Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Week's Best Posts

Week's Best Posts

NEW YORK DEPARTMENT ISSUES HIGH PROFILE CRITICISM OF CAPTIVES; SOME OTHER COMMISSIONERS NOT IMPRESSED

by

On June 11, 2013 the New York Department of Financial Services released a report titled Shining A Light On Shadow Insurance: A Little-Known Loophole That Puts Insurance Policyholders And Taxpayers At Greater Risk (“the NY Report”). The NY Report describes an investigation that the New York Department initiated in July 2012 into the practice of reinsuring term and universal life insurance policies with non-New York domiciled captive insurers which are subject to “looser reserve and regulatory requirements.” Receiving publicity in a New York Times article, the NY Report pledges to continue the investigation, urges the NAIC to develop enhanced disclosure requirements for “shadow insurance,” urges the Federal Insurance Office (“FIO”) and the NAIC to conduct a “similar investigation,” and suggests “an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete ….”

As reported previously in Reinsurance Focus, the NAIC formed a special working group of the Financial Condition (E) Committee in November 2011, which has been investigating the use of captives, including the possible use of captives to evade regulatory accounting rules concerning reserves. The working group, of which New York has been an active member, approved a white paper containing its recommendations on June 6, 2013, shortly before the release of the NY Report, which inexplicably failed even to mention the existence of the NAIC’s on-going inquiry. The approved NAIC white paper recommends a number of changes to accounting and other rules. In order to promote uniformity of practice, the NAIC working group has recommended that some of the proposed changes be included in the NAIC’s accreditation requirements rather than in merely optional guidelines which may or may not be adopted by individual states. In another instance of curious timing, the NY Report recommended that the FIO establish a task force to look into issues relating to captives, while it is public knowledge that the FIO already had established such a task force.

The insurance commissioners of Delaware, Louisiana (the current NAIC President) and Tennessee have, according to news reports, rejected the call in the NY Report for a moratorium, stating that: (1) many transactions engaged in by captives are appropriate and lawful, not involving the “shadow insurance” allegations contained in the NY Report; (2) captives can be regulated properly, if necessary with additional resources applied by the state insurance departments; and (3) the current NAIC captives initiative will continue and proceed to a proper conclusion.

This post written by Rollie Goss.

See our disclaimer.

TWO APPELLATE DECISIONS PROVIDE CONTRAST REGARDING ARBITRABILITY OF DISPUTES INVOLVING MULTIPLE AGREEMENTS

by

Two recent appellate decisions highlight the subtleties involved in determining whether multiple contracts are sufficiently interconnected and relied upon to compel arbitration in a dispute that purportedly involves a contract lacking arbitration provisions. In Robinson Brog Leinwand Green Genovese & Gluck P.C. v. John M. O’Quinn & Associates, the Second Circuit affirmed an order compelling arbitration in a case brought by one law firm against a co-counsel firm to recover attorneys’ fees and expenses for legal work in a stock fraud case. The plaintiff firm sought fees under a joint legal representation agreement, which did not contain an arbitration clause. The defendant moved to compel arbitration, contending that the related client agreement, which contained a broad arbitration clause, supported arbitration. The court agreed with the defendant and compelled arbitration, and the Second Circuit affirmed, holding that the client agreement, which detailed the attorney client relationship, set the contingency fee, and memorialized the client’s promise to pay attorney fees and expenses “function[ed] together with the other agreements” and provided the “basis for generating a potential recovery” for the plaintiff firm’s claim for attorneys’ fees and expenses. Robinson Brog Leinwand Green Genovese & Gluck P.C. v. John M. O’Quinn & Associates, Case No. 12-2915 (2d Cir. April 22, 2013).

In contrast, in Dental Associates, P.C. v. American Dental Partners of Michigan, LLC, the Sixth Circuit affirmed an order denying arbitration in a dispute involving a service agreement for administrative services entered in connection with the purchase of dental practices. The court found that the dispute was not arbitrable because the plaintiff’s claims for breach of fiduciary duty and breach of contract, and related claims arose only under the service agreement, which did not provide for arbitration of such a dispute. The court found that the related purchase agreement, which did contain relevant arbitration provisions, was not “an umbrella agreement” and did not create the relationship between the parties. The purchase agreement, the court explained, governed only a “one time purchase and transfer of assets,” whereas the service agreement defined “the ongoing business relationship between the parties,” created the fiduciary duty in question, and was capable of interpretation independently. The court also construed the service agreement to find that the parties did not intend to arbitrate the claims at issue in the case. Dental Associates, P.C. v. American Dental Partners of Michigan, LLC, Case No. 12-1008 (6th Cir. March 28, 2013).

