Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

FEDERAL COURT DENIES REINSURER’S POST-TRIAL MOTIONS IN LONG-RUNNING DISPUTE WHICH RESULTED IN A VERDICT IN ITS CEDENT’S FAVOR

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A federal district court has denied both a motion for judgment as a matter of law or for a new trial and a motion to correct the interest calculation filed by Fireman’s Fund Insurance Company after a jury award of $35 million in damages and $29 million in prejudgment interest against Fireman’s Fund based on its reinsurance obligations to Utica Mutual Insurance Company.

Fireman’s Fund motion argued that there was insufficient evidence that it had breached the relevant reinsurance contracts with Utica because: (1) the facultative certificates at issue did not cover the underlying loss; (2) the follow the settlements doctrine did not apply; and (3) Utica’s late notice either economically prejudiced Fireman’s Fund or was the result of gross negligence or recklessness by Utica.  The court began by finding that the follow the settlements doctrine applied to the facts of the dispute unless Fireman’s Fund could show that Utica’s settlement decisions, by which it allocated portions of a settlement to certain reinsured policies, were objectively unreasonable.  The court found that, based on the evidence presented at trial, a reasonable jury could have concluded that Utica’ settlement decisions were objectively reasonable, and therefore that the follow the settlements doctrine obligated Fireman’s Fund to indemnify Utica for the amounts sought under the certificates.

Regarding Fireman’s Fund’s late notice defense, the court found that a reasonable jury could have concluded that Fireman’s Fund failed to prove that it suffered tangible economic injury from any late notice on Utica’s part with respect to the claims for which it sought reinsurance coverage. The court also found that evidence Utica presented of its routine procedures related to its search for applicable reinsurance and reporting claims to reinsurers was sufficient for the jury to conclude that Utica’s late notice to Fireman’s fund in this instance was not the result of gross negligence or recklessness.  Because the court found the jury’s decisions on these issues to be reasonable and not against the weight of the evidence, the court refused to grant Fireman’s Fund’s motion for either judgment as a matter of law or a new trial.

As regards Fireman’s Fund’s motion to correct the interest calculation, it argued that this interest was based on the faulty assumption that the entire $35 million that the jury found Fireman’s Fund owed Utica came due on September 22, 2008, when Utica first provided Fireman’s Fund with a claims narrative and billings. The court found the motion to be procedurally improper, as the revision requested “would be substantive rather than clerical,” as it required findings regarding each of the multiple days on which Fireman’s Fund’s argued its obligation to pay Utica accrued, findings that would contradict the jury’s finding that Utica provided Fireman’s Fund’s with sufficient proof of loss as of September 22, 2008.  The court found that such a reconsideration of the jury’s factual findings was beyond its authority under Rule 60, and it denied the motion.

Utica Mutual Insurance Company v. Fireman’s Fund Insurance Company, Case No. 6:09-CV-853 (N.D.N.Y. Feb. 28, 2018).

This post written by Jason Brost.
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REINSURER PREVAILS IN DISMISSING BREACH OF CONTRACT, BAD FAITH CLAIMS ASSERTED BY UNDERLYING POLICYHOLDER

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A federal district court in Pennsylvania recently dismissed all claims asserted by an insured against a reinsurer in a coverage dispute over an explosion at plaintiff Three Rivers Hydroponics (“Three Rivers”)’s commercial greenhouse. Three Rivers’s greenhouse was insured by Florists’ Mutual Insurance Co. (“Florists”), which in turn reinsured that policy through Hartford Steam Boiler Inspection and Insurance Company (“HSB”). Three Rivers’s amended complaint alleged breach of contract, bad faith, and civil conspiracy claims against both Florists and HSB. In this opinion the court granted defendants’ motion to dismiss aimed at removing HSB from the lawsuit and dismissing the civil conspiracy claim against both.

First, the court dismissed the breach of contract claim against HSB because there was no privity of contract between it and Three Rivers and Three Rivers was not a third-party beneficiary of the reinsurance agreement. Simply put, Three Rivers was not a party to the reinsurance agreement between HSB and Florists and HSB was not a party to the insurance policy between Three Rivers and Florists; nor had HSB assumed Florists’ obligations under the insurance policy. Additionally, Three Rivers was not a third-party beneficiary of the reinsurance agreement because the parties did not express an intention to benefit Three Rivers anywhere in the relevant contract and there were no compelling circumstances to grant third-party beneficiary status. In particular, the court rejected Three Rivers’s argument the implied covenant of good faith evidences intent to benefit third-parties because allowing it would mean that every reinsurance agreement necessarily intends to benefit individual underlying policyholders, an untenable result under Pennsylvania law.

Second, the court dismissed the bad faith claim against HSB after finding it was not an “insurer” under Pennsylvania’s bad faith statute. HSB was not identified as an insurer in policy documents, was not a party to the policy, and did not act as an insurer. Furthermore, Pennsylvania courts have held that parties lacking contractual relationships with the insured (such as reinsurers) cannot be sued under the bad faith statute.

Third, the court dismissed the civil conspiracy claim against both defendants. The court side-stepped deciding plaintiff’s argument that bad faith can be the predicate tort for a civil conspiracy claim by holding that the conspiracy claim failed to allege the required malice element where it could not allege defendants acted without a business motive.

Finally, the court partially granted Florists’ motion to strike. It struck the complaint’s introduction because it technically violated the requirement for numbered paragraphs, but denied the requested strikes otherwise because the procedural device was not intended to address the merits and defendants failed to satisfy the heavy burden required for a motion to strike.

