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New reinsurance-related and arbitration developments from Carlton Fields

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Arbitration / Court Decisions

COURT VACATES ARBITRAL AWARD FINDING IT “COMPLETELY IRRATIONAL” AND IN MANIFEST DISREGARD OF LAW

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Platinum Underwriters Bermuda, Ltd. reinsured PMA Capital Ins. Co., under a reinsurance agreement that contained a “deficit carry forward” provision. The parties disputed how certain deficits were to be calculated under the provision and arbitrated the claim. The arbitral panel awarded PMA $6,000,000, but eliminated the “deficit carry forward” provision from the contract, which provision ran to the benefit of Platinum. Both parties sought to vacate or modify the award. The court found the panel’s decision “completely irrational” – even under the broad grant of authority provided to the panel under the contract’s “Honorable Engagement Clause” – as the deficit carry forward provision was part of the essence of the contract and could not be written out of it. Moreover, the court saw no justification for the $6,000,000 award, other than as an equally irrational attempt to “compensate” Platinum for the elimination of the deficit carry forward provision. The Court granted PMA’s application to vacate the award, finding that an arbitration award that is not drawn from the essence of the contract is completely irrational, and therefore, in manifest disregard of the law. PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., No. 09-84 (USDC E.D. Pa. Sept. 15, 2009).

This post written by John Pitblado.

NO JUMPING THE GUN ON DISCOVERY: MOTION TO COMPEL REINSURANCE AGREEMENT DENIED

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The plaintiff, Dartmouth Hitchcock Medical Center, moved to compel the defendant, CHG Medical Staffing, to produce a reinsurance agreement between CHG and CNA. In support of its motion, Dartmouth represented that the court had ordered CHG to produce insurance policies during a hearing in a related case. CHG refused to produce the agreement on the ground that discovery has not yet begun, citing the automatic discovery moratorium imposed by Federal Rule of Civil Procedure 26(d). Dartmouth argued in its Motion to Compel Production of Documents that CHG is in violation of the “intent and spirit of this Court’s Order, if not the letter.” The court found in favor of CHG, noting that because the parties agreed that the court did not order production of the reinsurance agreement, CHG’s refusal to produce it did not violate an existing court order and that discovery would progress in accordance with the Federal Rules. Dartmouth Hitchcock Medical Center v. Cross Country Travcorps, Inc., Case No. 09-160 (USDC D.N.H. July 31, 2009).

This post written by Brian Perryman.

EASTERN DISTRICT OF NEW YORK DENIES MOTION TO AMEND: HOLDS CLAIM WOULD BE FUTILE

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On August 24, 2009, the Eastern District of New York ruled on plaintiff Callon Petroleum’s motion to amend its complaint by adding a statutory claim for punitive damages based on defendant National Indemnity’s bad faith failure to make a timely payment following the submission of the bond claim in the action. This action arose out of a judgment Callon obtained against its reinsurer Frontier Insurance Company in the form of a surety bond Frontier issued to Wood Energy Corporation. Defendant moved to dismiss plaintiff’s claims since it was not a party to the surety bond. The motion to dismiss was granted in part and denied in part, and over a year and a half later plaintiff moved to include the statutory claim.

Applying New York’s “center of gravity/grouping of contacts analysis,” the court concluded that New York law should be applied. The court noted that the reinsurance contract was negotiated and entered in New York, the place of performance was New York, and one of the contracting parties (Frontier) is domiciled in New York. Additionally, the arbitration clause in the contract requires all arbitration to take place in New York. Having determined that New York law should apply, the court denied the motion to amend, holding that the claim would be futile under New York law. Callon Petroleum Co. v. Nat’l Indem. Co., Case No. 06-CV-0573, (E.D. N.Y. Aug. 24, 2009).

This post written by John Black.

DISTRICT COURT FINDS CONTRACTING PARTIES IN PRIVITY, DISMISSES THIRD PARTY COMPLAINT

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In the latest development of Guaranteed Trust Life’s (“GTL”) suit for reinsurance benefits from First Student Programs, the Northern District of Illinois granted in full third party defendant American United Life’s (“AUL”) motion to dismiss. After previously granting in part and denying in part AUL’s motion to dismiss, the court invited the parties to readdress the issues of res judicata. In fully granting AUL’s motion in the instant order, the court determined that, even though First Student Programs was not a party to the arbitration between GTL and AUL, it was in privity with GTL. The court concluded that because the two companies’ claims against AUL arose out of the same alleged breach of contract, were based on the same legal and factual arguments, and rested on a contractual relationship between the two companies, Illinois’ privity test was met. Accordingly, First Student Programs’ claim agasint AUL was precluded by the arbitration award against AUL. Guarantee Trust Life Ins. v. First Student Programs, LLC, Case No. 05 C 1261 (N.D. Ill Sept. 9, 2009).

This post written by John Black.

EXISTENCE OF DEEMER CLAUSE UNDOES JUDGMENT AGAINST REINSURER

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We previously reported (April 7, 2008) on a federal district court’s interpretation of the liability limit of an employers’ liability reinsurance agreement in a summary judgment setting, finding in favor of the position advanced by the reinsured. We subsequently noted (August 6, 2008) the district court’s entry of judgment in the total amount of $1,707,698.62, consisting of $1.5 million in damages and $207,698.62 in pre-judgment interest. It appears, however, that the district court was in error, as the Third Circuit vacated the judgment, and remanded the case for further proceedings. The central issue was whether the warranty provision in the agreement limited the reinsurer’s liability for EL claims. The district court held that the contract was unambiguous and contained no such limitation. The Third Circuit held the problem with this conclusion was that it fails to account for the phrase “or so deemed” in the warranty provision. The existence of this “deemer clause” meant the warranty provision could not be interpreted as the district court saw it, solely as a promise or guarantee. The consequence of the reinsured’s failure to comply with the warranty is that, at least in some circumstances, the reinsured was deemed to have complied, so the deemer clause effectively redefined the EL limits in the underlying policies in a way that limited the reinsurer’s liability. Princeton Insurance Co. v. Converium Reinsurance (North America) Inc., No. 08-2136 (3d Cir. Sept. 14, 2009).

This post written by Brian Perryman.