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Arbitration / Court Decisions

SOUTH CAROLINA FEDERAL COURT MAKES TWO RULINGS ON MOTIONS TO DISMISS IN DISPUTE INVOLVING REINSURANCE TRUST AGREEMENTS

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This case was previously reported by us on our blog on January 5, 2016, June 28, 2016 and July 20, 2016. For the full procedural background, we refer to the recent November 3, 2016 and November 16, 2016 decisions. In sum, Plaintiff Companion Property and Casualty Insurance Company (“Companion”) participated in a fronted insurance program with two reinsurers, Redwood and Freestone. Reinsurance collateral trusts were established for Companion’s benefit and maintained by defendant U.S. Bank as trustee. Companion authorized Redwood and Freestone to administer the trusts’ assets by giving direction to U.S. Bank. One such direction was to authorize certain third-parties who could act for Redwood and Freestone with regard to each trust account. Through the direction of Redwood, Freestone and their authorized third-parties, U.S. Bank made certain investments which were ultimately to the detriment of the trusts.

U.S. Bank then made claims against the third-parties for apportionment, contribution and indemnification for its liability to Companion. The third-parties moved to dismiss U.S. Bank’s claims, which was granted except for U.S. Bank’s claim for contribution. U.S. Bank then filed an amended third-party complaint, adding Aon Insurance Managers (Cayman) Ltd. (“Aon”) as a third-party defendant. One of the third-parties, Alexander Chatfield Burns (“Burns”) also filed an answer to U.S. Bank’s third-party complaint, which contained seven counterclaims against U.S. Bank. U.S. Bank then moved to dismiss Burns’ counterclaims. Aon also moved to dismiss the third-party complaint by U.S. Bank on the basis that the court lacked personal jurisdiction over it. Burns also filed a fourth party complaint against U.S. Bank Trust National Association (“USBT”) for contribution. USBT also moved to dismiss the complaint by Burns on the basis that the court lacked personal jurisdiction over it.

The South Carolina federal court recently ruled on the motions to dismiss by U.S. Bank, Aon and USBT. On November 3, 2016, the court granted in part and denied in part U.S. Bank’s motion to dismiss Burns’ counterclaims. First, the court noted that Burns’ contribution counterclaims were premised on its liability to either U.S. Bank or Companion. The court dismissed Burns’ contribution counterclaim against U.S. Bank premised on Burns’ liability to U.S. Bank as contribution is not available in such case. As for Burns’ contribution counterclaim premised on its liability to Companion, even though Companion had not yet formally sued Burns, that counterclaim remained. The court noted that the torts giving rise to U.S. Bank’s and Burns’ liability to Companion have already occurred and thus, Burns’ cause of action for contribution had accrued. Burns’ remaining counterclaims sounding in contract and tort, however, were dismissed because through those claims, Burns was seeking to recover damages on behalf of Redwood and Freestone, and thus ran afoul of the prudential standing doctrine.

On November 16, 2016, the South Carolina federal court granted the motions to dismiss by Aon and USBT. With respect to USBT’s motion to dismiss Burns’ fourth party complaint, the court found that Burns failed to meet his burden that USBT, which is incorporated and has its principal place of business in Delaware, should be subject to the court’s general or specific personal jurisdiction, and thus the complaint against USBT was dismissed. With respect to Aon’s motion to dismiss U.S. Bank’s third-party complaint, the court found that U.S. Bank also failed to meet its burden that Aon, which is incorporated and has its principal place of business in the Cayman Islands, should be subject to the court’s specific personal jurisdiction, and thus the complaint against Aon was dismissed.

Companion Property and Casualty Insurance Co. v. U.S. Bank Nat’l Association, No. 3:15-cv-01300 (USDC D.S.C. Nov. 3, 2016 and Nov. 16, 2016).

This post written by Jeanne Kohler.

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SECOND CIRCUIT UPHOLDS CONFIRMATION OF ARBITRATION AWARD FINDING THE PENALTY PROVISION IN CONTRACT DID NOT VIOLATE PUBLIC POLICY

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Although unable to revisit the arbitration panel’s fact-finding or legal reasoning behind an arbitration award, the Second Circuit Court of Appeals upheld confirmation of the award itself, as it did not violate public policy. The arbitration panel, which acknowledged the policy against contract penalties, nevertheless found the policy inapplicable because it construed the contract clause at issue as a termination provision, rather than as a liquidated damages provision. Petitioners pointed to no laws nor legal precedents indicating that the contract’s termination provisions “setting the terms for ending a joint venture are contrary to well defined and dominant public policy.” Thus, the Court upheld the Southern District’s confirmation of the award.

PDV Sweeny, Inc., et al. v. Conocophillips Co., et al., No. 16-170-cv (2d Cir. Nov. 7, 2016)

This post written by Nora A. Valenza-Frost.

