An Oklahoma District Court was forced to deny the defendant’s motion to compel arbitration, despite the parties’ reinsurance contracts that contained clear and unambiguous arbitration clauses. Pursuant to the McCarran-Fergusson Act, the court was required to apply a state statute prohibiting the enforcement of arbitration clauses in any contract “which reference[s] insurance.” The court also concluded that Oklahoma common law could not save the arbitration agreements. Citing to an Oklahoma Supreme Court case, the court stated that “arbitration provisions falling outside of the UAA [Uniform Arbitration Act] are governed by common law and, generally, ‘agreements to submit future controversies to arbitration are contrary to public policy.’” Cannon v. Lane, 867 P.2d 1235 (Okla. 1994). Although the court acknowledged several subsequent cases stating that the public policy of Oklahoma favors arbitration, the court distinguished those cases because they all fell within the purview of the UAA. Since Cannon has not been overruled, the District Court was bound by it and forced to deny the motion to compel arbitration. The court also rejected defendant’s argument that the Oklahoma statute violates the Contracts Clause of the Federal Constitution. Mid-Continent Casualty Co. v. General Reinsurance Corporation, Case No. 06-CV-0475 (N.D.Okla. Feb. 15, 2007).
Arbitration / Court Decisions
Court confirms arbitration award with no choice of law
A District Court has confirmed an arbitration award finding no coverage under an insurance policy due to the presence of an absolute pollution exclusion. The policy did not have a choice of law provision, and the arbitration grew out of a declaratory judgment action filed by the insurer in US District Court in Indiana. Indiana law does not enforce the absolute pollution exclusion. Since the arbitration agreement provided for arbitration under the rules of the American Arbitration Association, which did not require that any substantive law apply, the arbitration panel declined to apply Indiana law, and arrived at what it viewed to be a fair and just decision. The District Court found no error in this decision. Reliance Ins. Co. v. Raybestos Products Co., Case No. 97-0027 (USDC S.D. Ind. Jan. 27, 2007). Additional background information may be found in the memoranda filed by Reliance and Raybestos as to whether the award should be confirmed or vacated.
Reinsurer’s Calculation Of “Incurred Loss” Could Lead To Finding Of Bad Faith
BJC, a network of hospitals is the sole shareholder of ATG, a captive insurance company that provides insurance for BJC. A dispute arose between ATG and its reinsurer, Columbia Casualty pertaining to the “incurred loss condition” clause in their reinsurance agreement. The incurred loss condition provided that continued coverage would be conditioned upon an incurred loss ratio of less than 75%. A few days before the end of the second policy year, Columbia terminated the agreement, claiming that BJC had exceeded the incurred loss ratio on an aggregate basis and on an individual claim.
Much of the case revolved around the actuarial work Columbia presented to BJC to justify Columbia’s determination that the incurred loss ratio had exceeded 75%. While the Eighth Circuit agreed that Columbia had broad discretion to determine the incurred loss, it held BJC presented sufficient evidence from which a reasonable jury could conclude that Columbia acted in bad faith.
The Court also agreed with the district court’s decision to strike the prayer for punitive damages because ATG’s complaint failed to allege fraud with the particularity required by Federal Rule of Civil Procedure 9(b).
Finally, the Court affirmed the district court’s finding that BCA was precluded from recovering compensatory damages resulting from Columbia’s decision to terminate the Contract because BJC failed to properly quantify its costs.
BJC v. Columbia Casualty, Case No. 06-1326 (8th Cir., February 23, 2007).
Tenth Circuit affirms confirmation of arbitration award
In a non-insurance arbitration, the United States Court of Appeals for the Tenth Circuit has affirmed the confirmation of an arbitration award, rejecting an argument that the arbitrator had acted in manifest disregard of law. The Court found that while the arbitrator's decision on liability “may be a close call,” it did not constitute manifest disregard of law. The Court also rejected an argument by a party against which an award had been entered that it was not a proper party to the arbitration, since it was not a party to the underlying note. This argument was rejected, in part because the party had vigorously participated in the arbitration without making any objection to its being named as a party. Hicks v. Bank of America, Case No. 05-1399 (10th Cir. Feb. 21, 2007).
Securities fraud putative class action against MBIA dismissed
Having settled with the SEC over charges relating to allegedly fraudulent reinsurance transactions, MBIA may be finding closure on the civil side of that problem. Relying on a 1991 Supreme Court decision stating that litigation under Section 10(b) and Rule 10b-5 must be commenced “within one year after the discovery of the facts constituting the violation and within three years after such a violation,” a District Court has dismiss a securities fraud putative class action against MBIA as time-barred. Plaintiffs filed a consolidated securities fraud class action alleging that MBIA’s financial statements were materially misstated because MBIA improperly treated a series of transactions in 1998 as reinsurance agreements, and the associated proceeds as income, although they were in fact disguised loans. In re MBIA Inc. Securities Litigation, Case No. 05-3514 (USDC S.D.N.Y. Feb. 14, 2007).