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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

NEW JERSEY COURT COMPELS ARBITRATION, DECLINES TO APPOINT SUBSTITUTE ARBITRATOR DESPITE “EXORBITANT” ADMINISTRATIVE FEE

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Terra Finance LLC brought an action to compel arbitration. Defendant Acrow Corporation moved to dismiss the action under Fed. R. Civ. P. 12(b)(6), arguing that the arbitration clause was unconscionable, and therefore unenforceable. Defendant attached two other arbitration agreements as evidence that the subject provision was unconscionable. As a result, the Court converted the motion to a motion for summary judgment.

To support unconscionability, Acrow argued: “(1) the clauses constitute contracts of adhesion; (2) at the time that each arbitration clause was executed, [Plaintiff] did not seek assistance of legal counsel; and (3) during negotiations over the… agreement, [Defendant’s] representative stated that arbitration before the ICC would be cheaper than litigation in U.S. courts.”

The Court rejected Acrow’s arguments, and compelled arbitration as Acrow “failed to come forward with evidence from which the Court might conclude that the arbitration clauses are procedurally or substantively unreasonable.”

The Court further declined Acrow’s request for the Court to appoint a substitute arbitrator in ICC’s place, on the grounds that ICC is “unavailable” due to the “exorbitant administrative fee.” Pursuant to Section 5 of the FAA, “exorbitant” administrative fee does not amount to a “lapse in the naming of an arbitrator” which would allow the Court to appoint a substitute.

Terra Finance, LLC, et al. v. Acrow Corp. of Am.a>, 16-0075 (USDC D.N.J. Feb. 7, 2017)

This post written by Nora A. Valenza-Frost.

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APPELLATE COURT REJECTS CLAIM OF ARBITRATOR BIAS BASED ON UMPIRE’S SERVICE AS A PARTY ARBITRATOR IN OTHER MATTERS INVOLVING A RETROCESSIONAIRES’ ALLEGED AFFILIATE

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The Second Circuit has rejected the attempt of a retrocedent, IRB Brasil Reseguros S.A. (“IRB”), to vacate certain arbitration awards against it in favor of its retrocessionaire, National Indemnity Company (“NICO”). IRB argued that vacatur was required because the neutral umpire on a three arbitrator panel accepted a position as party arbitrator on behalf of an alleged affiliate of NICO while the NICO/IRB arbitration was ongoing. Notwithstanding this, the court found that this did not amount to “evident partiality” or any other basis for vacatur of an arbitration award under the Federal Arbitration Act based upon arbitrator misconduct.

IRB and NICO were involved in a series of arbitrations over seven years regarding NICO’s obligations to indemnify IRB for losses it incurred under certain reinsurance contracts that covered losses suffered by large Brazilian company. The three-member arbitration panel was made up of two party-appointed arbitrators and one neutral umpire. In 2012, IRB demanded that the neutral umpire withdraw from the arbitration because he had served as a party-arbitrator for an alleged affiliate of NICO in another matter. The umpire refused to step down and later accepted another appointment as a party-arbitrator for that same purported NICO affiliate. The majority of the arbitration panel in the NICO/IRB matters ultimately issued three awards in NICO’s favor.

The court found that the umpire’s conduct did not demonstrate “evident partiality” under the FAA, which the court, quoting an earlier Second Circuit decision, said exists when “a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side.” The umpire was not alleged to have a familial, business, or employment relationship with NICO or its alleged affiliate, or a financial interest in the outcome of the arbitrations, and had in fact voted against NICO’s purported affiliate when acting as party arbitrator. The court also rejected IRB’s argument that his conduct constituted “misbehavior” under the FAA because this argument was not raised before the district court. However, the court found that IRB’s arguments were not frivolous and thus rejected NICO’s request for attorneys’ fees and costs. National Indemnity Co. v. IRB Brasilia Reseguros S.A., No. 16-627-cv (2d Cir. Jan. 31, 3017)

This post written by Jason Brost.

