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Arbitration / Court Decisions

TEXAS APPELLATE COURT REVERSES ORDER IN FAVOR OF TEXAS DEPARTMENT OF INSURANCE CONCERNING INTERPRETATION OF REINSURANCE REPORTING OBLIGATIONS

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The Texas Insurance Department (“Department”) determined that American National Ins. Co. and other insurance companies were incorrect when they reported stop-loss insurance policies that they sold to self-funded employee benefit plans as reinsurance instead of direct insurance. The Companies disagreed, and brought the matter to court. The trial court granted the Department’s motion for summary judgment, agreeing with the Department that self-funded plans are not insurers under Texas law. The Companies appealed, and the Appellate Court reversed. It found that by selling the stop-loss policies at issue in this case to self-funded benefits plans and reporting their sale to the Department as a sale of assumed reinsurance, the Companies did not violate those provisions of the Texas Insurance Code cited by the Department. The Court filed an Order with instructions to enter judgment in favor of Companies on the issue. American National Ins. Co. v. Texas Dept. of Insurance, No. 03-08-00535-CV (Tex. App. Ct. Dec. 16, 2009).

This post written by John Pitblado.

REINSURER NOT LIABLE FOR LOSSES, “FOLLOW THE FORTUNES” CLAUSE NOT APPLICABLE

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Royal Surplus Lines Insurance Company, the plaintiff’s predecessor, assumed the liabilities and acquired the related assets of an insurer that provided a one-year general liability policy to Equity Residential (“Equity”). Employers Reinsurance Company, the defendant’s predecessor, reinsured this policy until it terminated the reinsurance agreement on August 18, 2000. In this action, the plaintiff, Arrowood Surplus Lines Insurance Company (“Arrowood”), sought reimbursement for a settlement payment to Equity and claim expense in connection with losses occurring between December 15, 2000 and December 15, 2002, and the defendant, Westport Insurance Corporation (“Westport”), moved for judgment on the pleadings, arguing that Westport has no liability for losses after December 15, 2000. Arrowood argued that the Equity settlement was covered under the reinsurance agreement under the “follow the fortunes” clause.

The court, however, found that the losses under the Equity policy were outside of the reinsurance agreement, which stated that a policy issued for a period of more than one year shall be considered as “becoming effective” on the policy’s anniversary date while the policy is in force. Even if the runoff option was exercised, the policy would only be in effect until the anniversary date. Therefore, the reinsurance coverage period was limited to one year at a time, regardless of the length of the underlying insurance contract. Losses after the anniversary date would not be covered because the Equity policy could not “become effective” under a terminated reinsurance agreement. Moreover, the “follow the fortunes” clause only applies to a reinsurance contract in force. The court thus granted Westport’s motion for judgment on the pleadings. Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., Case No. 08-1393 (USDC D. Conn. Jan. 5, 2010).

This post written by Dan Crisp.

WHICH COURT WANTS THIS CASE?

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AXA Belgium S.A. (“AXA”) reinsured Century Indemnity Co. (“Century”) under certain treaties dating back to the 1970’s. In 2005, Century disputed AXA’s fulfillment of certain payment obligations, and the parties arbitrated the matter. The award, rendered in 2007, was in Century’s favor on a number of issues, and ordered AXA to make payments to Century. After AXA refused to make the ordered payments, Century filed an action in Pennsylvania in 2009 to confirm the award, and the award was confirmed. Thereafter, Century claims AXA still did not make required payments, and moved for contempt in the Pennsylvania action.

For its part, AXA claims that correlated issues involving the parties that were not subject to the arbitration impact AXA’s payment obligations because they entitle AXA to offsets or credits against its payment obligations ordered in the arbitration and confirmed in court. AXA thus filed its own action in New York federal court, seeking to compel arbitration of the offset issues it claims impact its payment obligations. The New York court deferred and transferred the action, suggesting that AXA was engaged in forum shopping, and finding that the Pennsylvania court was already familiar with the issues and was the appropriate forum for AXA to raise its claims pertaining to the offset. However, in an Order ironically issued the same day as the New York Order, the Pennsylvania court – plainly displeased by the bitter tone of the parties’ dispute – refused to enjoin the New York litigation, but did not grant Century’s motion for contempt, based on its review of the arbitration award, finding that the award did not command the payment of a sum certain by AXA. It also held that the arbitrability of the offset issue should be determined in the New York action. Both courts have now deferred the resolution of this issue to the other court. AXA Belgium, S.A. v. Century Indemnity Co., 09-9703 (USDC S.D.N.Y. Jan. 11, 2010); Century Indemnity Co. v. Certain Underwriters at Lloyd’s, No. 09-94 (USDC E.D.Pa. Jan 11, 2010).

This post written by John Pitblado.

SECOND CIRCUIT VACATES CONFIRMATION OF ORIGINAL ARBITRATION AWARD; REINSTATES AMENDED AWARD

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Parties to a contract for the sale of steel pipe brought cross-motions to vacate, modify and correct an arbitration award conducted according the International Dispute Resolution Procedures of the AAA’s International Centre for Dispute Resolution. The arbitrator issued an amended award, which was challenged in District Court by both parties. The District Court vacated the amended award and confirmed the original award. Appellant T.Co. Metals appealed the judgment to the Second Circuit arguing that the arbitrator acted in manifest disregard of the law and exceeded his powers. Appellee Dempsey Pipe & Supply filed a motion for fees.

The Second Circuit agreed with the district court’s refusal to vacate the damage award to Dempsey finding that the arbitrator did not manifestly disregard the law in interpreting the Supreme Court’s recent decision in Hall Street Assoc. LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008). The Court determined, however, that the district court erred in applying the functus officio doctrine to the arbitrator as he was acting on the parties’ petitions for reconsideration and revised the award pursuant to his interpretation of the arbitral rules the parties had agreed upon. Accordingly, the Second Circuit vacated the order confirming the arbitrator’s original award and remanded the case so that the amended award may be confirmed. Dempsey’s motion for fees was denied. T.Co. Metals, LLC v. Dempsey Pipe & Supply, Inc., Case No. 08-3894 (2d Cir. Jan. 14, 2010).

This post written by John Black.

DISTRICT COURT DENIES MOTION TO STAY ARBITRATION WHILE MOTION FOR RECONSIDERATION PENDING

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After granting defendant Lloyd’s motion to compel arbitration, plaintiff B.D. Cooke and Partners filed a motion for reconsideration of the order.  Soon thereafter, B.D. Cooke contacted Lloyd’s to begin arbitration.  Lloyd’s subsequently filed a motion to stay arbitration pending the result of B.D. Cooke’s motion for reconsideration.  The District Court for the Southern District of New York likened the analysis to a stay of arbitration requested pending appeal of a court’s order compelling arbitration.  In such situations, the court explained, motions to stay are generally denied unless the equities tip decisively in the direction of a stay, such as when irreparable harm or clear hardship would otherwise result.  The Court denied the motion to stay, reasoning that incurring unnecessary expenses did not constitute sufficient harm to the defendant.  The court, however, denied plaintiff’s motion for fees finding that the motion to stay was not brought in bad faith.  B.D. Cooke & Partners Ltd. v. Certain Underwriters at Lloyd’s London, Case No. 08-3435 (USDC S.D.N.Y. Nov. 19, 2009).

This post written by John Black.