This post written by Michael Wolgin.

See our disclaimer.

SUPREME COURT WEIGHS IN ON §10(a)(4) OF THE FAA TO RESOLVE CIRCUIT SPLIT

by

In a unanimous opinion authored by Justice Kagan, the Supreme Court concluded that an arbitrator did not “exceed [his] powers” under §10(a)(4) of the Federal Arbitration Act (“FAA”) when he found that the parties’ contract provided for class arbitration. The arbitrator interpreted an arbitration clause which provided for final and binding arbitration in lieu of civil action and determined that the clause authorized class arbitration. The party opposing class arbitration twice moved in federal court to vacate the arbitrator’s decision on the ground that he “exceed [his] powers” under § 10(a)(4) and was twice denied by the district court and the Third Circuit. The Supreme Court concluded that the limited judicial review of §10(a)(4) did not allow it to find that the arbitrator exceeded his powers because the only question for a judge under § 10(a)(4) “is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Since the arbitrator “articulate[d] a contractual basis for his decision” he did not exceed his powers. Justice Kagan distinguished the Court’s holding in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., in which the Court relied on § 10(a)(4) to vacate an arbitrator’s decision approving class proceedings. According to the Court, the distinction lies in the fact that in Stolt-Nielsen the parties stipulated that they had not reached an agreement regarding class arbitration and the arbitrator simply imposed his own views rather than interpret an agreement. Oxford Health Plans LLC v. Sutter, No. 12-135 (U.S. June 10, 2013).

This post written by Abigail Kortz.

See our disclaimer.

FEDERAL LEGISLATION REINTRODUCED AIMED AT TAXING FOREIGN REINSURANCE AFFILATE INCOME

by

H. R. 2054 was introduced on May 20, 2013, and referred to the Ways and Means Committee. The bill would disallow the deduction for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates “to prevent the avoidance of tax by insurance companies through reinsurance with non-taxed affiliates.” Co-sponsored by Representatives Neal and Pascrell, the bill would amend the Internal Revenue Code of 1986. There are a number of excepted risks, but generally, the bill states that such “income shall be subject to tax under this subchapter to the same extent and in the same manner as if such income were the income of a domestic insurance company.” The amendment to the IRC would apply to taxable years beginning after December 31, 2013. Similar bills have been introduced in the past, but did not find their way to passage. See, for example, our previous posts concerning a prior versions of this proposal in 2009 and 2008.

This post written by John Pitblado.

See our disclaimer.

SECOND CIRCUIT VACATES ORDER DENYING PETITION TO CONFIRM INTERNATIONAL ARBITRATION AWARD

by

VRG Linhas Aereas, a subsidiary of GOL Linhas Aereas, initiated an arbitration administered by the International Court of Arbitration for the International Chamber of Commerce (ICC) against MatlinPatterson, a New York private equity firm. The dispute concerned the calculation of the price for VRG in VRG’s purchase from two of MatlinPatterson’s affiliates. MattlinPatterson argued before the ICC arbitration panel that it was not a party to any arbitration agreement because it had not signed the purchase agreement—it had only signed an addendum. The arbitral tribunal disagreed, holding that MatlinPatterson was bound to arbirate and, furthermore, sided with VRG on the merits of the dispute.

VRG petitioned to confirm the award in federal district court. The district court denied the petition on the basis that, even if MatlinPatterson had agreed to arbitrate certain disputes, the arbitration agreement clearly did not extend to VRG’s purchase price. The Second Circuit vacated the district court’s order. It held the district court erred by failing to make the threshold determination whether the arbitrators or the court should decide the issue of arbitrability before interpreting the arbitration clause. The court held that, under Supreme Court precedent, if the parties clearly and unmistakably had agreed to arbitrate, then the decision as to arbitrability was properly for the arbitrators and the award should be confirmed. VRG Aeras S.A. v. Matlin Patterson Global Opportunities Partners II L.P., No. 12-593-cv (2d Cir. June 3, 2013).

This post written by Ben Seessel.

See our disclaimer.