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New reinsurance-related and arbitration developments from Carlton Fields

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NEW YORK COURT OF APPEALS FINDS MCCARRAN FERGUSON ACT DOES NOT REVERSE PREEMPT THE FAA WITH RESPECT TO CALIFORNIA INSURANCE CODE § 11658

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In an action to compel arbitration under payment agreements entered into between National Union and its insured, the New York Court of Appeals held the determination of arbitrability was not barred by the McCarran Ferguson Act, and would be decided by an arbitration panel, despite the fact National Union did not file copies of its workers’ compensation insurance policies in accordance with California Insurance Code § 11658. § 11658 requires workers’ compensation insurers to file copies of policies prior to issuance and at the time the payment agreements at issue were entered into. California law did not mandate a specific form or content of arbitration clauses, nor otherwise restrict their use. The law was later amended, requiring arbitration provisions in workers’ compensation policies or endorsements be disclosed to each potential insured, and failure to do so resulted in a default to California as the choice of law and forum (see § 11658.5).

Since California law did not prohibit arbitration in the insurance context, no law would be “invalidated, superceded or impaired” by application of the FAA, and thus the McCarran Ferguson Act does not reverse preempt the FAA with respect to § 11658. It was therefore up to the arbitrators – not the Court – to determine the question of whether the payment agreements’ arbitration provisions, and the agreements themselves, are enforceable under California law, despite the fact they were not filed in accordance with § 11658. The parties were required to arbitrate as they had clearly delegated the question of arbitrability and enforceability of the arbitration clauses to the arbitrators, and pursuant to the FAA, such arbitration provisions should be enforced as written.

Monarch Consulting, Inc., et al. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., et al., Case No. 8 (N.Y. Feb. 18, 2016)

This post written by Nora A. Valenza-Frost.

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UPDATE ON COVERED AGREEMENT NEGOTIATIONS BETWEEN THE U.S. AND THE EUROPEAN UNION

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As we previously reported, in November 2015, the U.S. Treasury Department and the U.S. Trade Representative gave notice to Congress to initiate discussions with the European Union to enter into a Covered Agreement essentially addressing two major issues: (1) the equivalence of the U.S. insurance and reinsurance regulatory regime in the context of the EU’s Solvency II initiative; and (2) credit for reinsurance collateral requirements. Covered Agreements were introduced by the Dodd-Frank Act as a vehicle for limited federal intrusion into the regulation of the business of insurance and reinsurance by the states. We described the Covered Agreement process in a Special Focus article. On February 23, 2016, the United States and the European Union released a joint statement regarding the status of negotiations and advised that representatives met in Brussels on February 18-19, 2016, and that both sides agreed to move forward efficiently in pursuit of agreement and expressed their hope that such future Covered Agreement will improve regulatory and supervisory treatment for insurers and reinsurers operating on both sides of the Atlantic. The Joint Statement can be found here.

This post written by Jeanne Kohler.

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FEDERAL COURT FINDS THAT THE MCCARRAN FERGUSON ACT BARS PLAINTIFF’S RICO CLAIMS ARISING FROM CERTAIN REINSURANCE TRANSACTIONS

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In a putative class action seeking damages for alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) arising from certain reinsurance transactions, the United States District Court for the Western District of Missouri held that Plaintiff’s claims were barred by the McCarran-Ferguson Act, granting defendants’ motion to dismiss. Plaintiff Dale Ludwick and others purchased annuities from F&G Life Insurance Company, which was acquired by Harbinger Group, Inc. Plaintiff brought suit alleging that F&G, Harbinger and Harbinger’s chairman and CEO engineered a fraudulent accounting scheme to hide F&G’s liabilities, artificially inflate its reported assets, and create a false appearance of capital adequacy through reinsurance transactions with certain entities, including defendants Raven Reinsurance Company and Front Street Re (Cayman), Ltd, in violation of RICO.

