Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

THIRD CIRCUIT CONFIRMS THAT FEDERAL ARBITRATION ACT PREEMPTS STATE LAW DEEMING CLASS ARBITRATION WAIVERS UNCONSCIONABLE

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The Third Circuit reversed a prior decision and held that, under the Supreme Court’s ruling in AT&T Mobility v. Concepcion, a New Jersey law providing that class arbitration waivers in consumer adhesion contracts are unconscionable is preempted by the Federal Arbitration Act. As we reported earlier on June 1, 2010, the Third Circuit had previously vacated a trial court order compelling individual arbitration holding that, under governing New Jersey law, provisions in adhesion contracts precluding class arbitrations are unconscionable and thus unenforceable. The defendant, Cellco Partnership, d/b/a Verizon Wireless, successfully petitioned for a writ of certiorari to the Supreme Court, which vacated the Third Circuit’s decision after deciding in Concepcion that a similar California law was preempted by the FAA. On remand, the Third Circuit reversed its prior decision and affirmed the trial court’s order compelling individual arbitration of the plaintiffs’ claims. Litman v. Cellco Partnership, No. 08-4103 (3d Cir. June 6, 2011).

This post written by Ben Seessel.

COURT OKAYS “BATHTUB” ALLOCATION METHOD UNDER “FOLLOW THE FORTUNES” DOCTRINE

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Lexington Insurance Company participated in a tower of coverage for Dresser Industries, a manufacturer of asbestos-containing products that was forced into bankruptcy by the multi-billion dollar exposure it faced arising from product liability litigation against it. In the context of the bankruptcy proceeding, Dresser commenced an insurance coverage action against its various liability insurers. The several insurers named as defendants, including Lexington, ultimately participated in a global settlement, at a figure determined by an outside consultant hired by the group of settling insurers. For its part, Lexington utilized its own “bathtub” method of allocation to determine which of its policies would contribute to its share of the settlement, and in what amounts. By this method, each of its exposed policies were layered (as though in a bathtub) according to their layers of coverage, and those that were “underwater” given the settlement structure were tendered to their limits. Based on this analysis, Lexington paid out the limits under two particular $10,000,000 policies. As a participating reinsurer on these two policies, Clearwater denied Lexington’s claim under the theory that Lexington’s use of the “bathtub” methodology was contrary to the recommendations of the outside consultant that determined the ultimate global settlement. Lexington sued and the parties cross-moved for summary judgment on the issue. The Court found in favor of Lexington under the “follow the fortunes” doctrine, noting that there was nothing inherently unreasonable about Lexington’s chosen allocation method. Lexington Ins. Co. v. Clearwater Ins. Co., No. 09-0234C (Mass. Super. Ct. July 26, 2011).

This post written by John Pitblado.

FINANCIAL STABILITY OVERSIGHT COUNCIL ISSUES FIRST ANNUAL REPORT

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The Financial Stability Oversight Council (“FSOC”) has issued its first annual report. Established by the Dodd-Frank Act, the purposes of the FSOC are: (1) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (2) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure; and (3) to respond to emerging threats to the stability of the U.S. financial system. The initial annual report focuses on the establishment of the FSOC and its initial activities to restore stability and strength of the U.S. financial markets, especially in the areas of capital levels, leverage, liquidity, resolution plans, volatility, swaps, the mortgage market and systemic risk. The Report also identifies the increased role of foreign banks in the U.S. marketplace as a risk point, since such institutions are not subject to the same regulation as are U.S.-based institutions. There is concern that foreign banks are subject to less strict capital and other financial standards than are U.S. banks, but that the pending Basel III reforms will help to address such issues.

The Report does not mention reinsurance, and contains only passing references to the insurance market, stating that “[t]he traditional U.S. insurance market largely functioned without disruption in payments to consumers throughout the financial crisis and the recovery.” The Report does note the role of financial guaranty and mortgage insurance in markets and products which experienced stress in recent times. The insurance industry is discussed at pages 61-62, 73 and 140-41 of the Report, which notes that insurance companies generally have strengthened their balance sheets and improved their investment portfolios.

On July 26, 2011, the Senate Committee on Banking, Housing & Urban Affairs held a nomination hearing which included Roy Woodall, the President’s insurance appointee to the FSOC, as well as nominees for the chair of the FDIC and the Comptroller of the Currency. The vast majority of the questions during the hearing were directed to the FDIC and OCC nominees, with no critical questioning of Mr. Woodall. As of the writing of this post, the Committee has not voted on those nominations.

This post written by Rollie Goss.

ARBITRATOR’S UNDISCLOSED RELATIONSHIP WITH COUNSEL RESULTS IN VACATION OF AWARD

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Recently, a Texas Court of Appeals issued a ruling on an appeal from an order confirming a $22 million arbitration award in a partnership dispute. The appellants argued on appeal that their rights were prejudiced by the evident partiality of the arbitrator because the arbitrator failed to disclose his personal and professional relationship with appellee’s counsel. The court, assessing all contacts between the individuals, found this argument persuasive, noting that the standard for disclosing such relationships reflects the determination that courts should not involve themselves in evaluations of partiality that are better left to the parties. The court found that the relationship between the arbitrator (a US Magistrate Judge) and the appellee’s counsel (a former US District Court clerk) stretched for years and that the social relationship had business overtones. Accordingly, the court concluded that the arbitrator’s duty of disclosure had been triggered and the failure to disclose the relationship constituted evident partiality. The court reversed the confirmation award and judgment, vacated the award, and remanded for further proceedings. Karlseng v. Cooke, No. 05-09-01002 (Tex. Ct. App. June 28, 2011).

This post written by John Black.

UK FSA ASSESSES WILLIS LIMITED LARGEST BRIBERY FINE EVER

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The UK Financial Services Authority handed down its largest ever fine relating to bribery in late July. The FSA issued a final notice fining Willis Limited £6.895 for failures in its anti-bribery and corruption systems and controls, concluding that Willis’ systems allowed for an unacceptable level of risk that overseas third party payments could be used for corrupt purposes. Over the course of 4 years, Willis made a series of payments to overseas third parties to assist in winning business from overseas clients. The FSA, however, also concluded that the misconduct on the part of Willis was not deliberate or reckless. Willis was given 14 days from the issuance of the penalty to remit payment. FINANCIAL SERVICES AUTHORITY, FSA/PN/066/2011 (U.K. July 21, 2011).

This post written by John Black.