Arbitration / Court Decisions

THIRD CIRCUIT: PENNSYLVANIA LAW PREEMPTED BY THE FAA

March 25, 2015 by Carlton Fields

The Third Circuit recently ruled that a Pennsylvania statute prohibiting an unregistered businesses from maintaining any “action or proceeding” in any court in the state interferes with the enforcement of arbitration awards and therefore is preempted by the Federal Arbitration Act. The plaintiff was a non-registered company, but the parties had agreed that the arbitration could proceed and be administered under the rules of the American Arbitration Association. The district court confirmed the arbitration award, and the Third Circuit affirmed, holding that the FAA preempted application of the law because it rendered the arbitration agreement unenforceable, noting that the intent of Congress in enacting the FAA was to promote arbitration. Therefore, the Pennsylvania statute, by barring any “action or proceeding,” interfered with the enforceability of the FAA and therefore was preempted.

The issue of state statutes interfering with the enforcement of arbitration awards has been a subject of Reinsurance Focus blogs numerous times. Particularly, courts have examined state statutes that require the posting of security before a non-admitted company may file suit in that state. We will continue to monitor case law addressing whether other courts find that the FAA pre-empts similar pre-pleading security statutes.

Generational Equity LLC v. Schomaker, No. 14-1291 (3d Cir. Feb. 23, 2015).

This post written by Catherine Acree.

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REINSURANCE EXCLUSION BARS COVERAGE FOR BAD FAITH LAWSUIT

March 23, 2015 by Carlton Fields

A federal judge in North Carolina recently examined a reinsurance policy provision excluding loss “resulting from any claim for . . . any actual or alleged lack of good faith or unfair dealing in the handling of any claim or obligation under any insurance contract.” The case involved a request for coverage under a reinsurance policy for a lawsuit filed by a doctor against his medical malpractice carrier, the reinsured. The doctor, against whom an excess verdict had been entered, asserted a number of causes of action including bad faith refusal to settle within the policy limit. The reinsurer filed a motion for summary judgment arguing that there was no coverage for the doctor’s lawsuit based on the exclusion mentioned above because all potential loss resulted from the reinsured’s alleged lack of good faith in refusing to settle the underlying matter within the underlying policy limit. Applying North Carolina law, the court agreed with the reinsurer, concluding that all the causes of action alleged a single course of conduct involving a lack of good faith in refusing to settle within the limit. Because all potential loss “resulted from” and was “inextricably intertwined” with the bad faith allegations, the reinsurer had no duty to defend or indemnify.

Greenwich Ins. Co. v. Medical Mutual Ins. Co. of North Carolina, No. 5:14-cv-295 (USDC E.D.N.C. Jan. 27, 2015).

This post written by Catherine Acree.

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CFPB ISSUES ARBITRATION STUDY – POSSIBLE IMPACT ON REINSURANCE UNCLEAR

March 20, 2015 by Carlton Fields

The Consumer Financial Protection Bureau has issued a study that is critical of arbitration in the context of consumer claims, contenting that arbitration “restricts” the rights and remedies of consumers by limiting or prohibiting class actions. For a summary of the study and links to the study and a summary fact sheet, visit our Class Action blog. It may be questionable whether the CFPB has given appropriate consideration to the various United States Supreme Court and federal Court of Appeals opinions concerning the enforceability of arbitration agreements under the Federal Arbitration Act, and it will be interesting to see how this CFPB’s arbitration-related pronouncements develop. Since the CFPB’s principal focus is on consumer issues, it remains to be seen if and how its activities in this area may affect the resolution of reinsurance disputes.

This post written by Rollie Goss.

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INSURER NOT REQUIRED TO PRODUCE COVERAGE MEMORANDA OR REINSURANCE INFORMATION IN DISCOVERY

March 18, 2015 by Carlton Fields

A federal district court in New York has held that the attorney-client and work-product privileges apply to coverage memoranda sought by an insured from AIG Specialty Insurance in an ongoing coverage and bad faith litigation where AIG declined coverage for claims brought under a pollution liability policy. The insured first sought production of a memorandum prepared by AIG’s own coverage counsel, which the court found “unquestionably” came within the attorney-client privilege. The insured then sought production of a memorandum prepared by coverage counsel for an additional insured named on the policy, who AIG had covered in the underlying lawsuit. The court found the memorandum was protected by the work-product privilege and because the insured neither demonstrated a “substantial need” for the document nor an “undue hardship” in obtaining equivalent information elsewhere, it was not discoverable. The court further held that certain “executive claim summaries” previously produced by AIG in redacted form were not discoverable. The redacted information concerned only reinsurance calculations and was therefore irrelevant. The court did, however, direct AIG to produce drafts of a coverage letter and any metadata pertaining to that letter, rejecting application of any privilege to that information. Broadrock Gas Services, LLC v. AIG Specialty Insurance Co., Case No. 1:14-cv-03927 (USDC S.D.N.Y. March 2, 2015).

This post written by Renee Schimkat.

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COURT ALLOWS PUTATIVE CLASS ACTION TO PROCEED WITH DISCOVERY REGARDING EQUITABLE TOLLING OF RESPA VIOLATIONS

March 17, 2015 by Carlton Fields

M&T Bank Corporation, M&T Bank, and M&T Mortgage Reinsurance Company unsuccessfully sought to stay all discovery in a suit brought against it in a putative class action involving allegations that M&T violated the federal Real Estate Settlement Procedures Act. The named plaintiffs were individual borrowers who entered into loan transactions with M&T and paid private mortgage insurance through M&T. M&T placed the private mortgage insurance with certain insurers who then reinsured the policies with M&T’s captive reinsurer. This scheme was allegedly an illegal sham because it did not create a bona fide reinsurance relationship. Moving to dismiss, M&T argued the entire case was barred under RESPA’s one-year limitations period. Plaintiffs countered that, under the doctrine of equitable tolling, M&T’s fraudulent conduct prevented them from discovering the RESPA violation within the one-year period.

The court allowed the plaintiffs to conduct limited discovery related to the equitable tolling argument. This ruling was in part informed by the ruling from a different judge in a companion case, Riddle v. Bank of America. The Riddle court subsequently entered an order in favor of the defendants which the plaintiffs in that case appealed. M&T thus moved for stay of all discovery pending the outcome of the appeal of the Riddle case. The motion was denied. Although some overlap existed, the court found that the Riddle court had too narrowly limited the issue as to whether plaintiffs in that case engaged in due diligence following execution of their mortgages. Cunningham v. M&T Bank Corp., Case No. 1:12-cv-1238 (USDC M.D. Pa. Jan. 14, 2015).

This post written by Leonor Lagomasino.

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