Week's Best Posts

Minnesota Court of Appeals affirms vacation of arbitration award procured by "undue means"

May 7, 2007 by Carlton Fields

Cincinnati Insurance Company (“CIC”) brought a subrogation action against Tyco Fire Products (“Tyco”), alleging that Tyco negligently designed, manufactured, and installed a sprinkler system that malfunctioned, causing property damage to CIC’s insured. The parties agreed to submit the matter to binding arbitration by Arbitration Forums, Inc. (“AF”). AF’s rules provide, among other things: (1) that an arbitration is commenced by the filing of a completed P-Form; (2) that a respondent answers by filing its materials with AF and all other involved parties; and (3) that “personal representation will not be allowed in cases when an answer has not been filed as outlined above.” Despite submission of an incomplete P-Form by CIC (neglecting to “x” the boxes requesting notice of and attendance at the arbitration hearing) and failure by Tyco to provide CIC with copies of its answer, AF, contrary to its own rules, concluded that CIC had waived notice and appearance and allowed Tyco to be represented at the hearing. The arbitration proceeded without attendance of CIC’s counsel and a decision favorable to Tyco was issued. Thereafter, CIC petitioned the Minnesota District Court to vacate the arbitration award under Minn. Stat. § 572.19, subd. 1(1) (2004), as procured by “other undue means.” The District Court granted the petition and Tyco appealed.

The Minnesota Court of Appeals affirmed the District Court’s decision, concluding that Tyco’s failure to provide its arbitration documents to Cincinnati resulted in Tyco having an ex parte communication with the neutrals in the case and constituted procurement of an award by “other undue means.” The Court of Appeals reasoned that, even if CIC could be said to have waived notice of and appearance at the hearing, CIC never waived its right to receive copies of Tyco’s submissions or its right to amend its own submissions in response. Additionally, the Court concluded that the arbitration award should be vacated under Minn. Stat. § 572.19, subd. 1(4), on the alternative ground that the hearing was conducted without due process, in violation of Minn. Stat. § 572.129(a), requiring that the arbitrators have notification of the arbitration hearing served on the parties “personally or by certified mail not less than five days before the hearing.” In re Arbitration Cincinnati Ins. Co. v. Tyco Fire Prod., f/k/a Cent. Sprinkler Co., Case No. 82C806001071 (Minn. Ct. App. May 1, 2007).

THIRD CIRCUIT DISMISSES SHAREHOLDER’S COMPLAINT AGAINST LIQUIDATOR

April 30, 2007 by Carlton Fields

This appeal arose out of the liquidation of an insolvent insurer, Colonial Assurance Company (“Colonial”). The Plaintiff, a Colonial shareholder, litigated for years in the Pennsylvania state courts to fight the liquidation plan proposed by Pennsylvania. After his objections were dismissed in that forum, he filed an action in United States District Court alleging that the Defendants violated his civil rights, engaged in a civil conspiracy, and breached their fiduciary duties in relation to the Colonial liquidation. The District Court dismissed his claims under the Rooker-Feldman doctrine, alternatively holding that his claims were barred by the doctrine of res judicata.

On appeal, the Third Circuit concluded that this was not an appropriate case for the application of the Rooker-Feldman doctrine because the Plaintiffs’ Complaint was directed at conduct that preceded the state-court judgment. The Court explained that the Rooker-Feldman doctrine, which prevents inferior federal courts from sitting as appellate courts for state court judgments, does not apply when a party complains of an injury “not caused by the state-court judgment but instead attributable to defendants’ alleged. . .violations that preceded the state-court judgment.” (citations omitted). Nevertheless, the Third Circuit held that dismissal was appropriate because the Plaintiff’s claims were barred by the doctrine of res judicata. All of the elements of res judicata were satisfied, because the parties to the two actions were identical, all of the claims were actually litigated in the prior state court action, and determination of the claims was necessary to the entry of the judgment by the state court. Mazzella v. Commonwealth of Pennsylvania, Case No. 06-2325 (3d Cir. Apr. 17, 2007).

Court refuses to find fiduciary duty in reinsurance relationship

April 24, 2007 by Carlton Fields

Employers Reinsurance Corporation (“ERC”) filed suit in Missouri federal court against its reinsured, Massachusetts Mutual Life Insurance Company (“MassMutual”) alleging that MassMutual breached the parties’ reinsurance agreement. MassMutual filed various counterclaims alleging that ERC breached the contract by failing to reimburse it for covered claims under the contract. ERC sought dismissal of MassMutual’s counterclaims for vexatious refusal under Missouri and Kansas law and breach of fiduciary duty.

