Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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LONDON MARITIME ARBITRATION ASSOCIATION HELD TO BE A “FOREIGN TRIBUNAL” WITHIN THE MEANING OF 28 U.S.C. § 1782

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Kleimar N.V., the plaintiff in a London arbitration against defendant Dalian Dongzhan Group Co. Ltd. (Dailan), filed an ex parte application with the New York District Court seeking the issuance of a discovery order and subpoena on Vale S.A., a third-party entity located in the United States. The District Court granted the application permitting discovery and asked that any challenges to the order be brought in a motion to quash. Kleimar subsequently served Vale with the subpoena and Vale moved to vacate the discovery order and quash the subpoena.

The principal issue in the case was whether the London Maritime Arbitration Association was a “foreign tribunal” under 28 U.S.C. § 1782, which permits a U.S. district court to approve the discovery over a person or entity found in the U.S. for use in a proceeding in a foreign or international tribunal. Putting aside Second Circuit precedent which had excluded private foreign arbitrations, the district court relied upon the 2004 U.S. Supreme Court case of Intel Corp. v. Advanced Miro Devices, Inc., wherein the Supreme Court’s interpretation of § 1782 left open the possibility that a private foreign arbitration could fall within its scope. The Court also found that the third-party was located in New York for the purposes of § 1782 because it traded on the New York Stock Exchange, regularly filed forms with the Security and Exchange Commission and had significant ties to an American entity that conducted systematic and regular business in New York. As such, the Court deemed the requirements of § 1782 were met and denied Vale’s motions. In re Ex Parte Application of Kleimar N.V., Case No. 16–mc–355 (USDC S.D.N.Y. Nov. 16, 2016).

This post written by Gail Jankowski.

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NAIC DRAWS LINE IN CFPB SAND BOX

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The National Association of Insurance Commissioners has taken a firm stance on the Consumer Financial Protection Bureau’s proposed ban of “mandatory arbitration” clauses that make financial product consumers waive their right to join class actions.

Because consumer loans are generally financial products within the CFPB’s purview, the CFPB stated that the proposed ban would extend to arbitration clauses used for whole life insurance policy loans, if (a) the insurance company is a “creditor” under the Equal Credit Opportunity Act (ECOA) and (b) the activity is not the “business of insurance” under the Dodd –Frank Act. In a comment letter, however, the NAIC has urged the agency to remove altogether policy loan features from the scope of the rule.

In drawing a line between insurance policy loans and consumer finance, the NAIC argued that whole life policy loans do not make insurance companies ECOA “creditors.” Insurers do not extend, renew, or continue credit; nor do they arrange for such transactions. Rather, despite the use of the word “loan,” a policy loan is in substance an advance payment of the policy’s cash surrender value. It more closely resembles a structured temporary conversion from one type of asset into cash, particularly because, if a policyholder does not repay the loan, the insurance company’s recourse is simply to reduce the policy benefits by the outstanding balance of the loan.

Finally, the NAIC pointed to Dodd-Frank Act language stating that the bureau has no authority to alter, amend, or affect the authority of any state insurance regulator. Because states regulate the issuance of insurance policy loans and none of the CFPB’s enumerated statutes—like the Truth in Lending Act or Real Estate Settlement Procedures Act—expressly incorporates policy loans into their purview, the NAIC concluded that the CFPB’s purported encroachment into this territory is “beyond the appropriate jurisdiction of the bureau.”

For more analysis of this CFPB rule proposal, and how state insurance law is not the only area of regulation as to which it is engendering line-drawing controversies, see “CFPB Grabs for SEC/CFTC Turf.”

This post written by Sarah J. Auchterlonie.

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NY HIGHEST COURT ASKED CERTIFIED QUESTION ON REINSURER LIABILITY CAP

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The Second Circuit certified to the New York Court of Appeals the question of whether its 2004 decision (Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004)) imposed
“either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total insurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?”

Relying on the Second Circuit’s decision in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., the SDNY previously determined the limits in the reinsurance certificates capped the reinsurer’s liabilities for both the cedent’s indemnity payments (“losses”) and its defense costs (“expenses”). Courts across the United States have reached different results on this issue.

Noting the potential economic impact of a reversal of Bellefonte and Unigard Security Insurance Co. Inc. v. North River Insurance Co., the panel stated its intention “is to seek the New York Court of Appeals as to whether a consistent rule of construction specifically applicable to reinsurance contracts exists” and that the “interpretation of the certificates at issue here is a question of New York law that the New York Court of Appeals has a greater interest and greater expertise in deciding.”

Global Reinsurance Corp. of Am. v. Century Indem. Co., Docket No. 15-2164-cv (2d Cir. Dec. 8, 2016).

This post written by Nora A. Valenza-Frost.

