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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

SECOND CIRCUIT FINDS ARBITRATOR DID NOT EXCEED AUTHORITY BY ISSUING AWARD, CONTRARY TO EARLIER AWARD

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This appeal is from a judgment entered by a district court in New York, denying a petition of United Brotherhood of Carpenters and Joiners of America (“UBC”) to enforce a May 4, 2014 arbitration award (“May 4 Award”) and to vacate a subsequent award on May 13, 2014 (“May 13 Award”), and granting Tappan Zee Constructors, LLC’s cross petition, seeking enforcement of the May 13 Award. UBC appealed the district court’s conclusion that the May 4 Award was not final and that the arbitrator did not exceed his authority by issuing the May 13 Award.

The contract at issue provided that the arbitrator must “render a short-form decision within 5 days of the hearing based upon the evidence submitted at the hearing, with a written decision to follow within 30 days of the close of the hearing”. The Second Circuit, under the “heightened standard of deference” courts apply to arbitration awards, concluded that it must defer to the arbitrator’s interpretation of the contract as allowing him to alter the earlier short‐form decision when rendering his later written decision. The Court noted that the contract does not define the term “short‐form”, nor does it specifically require that the second decision echo the result of the first. Thus, the Court held that, absent any such definitions or provisions, the arbitrator had the authority to interpret the contract as allowing him to change or alter the first award in consideration of certain criteria under the National Plan for the Settlement of Jurisdictional Disputes in the Construction Industry, which governed the arbitration. Accordingly, the Court affirmed the district court’s ruling, confirming the May 13 Award and vacating the May 4 Award.

United Brotherhood of Carpenters and Joiners of America v. Tappan Zee Constructors, LLC, No. 15-1002 (2d Cir. Oct. 20, 2015).

This post written by Jeanne Kohler.

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COURT FINDS THAT FOLLOW THE FORTUNES DOCTRINE DOES NOT APPLY TO CLAIMS AGAINST A REINSURANCE PROGRAM’S TPA, BUT DISMISSES SUIT AGAINST IT ON OTHER BASES

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A New York federal district court recently held that the follow the fortunes doctrine does not govern certain claims brought against a third-party administrator of a reinsurance program, but otherwise granted the administrator’s motion to dismiss on various grounds. AmTrust North America, Inc. and its affiliate, Technology Insurance Company, Inc., brought suit against certain individuals and companies in which those individuals were purportedly involved (the “Third-Party Plaintiffs”) seeking a declaratory judgment and monetary damages arising from a reinsurance venture. The gist of the insurers’ claims was that the Third-Party Plaintiffs fraudulently induced the insurers to act as “middle men” in a reinsurance program that was supposed to be structured so that the insurers avoided risk, when in fact they were exposed. The Third-Party Plaintiffs, in turn, sued Network Adjusters, Inc., the claims administrator for the program, alleging that its conduct inflated the insurers’ purported losses.

The factual background discussing the complex transactions involved in the lawsuit is described here. Network moved to dismiss the third-party complaint. The court denied the prong of Network’s motion that sought dismissal under the follow the fortunes doctrine, finding the doctrine inapplicable to the claims alleged against Network, which did not arise from a cedent/reinsurer relationship. Dismissal was nonetheless warranted because: (a) the Third-Party Plaintiffs’ breach of contract claim was not actionable, as they were not parties to or third-party beneficiaries of the contract under which the claims against Network arose; (b) Network owed no duty of care to the Third-Party Plaintiffs, defeating the cause of action for negligence; (c) the Third-Party Plaintiffs’ contribution claim sought only economic/contract damages, and was not cognizable under New York law; and (d) the causes of action for common law and contractual indemnification failed because Network owed no independent duties to the Third-Party Plaintiffs, nor did they plead facts alleging that Network’s contractual duty to indemnify was triggered. Amtrust North America, Inc. v. Safebuilt Insurance Services, Inc., No. 1:14-cv-09494 (USDC S.D.N.Y. Oct. 28, 2015).

This post written by Rob DiUbaldo.

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INSURER’S ACTION TO ARBITRATE STAYED IN LIEU OF EARLIER-FILED STATE COURT COVERAGE ACTION

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An Illinois federal court recently stayed an insurer’s petition to compel arbitration of a dispute with its policyholder, finding that abstention in favor of an earlier-filed suit involving the parties was appropriate under the so-called Colorado River doctrine. A.O. Smith Corporation entered into a settlement/coverage-in-place agreement (the “Agreement”) with Allstate Insurance Company to resolve disputes between them concerning the coverage afforded by various policies for underlying asbestos claims. In exchange for certain payments, the Agreement released Allstate from all claims and liabilities under the subject policies, provided that A.O. would be responsible for a share of defense and indemnity costs, and required A.O. to cooperate in the defense of such claims. The Agreement also contained a provision mandating that A.O. and Allstate resolve disputes by arbitration.

