Week's Best Posts

COURT FINDS CLAIMS RELATING TO REINSURANCE PLACEMENT BARRED BY STATUTE OF LIMITATION

July 14, 2008 by Carlton Fields

Gerling Global Reinsurance alleged that it was “lured” to provide reinsurance through material misrepresentations and omissions and instituted arbitration against Fremont Indemnity Company. After reaching a settlement with Fremont Indemnity, Gerling sued Fremont General Corporation, Fremont Compensation Insurance Group and Louis Rampino, alleging that they had participated in a scheme to increase the premium revenue of Fremont Indemnity, seeking to recover the balance of its losses not recovered in the settlement with Fremont Indemnity. Gerling contended that the running of the statute of limitations was tolled because the defendants were alter egos of Fremont Indemnity. Both the district court and the Ninth Circuit Court of Appeals disagreed, finding that the causes of action against all of the parties accrued at the same time, and that there was no tolling of the running of the statutes of limitation on the claims against Fremont General Corporation, Fremont Compensation Insurance Group and Louis Rampino during the arbitration with Fremont Indemnity. Gerling Global Reinsurance Corporation of America v. Fremont General Corp., No. 07-55198 (USCA 9th Cir. June 24, 2008).

This post written by Rollie Goss.

COURT COMPELS PRODUCTION OF ACCOUNTING AND RESERVE-RELATED DOCUMENTS TO HELP INTERPRET REINSURANCE CONTRACTS

July 8, 2008 by Carlton Fields

On November 19, 2007, we reported on the denial of a motion to dismiss an action seeking to bar the arbitration of disputes under 43 reinsurance contracts. A district judge has now compelled the production of documents in five categories, finding them relevant to both the claims alleged by Midwest Employers Casualty Company (“MECC”) and the defenses of Legion Insurance Company (“Legion”). The dispute is whether the reinsurance contracts provide for coverage on a “risk attaching” basis (Legion’s contention) or a “loss occurring” basis (MECC’s contention). The court compelled Legion to produce:

Contracts evidencing reinsurance purchased by Legion for program business on a “loss occurring” basis;

Documents evidencing the attachment basis of the reinsurance that Legion purchased from MECC;

Documents showing Legion’s booking of or accounting for reinsurance purchased from MECC;

Documents showing actuarial support for Legion’s last Schedule F statutory filing relating to its projection of MECC’s ultimate liability and any subsequent projection of MECC’s ultimate liability; and

Documents showing case reserves and reinsurance receivables by claim, program and/or year relating to Legion’s policies or accounts reinsured by MECC or that otherwise show reinsurance payments that Legion estimated or expected to receive from MECC.

Further detail regarding the dispute is set forth in the memoranda in support of and in opposition to the Motion to Compel. Midwest Employers Casualty Company v. Legion Insurance Company, Case No. 07-870 (USDC E.D. Mo. June 4, 2008).

This post written by Rollie Goss.

FIRST CIRCUIT PANEL VACATES ARBITRATION AWARD AS BEING IN MANIFEST DISREGARD OF LAW, WITHOUT MENTIONING HALL STREET ASSOCIATES

July 7, 2008 by Carlton Fields

In an appeal of an arbitration award rendered pursuant to the rules of the National Association of Securities Dealers (“NASD”), the First Circuit has reversed the confirmation of an arbitration award on the basis that the award was in manifest disregard of law. The arbitrators had dismissed certain claims, with prejudice. The Panel initially justified its decision as being based upon its consideration of the merits of the claims, but when the losing party reminded the Panel that the merits of the claims had not been briefed, nor had the Panel received any evidence pertaining to the claims, the Panel announced that the dismissal was a discovery sanction pursuant to NASD Code Rule 10305, based upon the failure to produce documents in accordance with an Order to do so. The First Circuit found that the NASD rules required the imposition of lesser sanctions in an attempt to achieve compliance “before the ultimate sanction of dismissal is imposed. The Panel ignored this unmistakable directive.” The Court clearly was troubled by the severity of the sanction.

This opinion does not mention the Supreme Court’s decision in Hall Street Associates v. Mattel, which another panel of the First Circuit has read as eliminating the doctrine of manifest disregard of law as a basis for vacating an arbitration award. See the June 30, 2008 post discussing Ramos-Santiago v. UPS, No. 07-1024 (1st Cir. April 24, 2008), which stated in dicta that “manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]”. This is developing into an interesting area of the law of arbitration. Kashner Davidson Securities Corp. v. Mscisz, No. 07-1231 (1st Cir. June 27, 2008).

