Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

SANCTIONS AWARDED AGAINST PARTY ISSUING SUBPOENA FOR ARBITRATION

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When plaintiff, in a case submitted to arbitration, issued a third party subpoena using the court’s caption and case number, without advising the opposing party, the arbitrator, or the court, the court granted defendant's motion for sanctions, awarding him attorney's fees associated with filing the motion. The court found that the subpoena issued by plaintiff's counsel to a third party was blatantly improper because: (1) the court had fully stayed the case pending arbitration and placed the case on the suspense calendar; (2) only arbitrators, and not parties, have authority to issue subpoenas; (3) plaintiff failed to give proper notice as required by Rule 45(b)(1); and (4) the subpoena sought documents that the arbitrator had already ruled were not discoverable. The court declined to enjoin plaintiff from issuing additional subpoenas. Kenney, Becker LLP v. Kenney, Case No. 06-2975 (USDC S.D. N.Y. Mar. 6, 2008).

This post written by John Black.

SIXTH CIRCUIT VACATES ARBITRATION AWARD BASED UPON MANIFEST DISREGARD OF LAW

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This procedurally complicated dispute arises out of a franchise agreement for a Coffee Beanery cafe. As a result of disputes about the negotiation of the agreements for the café and its operation, the franchisee demanded arbitration, later withdrew the demand and filed suit in federal court, followed by the franchisor demanding arbitration and the Maryland Securities Commissioner issueing an Order to Show Cause, contending that the franchisor had violated the disclosure and anti-fraud provisions of the Maryland franchise act. An arbitration proceeded to a final award in favor of the franchisor. A request to vacate the award was denied, and an appeal followed.

The Sixth Circuit issued two opinions in this appeal. Both opinions held that because an officer of the Coffee Beanery failed to disclose a prior felony conviction for grand larceny, the agreement was in violation of the Maryland Franchise and Registration Act. As such, the court found that the arbitration award should be vacated because the arbitrator showed “a manifest disregard of the law.” The first opinion did not discuss Hall Street Associates LLC v. Mattel Inc., 28 S.Ct 1396 (2008). The amended opinion discusses Hall Street, finding that it did not clearly eliminate the manifest disregard of law doctrine. The opinion states that “[i]n light of the Supreme Court’s hesitation to reject the manifest disregard doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle.” The court found that since the franchisee was deprived of a statutorily required notification of prior felony convictions, it was fraudulently induced and not bound by the arbitration provision, and could pursue a claim to rescind the franchise agreement in its federal court lawsuit. Coffee Beanery, LTD v. WW LLC, No. 07-1830 (6th Cir. November 14, 2008).

This post written by John Black.

INSURANCE UNDERWRITER LACKED THIRD-PARTY BENEFICIARY STATUS UNDER REINSURANCE AGREEMENT; COUNTERCLAIMS DISMISSED

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TIG Insurance entered into an agreement with Titan Underwriting for Titan to act as managing general underwriter, soliciting and procuring stop-loss health and life insurance insureds for policies to be issued by TIG. Titan was also obligated to obtain reinsurance to cover the stop-loss policies issued by TIG. Chubb Re reinsured TIG, and TIG received a percentage of the ceding commission of the gross premiums ceded to the reinsurer, a portion of which Titan received as compensation. Subsequently, TIG terminated the stop-loss program and sued Titan for, among other things, breach of contract and fraud. TIG also sent a letter to state insurance commissioners requesting information that Titan refused to produce to TIG. In response, Titan counterclaimed for breach of the Chubb reinsurance agreement, tortious interference with a contract, tortious interference with its business relationships with policyholders, defamation and negligence. The trial court dismissed each of the counterclaims and the court of appeals affirmed the dismissal.

