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Arbitration / Court Decisions

DEVELOPMENTS IN BROKERAGE ANTITRUST ACTIONS

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This past week saw significant developments in the antitrust brokerage MDL proceeding pending in the USDC for the District of New Jersey. The court entered a 73 page order on September 28 dismissing, with prejudice, the federal RICO claims asserted against the insurer and broker defendants. This was the third strike, the court having previously dismissed the RICO claims twice with leave to amend. See Reinsurance Focus posts dated October 16, 2006 and April 27, 2007. In re Insurance Brokerage Antitrust Litigation, Case No. 04-5184 (MDL Docket No. 1663) (USDC D. N.J.). As in the prior opinions, the court’s analysis concentrated on the enterprise element of a RICO claim. RICO claims generally have not fared well recently against reinsurers and brokers. In two opinions involving Gen Re, a court dismissed federal RICO claims relating to alleged “accommodation reinsurance” and undisclosed side agreements based upon inadequate allegations of causation and reliance. See Reinsurance Focus posts dated July 5, 2006 and November 13, 2006.

The MDL court entered a separate order on October 5 approving an award of attorneys’ fees, expenses and incentive award payments relating to a settlement entered into by three companies related to Arthur J. Gallagher & Co. The court awarded $8.85 million for fees and costs, which is 24% of the $28 million compensation fund created by the settlement. The award consisted on $6,221,480 in fees and $2,413,520 in expenses.

CASE UPDATE: DUTY TO ARBITRATE ARISING FROM RETROCESSION AGREEMENT EXTINGUISHED BY COMMUTATION AGREEMENT

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As described in a recent posting to this blog (dated Sept. 10, 2007), Continental Casualty Company (“CCC”) and LaSalle Re are currently engaged in a dispute regarding an Excess of Loss Retrocession agreement and a subsequently executed Commutation and Release Agreement. Last month an Illinois federal court ruled that LaSalle Re’s removal of the case to federal court was proper. Quickly reaching the merits of the dispute, on September 21, the same court granted CCC’s motion to stay arbitration proceedings commenced by LaSalle Re. CCC argued that the arbitration clause contained in the Excess of Loss agreement was extinguished, along with all other obligations, by the subsequent Commutation Agreement.

Applying Illinois contract law and looking to the plain language of the Commutation Agreement, the Court concluded that “it would be difficult to envision a more clear statement of the parties’ intent to extinguish their obligations under the Retrocession Agreement.” Recognizing that the parties could have included an arbitration clause in the Commutation Agreement, but did not choose to do so, the Court concluded that the parties intended to extinguish their duty to arbitrate. Continental Casualty Co. v. LaSalle Re Ltd., Case No. 07-C 4228 (USDC N.D. Ill. Sept. 27, 2007).

CASE UPDATE: REINSURER LIABLE FOR COMPENSATORY AND PUNITIVE DAMAGES

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The Oklahoma Insurance Commissioner, in her capacity as the court-appointed receiver of Hospital Casualty Company (“HCC”), brought this action against Employers Reinsurance Corporation (“ERC”) contending that HCC was entitled to recover from ERC for certain claims under reinsurance policies issued by ERC in HCC’s favor. The court recently ruled upon cross motions for summary judgment.

The Mulberry Claim: HCC issued a $1 million primary policy and a $5 million excess policy to Amity Care Corp., a nursing home company. ERC reinsured the excess policy. Amity was sued by the estate of Bonnie Mulberry, a nursing home resident. The case settled for over $1 million dollars. HCC sought indemnity from ERC, but ERC denied the claim asserting that public policy prohibited insurance coverage for punitive damages. The court ruled that the ERC was liable for the excess insurer’s entire share of the settlement because it was unclear which claims the jury relied upon in its determination that punitive damages should be awarded.