Three Rivers Hydroponics, LLC v. Florists’ Mut. Ins. Co., Case No. 15-809 (W.D. Pa. Feb. 8, 2018).

This post written by Thaddeus Ewald .

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NINTH CIRCUIT REAFFIRMS THAT WASHINGTON STATE’S PROHIBITION OF ARBITRATION CLAUSES IN INSURANCE CONTRACTS REVERSE-PREEMPTS FAA

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This case concerned a coverage dispute between Technical Security Integration Inc. and its insurer, Philadelphia Indemnity. The District Court for the District of Oregon denied Philadelphia Indemnity’s motion to compel arbitration, which prompted this interlocutory appeal. Because Washington Code § 48.18.200 prohibits mandatory arbitration agreements in insurance contracts, while Oregon lacks any analogous provision, the issue on appeal was whether the district court erred when it applied Washington law, rather than Oregon law, to the dispute. Reviewing de novo and applying Oregon’s multi-factor test for determining “the most appropriate” law in the absence of an effective choice of law provision, the Ninth Circuit affirmed that Washington law applied, and therefore, it affirmed the denial of Philadelphia Indemnity’s motion to compel arbitration. The court found that the district court properly followed Washington Supreme Court precedent interpreting Washington’s statute as prohibiting mandatory arbitration clauses in insurance contracts, and moreover, that the statute “reverse-preempts” the Federal Arbitration Act, rather than being preempted by it.  Tech. Sec. Integration, Inc. v. Philadelphia Indem. Ins. Co., No. 15-35683 (9th Cir. Feb. 1, 2018).

This post written by Gail Jankowski.
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PARTICIPATION IN LITIGATION TO AVOID A DEFAULT JUDGMENT DOES NOT WAIVE A PARTY’S RIGHT TO COMPEL ARBITRATION

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An employer did not waive its right to compel arbitration under an employment agreement by seeking to set aside a default in an employment discrimination suit brought against it by its employee. Due to an “administrative oversight,” the employer’s counsel did not become aware it had been served with a complaint until after a default had been entered. The employer was successful in its effort to set aside the default, however, the employee argued that the employer’s participation in the litigation resulted in a waiver of its right to compel arbitration.

The Eleventh Circuit disagreed. A two-part test controls whether a party has waived its right to arbitration. The first prong inquires whether, under the totality of the circumstances, the party has “acted inconsistently with the arbitration right.” This occurs when the party “substantially invokes the litigation machinery prior to demanding arbitration.” The second prong asks whether the invocation of litigation has prejudiced the other party.

The employer’s participation in the litigation was not substantial enough to be considered inconsistent with an intent to arbitrate. In so holding, the court noted that moving to set aside the default was the only procedure the employer could have used to permit it to seek arbitration of the employee’s claims. Because the employer’s participation in the litigation failed to satisfy the first prong of the two-part test, the employer did not waive and was permitted to enforce its right to compel arbitration.  Sherrard v. Macy’s Sys. and Tech. Inc., Case No. 17-11766 (11th Cir. Feb. 5, 2018).

This post written by Benjamin E. Stearns.
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COURT ENFORCES ARBITRATION AWARD, FINDS REINSURER MUST PAY SETTLEMENT BETWEEN RETROCESSIONAIRE AND POLICYHOLDER

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Granting a motion to enforce an arbitration award, the U.S. District Court for the Southern District of New York has held that a reinsurer is liable for a $5 million settlement entered into between a policyholder and the reinsurer’s retrocessionaire.

The action arises out of insurance policies issued to Companhia Siderurgica Nacional S.A. (“CSN”), which were reinsured by defendant, IRB Brasil Resseguros S.A. (“IRB”), and retroceded to plaintiff, National Indemnity Company (“NICO”). In settlement of an action between CSN and IRB arising out of a large loss suffered by CSN, the two executed an agreement in which they agreed that IRB had not retroceded CSN-related risks to NICO, and that IRB would cooperate in CSN’s effort to recoup a $9 million Premium that CSN had paid to NICO for the retrocessional coverage (the “Premium”). In a related arbitration between NICO and IRB, however, the panel subsequently issued an award holding that NICO was entitled to retain the Premium, and that IRB must hold harmless and indemnify NICO against CSN’s claim for repayment thereof (the “Award”). The Award was subsequently confirmed by the S.D.N.Y. and affirmed by the Second Circuit. While confirmation of the Award was pending, CSN filed an action against NICO in New Jersey District Court regarding liability for the Premium. CSN and NICO later settled that action for $5 million and agreed that, instead of NICO paying the $5 million from its own funds, NICO would seek a judgment against IRB based on its hold harmless and indemnity rights against IRB under the Award. The instant action followed.

On NICO’s motion to enforce the Award, IRB argued that the $5 million CSN-NICO settlement was not subject to the Award because it did not require NICO to pay CSN $5 million from its own funds. IRB argued that, under New York law, an insurer’s obligation to indemnify extends only to the damages the insured is legally obligated to pay. But the court rejected the argument, reasoning that IRB’s obligation to pay any amount NICO owed to CSN was embodied in a court-ordered judgment predating the CSN-NICO settlement. As such, it was irrelevant that the CSN-NICO settlement released NICO from any liability for the $5 million settlement. In addition, the court rejected IRB’s argument that the CSN-NICO settlement was unreasonable or was reached in bad faith, emphasizing that the $5 million was $4 million less than the $9 million Premium that IRB was actually required to indemnify.

National Indemnity Co. v. IRB Brasil Resseguros S.A., No. 15-3975 (USDC S.D.N.Y. Jan. 23, 2008)

This post written by Alex Silverman.

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