This post written by Rollie Goss.

REINSURER BOUND TO ARBITRATE DESPITE ITS FAILURE TO SIGN THE CONTRACT CONTAINING THE ARBITRATION PROVISION

July 1, 2008 by Carlton Fields

Prior to 1995, Fencourt Reinsurance Company was a wholly owned subsidiary of ITT Corp., and provided reinsurance to Century Indemnity Company, which insured ITT. Fencourt alleged that ITT promised to hold it harmless for any net losses resulting from the reinsurance arrangement, but did not produce any written agreement to that effect. In 1995, ITT reorganized, splitting into three unaffiliated public companies. This split was accomplished through a Distribution Agreement (“DA”), which Fencourt did not sign, and which contained a broad arbitration provision. Century suffered asbestos-related losses, and demanded $85.5 million from Fencourt under their reinsurance agreement. Fencourt sought indemnification from what it alleged was the successor to the indemnification promisor. Century and Fencourt commenced arbitration of their dispute, and Fencourt and the former ITT-related entities commenced a separate arbitration. Fencourt sued ITT to enforce the indemnification promise.

ITT contended that the arbitration provision in the DA covered the dispute, even though Fencourt was not a signatory to that agreement. The district court agreed with ITT and stayed the case pending the result of the already commenced Fencourt-ITT arbitration. There were three bases for the ruling: (1) the DA plainly covered the dispute, and as a wholly owned subsidiary of a party to the DA, Fencourt was bound to arbitrate; (2) Fencourt was equitably estopped from asserting that its lack of signature precluded arbitration since despite its status as a non-party to the DA, it nevertheless took advantage of certain of its provisions; and (3) Fencourt was an intended third-party beneficiary of the DA. This opinion contains a good discussion of these various theories. Fencourt Reinsurance Company, Ltd. V. ITT Industries, Inc., Case No. 06-4786 (USDC E.D. Pa. June 20, 2008).

This post written by Rollie Goss.

IS THE MANIFEST DISREGARD OF LAW DOCTRINE DEAD IN THE FIRST CIRCUIT?

June 30, 2008 by Carlton Fields

In an April 28, 2008 Special Focus posting and related article, we raised the question as to whether the manifest disregard of law doctrine would survive the Supreme Court’s decision in Hall Street Associates v. Mattel. This issue came up in a recent district court opinion. ALS & Associates sought the vacation of an arbitration award on three bases: (1) the arbitrator’s failure to postpone the proceedings; (2) the arbitrator’s evident partiality; and (3) the arbitrator’s manifest disregard of law. The district court confirmed the award. The court found that there was no evidence that the failure to postpone the proceedings to allow ALS to pursue documents from a third party deprived it of a fair hearing. The court noted that proceedings to enforce a subpoena to obtain 12 documents had been ongoing for two years, with two trips to the First Circuit, and that there was no showing that the documents were critical to ALS’s case. The court also rejected the contention that the arbitrator's very attenuated “connection” with one of the law firms resulted in any appearance of impropriety, much less evident partiality.

The interesting part of this opinion is the holding that the First Circuit has ruled that the manifest disregard of law doctrine is not a valid basis for vacating or modifying an arbitration award after Hall Street Associates. In so ruling, the district court relied upon the First Circuit’s decision in Ramos-Santiago v. UPS, No. 07-1024 (1st Cir. April 24, 2008), which stated that “manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]”. That statement in Ramos-Santiago, however, is dicta, since the Court stated later in the footnote in which the statement appears that it was nevertheless not reaching that issue in deciding that case. However, in UMass Memorial Medical Center, Inc. v. United Food and Commercial Worker’s Union, No. 07-2527 (1st Cir. May 15, 2008), the First Circuit stated that courts still retain “inherent powers outside” the FAA to vacate arbitral awards, including situations in which the arbitrator acts in disregard of law. It seems that there is some dissention in the First Circuit on this issue. Stay tuned for further developments. ALS & Associates, Inc. v. AGM Marine Constructors, Inc., Case No. 06-10088 (USDC D. Mass. June 2, 2008).

This post written by Rollie Goss.