The Hepatitis Claim: HCC issued primary and excess general liability policies to Norman Regional Hospital over several years. HCC reinsured the excess policies with ERC. A number of lawsuits including a class action were filed against the hospital by patients exposed to or infected by hepatitis between 1999 and 2002. To settle the claims, NRH agreed to pay $11 million dollars, with HCC providing $8 million. The issue raised in this case was the proper allocation of the $8 million between the relevant policy years. ERC argued that the parties intended to allocate $3 million to the 2000-2001 policy year and $5 million to the 2001-2002 policy years, thereby exhausting both the primary and excess coverage in the 2001-2002 year. The judge agreed, pointing to the undisputed fact that this is what HCC intended.

Claims Expenses: The court further ruled that the reinsurer, ERC, was not obligated to pay additional costs because the excess insurer did not pay or incur any claim expenses in its capacity as the excess insurer. State of Oklahoma ex rel. Kim Holland v. Employers Reinsurance Corp., No. Civ-06-0426-HE (W.D. Okla. Sept. 13, 2007). A prior post dealing with the relationship between this case and the liquidation proceeding appear in this blog on September 20, 2006.

COURT OF APPEAL AFFIRMS REFUSAL OF ARBITRATION PANEL TO GIVE OFFENSIVE NON-MUTUAL COLLATERAL ESTOPPEL EFFECT TO PRIOR COURT JUDGMENT

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This case presents a very interesting question regarding the use of non-mutual offensive collateral estoppel in arbitrations. Three former employees sued D. R. Horton, Inc. (“Horton”), alleging in two separate lawsuits that Horton had improperly reneged on a promise to include stock in severance packages when their employment ended as a result of a merger agreement. After Horton's motion to consolidate the cases was denied, one of the employees prevailed at a trial, while the other two took their claims to arbitration. The arbitration panel ruled for Horton on the stock issue. The Claimants contended that the panel should have accorded the prior final judgment in favor of the other former employee on this issue preclusive effect based upon the doctrine of offensive collateral estoppel. The panel had declined to so rule since there was not complete mutuality of parties in the prior lawsuit and the arbitration, and since the prior judgment was on appeal.

The district court denied Claimants' motion to vacate the arbitration award on the basis that it was in manifest disregard of law, and the Ninth Circuit Court of Appeals affirmed. The Court concluded that the arbitration panel could not have manifestly disregarded the law because there was no binding precedent on the issue presented; indeed, it was an issue of first impression in the federal courts of appeal. The Court noted that district courts had discretion in deciding whether to apply collateral estoppel offensively where there was a lack of complete mutuality of parties between the two actions, and held that arbitrators should have the same discretion. The panel had stated that it would not apply the collateral estoppel doctrine due to an interesting procedural difference between lawsuits and arbitration. The panel noted that if the second action was a lawsuit, and the prior judgment was reversed on appeal, the losing party in the second lawsuit could then seek to have the application of collateral estoppel reversed on appeal, but that due to the restrictive judicial review of arbitration awards under the Federal Arbitration Act, if the prior judgment was reversed on appeal, the preclusive effect given the prior judgment in a later arbitration proceeding would remain. The possibility of this inequitable result persuaded the panel to hear evidence and decide the issue itself rather than to short-cut the determination of the issue through the application of collateral estoppel. Collins v. D. R. Horton, Inc., No. 05-15737 (USCA 9th Cir. Sept. 24, 2007).

DISTRICT COURT DENIES PRELIMINARY INJUNCTION TO ENJOIN EXCESS INSURANCE COVERAGE ARBITRATION IN UK

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A district court has denied a motion for preliminary injunction, which would have enjoined an excess insurer from seeking to arbitrate coverage disputes under an excess insurance policy in London, England, as required by the excess policy. The Court rejected the contention that Arkansas law, which would have voided the arbitration provision, applied to the dispute, given a New York choice of law provision and the applicability of the Convention on the Recognition and Enforcement of Arbitral Awards. Considering the requirements for a preliminary injunction, and the potential application of the McCarran-Ferguson Act, the court held that a preliminary injunction was not warranted, based in part upon principles of international comity. Murphy Oil USA, Inc. v. SR Business Ins. Company Ltd., Case No. 07-1071 (USDC W.D. Ark. Sept. 20, 2007).