Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

MF GLOBAL HOLDINGS REINSURER’S $15 MILLION BOND STRUCK BY BANKRUPTCY COURT AND LEAVE TO APPEAL REJECTED BY NEW YORK FEDERAL COURT

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Two courts in New York recently issued decisions concerning Allied World’s ongoing coverage dispute with MF Global Holdings Ltd. over the former’s bankruptcy. As previously reported on this blog, the Bankruptcy Court for the Southern District of New York, in a series of opinions, has found that Allied World and other re/insurers violated the Barton Doctrine by initiating suits in Bermuda which resulted in anti-suit injunctions, granted a preliminary injunction prohibiting the insurers from enforcing those injunctions, and ordered Allied World to post a $15 million bond as an unauthorized foreign insurer. Late last month, the Southern District of New York—with appellate jurisdiction over Bankruptcy Court decisions—denied Allied World’s motions seeking leave to appeal the court’s order granting a preliminary injunction, the contempt order for violating a prior temporary restraining order, and the Barton violation order. In another ruling last week, the Bankruptcy Court struck a $15 million bond posted in response to that court’s earlier order.

In part, the Southern District rejected Allied World’s argument it was entitled to an appeal as of right regarding the Barton order because, as an automatic stay, it was akin to a permanent injunction which qualifies as a final order subject to interlocutory review. The court found the Barton order was not an appealable final order. Although in certain circumstances a Barton violation order could constitute a final order, the court held that as a “practical matter” it was not final because the Bankruptcy Court intended to reconsider the propriety of the order imminently. Indeed, the parties had submitted additional briefing on the issue and an opinion on the matter was pending in the Bankruptcy Court at the time. Additionally, the court rejected Allied World’s alternative ground for appeal under the collateral order doctrine because it failed the doctrine’s third prong that the order at issue be effectively unreviewable.

Next, the court addressed Allied World’s motions for leave to appeal the preliminary injunction, contempt order, and Barton order. In regards to Allied World’s argument that the Bankruptcy Court lacked personal jurisdiction for the preliminary injunction and Barton order based upon insufficient service, the court found the record was incomplete on the service and thus interlocutory review was inappropriate. In regards to Allied World’s argument that the Bankruptcy Court applied the Barton doctrine in novel ways by extending the types of defendants covered and by applying it extraterritorially, the court noted the Barton order was hardly a “controlling issue of law” for the overarching litigation because proceedings in the matter would continue even if it were reversed. Additionally, the court concluded Allied World did not demonstrate any substantial ground for differences of opinion aside from mere conjecture on either supposedly novel application. In regards to Allied World’s argument for pendent jurisdiction over the contempt order, the court denied that motion because it had denied leave to appeal either of the other two orders.

The Bankruptcy Court also struck Allied World’s bond filed in response to the court’s June 12 order. After Allied World posted the bond, MF Global moved to strike the bond on the grounds that it inappropriately conditioned performance upon the exhaustion of any appeal filed by Allied World from a final judgment of the Bankruptcy Court. The court found that the statute requiring the bond imposed no such requirement for exhaustion of appeals and the statute’s trigger—a “final judgment”—includes final judgment of trial courts notwithstanding ongoing appeals. Further, the court found Allied World’s proposed modifications to the bond were likewise unacceptable, noting the only way Allied World could avoid or delay payment would be a stay of enforcement pending appeal and subsequent posting of a supersedeas bond. Allied World must now post a compliant $15 million bond by July 21, 2017.

This post written by Thaddeus Ewald .

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TEXAS AND WISCONSIN JOIN LIST OF STATES PERMITTING DOMESTIC SURPLUS LINES INSURANCE

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On June 15 and 22, 2017, respectively, the Governors of Texas and Wisconsin approved new laws permitting domestic surplus lines insurers in those states (i.e., insurers domiciled in Texas and Wisconsin) to conduct business within those states. Texas and Wisconsin join a growing list of states, including Arizona, Arkansas, Delaware, Illinois, Louisiana, Missouri, North Dakota, New Hampshire, New Jersey, and Oklahoma, that have passed similar legislation. Previously, a surplus lines carrier would be admitted in one state and be eligible to sell surplus lines coverage only in the other 49 states. This model is gradually changing. Domestic surplus lines insurers in states with laws similar to Texas and Wisconsin are now authorized to issue domestic coverage provided that they satisfy certain eligibility requirements, including minimum capital and surplus requirements. Domestic surplus lines carriers may still not issue coverage in admitted markets. The Texas law is effective January 1, 2018, and the Wisconsin law was effective on June 22, 2017. Texas H.B. No. 2492; Wisconsin 2017 S.B. No. 77.

This post written by Michael Wolgin.

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COURT FINDS CALIFORNIA INSURANCE CODE SECTION 11658.5 REVERSE-PREEMPTS SECTION 4 OF THE FAA

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National Union Fire Insurance Company of Pittsburgh, PA provided Seneca Family of Agencies with workers’ compensation and employers’ liability insurance for Seneca’s operations in California from 2004 to 2013. The parties entered into a payment agreement that governed the parties’ financing and credit obligations with respect to the insurance policies. The agreement’s arbitration provision provided that, among other things, “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.” In 2013, the parties amended the arbitration provision to include: “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.”