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COURT OF APPEALS AFFIRMS DISMISSAL OF “SHADOW INSURANCE” LAWSUITS

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In a summary order, the United States Court of Appeals for the Second Circuit has affirmed the dismissal of two “shadow insurance” putative class action lawsuits against Axa Equitable Life Insurance and Metropolitan Life Insurance on the basis that the plaintiffs lacked standing under Article III of the United States Constitution to sue them in United States District Court.  The Complaints alleged that the insurance companies misused captive reinsurers domiciled in foreign jurisdictions to avoid higher reserve requirements of U.S. jurisdictions, resulting in the misstatement of their financial information and increased risks for plaintiffs.  The District Court had dismissed the suits based on the failure of the plaintiffs to establish Article III standing.

The Court of Appeals found that the Complaints failed adequately to allege that the plaintiffs had suffered injury-in-fact, a necessary element of Article III standing.  First, the court rejected plaintiffs’ argument that allegations that the companies had violated New York Insurance Law section 4226 sufficiently alleged injury-in-fact because of injury “inherent in the statutory violation.”  The Court held that “[t]he mere fact that an insurer may make a misleading representation does not require or even lead to the necessary conclusion that the misleading representation is material or even likely to cause harm.”  Second, the Court held that to establish standing plaintiffs had to allege that the injury-in-fact was concrete, particularized, and “actual or imminent, not conjectural or hypothetical.”  (Citing Spokeo, Inc. v. Robbins, 136 S.Ct. 1540 (2016).  The Court found that the harm alleged in the Complaints was speculative and hypothetical, insufficient to establish standing.

For readers interested in a deeper reading of this appeal, following are links to the recording of the oral argument at the Second Circuit and some of the briefs of the parties in the consolidated appeal: Appellants’ principal brief; Axa’s brief; MetLife’s brief; and Appellants’ reply brief.

Appellate oral argument:


Ross v. Axa Equitable Life Insurance Company and Robainas v. Metropolitan Life Insurance Company, Nos. 15-2665, 15-3504, 15-3553 and 15-4189 (2d Cir. Feb. 23. 2017).

This post written by Rollie Goss.
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THIRD CIRCUIT AFFIRMS REJECTION OF CLASS ARBITRATION WHERE EMPLOYMENT AGREEMENT WAS SILENT ON WHETHER ARBITRATION COULD PROCEED ON A CLASS BASIS

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Plaintiffs, former staffing managers of defendants’ international staffing agency, alleged that defendants misclassified them as overtime-exempt employees in violation of the Fair Labor Standards Act. Following earlier rulings of the trial court permitting an arbitrator to determine the availability of class arbitration, the Third Circuit established precedent that it was the role of the court, not the arbitrator, to make this determination. The trial court then found that the relevant employment agreements did not specifically provide for class arbitration, and therefore no class arbitration could go forward. At issue on appeal were first, whether the availability of class arbitration was indeed for the court or the arbitrator to decide; and second, whether the trial court erred in determining that the parties’ agreements did not permit class arbitration.

Regarding the issue of availability of class arbitration, the Third Circuit reaffirmed its previous decision that the question of arbitrability of class claims is for the court, and not the arbitrator to decide. As to the issue of whether the employment agreements permitted class arbitration, the court held that silence regarding class arbitration generally indicates a prohibition against it. Moreover, the court stated that “[e]ven assuming arguendo that class arbitration may be permitted without express authorization in an arbitration clause, Plaintiffs ha[d] set forth nothing suggestive of any implicit intent to permit class arbitration here.” The court therefore affirmed the dismissal of the case due to the lack of authority to hold a class arbitration. Opalinski v. Robert Half Int’l Inc., Case No. 15-4001 (3d Cir. Jan. 30, 2017).

This post written by Gail Jankowski.
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SPECIAL FOCUS: THE COVERED AGREEMENT

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The United States and the European Union have agreed on the final wording of a Covered Agreement which covers several topics, including the provision of collateral by foreign reinsurers.  We discuss the Covered Agreement and the initial responses to the agreement in a Special Focus article.

This post written by Rollie Goss.
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