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New reinsurance-related and arbitration developments from Carlton Fields

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Arbitration / Court Decisions

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.

THOU SHALT ARBITRATE: FEDERAL COURT ENFORCES A BIBLICALLY-BASED ARBITRATION AGREEMENT

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In this case, the plaintiff brought suit against her former employer, Heritage Christian Schools, Inc. (“Heritage”), after being constructively discharged from her teaching position. Heritage then filed a motion to stay proceedings and compel arbitration, and the plaintiff filed a motion to strike the arbitration agreement, which commanded that the parties resolve their differences in accordance with Matthew 18:15-17 and that the arbitration process be conducted in accordance with the Rules of Procedure for Christian Conciliation (“RPCC”), which proclaimed that the Bible shall be the supreme authority governing the arbitration process, though local, state, and federal laws must be taken into consideration. In denying the motion to strike and granting the motion to stay proceedings and compel arbitration, the court found that: (1) no evidence supported the argument that the arbitration provision is vague and ambiguous; (2) the plaintiff had not shown that submission to arbitration under the RPCC will deprive her of the ability to vindicate her statutory rights; (3) the plaintiff failed to articulate how the processes under the arbitration agreement are structurally biased and procedurally inadequate; and (4) despite the RPCC requiring that the plaintiff pay half of the fees and costs of arbitration, the arbitrator still has the power to award fees and costs to a participant and, thus, the plaintiff was not precluded from effectively enforcing her rights. Easterly v. Heritage Christian Schools, Case No. 08-1714 (USDC S.D. Ind. Aug. 26, 2009).

This post written by Dan Crisp.

ARBITRATION AWARD IN FAVOR OF UNION UNDER CBA UPHELD

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The plaintiff moved to vacate an arbitration award in favor of the defendant in disputes about grievance procedures arising from the parties’ Collective Bargaining Agreement (“CBA”). The disputes arose from the plaintiff’s disciplinary actions of certain members of the defendant unions. The court declined to vacate the award, relying on principles of deference to arbitral panels generally, and in particular under a CBA, deference to the arbitrators’ interpretation of the CBA and its procedural requirements. Continental Carbon Corp. v. United Steel, Paper and Forestry, Rubber Manufacturing, Energy, and Allied Industrial Service Workers Int’l Union, 08-cv-543-JHP-TLW (N. D. Okla. July 23, 2009).

This post written by John Pitblado.