Years later, a dispute over the amount of collateral to be paid under the payment agreement arose and National Union moved to compel arbitration. At issue before the court was Seneca’s objection based on the application of Cal. Ins. Code § 11658.5, which requires arbitration provisions in workers’ compensation policies to be disclosed to potential insureds. The court approached this issue in two parts— first, addressing claims related to policies issued on or after July 1, 2012, the effective date of § 11658.5, (the “Post-July 2012 policies”) and second, addressing claims related to policies issued prior to July 1, 2012 (the “Pre-July 2012 policies”).

With regard to claims related to the Post-July 2012 policies, the Court denied National Union’s motion to compel arbitration. The Court analyzed an issue not previously addressed in the case of Monarch Consulting (see blog post dated March 15, 2016)— that is, whether the McCarran-Ferguson Act reverse-preempts the FAA with respect to § 11658.5. Applying the three-prong test to determine if a state statute reverse-preempts a federal statute, the Court found all prongs to be met: (1) the FAA did not specifically relate to insurance; (2) § 11658.5 was enacted to regulate the business of insurance; and (3) the FAA would invalidate, impair, or supersede § 11658.5 because § 4 of the FAA directly conflicted with § 11658.5 in this case.

With regard to the Pre-July 2012 policies, the Court found that any claims related to those policies must be arbitrated, primarily because § 11658.5 did not apply to those policies, and any claims related to Pre-July 2012 policies plainly fell within the scope of the payment agreement’s arbitration provision. As such, the Court granted National Union’s motion to compel arbitration of claims related to the Pre-July 2012 policies. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Seneca Family of Agencies, Case No: 17-cv-01061 (USDC S.D.N.Y. June 12, 2017).

This post written by Gail Jankowski.

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UNITED STATES TO SIGN COVERED AGREEMENT WITH EUROPEAN UNION

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The U.S. Department of the Treasury and the U.S. Trade Representative have ended the speculation about the fate of the Covered Agreement negotiated by the Obama Administration with the European Union by announcing their intention to sign the agreement.  The Covered Agreement covers prudential measures regarding insurance and reinsurance, including the issue of the requirement for collateral for ceding insurers to claim financial statement credit for reinsurance provided by non-U.S. reinsurers and what may be a functional substitute for a declaration of equivalence of the U.S. insurance/reinsurance market for purposes of Solvency II.  The announcement states that “the Administration also plans to issue a U.S. policy statement on implementation.”  It will be interesting to see whether the implementation statement addresses the substance of any of the criticisms of the Covered Agreement.  The Covered Agreement has been approved by the E.U. Council, although the European Parliament may be asked to approve it as well.

This post written by Rollie Goss.
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APPELLATE COURT UPHOLDS ARBITRATION AWARD IN FACE OF MANIFEST DISREGARD OF LAW AND PUBLIC POLICY ARGUMENTS

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An arbitration panel entered an award in a legal malpractice matter in favor of the claimant and the attorneys and law firm moved to vacate the award.  The district court denied the motion to vacate, and the Ninth Circuit affirmed.   The court of appeals rejected two proffered bases for vacation: (1) that the panel’s finding that the claim was not barred by a one year statute of limitation amounted to manifest disregard of law; and (2) that the alleged perjury of a witness in an underlying action justified vacature on the basis that the award violated public policy.

The Court held that even if the panel had made an error of law in its finding that the claim was not barred by the statute of limitation, the record did not reflect a factual basis for a finding that it had manifestly disregarded the law by “intentionally” disregarding the law, and that the movants had failed to carry their burden to prove manifest disregard.  Without a reasoned award or a hearing transcript specifically providing a record on this issue proving manifest disregard may be a challenge.

With respect to the public policy ground for vacation, the Court found that the panel expressly considered the claim of perjury and questioned the witness concerning the allegedly perjured testimony.  The Court declined to vacate the award on this basis because doing so “would require the Court to revisit the arbitrator’s findings of fact and conclusions of law with respect to Defendant’s perjury argument put forth to the arbitrator ….”

The court of appeal did partially vacate the district court’s ruling.  The arbitrator had awarded pre-judgment interest from June 30, 2011.  The defendants did not challenge that part of the award in the motion to vacate the award, but after the award was confirmed contended, in a FRCP 59(e) motion to amend the judgment, that pre-judgment interest should have run from a later date, July 30, 2014.  The district court granted that motion.  The court of appeals vacated that ruling, holding that the Rule 59(e) motion amounted to a late and improper attempt to circumvent the provisions of the Federal Arbitration Act.  Demartini v. Johns, Nos. 15-15205, 16-15078, 16-15134 (9th Cir. June 7, 2017).

This post written by Rollie Goss.
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