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Arbitration / Court Decisions

Following New York High Court’s Answer To Certified Question, Second Circuit Remands Reinsurance Dispute To District Court

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The Second Circuit vacated and remanded for reconsideration a district court opinion in a dispute concerning the limits available under certain facultative reinsurance certificates after the New York Court of Appeals answered a certified question on that issue. Specifically, the Second Circuit had questioned whether Excess Insurance Co. v. Factory Mutual Insurance Co. imposed a rule of construction or a presumption that the per occurrence liability caps in facultative reinsurance certificates strictly limit the reinsurance coverage regardless of whether the operative language is understood to cover defense costs or other expenses. The N.Y. Court of Appeals answered there is no such rule of construction or presumption, and instead, reinsurance agreements are governed by standard contractual interpretation principles that place utmost importance on the language of the contract. Given that answer, the Second Circuit remanded the case to the district court to interpret, in the first instance, the reinsurance contracts terms as they relate to liability caps.

Global Reinsurance Corp. of Am. v. Century Indemn. Co., No. 15-2164 (2d Cir. May 9, 2018).

This post written by Thaddeus Ewald .

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Ninth Circuit Upholds Denial Of Judgment Creditor’s Request For Rescission Of Quota-Share Reinsurance Agreement

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Defendant National Farm Financial Corp. agreed to sell Business Alliance Insurance Co. (BAIC) to PSM Holding Corp. After National Farm walked away from the deal, PSM sued National Farm, BAIC, and BAIC’s president, Larry Chao, in the District Court for the Central District of California alleging breach of contract. A jury found in favor of PSM and awarded it $40 million.

After taking possession of BAIC, PSM and BAIC entered into an intercompany quota share reinsurance agreement (QSA). The district court’s ruling was then reversed on appeal and remanded, and upon remand, the court concluded that the defendants were entitled to specific restitution of the BAIC shares and an accounting of the profits earned while PSM held BAIC, diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens. Thereafter, the defendants filed a motion for an award of PSM’s profits totaling $14 million. PSM opposed the motion, arguing that it actually suffered a $1.5 million loss as a result of its temporary possession and control of BAIC and sought to rescind the QSA. The court decided that defendants would receive the return of BAIC’s shares, but that PSM would receive restitution of $1.1 million. The court also held that PSM could not rescind the QSA.

The parties cross-appealed to the Ninth Circuit, which concluded that the district court erred in allowing PSM – the judgment creditor – to recover in restitution. Regarding rescission of the QSA, however, the Ninth Circuit affirmed, agreeing with the district court that the QSA could not be rescinded since it was “an improvement” to BAIC rather than a necessary cost of protecting BAIC. PSM Holding Corp. v. Nat’l Farm Fin. Corp., Case Nos. 15-55026, 15-55941 (9th Cir. Mar. 7, 2018).

This post written by Gail Jankowski.

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Supreme Court Upholds Employee Individualized Arbitration Agreements Against Challenges Based On The National Labor Relations Act

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The U.S. Supreme Court ruled that agreements between an employer and an employee providing for individualized arbitration do not violate the National Labor Relations Act (NLRA). We previously reported on the conflicting cases pending before the Supreme Court here.

Justice Gorsuch, writing for the Court, explained that Congress instructed the courts to uphold arbitration agreements through the Federal Arbitration Act and nothing in the NLRA (or its predecessor, the Norris-La Guardia Act) requires the contrary. The dissent, written by Justice Ginsberg, focuses in large part on the policy motivating the enactment of the NLRA, and finds that the “adhesive waivers” at issue here were the type of employer action the NLRA was meant to counteract. Justice Ginsberg’s dissent argues that class actions are the type of “other concerted activities for the purpose of … mutual aid or protection” shielded by § 7 of the NLRA. Justice Gorsuch, however, points out that § 7 “focuses on the right to organize unions and bargain collectively…. But it does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act – let alone accomplish that much clearly and manifestly, as our precedents demand.” Although the NLRA protects employees’ right to organize unions, it does not speak to their right to arbitrate collectively. Therefore it does not conflict with and override the FAA. As such, the NLRA presented no obstacle to the Court’s enforcement of the “liberal federal policy favoring arbitration agreements” embodied in the FAA. Epic Systems Corp. v. Lewis, Case No. 16-285 (USSC 2018).

This post written by Benjamin E. Stearns.

