Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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PUTATIVE CLASS ACTION INVOLVING A PATENTED REINSURANCE ARRANGEMENT FOR WORKERS’ COMPENSATION COVERAGE LARGELY SURVIVES DISMISSAL

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The case is pending in a federal district court in New York, and involves three allegedly interconnected contracts purportedly “designed to circumvent [state] insurance laws,” including the laws of New York. The three contracts include: (1) a workers’ compensation insurance contract between a licensed insurer and an insured; (2) a reinsurance contract between the licensed insurer and an affiliated reinsurer; and (3) a “reinsurance and profit sharing” contract between the reinsurer and the insured. The plaintiffs (insured employers) allege that the “reinsurance and profit sharing” contract was an illegal contract of insurance that modified the workers’ compensation insurance contract issued by the licensed insurer. The plaintiffs also claim that the “reinsurance and profit sharing” contract was materially misleading, and misled insureds to assume liability for a portion of the losses they believed they had insured. Additional claims asserted by the plaintiffs include breach of contract, rescission, violation of New York law prohibiting deceptive trade practices, and unjust enrichment. The defendants (various alleged members of the Berkshire Hathaway Group) moved to dismiss the complaint for failure to state a claim.

In a lengthy opinion, the court granted in part and denied in part the motion to dismiss. Regarding claims for rescission based on alleged violations of the New York Insurance Laws governing workers’ compensation insurance, the court granted dismissal, reasoning that enforcement of those laws rests with the Superintendent of Insurance and that no private right of action exists. The court permitted claims for rescissory damages to proceed however, as reimbursement of amounts charged and paid over and above the filed rates of the policies is contemplated by New York law and “promotes the legislative purpose of the NYIL to ensure that parties adhere to filed rates.” The court also held that the claims for breach of contract (based on plaintiffs’ contention that the reinsurance and profit sharing contract modified the workers’ compensation insurance policies) and unjust enrichment, should survive dismissal. As to the claims for deceptive trade practices, the court held that for certain named plaintiffs, the claims were time-barred, but for other plaintiffs, the claims could proceed. National Convention Services, L.L.C. et al. v. Applied Underwriters Captive Risk Assurance Co., Inc., et al., Case No. 15-cv-07063 (USDC S.D.N.Y. Mar. 9, 2017).

This post written by Michael Wolgin.

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APPELLATE COURT PRECLUDES ASSIGNEE OF REINSURANCE CLAIMS FROM RE-LITIGATING LACK OF ENTITLEMENT TO ARBITRATION

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In 1986, Pine Top Insurance Company became insolvent and was placed into liquidation. The liquidator eventually sold Pine Top’s accounts receivable, including reinsurance claims, to an entity named Pine Top Receivables of Illinois, LLC. In 2015, Pine Top Receivables sued Transfercom, Ltd. to collect on an assigned reinsurance claim and sought to compel Transfercom to arbitrate the claim pursuant to the underlying reinsurance agreement.

Several years earlier, Pine Top had unsuccessfully sued a Uruguayan entity in a federal district court in Illinois, and similarly sought to compel arbitration. That court and the Seventh Circuit Court of Appeals determined that Pine Top Receivables had no right to enforce the arbitration clause in the reinsurance contract because, among other reasons, the assignment of the reinsurance claims from the liquidator conveyed only the right to collect the debt but did not convey the contractual right to demand arbitration.

In the current litigation, Transfercom argued that the Seventh Circuit’s decision collaterally estopped Pine Top Receivables from relitigating the issue of whether it was entitled to demand arbitration with respect to the assigned reinsurance claims. The trial court agreed with Transfercom and denied Pine Top’s motion to compel. And on appeal, the court affirmed the judgment of the trial court. The appellate court reasoned that the earlier case resolved on the merits the issue of whether Pine Top Receivables was entitled to demand arbitration of claims assigned to it by the liquidator. The appellate court further explained that once the Seventh Circuit resolved the arbitration issue in Pine Top Receivables’s interlocutory appeal in the earlier litigation, the issue could not be revisited and the judgment on that issue was final. Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., Case No. 15 L 009145, (Ill. App. Ct. Mar. 31, 2017).

This post written by Gail Jankowski.

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LOUISIANA FEDERAL COURT FINDS REMOVAL PROPER AS DISPUTE COULD RELATE TO AN UNDERLYING ARBITRATION CLAUSE IN INSURANCE POLICY

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In this case, a Louisiana federal court denied a motion for remand of a former machinist’s asbestos-related claim, finding that an English insurer’s removal from state court was appropriate and that the dispute could relate to an underlying arbitration agreement contained in an insurance policy.

The background of this case can be found here. In short, plaintiff filed a personal injury action in Louisiana state court against defendants Cove Shipping, Inc. and Maritime Management Corp. (together, “Cove Shipping”), alleging that he now suffers from lung cancer as a result of asbestos exposure from years spent working as a machinist onboard several oil tankers in the early 1980s while he was working for Cove Shipping. Via the Louisiana Direct Action Statute, plaintiff also named West of England Shipowners Mutual Insurance Association, a P&I Club (“West of England”) as a defendant, for its role as Cove Shipping’s insurer during the years in question. West of England subsequently removed the action, invoking the removal provision of the Uniform Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”).