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SIXTH CIRCUIT AFFIRMS OHIO FEDERAL COURT’S RULING DENYING MOTION TO COMPEL ARBITRATION BECAUSE ARBITRATION CLAUSE IN AN EXPIRED AND DISPUTED CONTRACT WAS NOT ENFORCEABLE

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This case involves a dispute between Shandong Linglong Tire Co. Ltd., a Chinese tire manufacturer, its Thai and U.S. subsidiaries (collectively, “Linglong”) and Horizon Tire, Inc., Linglong’s U.S. distributor.

A brief history of the case is as follows. In 2015, Horizon sued Linglong in California federal court, alleging that Linglong had not repaid a $3.6 million loan, failed to fulfill a November 2014 order for tires, and failed to honor Horizon’s exclusive distributorship rights for Linglong’s tires. Linglong then sued Horizon in Ohio federal court, seeking, among other things, a declaration that Horizon did not have an exclusive distributorship arrangement with Linglong. Horizon dismissed its California suit, and filed an answer and counterclaims in Ohio. Linglong amended its complaint, and Horizon then filed an answer and amended counterclaims for declaratory relief, breach of contract, and misappropriation of trade secrets, among other claims. Linglong filed a motion under Rule 12(b)(1) to dismiss or stay Horizon’s amended counterclaims pending arbitration based on an arbitration clause in a Collaboration Agreement between them entered into in 2006, which expired in 2011 (the “Agreement”). The Ohio district court denied the motion, reasoning that Horizon’s claims were not based on the Agreement, that the Agreement had expired, and that Linglong had waived any right to arbitrate. Linglong then appealed to the Sixth Circuit, arguing that the arbitration clause survived the expiration of the Agreement.

The Sixth Circuit, in reviewing the Ohio district court’s refusal to compel arbitration de novo, noted that an arbitration clause survives the expiration of a contract only when the dispute at issue “arises under the contract,” which occurs in two circumstances relevant to the current dispute. First, the Court stated that a dispute arises under the contract when a “majority of the material facts and occurrences” giving rise to the dispute occurred prior to the expiration of the contract at issue. In this case, the Court noted that the vast majority of events at issue occurred after the expiration of the Agreement. Second, a dispute arises under the contract when the contractual right at issue survives the expiration of the contract itself. Although the Sixth Circuit noted that one might interpret Horizon’s claims for permanent right of exclusive distributorship to arise out the Agreement, the Court also noted that Horizon itself had stated that “to the extent that Horizon had a claim based on a continuing obligation created by the Collaboration Agreement, Horizon has unequivocally and irrevocably waived it.” The Sixth Circuit then found that the Agreement’s arbitration clause does not apply to Horizon’s claims and that Horizon is estopped from making any claim based upon the Agreement. Thus, the Court affirmed the Ohio district court’s order denying Linglong’s motion.

Linglong Americas Inc. et al. v. Horizon Tire Inc., No.16-3520 (6th Cir. Dec. 1, 2016).

This post written by Jeanne Kohler.

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FOURTH CIRCUIT REFUSES TO VACATE FINRA ARBITRATION AWARD, DESPITE PARTY’S CLAIM THAT IT HAD NO OPPORTUNITY TO PARTICIPATE IN SELECTION OF ARBITRATORS AND CHALLENGES TO DAMAGES CALCULATION

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UBS Financial Services’ motion to vacate a FINRA arbitration award was denied, despite its claims that the panel was improperly chosen and that the panels damages award was flawed in that it did not impose an offset.

UBS brought the arbitration against Padussis seeking repayment of a loan, and Padussis counterclaimed. FINRA mailed a list of potential arbitrators to the parties, which then had twenty days to rank and strike the arbitrators. Padussis did so, but UBS did not. After the deadline passed, UBS moved to extend its time to rank and strike, claiming it never received the list. FINRA denied this motion and selected a panel of three arbitrators based on Padussis’ preferences. The panel ultimately awarded over $1.6 million to UBS and over $900,000 to Padussis, but did not provide that these amounts would offset. Padussis then claimed that he could not pay the $1.6 million award “due to a statutory lien and the prospect of bankruptcy,” such that UBS would receive nothing yet need to pay Padussis more than $900,000.

UBS claimed the award should be vacated because the panel was not selected in accordance with the parties’ agreement. The Court disagreed, finding that FINRA had followed its own rules by mailing the list to the parties and selecting arbitrators based on the responses it received. Further, the Court held that whether to grant UBS an extension to respond to the list was a procedural question that was completely within FINRA’s discretion.

UBS also asked the Court to impose an offset, but the Court declined to do so, noting that the “arbitration award expressly denied ‘[a]ny and all relief not specifically addressed’ by the award, and the award did not mention an offset.” Imposing an offset would thus be a modification of the award and “would not effectuate the intent of the arbitrators,” whose intent could not be assumed. Such a presumption of an offset was made part of FINRA’s rules for awards issued after October 24, 2016, but this change came too late to assist UBS. UBS Financial Services, Inc. v. Padussis, No. 15-2145 (4th Cir. Nov. 22, 2016)

This post written by Jason Brost.

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