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New York Federal Court Dismissed Action, Finding That Insurer’s Reimbursement Under Insured’s Captive Reinsurance Agreement Did Not Breach Its Contracts With Insureds

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In this case, plaintiffs Keller Foundations LLC, a limited liability construction company (“Keller”), Hayward Baker Inc., a construction services corporation (“HBI”), and their parent Keller Group PLC (“Keller Group”) brought a suit in New York federal court against Zurich American Insurance Company (“Zurich”) for breach of contract and breach of the contractual and statutory implied covenants of good faith and fair dealing. Zurich had issued a policy to Keller and HBI. Keller Group is also the parent company of Capital Insurance Company, a captive reinsurer that covered a portion of Zurich’s risk under a captive reinsurance agreement that provided that Capital would reimburse $450,000 per loss on the policy in excess of a $50,000 deductible.

The dispute concerns a settlement Zurich entered into with Diaz Fritz Isabel (“Diaz”). In 2009, HBI was hired by Diaz to serve as a subcontractor at an expansion project at a hospital in Florida. Groundwater seeped into the existing portions of the hospital, causing damage to the project. Diaz then sued HBI in Florida state court for breach of contract relating to the flood damage, to which HBI counterclaimed for money that it was owed for its work as subcontractor (the “Diaz/HBI Lawsuit”). Diaz also sought additional insured coverage under the Zurich policy, which was denied by Zurich. Diaz then sued Zurich in Florida federal court, alleging that it was entitled to additional insured coverage with respect to the damages allegedly caused by HBI’s breach (the “Diaz/Zurich Lawsuit”). Zurich counterclaimed, seeking a declaration that it had no duty under the policy to defend or indemnify Diaz. The parties mediated their dispute, which resulted in a settlement under which Zurich agreed to pay Diaz $450,000. Zurich paid Diaz, and then sought reinsurance reimbursement from Capital under the reinsurance agreement, which was paid by Capital. In the New York litigation, plaintiffs claimed that Zurich did not have the authority to enter into the settlement agreement with Diaz and that Zurich unlawfully damaged them by doing so. Zurich initially moved to dismiss the complaint, which the court granted, but without prejudice to the plaintiffs’ ability to bring an amended complaint or a new lawsuit against Zurich. Plaintiffs then filed an amended complaint, which Zurich again sought to dismiss.

The New York federal court again dismissed the amended complaint in its entirety for failure to state a claim. First, the court held that there are no adequate allegations that Zurich breached its duties in the Diaz/HBI Lawsuit as Zurich has paid, and continues to pay, for HBI’s defense in that action. As for the Diaz/Zurich Lawsuit, the court held that since none of the plaintiffs in the New York action were a party to that case, Zurich could not have violated a duty to defend them. The court also noted that plaintiffs did not allege that Zurich failed to repay ‘‘sums’’ for ‘‘damages’’ covered by the Zurich policy to which HBI and Keller are parties. Rather, the court noted that the New York litigation involved Capital’s reimbursement under the captive reinsurance agreement, to which none of the plaintiffs was a party. Thus, the court held “[t]o the extent Keller and HBI are aggrieved by this chain of events, their grievances do not arise under the Policy, but under the Captive Reinsurance Agreement, to which plaintiffs are not parties. And plaintiffs’ grievances are ultimately not with Zurich, but with Capital.” Thus, the court granted the motion to dismiss Keller and HBI’s breach of contract claims, and as for Keller Group, the court ruled that it lacks standing to sue Zurich under the policy. The court also dismissed plaintiffs’ claims for breach of good faith and fair dealing.

Keller Foundations LLC, et al. v. Zurich American Insurance Co., No. 16-6751 (USDC S.D.N.Y. Mar. 29, 2018).

This post written by Jeanne Kohler.
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Colorado Federal Court Adopts Report & Recommendation to Compel Arbitration Despite Challenge

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Plaintiff sought to compel arbitration and enjoin defendant from pursuing claims of negligence and violations of the Colorado Consumer Protection Act (“CCPA”) in state court. Defendant argued the Court should abstain from ruling and allow the state court to address the arbitration issue or dismiss the complaint since the arbitration agreement is unenforceable under state law. As to the abstention argument, the Court applied the Colorado River factors.  It found the state and federal actions to be parallel, but there were no exceptional “factors supporting Defendant’s position in favor of abstention, and since there are several factors that are neutral (or point the other way), the court has little choice but to exercise jurisdiction.” The arbitration agreement’s enforceability was largely dictated by whether Colorado’s Health Care Availability Act (“HCAA”) is preempted by the Federal Arbitration Act (“FAA”). Finding the HCAA was preempted by the FAA, the arbitration agreement was found to be valid and enforceable.

The District Court adopted the Magistrate’s Report & Recommendation, granting the motion to compel and staying the state court proceeding.

Watermark Harvard Square, LLC, et al. v. Willie Lee Calvin, Case No. 1:17-cv-00446 (USDC D. Colo. Mar. 29, 2018).

This post written by Nora A. Valenza-Frost.

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