Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

COURT COMPELS ARBITRATION TO DETERMINE THE ARBITRABILITY OF REINSURANCE DISPUTE WITH CAPTIVE INSURANCE COMPANY

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In a suit by an auto body company against a captive insurance company for rescission of certain workers compensation reinsurance participation agreements, for disgorgement of $70,000 paid thereunder, and for fraud, breach of contract, and unfair business practices, the court compelled arbitration of all claims. The auto body company argued that arbitration should not be compelled because a clause within the arbitration agreement stated that it was “only intended to provide a mechanism for resolving accounting disputes in good faith” (the dispute here did not involve an accounting dispute). The court, however, interpreted the entire arbitration agreement to find that the agreement “was intended to govern all disputes arising from the parties’ commercial transaction, not merely accounting disputes.” The court further found that the language in the arbitration agreement providing that the arbitrator would decide the “construction and enforceability” of the agreement delegated to the arbitrator the threshold question of whether the dispute was arbitrable. The court bolstered this finding by holding that the agreement’s incorporation of the AAA Rules, which provide that parties must arbitrate the arbitrability of a dispute, is another “clear and unmistakable delegation provision.” Accordingly, the court delegated to the arbitrator the auto body company’s contentions that the reinsurance agreements were unlawful and that a condition precedent to arbitration had not been satisfied. Mike Rose’s Auto Body, Inc. v. Applied Underwriters Captive Risk Assurance Co., Case No. 16-cv-01864 (USDC N.D. Cal. Sept. 28, 2016).

This post written by Michael Wolgin.

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FIFTH CIRCUIT AFFIRMS ORDER COMPELLING ARBITRATION AGAINST NON-SIGNATORIES BASED ON “INTERTWINED CLAIMS” ESTOPPEL

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A physician sued several healthcare entities for wrongful termination of employment, negligence, breach of contract, and tortious interference with at-will employment. While two of the defendants were signatories to plaintiff’s employment agreement which contained an arbitration clause, the other defendants were not. Noting that Texas law expressly recognizes the theory of “direct benefits” estoppel, the trial court reasoned that because the defendants’ liability under the tortious interference claim could not be determined without reference to the employment agreement, the plaintiff must arbitrate that claim. Regarding the plaintiff’s other claims, the trial court applied the theory of “intertwined claims” estoppel and required the plaintiff to arbitrate those claims as well.

On appeal, the Fifth Circuit affirmed the trial court’s rulings, including the application of intertwined claims estoppel. The court explained that intertwined claims estoppel involved compelling arbitration when a non-signatory defendant has a “close relationship” with a signatory and the claims are “intimately founded in and intertwined with the underlying contract obligations.” Relying on a Texas Supreme Court case that “intimated at the validity of” the theory, on lower courts in Texas that applied the theory, and on the fact that arbitration of disputes is strongly favored under federal and state policy, the Fifth Circuit determined that the “Texas Supreme Court, if faced with the question, would adopt intertwined claims estoppel.” Finding that plaintiff regarded all of the defendants as closely related by failing to differentiate his factual allegations for each claim, and that the claims at issue closely related to plaintiff’s alleged wrongful termination, the Fifth Circuit affirmed. Hays v. HCA Holdings, Inc., Case No. 15-51002 (5th Cir. Sept. 29, 2016).

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

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ILLINOIS FEDERAL COURT GRANTS MOTION TO CONFIRM ARBITRATION AWARD FOR PRE-HEARING SECURITY

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We previously reported on this case in our blog dated December 21, 2015. The background of the dispute is as follows. A dispute arose between an insurer and its insured under four written program agreements, each containing an arbitration clause. The insurer filed a single demand for arbitration with the American Arbitration Association (the “AAA”), alleging that the insureds failed to pay amounts due under the four program agreements. The insureds raised various objections to the arbitration demand, including that they were entitled to four separate arbitrations. The AAA ruled that the arbitration would continue as one arbitration, and the insureds appointed the sole arbitrator. Shortly thereafter, the insureds filed an action in Texas state court, seeking a Temporary Restraining Order (“TRO”) to stay the arbitration because it had been improperly consolidated. The Texas court granted the TRO, stating that the AAA had failed to follow the arbitration agreements by administering one proceeding, not four, and enjoined the AAA from administering the arbitration. The AAA removed the Texas action to federal court, and filed a motion to dismiss, to which the insureds did not file a response. After the TRO expired, the AAA attempted to resume administration of the arbitration, but the insureds would not participate in the arbitration and informed the AAA that their counsel could not communicate with the AAA given the pending Texas action. Thus, the insurer filed an action in Illinois federal court, where the arbitration was pending, seeking to compel arbitration, which was granted in November 2015. The parties then returned to arbitration.

In the arbitration, predicting future legal resistance from the insured, the insurer petitioned the arbitrators for the insured to post pre-hearing security. The arbitrators granted the petition, and ordered the insured to post about $4.6 million in security. The insured did not post such security, and the insurer thus sought to confirm the panel’s pre-hearing award for security in the Illinois federal court. In response, the insured argued that the award should be vacated because the arbitrators exceeded their authority under Section 10(a)(4) of the Federal Arbitration Act (the “FAA”).