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RECIPIENT OF ARBITRATION AWARD IN REINSURANCE DISPUTE PERMITTED DISCOVERY OF FUNDS WITHHELD ACCOUNT

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Plaintiffs secured an interim arbitration award in the amount of $7.8 million, plus interest, in what the court described as a complex insurance/reinsurance program. Seeking to collect on the award, plaintiffs served a subpoena on a third party which allegedly owed funds to the judgment debtor evidenced by a liability set up on its books in a funds withheld account. The recipient of the subpoena moved to quash the subpoena. The court held that the holder of the arbitration award was entitled to conduct discovery reasonably calculated to lead to the discovery of assets of the judgment debtor. The court found that it was undisputed that the funds listed on the books of the recipient of the subpoena were identified as a liability owed to the judgment debtor. The court enforced the subpoena, ordering the recipient of the subpoena to respond to the subpoena, and entered a “restraining notice” preventing the subpoena’s recipient from transferring the funds or taking them for its own use. The court did not find that the judgment debtor was entitled to the funds in the funds withheld account. That issue will be resolved later, if necessary. Amtrust North America, Inc. v. Preferred Contractors Insurance Co. Risk Retention Group, Case No. 15-7505 (USDC S.D.N.Y. Oct. 18, 2016)

This post written by Rollie Goss.
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UK COURT CONSIDERS WHETHER LATER CONDUCT STEMMING FROM A LOSS EVENT SHOULD BE CONSIDERED A LOSS UNDER AN EXCESS OF LOSS REINSURANCE POLICY

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This case considers an appeal against an arbitration award concerning whether health claims from persons involved in cleaning up the 9/11 World Trade Center site should be considered to be multiple claims or should be aggregated as losses or liabilities arising from the terrorist event. The underlying health claims were submitted by workers who became ill after they were not provided respirators or “properly trained” in the conduct of cleanup of debris from the World Trade Center site. The court described the claims as “a single event disassociated from the negligence which gave rise to the underlying liability claims.” The appeal described the issue on appeal as being: “Where the insured’s liability arises as a result of a continuing state of affairs (the failure to provide a safe system of work and equipment to multiple workers, working in disparate places over an extended period) is this to be treated as “a single event” of negligence or does the relevant event only arise when the harm giving rise to the insured’s liability occurs?”

The arbitrators concluded that the health claims could be aggregated under the applicable reinsurance contract and that the reinsurers would bound to indemnify with respect to paid health claims. The arbitrators’ analysis of the issue, and the court’s discussion, focused on the nature of the causal link between the terrorist attacks and the health claims of the cleanup personnel. The arbitrators employed a “but for” causation test rather than a “proximate cause” test, and looked to determine whether the terrorist event was a “significant cause” of the losses. Determining whether there was a “sufficiently significant causal connection” between the terrorist attack and the health injuries involved an exercise of judgment by the arbitrators. The court found that the arbitrators carefully considered the facts, the applicable law and the contracts in making their decision, and that they could have properly reached the decision they reached. Therefore, the appeal was not allowed.

Simmonds v. Gammell, [2016] EWHC 2515 (Commercial Court, Queen’s Bench Division Oct. 14, 2016).

This post written by Rollie Goss.
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REINSURANCE ARBITRATION AWARD STANDS IN FACE OF CHALLENGES TO RATIONALITY AND IMPARTIALITY OF DECISION

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Yosemite Insurance Co. (“Yosemite”) lost its challenge to an arbitration award that found Nationwide Mutual Insurance Co. (“Nationwide”) was not required to cover a share of Yosemite’s settlement with the State of California regarding pollution losses from the 1950s. After the arbitral board decided in Nationwide’s favor, Yosemite challenged the impartiality and rationality of the award.

In deciding Yosemite’s challenge, the court emphasized that the bases to vacate an arbitration award under the Federal Arbitration Act (“FAA”) are narrow and impose a steep burden on the challenging party. The dispute was based on whether an exclusion for “contamination and pollution” applied to any claims made or only where the party’s “main operations” related to “contamination and pollution.” The court found that while it believed the operative language was ambiguous, the arbitrators’ decision was “anchored” in the text of the agreement. Because the decision did not stray from an interpretation and application of the agreement, or exhibit a manifest disregard for the law, the court lacked authority under the FAA to second-guess the arbitral panel’s award.

Yosemite also challenged the arbitral panel’s impartiality because one of the three members failed to disclose that he had previously represented a client in a case adverse to Yosemite—a representation Yosemite’s counsel himself did not recall. The court applied a four-factor test borrowed from the Fourth Circuit to determine whether the inadvertent failure to disclose the representation would cause a reasonable person to conclude the arbitrator was biased. The court found there was no non-speculative suggestion of a conflict of interest, no suggestion of antipathy against Yosemite, and that the ten-year old adverse representation failed to impugn the impartiality of the arbitrator.

Despite rejecting Yosemite’s challenges, the court declined to award attorneys’ fees and costs to Nationwide because the claims were not objectively unreasonable. The court did however, “encourage” Yosemite’s counsel to review the strict and demanding showings required when seeking to vacate an arbitral award.

Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., Case No. 16-5290 (USDC S.D.N.Y. Nov. 10, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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