Week's Best Posts

DISPUTE ARISING OUT OF SLIPS FALLS WITHIN ARBITRATION CLAUSE OF ORIGINAL REINSURANCE AGREEMENT, FEDERAL COURT RULES

August 19, 2008 by Carlton Fields

We previously posted on April 14, 2008, about a reinsurer’s successful bid to remove a lawsuit to federal court based on the plaintiff insurer’s improper joinder of the reinsurer’s agent as a defendant. Now, in a related companion case, the United States District Court for the Middle District of Florida has granted the same reinsurer’s motion to compel arbitration of the claims between the parties. The insurer sought a declaratory judgment that it was entitled to more than $10 million from the reinsurer under four reinsurance placement slips. While the parties’ original reinsurance agreement contained an arbitration provision, the slips did not. The court, therefore, characterized the dispute as whether the claims arising out of the placement slips were covered by the agreement’s arbitration provision. It held that they were. These contracts all governed the same ongoing relationship between the same parties concerning the same subject matter (viz., obligations arising out of vehicle service contracts) and for overlapping time periods. The slips merely “upgraded” the level of reinsurance coverage provided in the agreement. That the placement slips and reinsurance agreement did not expressly refer to each other was not dispositive since the “broad terms” of the arbitration provision were not limited to claims brought directly under the agreement. Northbrook Indemnity Company v. First Automotive Service Corporation, Case No. 07-683 (USDC M.D. Fla. Aug. 1, 2008).

This post written by Brian Perryman.

COURTS CONFIRM ARBITRATION AWARDS, RULING ON CLAIMS OF MANIFEST DISREGARD OF LAW

August 18, 2008 by Carlton Fields

Four recent opinions confirmed arbitration awards, in part rejecting claims that the award was in manifest disregard of law. In three of the cases, there was no discussion of the impact of the Supreme Court’s Hall Street Associates opinion on the manifest disregard of law doctrine.

A district court has confirmed an arbitration award which adjudicated claims relating to underwriting fees allegedly owed in connection with a municipal bond transaction, holding that the arbitrators: (1) properly found an oral agreement subject to arbitration; (2) reasonably concluded that the arbitration was commenced timely; (3) afforded the parties a fundamentally fair hearing by considering all evidence offered; and (4) did not manifestly disregard the law. The court did not discuss Hall Street Associates. Finally, the court found that an award that was not a reasoned award was not arbitrary and capricious. Grigsby & Associates, Inc. v. M Securities Investment, Inc., Case No. 06-23-35 (USDC S.D. Fla. July 30, 2008).

In an action concerning the collection on a promissory note, a court has confirmed an award over claims that it was in manifest disregard of law, except to vacate it to the extent that the award provided for pre-judgment interest, which was clearly contrary to “controlling Tennessee law.” There is no discussion of Hall Street Associates. Hicks v. The Cadle Co., Case No. 04-2616 (USDC D. Col. July 23, 2008).

In Remote Solution Co. v. FGH Liquidating Corp., Case No. 06-4 (USDC D. Del. July 31, 2008), the court confirmed an award, finding no manifest disregard of law (without discussing Hall Street Associates), and that the arbitrator did not exceed his authority by awarding attorneys’ fees pursuant to a contractual provision. The agreement called for a reasoned award, and the arbitrator provided a very brief one paragraph “tentative ruling,” with an offer to provide a more detailed award if requested. The court found this to be sufficient, in part because no one requested a more detailed award.

In Supreme Oil Co. v. Abondolo, Case No. 07-6479 (USDC S.D.N.Y. July 31, 2008), an arbitration of ERISA and Labor-Management Relations Act (“LMRA”) claims, the court held that the manifest disregard of law doctrine was not a basis to vacate an award under the FAA after Hall Street Associates, but that it was unclear whether the doctrine survived with respect to claims under the LMRA. The court declined to reach that issue, however, based upon its finding that the facts before it did not demonstrate manifest disregard of law.

This post written by Rollie Goss.