The complex factual history regarding this case can be found here. In short, years after the Agreement was entered into, Continental Casualty Company brought suit in Wisconsin against Allstate, A.O., and other insurers seeking contribution and indemnification for amounts paid by Continental to resolve certain asbestos claims. Allstate moved to stay the action and petitioned an Illinois federal court to compel arbitration under the Agreement on the basis that certain issues involved in the Wisconsin action concerning the Agreement’s scope and A.O.’s duty to cooperate were arbitrable. The Illinois court held that it had subject matter jurisdiction over the action, rejecting A.O.’s motion to dismiss for lack thereof, on the grounds that the Wisconsin suit plainly involved matters that fell within the ambit of the Agreement’s arbitration provision, making it ripe under Section 4 of the Federal Arbitration Act. However, the court granted A.O.’s request to stay the lawsuit pursuant to the Colorado River doctrine, finding that the Wisconsin action would dispose of all the claims presented by Allstate, and that other factors, such as the desire to avoid piecemeal litigation with the other insurer-defendants, that the Wisconsin suit was filed first, the Agreement’s incorporation of Wisconsin law, and the risk of inconsistent rulings weighed in favor of abstention. Allstate Insurance Co. v. A.O. Smith Corp., No. 1:15-cv-06574 (USDC N.D. Ill. Oct. 23, 2015).

This post written by Rob DiUbaldo.

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COURT LAYS OUT VARIOUS GUIDELINES FOR ASSERTING PRIVILEGE IN INSURANCE AND REINSURANCE RELATED DISCOVERY

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The court considered the various privilege assertions of both the insurers (plaintiffs) and the insureds (defendants) in a multi-insurer insurance litigation. In analyzing varying categories of documents, including subsets of documents produced to the court in camera, the court ordered the production of certain documents but not others. Included in the court’s reasoning were the following principles based on New York law: (1) regarding attorney client privilege, discussions between the insurer and its attorney in advance of the denial of coverage are not privileged unless they are “primarily or predominantly a communication of a legal character,” as distinct from routine insurance business activities such as claim investigation; (2) regarding work product, the party seeking to withhold a document “must demonstrate that the document it seeks to withhold was created because of the anticipation of litigation” and in the context of insurers, that presumptively occurs when the insurance claim is denied; (3) documents related to reserves and reinsurance is discoverable unless they are “covered by another relevant privilege”; and (4) documents generated by the insureds that “speak more to the requirements for making a case to the insurers, not a case against the insurers in the courts,” namely, documents generated before the submission of proof of loss, is presumptively not privileged and is discoverable. Great American Insurance Co. of N.Y. v. Castleton Commodities International LLC, Case No. 1:15-cv-03976 (USDC S.D.N.Y. Oct. 15, 2015).

This post written by Michael Wolgin.

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SIXTH CIRCUIT CLARIFIES PRIOR REVERSAL OF AN ORDER THAT HAD VACATED ARBITRATION AWARD AS A MANIFEST DISREGARD OF THE LAW

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After an arbitrator ruled that indemnification agreements between an acquiring company and certain former directors and trustees of employee stock ownership plans, were void under ERISA, the district court vacated the arbitrator’s ruling as a manifest disregard of the law. On the initial appeal of that ruling, the directors argued that district court properly found a manifest disregard of the law based on ERISA, and also because the arbitrator ignored the directors’ alternative arguments based on fraud and estoppel. The Sixth Circuit reversed the vacatur ruling under ERISA, but in passing appeared to reject the remaining arguments asserted by the directors. Accordingly, on remand, the district court precluded the directors from asserting their alternative fraud and estoppel arguments, as the “law of the case.” The directors appealed, and, in a candid opinion, the Sixth Circuit reversed, noting “[w]e regret the extent to which [the Court’s] language was misleading.” The directors’ fraud and estoppel theories were not rejected, and on remand, “the district court should address that argument in the first instance.” Schafer v. Multiband Corp., Case No. 14-2518 (6th Cir. Oct. 20, 2015).

This post written by Michael Wolgin.

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