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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

PANEL DID NOT COMMIT MANIFEST DISREGARD OF THE LAW WHEN IT REJECTED RES JUDICATA DEFENSE

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A construction company appealed an order confirming an international arbitration award, which had denied the company’s demand for unpaid monies against an Antiguan medical school. The award also granted the medical school’s counterclaim, which had sought a refund of certain tax payments it had made to the company during the project that were earmarked for the company to pay the Antiguan and Barbudan tax authorities, but which the company never paid. In upholding the arbitration award, the Second Circuit rejected the company’s argument that the panel had committed a manifest disregard of the law by declining to apply res judicata and related claim or issue preclusion defenses due to a prior litigation between the parties. The court “correctly concluded that the arbitral panel ‘manifestly did not ‘ignore’ or ‘pay no attention to’ these doctrines; instead, it explicitly considered and rejected applying both doctrines, and in each case had more than ‘barely colorable justification.’” American University of Antigua-College of Medicine v. Leeward Construction Co., Ltd., Case No. 15-1595-cv (2d Cir. June 24, 2016).

This post written by Barry Weissman.

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D.C. COURT OF APPEALS REVERSES DISMISSAL AGAINST CZECH REPUBLIC, FINDING JURISDICTION UNDER NEW YORK CONVENTION

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In a divided opinion, the U.S. Court of Appeals for the D.C. Circuit reversed a district court ruling that dismissed a case against the Czech Republic on jurisdictional grounds. The Appeals Court revived the case, finding the conditions were satisfied for jurisdiction over a foreign arbitration award involving a sovereign: (1) there was a basis upon which the District Court could enforce the foreign arbitration award; and (2) the Czech Republic did not have sovereign immunity from the enforcement action.

The Court looked to the Foreign Sovereign Immunities Act (“FSIA”), which provides the “sole basis for obtaining jurisdiction over a foreign state” by the courts of the United States. The FSIA contains an arbitration exception to sovereign immunity. In order to fall within the exception, the Court must determine: (1) whether the parties had a defined legal relationship – whether contractual or not; and (2) whether the arbitration award “is or may be governed by a treaty or other international agreement in force for the United States.” The Appeals Court answered both questions in the affirmative. First, the agreement between the parties, though relatively informal, was enough to establish a legal relationship: the petitioner provided training, technology and coordination required for modernizing the Czech Republic’s plasma system, and the respondent, the Czech government, knew of and supported these efforts by providing necessary administrative permits.

Second, both the Czech Republic and the United States are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), 28 U.S.C. § 1605(a)(6), which provides jurisdiction to the district courts of the United States. However, the United States has adopted the commercial restriction to the enforcement of foreign arbitral awards, requiring the dispute to be “commercial in nature”. Looking to its treatment in the field of international arbitration, “commercial” was defined as a “matter of relationships, whether contractual or not, that arise out of or in connection with commerce.” Here, the parties were engaged in providing healthcare technology and medical services which the Court determined “has an obvious connection to commerce” and thus was “commercial in nature.” The fact the Czech Republic funded that technology “through a percentage of blood plasma collected rather than through an up-front payment does not change the commercial nature of the relationship, which turned in large part on the transmission of valuable commodities from one party to the other.”

As both a legal basis existed for the District Court to enforce the arbitration award, and the Czech Republic did not have sovereign immunity pursuant to the New York Convention and the nature of the parties’ agreement, the District Court’s sua sponte dismissal of the matter for lack of jurisdiction was reversed.

Diag Human v. Czech Republic Ministry of Health, No. 14-7142 (D.C. Cir. May 31, 2016)

This post written by Nora A. Valenza-Frost.
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MASSACHUSETTS FEDERAL COURT REJECTS PRE-AWARD CHALLENGE TO PARTY-APPOINTED ARBITRATOR

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In a recent reinsurance case, a Massachusetts federal court denied a pre-award petition of a cedent to remove the reinsurer’s party-appointed arbitrator, finding that the Federal Arbitration Act (the “FAA”) did not authorize the court to remove an arbitrator before a final arbitration award has been issued.

With respect to the challenge to the reinsurer’s party-appointed arbitrator, the parties disputed whether the arbitrator qualification requirements of the arbitration clause in the agreement at issue precluded the appointment of an arbitrator that previously worked for entities that once were, but no longer are, affiliates of the cedent. The Massachusetts federal court first analyzed whether the FAA authorized the pre-award removal of an arbitrator. The cedent argued, in support of its pre-award petition for removal of the arbitrator, that the prohibition on judicial intervention is limited to pre-award challenges for arbitrator bias and that there is an exception for pre-award judicial removal of an arbitrator based on the failure to meet the criteria specified in the arbitration clause. The court rejected this argument, finding that “challenges to a party-appointed arbitrator, such as allegations of bias, are properly considered by courts only at the conclusion of the arbitration,” and that the FAA “provides no express authorization for pre-award judicial intervention regardless of the grounds for removal.” The court also rejected the cedent’s argument that permitting a pre-award challenge supports the goals of speed and efficiency that arbitration and the FAA were intended to foster. Thus, the Massachusetts federal court held that it did not have the authority under the FAA to remove the reinsurer’s arbitrator prior to the conclusion of the arbitration and directed the parties to proceed with the arbitration.

