Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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

Arbitration / Court Decisions

CALIFORNIA SUPREME COURT ATTEMPTS TO THREAD THE UNCONSCIONABILITY NEEDLE

by

California’s appellate courts have had a strained relationship with the U.S. Supreme Court when it comes to enforcement of the FAA in the last few years. Illustrative of this tension is a recent decision captioned Sonic-Calabasas A, Inc. v. Moreno, No. S174475 (Cal. Oct. 17, 2013) (“Sonic II”). The Court in Sonic II was instructed by the U.S. Supreme Court to reconsider its ruling in Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (“Sonic I”), which invalidated an arbitration agreement.

The dispute arose from an employment wage dispute. The heart of the case was whether California’s statutory employment dispute mandatory ‘pre-screening’ process (referred to as a “Berman hearing”) could be waived by an arbitration agreement, such as the one in the employment contract at issue. In Sonic I, the Court held that an arbitration agreement that waives a Berman hearing is unconscionable and unenforceable. Shortly after Sonic I was released, the U.S. Supreme Court released its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ [131 S.Ct. 1740] (2011) (“Concepcion”). The defendant thereafter sought review of Sonic I by the U.S. Supreme Court, which granted certiorari and reversed, citing Concepcion and the FAA’s strong presumption in favor of arbitration.

On remand, in Sonic II, the Court held that, consistent with Concepcion, “the FAA preempts our state-law rule categorically prohibiting waiver of a Berman hearing.” However, it left the trial court some wiggle room to nevertheless find the agreement unconscionable on remand, holding (and citing Concepcion) that “state courts may continue to enforce unconscionability rules that do not interfere with fundamental attributes of arbitration.”

Based on its finding that evidence relevant to such an unconscionability claim was not developed, it remanded to the trial court to determine in the first instance whether the present arbitration agreement is unconscionable.

This post written by John Pitblado.

See our disclaimer.

COURT REFUSES TO COMPEL ARBITRATION AGAINST NONSIGNATORY ASSOCIATION CAPTIVE INSURER

by

The case involved motions to compel arbitration by multiple defendants, all of which were parties to contracts with the plaintiff, an association captive insurer, but only some of which had signed contracts containing arbitration provisions. The court compelled the plaintiff to arbitrate breach of contract and related claims with the arbitration-signatories, finding that the claims fell under the arbitration provisions’ scope, which covered all disputes “arising out of” the underlying contracts. The court rejected, however, a non-arbitration-signatory’s attempt to compel the plaintiff to arbitrate under an estoppel theory, finding that the nonsignatory was “really arguing” that the court should read the arbitration clause into its non-arbitration agreements. Notwithstanding the court’s decision to only partly compel arbitration, it did stay the entire litigation, finding that some of the issues or claims might eliminate certain issues against the non-arbitration-signatory, and that the arbitration would likely proceed expeditiously. J.M. Woodworth Risk Retention Group, Inc. v. Uni-Ter Underwriting Management Corp., Case No. 2:13-cv-00911 (USDC D. Nev. Sept. 11, 2013).

This post written by Michael Wolgin.

See our disclaimer.

AIG MIGHT GAIN ACCESS TO ELIOT SPITZER’S PERSONAL EMAILS IN CONNECTION WITH REINSURANCE ENFORCEMENT ACTION

by

In 2005, former New York Attorney General Eliot Spitzer commenced a civil enforcement action against AIG, AIG’s former CEO, and AIG’s former CFO Howard Smith for allegedly engaging in fraudulent reinsurance transactions. In response, Smith submitted a Freedom of Information Law (“FOIL”) request seeking the disclosure of the AG’s communications with the press regarding the complaint. A New York Supreme Court held that the AG’s office has a responsibility and obligation to gain access to Spitzer’s personal email account to determine if it contains documents that should be disclosed in accordance with the FOIL request. The court, however, also allowed the AG’s office to appeal the issue. On appeal, the Appellate Division determined that Spitzer is a necessary party and remanded the case without deciding the issue so the Supreme Court can order Spitzer’s joinder. Smith v. New York State Office of the Attorney General, No. 515758 (N.Y. App. Div. Oct. 17, 2013).

This post written by Abigail Kortz.

See our disclaimer.

RISK OF UMPIRE BIAS HELD AN INSUFFICIENT BASIS TO ENJOIN REINSURANCE ARBITRATION

by

In an ongoing reinsurance arbitration between Allstate Insurance Company and OneBeacon American Insurance Company, Allstate unsuccessfully sought to enjoin the arbitration because OneBeacon’s position statement informed the umpire of OneBeacon’s selection of him as umpire. Allstate alleged that this submission (1) violated the arbitration agreement’s umpire selection protocol, which, Allstate argued, implicitly prohibited communications that threatened umpire impartiality, and (2) violated the “reinsurance industry’s custom and practice.” Allstate could not make the requisite showing of “likelihood of success on the merits” to obtain injunctive relief because it misinterpreted the selection protocol, and because “[p]reaward challenges on the basis of bias” are not permitted. Allstate also failed to show “irreparable harm,” given Allstate’s ability to challenge the final award after the arbitration was completed. Concern over potential “lack of neutrality” did not tip the balance of equities in Allstate’s favor, nor did a “technical skirmish over arbitration procedure between two reinsurance companies” rank high in terms of the public’s interest. Allstate Insurance Co. v. OneBeacon American Insurance Co., Case No. 1:13-cv-12368 (USDC D. Mass. Oct. 8, 2013).

This post written by Michael Wolgin.

See our disclaimer.

REINSURER NOT OBLIGATED TO COVER D&O CEDANT

by

An insurance company that provided directors and officers liability to a lottery corporation sought coverage from its reinsurer for an employment litigation judgment entered against the lottery corporation. The reinsurance certificate stated that coverage would not be provided until the insurer’s losses totaled $5 million. The final judgment at issue was $6.7 million, which included $2.4 million in interest. Thus, the issue was whether the $2.4 million in interest was considered a “loss,” which would trigger reinsurance coverage with a final judgment of $6.7 million, or “interest on a judgment,” which would result in a final of judgment of $4.3 million which falls just shy of the $5 million threshold. The court determined that the carefully worded conditions in the reinsurance certificate made it clear that the reinsurer’s obligation to cover a portion of “interest on any judgment” was separate and apart from its obligation to cover losses and granted summary judgment in favor of the reinsurer. Seneca Insurance Co. v. Everest Reinsurance Co., Case No. 11-7846 (USDC S.D.N.Y. Oct. 17, 2013).

This post written by Abigail Kortz.

See our disclaimer.