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New reinsurance-related and arbitration developments from Carlton Fields

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REINSURANCE ARBITRATION AWARD STANDS IN FACE OF CHALLENGES TO RATIONALITY AND IMPARTIALITY OF DECISION

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Yosemite Insurance Co. (“Yosemite”) lost its challenge to an arbitration award that found Nationwide Mutual Insurance Co. (“Nationwide”) was not required to cover a share of Yosemite’s settlement with the State of California regarding pollution losses from the 1950s. After the arbitral board decided in Nationwide’s favor, Yosemite challenged the impartiality and rationality of the award.

In deciding Yosemite’s challenge, the court emphasized that the bases to vacate an arbitration award under the Federal Arbitration Act (“FAA”) are narrow and impose a steep burden on the challenging party. The dispute was based on whether an exclusion for “contamination and pollution” applied to any claims made or only where the party’s “main operations” related to “contamination and pollution.” The court found that while it believed the operative language was ambiguous, the arbitrators’ decision was “anchored” in the text of the agreement. Because the decision did not stray from an interpretation and application of the agreement, or exhibit a manifest disregard for the law, the court lacked authority under the FAA to second-guess the arbitral panel’s award.

Yosemite also challenged the arbitral panel’s impartiality because one of the three members failed to disclose that he had previously represented a client in a case adverse to Yosemite—a representation Yosemite’s counsel himself did not recall. The court applied a four-factor test borrowed from the Fourth Circuit to determine whether the inadvertent failure to disclose the representation would cause a reasonable person to conclude the arbitrator was biased. The court found there was no non-speculative suggestion of a conflict of interest, no suggestion of antipathy against Yosemite, and that the ten-year old adverse representation failed to impugn the impartiality of the arbitrator.

Despite rejecting Yosemite’s challenges, the court declined to award attorneys’ fees and costs to Nationwide because the claims were not objectively unreasonable. The court did however, “encourage” Yosemite’s counsel to review the strict and demanding showings required when seeking to vacate an arbitral award.

Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., Case No. 16-5290 (USDC S.D.N.Y. Nov. 10, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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ARBITRATION CLAUSE IN BODY OF REINSURANCE AGREEMENT GOVERNS OVER PROVISION IN ENDORSEMENT

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In a dispute between First Mutual, a ceding company, and its reinsurer, Infrassure, over which of two competing arbitration clauses in a reinsurance contract governed, the Second Circuit affirmed a lower court decision in favor of the reinsurer and found the arbitration provision contained in the body of the operative agreement controlling over a second provision located in an endorsement.

First Mutual, the insurance arm of New York’s Metropolitan Transit Authority, sought to resolve its claims against Infrassure arising from damage caused by Superstorm Sandy in a London arbitration. The endorsement relied upon by First Mutual contained the second arbitration clause, which was titled “LONDON ARBITRATION AND GOVERNING LAW (UK AND BERMUDA INSURERS ONLY).” Infrassure argued the endorsement was inapplicable because it was not a UK or Bermuda insurer. Another provision in the agreement, the so-called ‘Titles Clause,’ provided that titles in the agreement existed for convenience and were not deemed to limit or affect the provisions they titled. First Mutual argued that the endorsement’s title limiting the provision to UK and Bermuda Insurers could not limit the substance of that provision.

The Second Circuit ruled that the reinsurance agreement was unambiguous in this respect, and that the arbitration clause contained in its body controlled, because the second clause was contained in a section expressly limiting its effect to UK and Bermuda insurers. Furthermore, the court noted that First Mutual’s construction of the Titles Clause would render several critical clauses within the reinsurance agreement meaningless because the titles provided critical context regarding what the language therein governed.

Infrassure, Ltd. v. First Mut. Transp. Assurance Co., No. 16-306 (2nd Cir. Nov. 16, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

See our disclaimer.

THIRD CIRCUIT REVERSES ORDER DENYING ARBITRATION, RULING THAT STATE LAW PROHIBITING ARBITRATION OF INSURANCE MATTERS CHALLENGED REINSURANCE CONTRACT AS A WHOLE

