year term and whether IAS reached certain performance benchmarks. The agreement included a provision that IAS would provide an earn-out statement at the end of the earn-out period, and Sapp and Hopper could submit a “notice of disagreement” with the statement, which would be resolved by an accounting firm. IAS provided an earn-out statement that showed the company did not meet its financial targets. Sapp and Hopper filed a notice of disagreement under the agreement and filed a declaratory judgment action in district court that its claims against IAS were outside the dispute resolution process set forth in the agreement. The district court granted IAS’ motion to compel arbitration, concluding that the agreement did include an arbitration agreement. The accounting firm selected by the parties to hear the dispute concluded that no additional compensation was owed to Sapp and Hopper. Sapp and Hopper moved to vacate the decision. The district court denied the motion and entered judgment for IAS. Sapp and Hopper appealed.

The Third Circuit reversed the district court’s order and vacated the judgment. The court first recognized that arbitration and expert determinations are “two distinct forms of private alternative dispute resolution that produce binding results,” noting that expert determinations involve a less formal process with the expert deciding more narrow issues. Reviewing the terms of the asset purchase agreement, the court concluded that the parties intended the accounting firm hearing disputes would be acting as an expert, not an arbitrator. The court pointed to the fact that the agreement did not include procedural rules that would govern an arbitration and further provided that disputes should be “submitted to non-binding mediation” and if unsuccessful, “either party may initiate litigation.” The court concluded that these and other terms of the agreement show the parties intended the accounting firm would serve as an expert, and not an arbitrator, and the parties were free to continue to litigate their claims in court. The court reversed the district court’s order, vacated the judgment, and remanded the case for further proceedings.

Sapp v. Industrial Action Services, LLC, No. 22-2181 (3d Cir. July 20, 2023).