The Illinois federal court first found that an interim pre-hearing security award is an “award” under the FAA. Thus, the court noted that, under the FAA, it must confirm the award unless a statutory exception applies, one of which is Section 10(a)(4)of the FAA. The court also noted that a party seeking relief under Section 10(a)(4) bears a heavy burden and that strong deference is given to arbitrators’ decisions. Then, focusing on the parties’ program agreements, the court held that there is support for the pre-hearing security award in the agreements and arbitration clause. Although the agreements did not mention prehearing security as a remedy available to the parties, the court noted that it does not mean such remedy is not available. In this regard, citing other precedents, the court noted that “[i]f an enumeration of remedies were necessary, in many cases the arbitrator[s] would be powerless to impose any remedy, and that would not be correct. Since the arbitrator[s] derive[] all [their] powers from the agreement, the agreement must implicitly grant [the arbitrators] remedial powers when there is no explicit grant.” The court then stated that the arbitration clause at issue provided that the arbitration was to be conducted under the AAA Rules, which allow for interim awards of security. Thus, the court held that, by adopting the AAA Rules into their agreements, the parties implicitly included the arbitrators’ authority to grant an award like the interim security award at issue. Finding the insured’s arguments to vacate unpersuasive, the court then granted the insurer’s motion to confirm the pre-hearing security award.

Zurich American Insurance Company, et al. v. Trendsetter HR, LLC, et al., No. 1:15-cv-08696 (USDC N.D. Ill. Aug. 24, 2016).

This post written by Jeanne Kohler.

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NEW YORK TRIAL COURT FINDS CEDENT IS NOT COVERED FOR LOSS ADJUSTMENT AND LEGAL EXPENSES IN EXCESS OF THE AMOUNTS STATED IN ITS REINSURANCE CERTIFICATE

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Relying on past New York precedent, a New York state trial court determined the language of certain reinsurance certificates at issue were unambiguous, declining to accept plaintiff’s extraneous evidence “that the custom and practice in the insurance trade is contrary” to such precedent.

The Court relied on the following three cases: Utica Mut. Ins. Co. v. Clearwater Ins. Co., 2014 WL 6610915 (N.D.N.Y. Nov. 20, 2014) (currently on appeal); Excess Ins. Co. Ltd. v. Factory Mut. Ins. Co., 3 N.Y.3d 577 (2004); and Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990), wherein the courts “concluded that the [reinsurance] certificates as to the limit of liability are unambiguous, and therefore, extrinsic evidence should not be considered.” Notably, other courts have reached different results on this issue.

Although the certificate language here – “reinsurance accepted” – was different than the “limit” language considered by the New York Court of Appeals in Excess, the Court in Excess relied, in part, on the decision by the Second Circuit in Bellefonte – which involved reinsurance certificates with the same or similar language to the certificates at issue here. Citing to Excess in support of its decision, the Court noted:

Of course, both parties were well aware of the type of product that was being reinsured. It would be far from unreasonable to expect that at the time of procuring reinsurance, [the reinusred] could anticipate the possibility of incurring loss adjustment expenses in settling a claim… Certainly, nothing prevented [the reinsured] from insuring that risk either by expressly stating that the defense costs were excluded from the indemnification limit or otherwise negotiating an additional limit for loss adjustment expenses that would have been separate and apart from the reinsurer’s liability on the insured property. Failing this, the reinsurers were entitled to rely on the policy limit as setting their maximum risk exposure. (Excess, at 584-585).

The Court granted the moving defendants partial summary judgment on their affirmative defense pertaining to a cap on liability for both loss and expenses in the face amount of the reinsurance certificates. Utica Mut. Ins. Co. v. Abeille Gen. Ins. Co., n/k/a 21st Century Nat’l. Ins. Co., et al., Index. No. CA2013-002320 (Sup. Ct. N.Y. County Aug. 15, 2016).

This post written by Nora A. Valenza-Frost.

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ELEVENTH CIRCUIT DOUBLES DOWN ON THE IMPORTANCE OF SELECTING AN AVAILABLE ARBITRATION FORUM

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The Eleventh Circuit affirmed a district court’s denial of a motion to compel arbitration on the grounds that the designated forum in the arbitration agreement was both unavailable and integral to the agreement. Appellee Jessica Parm acquired a loan from Western Sky Financial, owned by a Cheyenne River Sioux Tribe (“the Tribe”) member. The loan agreement included a binding arbitration clause, specifying the Tribe would conduct the arbitration according to tribal governing rules, but allowed Parm a right to choose amongst certain arbitral organizations to administer the arbitration. At the time of both the agreement and the lawsuit, no tribal arbitral forum nor governing rules existed.

Parm sued the National Bank of California (“Bank”) for illegally permitting Western Sky to initiate electronic fund transfers from her account under the loan agreement. Bank moved to compel arbitration under the provision referenced above. In denying the motion, the court first applied traditional rules of contract construction to reject the Bank’s arguments, interpreting the choice of arbitrator provision as subject to the tribal arbitration provision to give meaning to both. It read an exception clause as applying to its nearest-reasonable referent, the “Dispute[s]” excepted from arbitration, rather than as an exception to the tribal exclusivity provision. It then stated that even if the Bank’s arguments were persuasive, the contract would be ambiguous, and thus construed against the Bank as the draftor. Finally, the court held the arbitration clause unenforceable, rather than substituting an available forum, based on how integral the tribal forum provisions were to the agreement. The mandatory language of and pervasive references to the Tribe and its rules indicated the use of that forum was not merely an ancillary concern. Because the agreement required arbitration in an unavailable forum that was integral to the agreement itself, the arbitration clause was deemed unenforceable. Parm v. Nat’l Bank of Cal., N.A., No. 15-12509 (11th Cir. Aug. 29, 2016).

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

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