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Arbitration / Court Decisions

NEW YORK DEPARTMENT CHANGES COURSE ON BROKER CONTINGENT COMMISSION ARRANGEMENTS

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The New York Insurance Department has issued a new regulation, Regulation No. 194 (effective January 1, 2011), which addressees contingent compensation arrangements for brokers in the placement of insurance. While this Regulation contains an express exception stating that it does not apply to the placement of reinsurance, this Regulation is a major shift from the approach taken by former New York Attorney General Eliot Spitzer in this area, and the potential impact of this change in policy on the placement of reinsurance is unclear. The Regulatory Impact Statement for Regulation 194 states that ‘[t]here is nothing inherently improper about incentive-based compensation arrangement[s] between an insurer and the producer,” so long as there is proper disclosure of the arrangement. The Department has also published an Assessment of Public Comments relating to this regulation, and has amended its settlement agreements with three major brokers, Aon, Marsh and Willis, to permit them to engage in contingent commission arrangements subject to the disclosures required by Regulation 194. The Independent Insurance Agents and Brokers of New York, a trade association, has announced that it plans to sue to attempt to block the implementation of this regulation, on the ground that it imposes an undue burden on its members and exceeds the authority of the Department.

This post written by Rollie Goss.

DISTRICT COURT VACATES ARBITRATION AWARD DUE TO ARBITRATORS’ “EVIDENT PARTIALITY”

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Scandinavian Reinsurance Company petitioned a federal district court to vacate a final award in an arbitration between it and St. Paul Fire and Marine. Scandinavian argued that two of the arbitrators exhibited evident partiality by failing to disclose their simultaneous involvement in another arbitration that involved a common witness, similar disputed issues and contract terms, and a company that succeeded to the business of St. Paul.

During the selection process, the arbitrators were asked about their current and previous service as arbitrators and experience with affiliates and subsidiaries of the parties, but neither disclosed that they were involved in an arbitration that involved a common key witness and issues. Scandinavian claimed that had it known about the arbitrators’ involvement in the other case, it would have objected to their service.

Under the Second Circuit’s test of evident partiality, “an arbitrator who knows of a material relationship with a party and fails to disclose it meets Morelite’s ‘evident partiality’ standard: A reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.” Applying this test, the district court concluded that the undisclosed relationship to the other arbitration constituted a “material conflict of interest,” since the arbitrators could receive ex parte information on key issues relevant to this arbitration. As such, the court found the arbitrators exhibited evident partiality, and vacated the award. Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Insurance Co., 09-9531 (U.S.D.C. S.D.N.Y. Feb. 23, 2010).

This post written by Lynn Hawkins.

FOURTH CIRCUIT AFFIRMS VACATUR OF ARBITRATION AWARD AGAINST FINANCIAL SERVICES COMPANY

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In 2005, three financial advisors filed a consolidated arbitration demand against Raymond James Financial Services, Inc. (“Raymond James”) seeking damages related to the alleged wrongful termination of the advisors’ affiliations with Raymond James. The arbitration panel granted substantial compensatory damages to the advisors, citing Raymond James’ unauthorized practice of law by permitting in-house counsel to represent the advisors in third-party arbitration proceedings against both Raymond James and the advisors. Raymond James then filed a motion in federal district court to vacate the award. After a remand to the panel for clarification, the district court vacated the award, concluding, among other things, that the panel exceeded its powers. The advisors appealed. The Fourth Circuit first concluded that the district court did not abuse its discretion in remanding the award to the panel for clarification of the award’s bases. The Fourth Circuit then affirmed the district court’s vacatur of the award, holding that the panel exceeded its power by granting an award whose basis exceeded the framework of arbitrable employment-related claims under NASD Rule 10101. Raymond James Fin. Servs., Inc. v. Bishop, No. 09-1038 (4th Cir. Feb. 22, 2010).

This post written by Dan Crisp.

REINSURANCE DISPUTE VOLUNTARILY DISMISSED AFTER ENTRY OF TOLLING AGREEMENT

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Republic Indemnity Co. of America voluntarily dismissed its suit against Transatlantic Reinsurance Company, shortly after the parties sought entry of a tolling agreement. Presumably, the dismissal indicates that the parties have agreed to resolve their dispute by an alternative dispute resolution. Republic alleged that Transatlantic breached obligations under a facultative reinsurance certificate allegedly requiring it to reimburse Republic for certain costs under excess policies issued by Republic to its insured, a distributor of insulation products who had been sued in connection with asbestos-related injuries stemming from the 1980’s. Republic Indemnity Co. of America v. Transatlantic Reinsurance Co., No. 09-Civ-8871 (USDC S.D.N.Y. Jan. 19, 2010).

This post written by John Pitblado.

COURT DISMISSES SECURITIES LAW CLAIMS AGAINST REINSURER, GRANTS LEAVE TO AMEND COMPLAINT

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PXRE Group Ltd. (“PXRE”) suffered significant losses following Hurricanes Katrina and Rita and sought to raise funds to pay out reinsurance claims through a public offering of common stock and a private offering of preferred shares. In October 2005, plaintiffs, a group of nineteen hedge funds, purchased preferred shares and were provided with a private placement memorandum in connection with the purchase. In February 2006, PXRE disclosed that actual losses were twice as much as previously announced. The plaintiffs then brought this action asserting claims for violations of sections 12(a)(2) and 15 of the Securities Act of 1933 and state law claims for fraud and negligent misrepresentation. The defendants subsequently filed a motion to dismiss.

On the section 12(a)(2) claim, which imposes liability for selling securities via a prospectus that includes a material misrepresentation, the court first ruled that this claim must fail because private offerings are not effected by means of a prospectus. Still, the plaintiffs sought to invoke the integration doctrine, arguing that the private offering of preferred shares was integrated with the public offering of common stock and therefore liability attached to the alleged misrepresentations in the private placement memorandum, but the court ruled that the plaintiffs failed to allege facts sufficient to invoke the integration doctrine. The court then dismissed the section 15 claim, which establishes control person liability for a violation of section 12(a)(2), and declined to exercise supplemental jurisdiction over the remaining state law claims. The district court thus granted the defendants’ motion to dismiss, but did grant the plaintiffs leave to amend the complaint. In a February 23, 2010 Order, the district court acknowledged receipt of the plaintiffs’ Second Amended Complaint and instructed the defendants to provide the court with a letter on whether the defendants intend to answer the complaint or renew their motion to dismiss. Anegada Master Fund, Ltd. v. PXRE Group Ltd., Case No. 08-10584 (USDC S.D.N.Y. Jan. 26, 2010).

This post written by Dan Crisp.