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Arbitration / Court Decisions

WHEN $16.5 MILLION IS NOT ENOUGH: INSURER AND REINSURER BATTLE OVER FRONTING ARRANGEMENT

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Lincoln General Insurance Company (“Lincoln”) appealed a district court judgment, despite it having won a $16.5 million dollar tortious interference verdict, to the Fifth Circuit Court of Appeals. Lincoln alleged that the district court erred in dismissing various claims before the trial began, including: breach of contract, breach of fiduciary duty, conversion, and derivative liability.

The lawsuit arose from a fronting arrangement whereby Lincoln reinsured 100% of State and County Insurance Company’s (“State”) liabilities. According to the suit, U.S. Auto Insurance Services (“US Auto”) served as general agent to State. For this arrangement, Lincoln expected to receive 10% of premium payments. The rest of expected premium payments were to be divided between US Auto for management services in conjunction with payments to policyholders. Despite paying out less than anticipated for filed claims, Lincoln claimed it lost millions of dollars.

In a morass of procedural history spanning six years, the Fifth Circuit Court reversed the district court’s refusal to alter its judgment to include a breach of contract claim against U.S. Auto. The Fifth Circuit Court also reversed the dismissal of a tortious interference claim against Jim Maxwell. Jim and Doug Maxwell were co-owners of a business that became the recipient of $50 million dollars from US Auto. The Fifth Circuit Court noted that even if one included the more rigorous “active participation” element to tortious interface–a debatable position in Texas—Jim Maxwell’s conduct was tortious. Defendants attempted to skirt this issue altogether by alleging that the tortious interference award was barred by a two-year statute of limitations. The Fifth Circuit Court disagreed, noting that Lincoln filed the action before the limitations period had run out as they “did not and could not have” reasonably known about the facts comprising the tortious interference claim until US Auto became insolvent.

Lincoln Gen. Ins. Co. v. U.S. Auto Ins. Serv., Inc., No: 13-10589 (5th Cir. May, 18, 2015)

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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COURT CONFIRMS REINSURANCE ARBITRATION AWARD WITHOUT OBJECTION

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A federal district court has entered judgment confirming an arbitration award entered in favor of Employers Insurance Company of Wausau against Continental Casualty. The dispute arose out of a certificate of casualty facultative reinsurance between the parties. At issue was Continental’s obligation under the certificate with respect to one claim submitted by Wausau. Wausau demanded arbitration with Continental under the certificate and the panel, without hearing oral argument on the parties’ motions for summary adjudication, issued its award. Continental did not object to Wausau’s prejudgment interest calculation on the award nor did it answer Wausau’s petition to confirm the award. By Order dated January 26, 2015, the court confirmed the award and directed the clerk of court to enter judgment thereon. The judgment was entered on February 20, 2015. Employers Insurance Co. of Wausau v. Continental Casualty Co., No. 1:14-CV-09192 (USDC S.D.N.Y. Feb. 20, 2015).

This post written by Renee Schimkat.

See our disclaimer.

ALABAMA SUPREME COURT REVERSES ARBITRATION AWARD WHERE ARBITER FAILED TO MAKE REQUIRED DISCLOSURES

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In a case involving a dispute between a not-for-profit corporation administering a self-insured group workers’ compensation fund and their investment advisor and broker-dealer, the Supreme Court of Alabama granted the fund’s motion to vacate an arbitration award in the advisors’ favor. The arbitration was conducted pursuant to FINRA’s rules for arbitration proceedings, which call for the selection of a three-arbitrator panel. However, because the court found that one of the arbiters failed to disclose a potential conflict of interest prior to his selection, it reversed the panel’s award. The arbiter was a vice president and partner in a financial-services firm that had served as a co-underwriter with the advisors on 36 equity and debt issuances, had been codefendants with the advisors in a number of lawsuits, was represented by the same counsel as the advisors, and had involvement with the investment product alleged in this lawsuit. This was enough to constitute a “reasonable impression of partiality” even though the arbiter claimed that he did not know about this relationship on behalf of his firm. Applying the constructive knowledge doctrine, the court found that there was “evident partiality” on the part of the arbiter and reversed the arbitration award under the Federal Arbitration Act. The lower court had refused to disturb the award, necessitating the lower court’s reversal as well. Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co., No. 1120532 (Ala. Apr. 3, 2015).

This post written by Zach Ludens.

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DISCOVERY IN AID OF FOREIGN LITIGATION DENIED IN ARBITRATION INVOLVING EXPANSION OF THE PANAMA CANAL

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In a dispute involving the expansion of the Panama Canal, a federal district court has denied an application for an order pursuant to 28 U.S.C. § 1782 to obtain discovery in aid of foreign litigation. The controversy concerned Grupo Unidos por el Canal, S.A.’s (GUPC’s) ex parte application to obtain discovery from an entity with whom the Autoridad del Canal de Panama (ACP) contracted to provide program management services in connection with the Panama Canal project. The contract between GUPC and ACP contains an arbitration clause which provides that any dispute arising from the Canal project be arbitrated in Miami, Florida, under the Rules of Arbitration of the International Chamber of Commerce.

GUPC, along with several co-claimants, commenced the arbitration proceeding against ACP. The Miami-based proceeding is alleged to be the “international tribunal” supporting GUPC’s Section 1782 request for documents. Several objections were made to that request, including (1) the Miami arbitration is a private commercial arbitration and not a “tribunal” within the ambit of Section 1782, (2) the Miami arbitration is not a “foreign or international” tribunal within the meaning of Section 1782 because the seat of the arbitration is in the United States, and (3) the proposed subpoena is unduly burdensome, intrusive, and an attempt to circumvent the contractual procedural and discovery limitations in the arbitration. The court found the proceeding was not a “tribunal” for purposes of Section 1782 and, therefore, found it unnecessary to consider whether the private, Miami-based arbitration was “international.” The court also found that even if the statutory requirements were met, Grupo would not be allowed discovery of 165 million documents that were physically located in Panama, noting that such discovery would be overly burdensome. Grupo’s ex parte application was denied. In re Grupo Unidos Por El Canal, S.A., No. 1:14-mc-00226 (USDC D. Colo. Apr. 17, 2015).

This post written by Renee Schimkat.

See our disclaimer.