John Hancock Life Ins. Co. (U.S.A.) v. Employers Reassurance Corp., No. 15-cv-13626 (USDC D. Mass. Jun. 21, 2016).

This post written by Jeanne Kohler.

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NEW YORK FEDERAL COURT HOLDS THAT AUDIT FIRM’S REVIEW OF TPA IS ATTORNEY WORK PRODUCT

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In a case upon which we have reported on January 6, 2016, and November 24, 2015, a New York federal district court held that the work of an audit firm hired to review the billing practices of a third-party administrator (“TPA”) could constitute attorney work product and be shielded from disclosure in discovery. The case centers on a reinsurance dispute between AmTrust North America, Inc. (“AmTrust”) and SafeBuilt Insurance Services, Inc. (“SafeBuilt”). Specifically, AmTrust reinsured insurance policies underwritten by SafeBuilt and its subsidiaries on the understanding that SafeBuilt’s subsidiaries would enter into retrocessions, which included coverage for the expenses of using a TPA.

However, AmTrust’s TPA began charging costs as high as twenty percent of the premium — where SafeBuilt maintains that the average is typically about four percent. Because of SafeBuilt’s objections to the cost of the TPA, AmTrust retained an audit firm to conduct a comprehensive review of the TPA’s billing practices to ensure that they were legitimate. Later, in the heated litigation between AmTrust and SafeBuilt, SafeBuilt sought to compel the production of the audit firm’s “work product and related material.”

AmTrust took the position that the material was attorney work product because, even though the audit firm was not made up of attorneys, the review was done “in anticipation of litigation.” Because AmTrust’s executives continually testified that they consulted counsel regarding SafeBuilt’s failure to reimburse for the TPA prior to retaining the audit firm, the court concluded that AmTrust hired the audit firm “because of the prospect of litigation.” The court dealt with SafeBuilt’s argument that the audit firm was retained for “dual purposes”—i.e., for both business purposes and litigation—by noting that this argument only carries water where an expert would have been retained “regardless of litigation prospects and . . . would have carried out its analysis in essentially similar form irrespective of the litigation.” Thus, the court declined to compel production of the audit firm’s file.

AmTrust N. Am., Inc. v. SafeBuilt Ins. Servs., Inc., Case No. 14-cv-9494 (S.D.N.Y. June 10, 2016).

This post written by Zach Ludens.

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MISSISSIPPI SUPREME COURT RULES IN INSURER’S FAVOR IN WINDSTORM POOL ASSESSMENT DISPUTE

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In a dispute concerning a post-Hurricane Katrina assessment levied by a state-based windstorm pool, the Mississippi Supreme Court recently held that an insurer was entitled to submit revised information pertaining to its alleged overpayment made to the pool, despite the pool’s position that the submission was untimely.

The Mississippi Windstorm Underwriting Association (the “Windpool”) is a statutorily created “insurer of last resort” that provides wind and hail insurance to citizens on Mississippi’s Gulf Coast. Arrowood Indemnity Company was a member of the Windpool, writing property insurance in the state. As a member, Arrowood was required to participate in the Windpool’s expenses, losses, and profits, which was calculated based upon its reported percentages of wind and hail insurance premium writings in Mississippi during the preceding calendar year. Members of the Windpool were subject to additional assessments, based on their participation percentage, if losses in a given year exceeded the pool’s assets. To incentivize insurers to underwrite more difficult risks, members that voluntarily wrote wind and hail policies on the coast received credits that would reduce—or possibly eliminate—their portion of an assessment. Losses arising from Hurricane Katrina depleted the Windpool’s assets, requiring it to issue a substantial assessment on its members. Because the assessment was based on information submitted by each member-insurer, they were given the opportunity to reexamine the data previously reported for the operative underwriting year. Arrowood’s submission failed to claim the appropriate credits available to it by statute, resulting in an alleged $5 million dollar overpayment. Its submission, however, was based on incorrect information provided by the Windpool regarding certain excess policies issued by Arrowood. Accordingly, it requested an opportunity to submit the correct information. The Windpool denied Arrowood’s request on the grounds that the deadline for corrections had passed.

Litigation followed, and the Mississippi Insurance Commissioner and the Hinds County Chancery Court affirmed the Windpool’s decision. On appeal, the Mississippi Supreme Court reversed, holding that the Windpool’s reporting deadline was tolled because its incorrect representation precipitated Arrowood’s incorrect data submission. The Court remanded the matter to the Mississippi Insurance Commissioner for further proceedings. Arrowood Indemnity Co. v. Mississippi Windstorm Underwriting Association, No. 2014-CA-01638-SCT (Miss. June 16, 2016).

This post written by Rob DiUbaldo.

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