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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

D.C. Federal Court Permits Insured to Amend Complaint in Reinsurance Dispute Related to Credit Insurance Policy

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A District of Columbia federal court partially granted and partially denied a reinsured’s motion to amend its complaint in a dispute over a reinsurance agreement for a credit insurance policy. Assured Risk Transfer (“ART”) extended a credit insurance policy to Vantage. The policy was reinsured under a contract with the reinsurer defendants, which was placed through a broker, the Willis Defendants. ART denied a claim under the credit insurance policy made by Vantage, and Vantage won an arbitration award against ART based on the denial. Vantage sued ART, the Willis Defendants, and the reinsurers after the reinsurers declined to pay under ART’s reinsurance agreement, but the court dismissed for jurisdictional issues. Thereafter, Vantage moved to amend.

First, the court denied Vantage’s effort to amend its complaint regarding its breach of contract and accompanying declaratory judgment claims. Vantage’s proposed amended complaint alleges that the parties created a contractual relationship via credit insurance “binders” which purportedly confirmed that the underlying credit insurance policy was reinsured, but the court concluded such allegations were insufficient because insurance binders describing a reinsurance agreement do not create a binding contractual relationship with the Willis Defendants or reinsurers.

Second, the court accepted Vantage’s proposed amendments related to the breach of implied contract, promissory estoppel, and unjust enrichment claims. On the implied contract claim, the amendments sufficiently alleged that ART and the Willis Defendants acted as agents for the reinsurers by claiming ART facilitated the transaction and the reinsurers delegated their underwriting authority to ART. Additionally, the allegations that reinsurers’ agents gave the insurance binders to Vantage and the reinsurers knew ART was unable to pay Vantage’s loses without reinsurance led he court to conclude it was plausible the reinsurers knew Vantage expected the reinsurers to pay and agreed to that arrangement.

On the promissory estoppel claim, the court interpreted the reinsurers’ agents’ delivery of the binders as a sufficiently alleged “promise” to pay any losses according to the credit insurance policy terms. Furthermore, Vantage plausibly alleged reliance upon the promise and an agency relationship between ART, the Willis Defendants, and the reinsurers. On the unjust enrichment claim, the court found the amendments adequately pleaded that reinsurers indirectly benefited through receipt of premiums to allow the claim to proceed. The court noted that Vantage is unable to prevail on its unjust enrichment and promissory estoppel claims if it prevails on its implied contract claim, but allowed amendment to permit Vantage to pursue all three until a conflict arises.

Lastly, the court granted Vantage’s request for leave to attempt to serve the reinsurers, declined to require the D.C. Department of Insurance, Securities, and Banking to accept service on their behalf, and dismissed Vantage’s complaint as to ART as a defendant where Vantage failed to establish the necessity for ART to remain.

Vantage Commodities Fin. Servs. I, LLC v. Assured Risk Transfer PCC, LLC, Case No. 17-1451 (USDC D.D.C. Nov. 16, 2018).

This post written by Thaddeus Ewald .

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Florida Court Finds that Arbitration Agreement Broadening Judicial Review Violates Florida Public Policy

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In a lawsuit brought by a contractor against a subcontractor and its insurer, Florida’s Fourth District Court of Appeals found a provision in an arbitration agreement allowing for a broad ranging review of any arbitration award to be void as a matter of law and policy.

The subcontractor and insurer moved to compel arbitration under an agreement providing that on review of any award issued pursuant to that agreement, “the court shall be empowered to address on review any failure by the arbitrator(s) to properly apply Florida law to the dispute. To the extent the arbitrator(s) or the court fail to apply the law properly, the Award of the arbitrator(s) is subject to further review through the Florida appellate process.” This is, of course, a much broader judicial review than is normally permitted with respect to arbitration awards, and thus the contractor argued that the provision was void and that the entire arbitration agreement should be discarded.

The trial court granted the motion to compel arbitration, but the appellate court reversed, finding that the subject provision violated public policy as expressed in the Florida Arbitration Code. The Code limits a courts’ ability to vacate an arbitration award to a fairly narrow set of circumstances, such as when an arbitration award is “procured by corruption, fraud, or other undue means,” when there is “evident partiality,” corruption, or misconduct on the part of the arbitrator, or when the arbitrator exceeds the authority provided by the parties’ agreement. The Code also prohibits parties from waiving or agreeing to vary their right to seek judicial confirmation of awards or the grounds for vacating or modifying an arbitration award.
The court found that the Code clearly prohibited expansions of the scope of judicial review of arbitration awards and thus made the contested provision in the arbitration agreement unenforceable. Rather than finding that the arbitration agreement was unenforceable as a whole, however, the court remanded the matter to the trial court to determine whether this provision was severable, such that the arbitration agreement could be enforced with that provision removed.

