Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

FOLLOWING REVERSAL OF ARBITRABILITY RULINGS ON APPEAL, COURT DISMISSES REINSURANCE LITIGATION BASED ON FORUM SELECTION

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On August 15, 2014, we reported on a Tennessee district court finding unenforceable an arbitration clause in a Reinsurance Participation Agreement (RPA) between an insured and a reinsurer. The insured had filed a lawsuit seeking to reform the RPA, and the reinsurer sought to compel arbitration. The court refused to compel arbitration, finding that the arbitration clause was invalid. Subsequently, the Sixth Circuit vacated this ruling, finding that the parties manifestly intended to submit the threshold question of arbitrability to the arbitrator and not the court. On remand to arbitration, the arbitrator then determined that the matter was not arbitrable based on the RPA’s forum selection clause. In response to that ruling, the reinsurer moved to vacate it, and to dismiss the lawsuit altogether based on the choice of a Nebraska forum in the RPA’s forum selection clause.

The court has now granted dismissal, holding that the forum selection clause was unambiguous, and it was mandatory. The court also found that the insured failed to demonstrate that the clause was obtained by fraud, duress or other unconscionable means, that a Nebraska court would not handle the suit properly, or that Nebraska was seriously inconvenient to the insured. The insured also failed to show that “public-interest” factors disfavored a dismissal. Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., Case No. 1:13-CV-01069 (USDC W.D. Tenn. Feb. 2, 2016).

This post written by Barry Weissman.

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DISTRICT COURT HOLDS ARBITRATION CLAUSE DOES NOT APPLY TO SWISS INSURER

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The United States District Court for the Southern District of New York recently denied a captive insurer’s motion to compel arbitration. The captive insurer, First Mutual Transportation Assurance Company, Inc. (FMTAC), argued that its reinsurer, Infrassure Ltd. (Infrassure), should be compelled to arbitrate a Hurricane Sandy-related reinsurance dispute in London. The parties shared a Certificate of Facultative Reinsurance that contained an arbitration clause setting forth arbitration procedures applicable to disputes between them. The district court held that the clause is inapplicable to this suit “because, by its explicit language, it only governs disputes between FMTAC and ‘UK and Bermuda Insurers.’” Infrassure is a Swiss insurer and therefore is not bound by the arbitration clause.

Infrassure, Ltd. V. First Mutual Transportation Assurance Company, Inc., No. 15-cv-8230 (U.S.D.C. S.D.N.Y. Jan. 22, 2016)

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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FOURTH CIRCUIT HOLDS ARBITRATION CLAUSE UNENFORCEABLE WHEN IT FORBIDS ARBITRATOR FROM APPLYING THE APPLICABLE LAW

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This case involves a class action filed in a Virginia district court against Delbert Services Corporation, the servicing agent of certain loans, for which the plaintiffs claimed that Delbert’s unfair debt collection practices violated federal law. The lender was Western Sky Financial, LLC, an online lender owned by a member of the Cheyenne River Sioux Tribe and located on the Cheyenne River Indian Reservation in South Dakota. Delbert sought to compel arbitration in response to the plaintiffs’ claims.

The loan agreements at issue required resolution of all disputes through arbitration, but stated that the agreement was “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe” and that “[n]either this Agreement nor Lender is subject to the laws of any state of the United States of America”.

The Virginia district court upheld the arbitration clause in the loan agreements. However, although recognizing that the FAA establishes a liberal policy favoring arbitration agreements, the Fourth Circuit reversed the district court’s ruling, holding that the arbitration clause was unenforceable. The Court noted that “[t]he agreement purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law. The FAA does not protect the sort of arbitration agreement that unambiguously forbids an arbitrator from even applying the applicable law.” The Fourth Circuit further noted that parties are free within bounds to select a choice of law clause, but that Delbert was seeking to use the arbitration process to avoid state and federal law.

Hayes v. Delbert Services Corp., No. 15-1170 (9th Cir. Feb. 2, 2016).

This post written by Jeanne Kohler.

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COURT DENIES MOTION TO STAY FURTHER REINSURANCE ARBITRATION PENDING APPEAL CONCERNING INITIAL ARBITRATION

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At the end of January, the United States District Court for the Eastern District of Michigan denied a motion to stay arbitration pending appeal. The case involves a reinsurance dispute between National Union Fire Insurance Company of Pittsburgh and members of the Meadowbrook Insurance Group. Following an initial arbitration, National Union moved to confirm the award. The court confirmed in part but vacated the portion of the arbitration award dealing with prejudgment interest. As a result, the court ordered the parties to arbitrate the issue of prejudgment interest. Both parties appealed, and National Union filed a motion to amend the judgment and a motion to stay the subsequent arbitration pending appeal.

According to National Union, the parties had already arbitrated the amount and interest in the first arbitration and the district court should have confirmed, vacated, or modified the awards—rather than submitting that question to a new arbitration—which National Union is appealing to the Sixth Circuit. However, the district court noted that the arbitration panel found in favor of National Union “in part because Meadowbrook failed to produce documentation” that would allow it to compute damages and prejudgment interest. Therefore, the district court reasoned, this issue had not already been arbitrated, and National Union was unlikely to succeed on the merits of its appeal. For this reason, among others, the court denied both National Union’s motion to amend the judgment and a motion to stay the subsequent arbitration pending appeal. Star Insurance Co. v. National Union Insurance Co. of Pittsburgh, Case No. 14-12915 (E.D. Mich. Jan. 27, 2016).

This post written by Zach Ludens.

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THIRD CIRCUIT FINDS THAT ALLEGED LEGAL ERRORS DO NOT JUSTIFY VACATUR OF ARBITRATION AWARD

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The United States Court of Appeals for the Third Circuit recently confirmed an arbitration award in a dispute concerning the ownership of certain music rights, rejecting the argument that alleged legal errors constituted sufficient grounds to vacate the award. The underlying arbitration involved a dispute between The Pullman Group, LLC and its owner, David Pullman (collectively, “Pullman”), and the estates of John Whitehead and Gene McFadden, who were “an integral part of the Philadelphia music scene in the 1970s.” Pullman entered into a contract with Whitehead and McFadden to purchase their song catalogue, but the sale was never finalized. After the musicians passed away, Pullman and the estates agreed to arbitrate their dispute over ownership of the catalogue. An arbitration panel ruled in favor of the estates, and Pullman brought an action in federal court to vacate the award on the grounds that the panel had committed various legal errors.

The district court denied Pullman’s motion to vacate the award, which the Third Circuit affirmed. The court held that mere errors of law are insufficient to warrant vacatur of arbitration award, and that such outcome is only justified where an arbitrator’s legal error is so substantial that a party was deprived of a fair hearing. In this case, that the arbitration panel’s application of New York law and decision to exclude certain testimony was well-founded, and did not arise to the level of misconduct required to vacate the award. The Third Circuit rejected Pullman’s alternative argument that the panel’s ruling amounted to “manifest disregard of the law,” finding that even if this doctrine is still a viable ground to vacate an arbitration award (which the court declined to address), it would not apply because the panel’s decision did not ignore binding legal precedent. Whitehead v. The Pullman Group, LLC, Nos. 15-1627 & 15-1628 (3d Cir. Dec. 10, 2015).

This post written by Rob DiUbaldo.

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