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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

SIXTH CIRCUIT DISCUSSES WHETHER COURTS OR ARBITRATORS SHOULD DETERMINE CERTAIN ISSUES

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In 2005, Chronimed purchased DiCello’s retail pharmacy business. The purchase agreement contained an additional purchase price payment based on the business’ 2006 earnings before interest, taxes, depreciation and amortization. The agreement provided that if the parties disagreed as to the calculation, accounting firm KPMG would arbitrate the dispute. A dispute arose as to the calculation, and DiCello invoked the arbitration clause, alleging that the business underperformed due to Chronimed’s management practices. Chronimed disputed DiCello’s position, contending that DiCello had failed to contest the calculation in sufficient detail to invoke the arbitration clause. DiCello sued, and Chronimed moved to compel arbitration. The district court held that Chronimed had waived the right to arbitrate by its pre-litigation conduct.

On appeal, the issues revolved around whether the court or the arbitrator should determine certain issues, with guidance drawn from the Supreme Court's decision of Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002). Not all courts have agreed as to the implementation of Howsam. The Sixth Circuit affirmed the holding that the court, rather than the arbitrator, should determine whether the dispute was within the arbitration clause, and agreed that the language of the broad arbitration clause encompassed the dispute. The Court further held that whether Chronimed failed to satisfy a contractual precondition to arbitration relating to the required documentation of the tax calculation was an issue for the arbitrator to decide. Finally, the Court held that the issue of whether Chronimed’s pre-litigation conduct waived the right to arbitrate was an issue for the court, not the arbitrator, and that the conduct here was not so “completely inconsistent” with the later arbitration demand as to constitute a waiver. The Court found that Chronimed’s conduct could be interpreted as a disagreement with DiCello’s position rather than a repudiation of arbitration as a process for resolving the dispute. JPD, Inc., et al. v. Chronimed Holdings, Inc., No. 07-4427 (6th Cir. Aug. 22 2008).

This post written by Dan Crisp.

COURT TO REINSURER: “FOLLOW THE FORTUNES”

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“The Corporation shall reimburse the Reinsured or its legal representative promptly for loss against which indemnity is herein provided.” Is this a “follow the fortunes” clause in a reinsurance treaty? Undoubtedly, a federal district court answered on Mass Mutual’s (the cedent) motion for summary judgment against its reinsurer, Employers Reinsurance Corporation. “Nowhere in the Treaty does it state that ERC may question claims once those losses are incurred and paid.” The fact that ERC had a right of joint participation in adjusting the claims did not undermine this conclusion. Mass Mutual retained the right to be the final decision maker in all determinations. The court found additional support in the parties’ thirteen-year course of conduct, inasmuch as during most of that period ERC “consistently and continually” paid out claims without questioning Mass Mutual’s handling of those claims. The court found for Mass Mutual again on the question of whether ERC breached the treaty’s offset provision by withholding disputed reimbursements to Mass Mutual. The provision stated that the parties could offset loss or claim expenses due from one to the other; disputed sums did not count.

As a consolation prize, the court dismissed Mass Mutual’s counterclaim against ERC for violations of the Connecticut Unfair Trade Practices Act: “A simple breach of contract claim is not in and of itself a violation of CUTPA.” The court previously had dismissed other claims that Mass Mutual had asserted, including a claim for breach of fiduciary duty. (See April 24, 2007 post to this blog.) The court essentially brought the dispute down to a simple breach of contract dispute, which was determined based upon the follow the fortunes doctrine. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Company , Case No. 06-0188 (USDC W.D. Mo. Aug. 19, 2008).

This post written by Brian Perryman.

SPECIAL FOCUS: NAIC, FLORIDA AND NEW YORK REINSURANCE COLLATERAL PROPOSAL UPDATE

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The NAIC's Reinsurance Regulatory Modernization Framework is now the subject of an redlined exposure draft, with a short comment period open until September 5, 2008. Florida and New York also have reinsurance collateral-related proposals pending. Carlton Fields partner Anthony Cicchetti summarizes these proposals in a Special Focus feature. Read the article.

This post written by Rollie Goss.

COURT FINDS REINSURANCE INFORMATION RELEVANT TO STATUTORY BAD FAITH CLAIMS; DEFENDANT COMPELLED TO PRODUCE

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Plaintiff, Cameron Parish School Board (“the School Board”) filed a complaint against RSUI Indemnity Company for breach of contract for failure to timely and properly adjust covered losses, and for bad faith in violation of several Louisiana statutes. The School Board filed three separate motions to compel against the defendant, one of which was a motion to compel the production of reinsurance information. Following in camera review of certain documents withheld by the defendant on privilege grounds, as well as a review of three separate privilege logs, the court concluded that even though the reinsurance information was not relevant to plaintiff’s breach of contract claim, the information might be probative of bad faith, and therefore relevant to plaintiffs’ statutory claims. As such, the court ordered the Defendant to produce items listed on their Underwriting Log. Cameron Parish School Bd. v. RSUI Indem. Co., Case No. 2:06-cv-1970 (W.D.La. July 23, 2008).

This post written by Lynn Hawkins.

ILLINOIS APPELLATE COURT AFFIRMS STAY OF STATE COURT DECLARATORY JUDGMENT ACTION PENDING INTERNATIONAL ARBITRATION

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Boeing insured satellites it manufactured partly through a Bermuda captive, which reinsured 100% of the risks, partly through Lloyds’ syndicates, which syndicates also assumed part of the risk as direct insurers. When a satellite sold to a Middle Eastern company failed, an arbitration was commenced under the auspices of the International Chamber of Commerce in Paris, France, with the governing law being the civil laws of Abu Dhabi, United Arab Emirates. The rules of that proceeding provided for limited discovery. The Lloyds’ syndicates filed a declaratory judgment action against Boeing in Illinois state court, seeking a declaration of their obligations as both direct insurer and reinsurer. The court stayed the lawsuit pending the outcome of the arbitration. The court of appeals affirmed, finding that the action was premature prior to the determination of liability in the arbitration, and that it was an improper attempt to obtain discovery for use in the arbitration. The dual roles of some of the parties in the two proceedings played an important role in the decision. This opinion presents a very interesting analysis of the interface between these two proceedings. Certain Underwriters at Lloyds’ v. Boeing, No. 1-07-1667 (Ill.Ct.App. Je. 30, 2008).

This post written by Rollie Goss.