SEC FILES AND SETTLES ANOTHER FINITE REINSURANCE ENFORCEMENT ACTION, THIS TIME WITH pRUDENTIAL FINANCIAL

August 12, 2008 by Carlton Fields

The Securities and Exchange Commission has filed a lawsuit against Prudential Financial, Inc., alleging violations of the financial reporting, books-and-records and internal control provisions of the Securities Exchange Act of 1934, based upon its former property and casualty subsidiaries (“Prupac”) entering into so-called finite reinsurance contracts with General Reinsurance Corporation. The SEC contends that the reinsurance agreements “had no economic substance and no purpose other than to build up and then draw down on an off-balance sheet asset, or 'bank,' that Gen Re held for Prupac.” Securities and Exchange Commission v. Prudential Financial, Inc., Case No. 08-3916 (USDC N. N.J. Aug. 6, 2008). The SEC reports that it has reached a settlement with Prudential, which has consented to a permanent injunction against further violations of certain sections of the Exchange Act and associated Rules. This is similar to an enforcement action filed by the SEC against Rennaisance Re (see November 6, 2006 blog post).

This post written by Rollie Goss.

FLORIDA BUYS CAT BOND PUT OPTION FROM BERKSHIRE HATHAWAY

August 11, 2008 by Carlton Fields

The Florida Hurricane Catastrophe Fund has agreed to a creative way to fund potential hurricane losses, and create liquidity, agreeing to pay Berkshire Hathaway $244 million for its agreement to buy $4 billion in 30-year tax-exempt bonds if the Cat Fund suffers insured hurricane losses in excess of $25 billion this year. Press reports state that the Cat Fund is looking to this mechanism to enable it to act quickly to reimburse insurers for incurred losses.

This post written by Rollie Goss.

NEW HAMPSHIRE SUPREME COURT CLEARS THE WAY FOR SETOFF OF REINSURANCE CLAIMS SUBJECT TO A “PUT-BACK” PROVISION

August 5, 2008 by Carlton Fields

The Supreme Court of New Hampshire has reversed a trial court’s ruling denying a reinsurer’s (CIC) asserted setoff of reinsurance claims in the liquidation of the Home Insurance Company (Home). CIC reinsured Home, remitting money to Home under a claims protocol that provided for a right of setoff controlled by a New Hampshire statute. Separately, CIC also reinsured certain affiliated insurance companies that had ceded a participation in their liabilities under certain policies in exchange for, among other things, an assignment of all rights to reinsurance recoverables relating to those policies. However, this assignment was qualified by a “put-back” provision that required CIC to return to its affiliated cedents any reinsurance recoverables deemed by CIC to be uncollectible, together with the rights to any related collateral. Among the reinsurance claims assigned to CIC were reinsurance obligations of Home to the affiliated cedents, i.e., reinsurance recoverables. Accordingly, pursuant to the claims protocol between CIC and Home, CIC sought to setoff amounts payable by it to Home against these recoverables.

Home’s liquidator objected to the attempted setoff, arguing that the New Hampshire statute referenced in the claims protocol required that setoff debts be “mutual,” and that the put-back provision destroyed mutuality by rendering the assignment conditional, not absolute. The liquidator contended that the provision made the affiliated cedents, not CIC, ultimately liable for the reinsurance. A referee ruled in favor of the liquidator, and the trial court sustained that ruling, reasoning that the mutuality requirement was not satisfied because the terms of the assignment required the return of uncollectible reinsurance, and so the assignment was conditional. On appeal, the New Hampshire Supreme Court reversed, concluding the assignment was, in fact, absolute, the put-back provision notwithstanding. The Supreme Court found that, although the provision allocated risk to the affiliated cedents, this “retained interest” was not fatal. Importantly, CIC, not the affiliated cedents, controlled implementation of the provision; thus, “the provision did not constitute a prohibited means of control over the reinsurance recoverables or ‘any form of revocation’ in the hands of the affiliated cedents.” In the Matter of the Liquidation of the Home Insurance Company, Case No. 2007-794 (July 25, 2008).

This post written by Brian Perryman.