In dismissing both vexatious refusal claims, the court did not reach the substantive issue of whether the Missouri and Kansas statutes apply to a reinsurance contract, but rather dismissed on the ground that Connecticut law, and not Missouri or Kansas law, applied to the parties’ reinsurance contract. Applying Connecticut law, the court also dismissed MassMutual’s claim for breach of fiduciary duty, concluding that the “defendant has failed to plead sufficient facts in its counterclaim supporting a fiduciary relationship between plaintiff and defendant.” Specifically, the defendants failed “to allege facts that there was a unique degree of trust and confidence between the parties or that plaintiff had superior knowledge, skill, or expertise.” The court added that “[c]considering that Connecticut courts have deemed that there is no fiduciary relationship between an individual policy holder and a sophisticated insurance company, they are not likely to imply one in a reinsurance relationship between two sophisticated insurance companies.” Employers Reinsurance Corp. v. Massachusetts Mutual Life Ins. Co., Case No. 06-0188-CV-W-FJG (W.D.Mo. April 10, 2007).

PETITION TO APPOINT UMPIRE DENIED PENDING MOTION FOR DISQUALIFICATION OF COUNSEL IN OTHER COURT

April 23, 2007 by Carlton Fields

Munich Reinsurance Company (“Munich Re”) initiated arbitration against its reinsurer, Ace Property and Casualty (“Ace”), to recover claims under a reinsurance contract. Ace contended that the amount of the claims was excessive. Each party appointed an arbitrator, and the two party-appointed arbitrators agreed on a pool of names from which an umpire would be selected. Ace then demanded that Munich Re’s counsel, Saul Ewing, voluntarily withdraw from the representing Munich Re in the arbitration, because he had previously represented Ace and possessed potentially prejudicial information. Saul Ewing refused and Ace filed an action in Pennsylvania’s Court of Common Pleas to disqualify him.

Munich Re then filed a Petition for the Appointment of an Umpire in United States District Court. Ace argued that such an appointment would be improper at this time in light of the civil action in Pennsylvania seeking to disqualify Munich Re’s counsel. The District Court stated that “[t][he central issue before me is whether the appointment of an umpire by the Court would move the matter forward despite the pending Pennsylvania action.” Finding that the issue of disqualification was properly before the Pennsylvania court, the Court denied Munich Re's Petition, stating that “although it is clearly within my power to grant a stay [pending the disposition of the Pennsylvania action], there is no articulable benefit to do so since the Pennsylvania court will soon decide the conflict issue” before it. Munich Reinsurance America v. Ace Property & Casualty Ins. Co., Case No. M-82 (HB) (S.D.N.Y. April 10, 2007).

THIRD CIRCUIT REVIVES RICO SUIT AGAINST INSURER

April 18, 2007 by Carlton Fields

The Third Circuit has revived a RICO suit against First Unum Life Insurance Co., finding that a lower court erred when it held that such a claim would interfere with state regulation of insurers. The plaintiff, Richard Weiss, brought suit under RICO against his insurer, First Unum, alleging that First Unum discontinued payment of his disability benefits as part of First Unum’s racketeering scheme involving an intentional and illegal policy of rejecting expensive payouts to disabled insured. The District Court dismissed his claim, believing that the allowance of such a RICO claim would interfere with New Jersey’s statutory regulation of insurers, and thus run afoul of the McCarran-Ferguson Act.

The Third Circuit reversed finding that the District Court’s reading of McCarren Ferguson was too narrow. The McCarran-Ferguson precludes applying a federal law only when doing so would “invalidate, impair, or supersede” state insurance law. After reviewing the totality of New Jersey's insurance regulatory scheme, including New Jersey’s Insurance Trade Practices Act and Consumer Fraud Act, the Third Circuit concluded that the District Court had erred in holding that RICO would impair it. Specifically, the Court stated “[t]here is nothing in the regulatory scheme that indicates that allowing other remedies as part of its regulation of insurance would frustrate or interfere with New Jersey's insurance regime…To the contrary, the legislation permits additional remedies … and the New Jersey courts have felt free to fashion them.” This case is one of a series which considers the issue of whether a federal statute that adds remedies not available under state law, which are not necessarily inconsistent with state law, violate McCarran-Ferguson. The counter-argument is that by affording a remedy that the state deliberately withheld, the federal statute is indeed inconsistent with state law. Weiss v. First Unum Life Ins. Co., Case No. 05-5428 (3d Cir. April 3, 2007).