Arbitration / Court Decisions

CASE UPDATE: JUDGMENTS REVERSED BY HOUSE OF LORDS IN APPEALS ASKING WHETHER COVERAGE UNDER A PROPORTIONAL FACULTATIVE REINSURANCE CONTRACT IS COEXTENSIVE WITH COVERAGE UNDER THE INSURANCE CONTRACT

September 8, 2009 by Carlton Fields

In an April 8, 2008 post, we reported on a UK Court of Appeals decision, Wasa International Insurance Co. v. Lexington Ins. Co., [2008] EWCA Civ. 150 (Feb. 29, 2008), reversing a lower court’s decision denying reinsurance coverage despite a follow the fortunes provision, based on a finding that the damages occurred outside the coverage period of the reinsurance, and despite the conclusion of a US court on the underlying claim finding liability for damage occurring outside the coverage period of the underlying policy. The Court of Appeals found that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance. The Court of Appeals agreed that the insurance and reinsurance contracts were not entirely “back-to-back” in terms of the coverage periods, but concluded that although there were some differences in the contracts, the parties intended that they should have the same effect, so the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract.

The UK House of Lords allowed consolidated appeals from the Court of Appeals. These appeals raised the question of the extent to which the coverage under a proportional facultative reinsurance contract is, or should be construed as being, coextensive with the coverage under the insurance contract. The House of Lords, as articulated by Lord Collins, found that the reinsurer takes a proportional share of the premium and bears the risk of the same share of any losses. Normally reinsurance of that kind is back-to-back with the insurance, and the reinsurer and the original insurer enter into a bargain that if the insurer is liable under the insurance contract, the reinsurer will be liable to pay the proportion which it has agreed to reinsure. Any loss within the coverage of the insurance will be within the coverage of the reinsurance. In the view of Lord Phillips, the result of the appeals was dictated by the fact that the subject reinsurance contract was governed by English law and by the principle under English law that a reinsurance contract in relation to property is a contract under which the reinsurers insure the property that is the subject of the primary insurance; “it is not simply a contract under which the reinsurers agree to indemnify the insurers in relation to any liability that they may incur under the primary insurance.” Lexington Insurance Co. v. AGF Insurance Ltd., [2009] UKHL 40 (July 30, 2009).

This post written by John Black.

ARBITRATION CLAUSE IN EMPLOYMENT AGREEMENT FOUND ENFORCEABLE NOTWITHSTANDING THE INVALIDITY OF A “NO APPEAL” CLAUSE

September 7, 2009 by Carlton Fields

The plaintiff sued the successor corporation of his former employer in state court alleging claims arising from the termination of his employment. The plaintiff asserted a claim for breach of contract and a tort “whistleblower” claim for wrongful discharge in violation of public policy. The defendant removed the action to federal court and filed a motion to stay proceedings and compel arbitration. The plaintiff opposed the motion, contending the arbitration provision in his employment agreement was invalid and unenforceable because it eliminated a right of judicial appeal, which provision was not severable from the agreement. The plaintiff also argued that even if the arbitration provision is enforceable, his whistleblower/public policy tort claim was not subject to mandatory arbitration.

The court found that the “no appeal” clause in the arbitration provision, to the extent it attempts to preclude any court access, was invalid. Parties seeking judicial enforcement of an arbitration provision or to enforce arbitration awards through confirmation judgments may not divest the courts of their statutory and common law authority to review both the substance of the awards and the arbitral process for compliance with the Federal Arbitration Act. However, the court concluded the “no appeal” clause could be severed, leaving intact the provision’s other portions. The court also found that the arbitration provision was broad, and covered the tort claim. The tort claim “touches the contract,” since it raised the issue of whether the plaintiff was terminated because, as asserted by the defendant, he violated the employment agreement or because, as asserted by the plaintiff, he was retaliated against for whistleblowing. As the court found the arbitration provision enforceable and that all the plaintiff’s claims were arbitrable, the defendant’s motion was granted. Strom v. First American Professional Real Estate Services, Inc., Case No. CIV-09-0504-HE (USDC W.D. Okla. July 24, 2009).

This post written by Brian Perryman.

COMMUTATION, SETTLEMENT AGREEMENT, AND RELEASE BETWEEN INSURER (IN LIQUIDATION) AND REINSURER APPROVED

September 3, 2009 by Carlton Fields

A Pennsylvania state court recently approved a Commutation, Settlement Agreement, and Release (“Settlement Agreement”) between Reliance Insurance Company (“Reliance”) and Munich Reinsurance America, Inc., formerly known as American Re-Insurance Company (“Munich Re”). Under the Settlement Agreement, Munich Re agreed to pay the Reliance estate $73,250,000 to terminate and commute the Reinsurance Agreement and release Munich Re from all liability under the Reinsurance Agreement. The court approved the Settlement Agreement, accepting representations that the Settlement Agreement constituted a fair and reasonable settlement of Munich Re’s past, present, and future obligations to the Reliance estate. Ario v. Reliance Ins. Co., No. 269 M.D. 2001 (Pa. Commw. Ct. July 15, 2009).

This post written by Dan Crisp.

PARTIES STIPULATE TO DISMISSAL IN TIG V. CENTURY INDEMNITY SUIT

September 2, 2009 by Carlton Fields

We previously reported on May 20, 2009 and June 25, 2009, about TIG Insurance Company’s suit against Century Indemnity Company, which alleged that Century breached its reinsurance agreement with TIG’s predecessor-in-interest, in connection with certain reinsured losses arising from underlying Honeywell asbestos suits. As previously reported, in April, 2009 the Court allowed TIG to amend its complaint to add breach of contract claims on two additional reinsurance contracts. In June, 2009, the Court denied Century’s motion to transfer venue from New York City to Philadelphia. All parties have now stipulated to dismissal with prejudice of all claims and cross-claims. TIG Ins. Co. v. Century Indemnity Co., No. 08-7322 (USDC S.D.N.Y. July 17, 2009).

This post written by John Pitblado.

COURT DENIES MOTION TO REOPEN CASE TO ADD A BAD FAITH CLAIM

September 1, 2009 by Carlton Fields

The Tenth Circuit previously held that a revised state statute rendered the parties’ arbitration agreements enforceable, and, on remand, the Oklahoma district court compelled the parties to arbitrate their entire dispute. When Mid-Continent Casualty Company (“Mid-Continent”) moved to reopen the case for the purpose of filing an amended complaint adding a bad faith claim that Mid-Continent admitted it would not assert in the arbitrations, the court had to determine whether the arbitration agreements required Mid-Continent to arbitrate the bad faith claim. The court ultimately denied Mid-Continent’s motion, finding that the agreements used broad language and showed a clear intent to arbitrate all claims and that the tort claim, which was part of the same cause of action, fell within the broad arbitration clause. Mid-Continent Cas. Co. v. Gen. Reins. Corp., No. 06-0475 (N.D. Okla. Aug. 18, 2009).

This post written by Dan Crisp.