Defendants moved to dismiss the action, arguing that plaintiff’s RICO claims impermissibly interfered with state statutory and regulatory insurance schemes, and were thus barred by the McCarran-Ferguson Act. The court granted defendants’ motion, finding that: (a) RICO does not specifically relate to the business of insurance, thus satisfying this prong of McCarran-Ferguson’s criteria; (b) the states relevant to the transactions at issue – Missouri and Iowa – have statutory schemes which regulate the business of insurance and governed said transactions; and (c) the application of RICO to the subject claims would intrude upon the insurance regulatory schemes in those states, and thus “invalidate, impair or supersede” the schemes in violation of McCarran-Ferguson. Moreover, the court rejected plaintiff’s argument that its common law claims negated the effect of McCarran-Ferguson and that such claims were not barred by the statute, as the transactions at issue were subject to the states’ insurance codes. Ludwick v. Harbinger Group, Inc., No. 15-cv-00011 (USDC W.D.MO. Feb. 12, 2016).

This post written by Rob DiUbaldo.

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COURT PROVIDES REFRESHER ON DISCOVERY IN BAD-FAITH LITIGATION WHERE REINSURERS ARE INVOLVED

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A Nevada federal district court provides a primer on discovery rules relating to bad faith claims and reinsurers. The case involved a bad-faith claim between OOIDA Risk Retention Group, Inc. and an individual insured. When the insured’s counsel made an array of discovery requests, OOIDA claimed attorney-client privilege and work-product doctrine for many of the documents. The dispute involved five different types of documents: 1): documents authored by or received by the liability adjuster; 2) communications between coverage counsel and liability defense counsel; 3) communications between adjusters and re-insurers; 4) communications or documents related to reserves; and 5) documents related to communications with third-party counsel or staff. The court noted that “the presumption against work product doctrine protection applies prior to a final coverage decision,” at which point there is no presumption that the documents are kept in the ordinary course of business. Given this, and that counsel for the individual claimant did not challenge OOIDA’s contention that providing information to a reinsurer does not waive privilege, the court found that emails “which discuss the liability lawsuit, coverage issues, reserves, and the budget from outside coverage counsel,” were protected by the “qualified immunity bestowed by the work product doctrine.” The court also found that withholding information regarding reserves in a bad faith case on the grounds that they are not relevant holds little water. The “bulk of cases” to consider the issue, the court stated, “have concluded that reserve information is relevant to whether an insurer acted in bad faith.” OOIDA Risk Retention Group, Inc. v. Bordeaux, Case No. 3:15-cv-00081-MD-VPC (USDC D. Nev. Feb. 3, 2016).

This post written by Zach Ludens.

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SECOND CIRCUIT FINDS PANEL DID NOT COMMIT A “MANIFEST DISREGARD OF THE LAW” AND DENIES VACATUR OF ARBITRATION AWARD

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The appellee, Sutherland Global Services, a call center support service provider, invoked the arbitration clause contained in its Master Service Agreement with the appellant, Adam Technologies, after Adam reportedly failed to pay for call center services rendered under the contract. The arbitration resulted in an award for Sutherland, which the district court confirmed. Adam appealed this ruling, contending that the arbitrators exceeded their authority and manifestly disregarded the terms of the contract. The Second Circuit found that Adam’s attempts to demonstrate errors committed by the panel were nothing more than attacks on “an arbitrator’s factual findings and contractual interpretation” which “generally are not subject to judicial challenge.” To the extent Adam argued that the panel overlooked certain provisions in the MSA limiting damages, the court held that the FAA “does not permit vacatur for legal errors.” Finally, with respect to Adam’s argument that the panel was improperly constituted, the court held that this contention was previously rejected by an earlier proceeding before the Fifth Circuit, and therefore barred by the doctrine of issue preclusion. Sutherland Glob. Servs. Inc. v. Adam Techs. Int’l SA de C.V., Case No. 15-1063-cv (2d Cir. Feb. 9, 2016).

This post written by Joshua S. Wirth.

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