National Millwork, Inc. v. ANF Group, Inc. and Liberty Mutual Insurance Company, No. 4D18-545 (4th DCA, Sep. 25, 2018)

This post written by Jason Brost.

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Federal District Court Declines to Rule on Arbitration Award, Finding No Independent Basis for Jurisdiction

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Following arbitration, the parties filed cross-motions to confirm and vacate the arbitration award. The District Court for the Southern District of California issued an order to show cause why the case should not be dismissed for lack of subject matter jurisdiction because the FAA does not independently confer jurisdiction, and the parties did not adequately plead a jurisdictional basis that would permit the court to rule. Golub, moving that the award be vacated, argued that the court had jurisdiction because (1) she was denied a fair arbitral hearing, and (2) the award was in manifest disregard of federal law. The court rejected both arguments, reasoning that federal question jurisdiction to enforce or vacate an arbitration award exists only when ultimate disposition of the matter by the federal court necessarily depends on resolution of a substantial question of federal law, such as when the petition alleges that the arbitrator manifestly disregarded federal substantive law. The court went on to warn that “even in those cases where the arbitrator manifestly disregarded federal substantive law, courts are reluctant to find jurisdiction.” Last, the court stated that the allegation that the arbitrator denied a party a fair opportunity to present its case by refusing to compel production of documents, does not raise a “substantial question of federal law.” The court was “aware of no case … stating that failure to follow federal procedure in an arbitration can give rise to federal question jurisdiction.” BOFI Fed. Bank v. Golub, Case No. 3:18-cv-00816 (USDC S.D. Cal. Nov. 8, 2018).

This post written by Gail Jankowski.

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$100 Million Arbitration Award Supported by “Even a Barely Colorable Justification” Upheld Under the FAA

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A $100 million arbitration award against NutraSweet was reinstated by a New York state appellate court due to the “emphatic federal policy in favor of arbitral dispute resolution embodied in the FAA, a policy that applies with special force in the field of international commerce.” NutraSweet’s acquisition of a Korean aspartame producer went sour, and the two companies proceeded to arbitration. The arbitration panel ruled against NutraSweet on all of the issues and rendered an award in excess of $100 million to Daeseng Corp. However, when Daeseng petitioned a New York trial court for confirmation of the award, the court reversed and remanded, finding the arbitrators had “manifestly disregarded the law and had misconstrued the procedural record.”

On appeal, the New York appellate court held the reversal to be in error, stating that “ordinary errors” of law are insufficient to constitute the required “manifest disregard of the law” necessary to overturn an arbitration award. The doctrine of manifest disregard of the law is “severely limited” and is a “doctrine of last resort limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” To modify or vacate an award on that ground, a court must find that “the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”

Under this demanding standard, even if the court held the arbitrators had made a mistake in their application of the law, that would not be sufficient to set the award aside where the issue was “far from obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” The court walked through each of NutraSweet’s arguments, and, without deciding that the arbitrators’ decisions were correct, nevertheless found that there was at least a “barely colorable justification” for each of them, and therefore they must be upheld. In re Daeseng Corp. v. NutraSweet Co., Case No. 2018 NY Slip Op. 06331 (NY. Sup. Ct. App. Div., Sept. 27, 2018).

This post written by Benjamin E. Stearns.

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Tenth Circuit Strikes Offending Arbitration Provision Clause in Au Pair Agreements

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Plaintiffs had entered into various au pair agreements which contained arbitration provisions, which defendants sought to enforce when a class action was filed. The District Court of Colorado denied the defendants’ motion to compel arbitration, finding the au pair agreements “were contracts of adhesion and procedurally unconscionable because the au pairs were relatively young at the time they signed the contracts, were foreigners, spoke English as a second language, and had no experience with contracts or contract law.”

The Circuit Court agreed that the arbitration provision was unconscionable, but reached “that conclusion for reasons more limited than those found by the district court.” The Court found the agreements were procedurally unconscionable “to a moderate degree,” as contracts of adhesion. As to substantive unconscionability, the Court analyzed three clauses: (1) allowing AuPairCar, Inc. to select unilaterally the arbitration provider has a high degree of substantive unconscionability; (2) a California forum selection clause was not unconscionable; and (3) bilateral fee shifting was not unconscionable. “Because the au pair agreements have moderate procedural unconscionability and significant substantive unconscionability due to the arbitration provider selection clause, the au pair agree is unconscionable and unenforceable as written.”

The Circuit Court ordered the District Court to sever the provision allowing AuPairCar, Inc. to unilaterally select the arbitration provider, as both California and federal law provide a default method for appointing an arbitrator, and, consistent with its opinion, to further compel the parties to arbitrate.

Beltran v. Interexchange, Inc., No. 17-1359 (USCA 10th Cir. Oct. 30, 2018)

This post written by Nora A. Valenza-Frost.

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