The appellate court found that Titan, which was not a party to the reinsurance agreement, could not sue in the capacity of a third-party beneficiary. Although Titan was entitled to receive a percentage of the ceding commission, the contract contained a provision disclaiming any intent to create a third-party beneficiary. The tortious interference with a contract claim failed because it was legally impossible for TIG to interfere with its own contract (the reinsurance agreement). The tortious interference with business relationships claim failed because Titan failed to establish that it had existing relationships with the policyholders, whose relationships were insurance policies with TIG. The defamation claim, which was based on TIG’s letter to the insurance commissioners, also failed since the letter was not alleged to contain statements that could be “reasonably construed to disgrace or injure Titan’s reputation in the community or subject Titan to public ridicule and contempt.” Finally, the negligence claim failed since Titan failed to establish, as it was required to do, that TIG owed Titan a duty of care. TIG Insurance Co. v. Titan Underwriting Managers, LLC, No. M2007-01977-COA-R3-CV (Tenn. Ct. App. Nov. 7, 2008).

This post written by Brian Perryman.

ARBITRATION AWARD CONFIRMATION DECISIONS

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Courts continue to confirm arbitration awards at a very high rate:

  • In this reinsurance matter, the court determined that whether to award post-judgment interest on an award, and at what rate, was for the court, not an arbitration panel, to decide, even if the issue was addressed in the reinsurance agreement., The court determined to award post-judgment interest at the statutory rate, since the contract did not clearly displace that rate, and to award attorneys’ fees as provided for in the agreement. Newmont U.S.A. Limited v. Ins. Co. of N. A., Case No. 06-1178 (USDC D. Col. Sept. 19, 2008).
  • The court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Rothstein, Case No. 08-373 (USDC S.D. N.Y. Sept. 29, 2008) confirmed an award, rejecting a contention that the award was in manifest disregard of law, without any discussion of the Hall Street Associates opinion.
  • The court confirmed an award under a collective bargaining agreement in Bemis Co., Inc. v. Graphic Communication Union Local No. 735-S, Case No. 07-1307 (USDC M.D. Pa. Sept. 15, 2008), finding that the arbitrator had reasonably interpreted the agreement with no arbitrator bias.
  • In The Householder Group v. Caughran, Case No. 07-316 (USDC E.D. Tex. Sept. 17, 2008), the court limited its consideration of a request to vacate an award to the statutory factors in the Federal Arbitration Act, pursuant to Hall Street Associates, and confirmed the award, in the face of what amounted to evidentiary and procedural challenges, some of which had not even been raised during the arbitration hearing.
  • A Magistrate Judge recommended confirmation of an award in Int’l. Brotherhood of Elec. Workers v. Firstenergy Generation Corp., Case No. 07-304 (USDC W.D. Pa. Aug. 22, 2008), on the basis that the award drew its essence from the agreement, which the arbitrator interpreted. The district judge overruled objections to the recommendation, confirming the award.
  • An award against an individual in his personal capacity, who signed an agreement in a representative capacity, was vacated in Millmaker v. Bruso, Case No. 07-3837 (USDC S.D. Tex. Oct. 9, 2008). The court noted that Hall Street Associates pout the continued viability of the manifest disregard of law doctrine in doubt, but that there had been no manifest disregard in this case. The court also upheld an award of attorneys’ fees pursuant to the terms of the contract.

This post written by Rollie Goss.

STATE LEGISLATIVE/REGULATORY UPDATE

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The following is an update on what has recently transpired in the state legislatures and insurance departments relating to reinsurance:

  • On October 2, 2008, the New Jersey Consumer Catastrophe Preparedness and Protection Act was introduced in the state Senate (Bill No. 2089). This Act would establish the New Jersey Catastrophe Fund, and cites instability in global reinsurance markets leading to an increase in reinsurance costs as one of the reasons for creating this fund.

  • The New York Insurance Department issued a circular letter declaring the department’s position and expectations on the topic of contract certainty in all reinsurance contracts. Circular Letter No. 20 (2008).

  • On the topic of assumption reinsurance, the New York Insurance Department issued an Office of General Counsel opinion stating that the insured’s consent must be obtained to effectuate a transfer of the contract and that state insurance law does not require foreign insurers’ assumption reinsurance transactions (save for life insurers) to be filed with the state insurance department. OGC Op. No. 08-07015.

  • Florida implemented a paragraph within their state statutes that permits the commissioner to allow credit for reinsurance without full collateral for transactions involving assuming insurers that do not meet statutory requirements. 69O-144.007 (effective 10/29/2008)

This post written by Dan Crisp.