As justification for using the Convention for removal, West of England cited an arbitration clause found in its Club Rules that it contends were in effect at the time of plaintiff’s alleged employment and now apply to his lawsuit, notwithstanding the fact that plaintiff is a third-party to the insurance agreement between West of England and Cove Shipping. In his motion for remand, plaintiff made various arguments in support of the contention that he is not bound by the arbitration clause and, thus, the case should be remanded: First, West of England has failed to demonstrate it is entitled to arbitration under documents it submitted with removal as the arbitration agreement at issue was not attached. Second, English law forbids the application of this arbitration agreement to non-signatories such as plaintiff. Third, the arbitration agreement is unenforceable because the prohibitive costs of the agreement prevent plaintiff from vindicating his federal statutory rights. Fourth, West of England waived its right to arbitrate. Fifth, Jones Act Claims are not subject to arbitration. And sixth, the law of Louisiana forbids arbitration in insurance disputes, which does not run afoul of the Convention.

Rejecting all of plaintiff’s arguments and/or finding them premature merit-based challenges to arbitration, the Louisiana federal court denied the motion to remand, finding that removal of the direct action plaintiff’s lawsuit against a foreign insurer was appropriate based on the existence of an arbitration clause found in the Club Rules of the insurer. The court noted that what was at issue in the present motion was a jurisdictional question, and that the plaintiff is not left without redress, as merit-based arguments may be presented in the form of an opposition to a motion to compel arbitration, which is typically the first matter to be raised after removal under 9 U.S.C. § 205 of the Convention. Finally, the court found that the arbitration clause at issue could conceivably have an effect on the outcome of plaintiff’s lawsuit, such that the two are related, and that therefore section 205 of the Convention confers subject matter jurisdiction on the court, making removal of the case by West of England proper.

O’Connor v. Maritime Management Corp., et al., No. 16-16201 (E.D. La. Mar. 16, 2017).

This post written by Jeanne Kohler.

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CALIFORNIA SUPREME COURT FINDS WAIVER OF STATUTORY REMEDY IN ARBITRATION AGREEMENT CONTRARY TO PUBLIC POLICY

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“Agreements to arbitrate claims for public injunctive relief under [California’s Consumers Legal Remedy Act or Unfair Competition Law], or the false advertising law are not enforceable in California.” The California Supreme Court was tasked with determining whether an “arbitration provision is valid and enforceable insofar as it purports to waive [the Plaintiff’s] right to seek public injunctive relief in any forum.”

Looking at Plaintiff’s complaint and allegations, the Court determined the arbitration provision at issue did in fact waive Plaintiff’s right to request in any forum public injunctive relief, invalidating the arbitration provision. The Court found the California rule was not preempted by the FAA, as § 2 of the FAA “permits arbitration agreements to be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract.” Thus, arbitration agreements “like other contracts, may be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.” Here, the contract defense at issue is that “a law established for a public reason cannot be contravened by a private agreement”.

Sharon McGill v. Citibank, N.A., Case No. S224086 (Cal. Sup. Ct. April 6, 2017)

This post written by Nora A. Valenza-Frost.

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DISTRICT COURT FIND NO FEDERAL QUESTION JURISDICTION IN ACTION CHALLENGING ARBITRATION AWARD BASED ON ARBITRATOR BIAS

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A federal court has rejected the attempt of the losing party in an arbitration to engage in discovery regarding the potential bias of the arbitrator, finding that it had no jurisdiction over the matter because it did not involve a question of federal law and that it was not appropriate to allow discovery on this issue based solely on speculation.
The arbitration arose out of a dispute over allegedly defective work performed by a building contractor, BCI Construction, Inc., resulting in an award of approximately $586,000 in damages and attorney’s fees to 797 Broadway Group, LLC. BCI filed an action to vacate the award in federal court on the basis that the arbitrator was biased and moved to compel the arbitrator’s deposition.

The district court began with the question of it jurisdiction over the matter, repeating the well-established rule that the Federal Arbitration Act does not create an independent basis for jurisdiction in federal court. BCI argued that it was premature to consider the jurisdictional question because the court had “not had the opportunity look through the pleadings and conduct an analysis of the underlying dispute to determine if jurisdiction is appropriate.” The court disagreed, finding that there was no apparent federal question in the underlying dispute and that it would not allow BCI to depose the arbitrator “in hopes that an underlying federal question will present itself.” Having found no basis for federal jurisdiction, the court dismissed the matter. The court also awarded 797 Broadway’s motion for costs and an attorney’s fees, finding that BCI had failed to “articulate[] a colorable reason why the parties’ underlying dispute presented a federal question.” BCI Construction, Inc. v. 797 Broadway Group, LLC, Case No. 1:16-cv-1077 (FJS) (N.D.N.Y. March 15, 2017)

This post written by Jason Brost.

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