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Applied Underwriters Captive Risk Assurance Company appealed from the denial of its motion to compel arbitration in a dispute related to a reinsurance participation contract with South Jersey Sanitation Company. The trial court denied the motion because it held that Nebraska law: (1) governed the dispute, (2) prohibits arbitration provisions that relate to insurance policies, as the relevant provision here purportedly does (according to South Jersey), and (3) preempted the FAA under the McCarran-Ferguson Act. The Third Circuit reversed, holding that it was for the arbitrator to determine the precise nature of the reinsurance participation contract, and whether it fell under an exception to the Nebraska law. Similarly, the Third Circuit held that South Jersey’s contention that the contract was procured based on fraud, implicated the contract “as a whole,” rather than specifically the arbitration provisions. “Therefore,” the court ruled, “the question of whether the [contract’s] arbitration provision is enforceable under Nebraska law is a question for the arbitrator,” and not the court. The court vacated the judgment and remanded to the trial court. Because the default location set forth in the contract was not within the district in which the petition to compel arbitration was filed, as is required by the FAA, the trial court was directed to determine the proper forum for arbitration, and “how to proceed” if the trial court is not able “to compel arbitration in the default location provided for in the contract.” South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co., Case No. 14-4010 (3d Cir. Oct. 25, 2016).

This post written by Michael Wolgin.

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APPLYING KENTUCKY LAW, SIXTH CIRCUIT FINDS CONTINUED EMPLOYMENT CONSTITUTES ASSENT TO ARBITRATION AGREEMENT

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During the time Plaintiffs Aldrich and Nolan worked as recruiters for the University of Phoenix, they allegedly signed an electronic form acknowledging their understanding of updated terms to the employee handbook. The acknowledgment form included an arbitration clause, and the updated employee handbook contained a class action waiver. Thereafter, both Aldrich and Nolan continued to work for the University of Phoenix for almost two years and were eventually let go. They later brought claims for wrongful termination on account of their refusal to engage in allegedly unfair, deceptive, and fraudulent practices related to recruiting veterans and service members. The trial court granted the University of Phoenix’s motion to dismiss and compel arbitration. Although Aldrich and Nolan asserted that they never received or signed the acknowledgement form, the court reasoned that under Kentucky law, continued employment constituted assent to the terms of the agreement. Moreover, the court held that there was no dispute of material fact entitling plaintiffs to a jury trial on the issue of whether they in fact signed, and because the arbitration agreement was valid, the waiver provision was valid as well.

On appeal, Sixth Circuit affirmed, reiterating Kentucky law holding that “an employee can be bound by an arbitration agreement, even without a signature, when he or she demonstrates acceptance of the agreement by continuing to work for the employer.” Aldrich v. University of Phoenix, Inc., Case No. 16-5276 (6th Cir. Oct. 24, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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ELEVENTH CIRCUIT AFFIRMS DISTRICT COURT’S CONFIRMATION OF ARBITRATION AWARD, FINDING THAT ARBITRATOR’S REFUSAL TO POSTPONE HEARING DOES NOT WARRANT VACATUR UNDER THE FEDERAL ARBITRATION ACT

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The background of this case is as follows. CM South East Texas Houston LLC and South East Texas KCH Co. LLC (collectively, “CM South”) asserted breach of contract claims against CareMinders Home Care Inc. (“CareMinders”) and demanded arbitration. After months of initial proceedings, a five day hearing was scheduled for December 2014. A scheduling conflict arose and both sides requested new hearing dates, and the hearing was rescheduled for February 2015. Yet another conflict arose, and both sides requested a new date, and this time the hearing was rescheduled for March 9-13, 2015. One of CareMinders’ key witnesses then had a family emergency. CareMinders asked the arbitrator to reschedule the hearing for some time between May and September, 2015, advising that CM South agreed to the rescheduling. After conferring with the parties and discussing available dates, the arbitrator rescheduled the hearing to March 18-21, 2015, reducing it from five to four days. The hearing took place and CareMinders’ witness attended the hearing. The arbitrator then issued an award in favor of plaintiff CM South, awarding it damages. CM South filed a motion to confirm the award in Georgia federal court, and CareMinders filed a motion to vacate the award, contending that the arbitrator engaged in misconduct by refusing to postpone the hearing when both parties agreed to the rescheduling. The district court denied the motion to vacate, finding that CareMinders failed to show that the arbitrator’s refusal to postpone the hearing amounted to misconduct or that it prejudiced CareMinders’ ability to defend the case. The court also confirmed the arbitration award, which CareMinders appealed.

The Eleventh Circuit affirmed the Georgia district court’s order confirming the arbitration award. In doing so, the Court held that an arbitrator’s refusal to postpone a hearing after it had been already rescheduled twice does not warrant vacatur of the award under the Federal Arbitration Act. The Court also noted that CareMinders’ witness attended and provided testimony at the hearing. As such, the Court further ruled that the parties were not prejudiced or deprived of a fair hearing and vacatur was not warranted.

CM South East Texas Houston v. CareMinders Home Care Inc., No. 16-11054 (11th Cir. Oct. 7, 2016).

This post written by Jeanne Kohler.
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