Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

D.C. CIRCUIT HOLDS THAT WHOLLY FOREIGN RETROCESSIONS NOT SUBJECT TO U.S. EXCISE TAX

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In late May, the United States Court of Appeals for the District of Columbia Circuit affirmed a grant of summary judgment to a reinsurer in a dispute with the IRS regarding the imposition of U.S. excise taxes on a wholly foreign retrocession arrangement. The case involved Validus Reinsurance, Ltd., which is organized under the laws of and with a principal place of business in Bermuda. The court found that the relevant provision of the Internal Revenue Code did not apply extraterritorially and ordered the return of the taxes paid by Validus. Validus is a foreign reinsurance company with no operations in the United States. However, Validus does sell reinsurance to insurance companies selling policies covering risks, liabilities, and hazards within the United States. Validus also purchases retrocessions for its own reinsurance, often from other non-U.S.-based retrocessionaires. The transactions at bar involved a U.S.-based risk with reinsurance issued by Validus and a retrocession issued by a foreign retrocessionaire.

Congress had expanded the excise tax applicable to foreign insurance in order to “eliminate an unwarranted competitive advantage now favoring foreign insurers,” which were not subject to U.S. income tax laws. After another amendment, the particular provision of the Code section at issue, § 4371, requires an excise tax of one cent per dollar of premium paid on foreign-issued “reinsurance covering any of contracts taxable” as casualty insurance or life insurance. Because the retrocession is covering reinsurance that covers the taxable underlying contract, the court had to resolve an ambiguity in the statute. Looking to the fact that the government’s proposed reading would lead to a “cascading tax theory” with no limit as to the number of times that the government could collect tax on retrocessions with some underlying U.S.-based risks, the court determined that Congress had not shown an intent for the law to apply this extraterritorially. Under the canon of statutory interpretation against implying a reading of extraterritoriality absent a showing of intent by Congress, this transaction was an overbroad reading of the statute. Validus Reinsurance, Ltd. v. United States, No. 13-109 (D.C. Cir. May 26, 2015).

This post written by Zach Ludens.

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CALIFORNIA APPELLATE COURT REVERSES TRIAL COURT, GRANTS MOTION TO COMPEL ARBITRATION

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A state appellate court in California reversed a trial court’s decision to deny defendant Santa Lucia Preserve Company’s (“Santa Lucia”) motion to compel arbitration, holding that plaintiffs failed to prove that the underlying arbitration agreement was substantively unconscionable in order for that agreement to be invalidated.

Plaintiffs filed a putative class action complaint against Santa Lucia alleging the company failed to pay requisite overtime compensation in addition to other violations of California’s Business and Professions Code. Santa Lucia moved to compel arbitration under previously signed employment agreements with plaintiffs. Plaintiffs alleged that the arbitration agreements were substantively unconscionable as they lacked mutuality and that they did not provide for judicial review. The trial court denied Santa Lucia’s motion to compel arbitration finding the agreements unconscionable both procedurally and substantively.

The appellate court reversed, finding that the arbitration agreements were not substantively unconscionable for a number of reasons. First, the agreements bound both employee and employer to arbitration for “any dispute or claim.” Second, the agreements waived court and jury trials for both parties. The court noted that judicial review is allowed when “arbitrators exceed[] their power and the award cannot be corrected without affecting the merits of the decisions…” The court determined that plaintiffs’ claims for overtime pay are subject only to the review requirements in Armendariz, namely that an arbitration decision be written and be reviewed under limited circumstances. Valdez v. Santa Lucia Preserve Co., No. H040685 (Cal. App. 6th Dist., Mar. 23, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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NINTH CIRCUIT DIRECTS COURT TO VACATE RULING THAT DISQUALIFIED ARBITRATOR IN THE MIDST OF AN ONGOING ARBITRATION

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The dispute at issue in this case involved claims of fraud in the sale of condominium units asserted by unit purchasers against the condominium developer. Arbitration under the AAA was underway between the parties, when it was discovered that the arbitrator had failed to disclose that he had become involved in business ventures to finance litigation for investment purposes. The developer requested that the AAA disqualify the arbitrator and stay the arbitration, but the AAA denied the request. The developer then convinced the district court to intervene in the pending arbitration and disqualify the arbitrator.

On appeal, the Ninth Circuit determined that the court committed “clear error,” holding that: (1) “the financial relationship in this case is contingent, attenuated, and merely potential” and did not satisfy “evident partiality”; and (2) “the district court’s equitable concern that delays and expenses would result if an arbitration award were vacated is manifestly inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of the arbitration.” The Ninth Circuit entered a writ of mandamus, and directed the district court to vacate its ruling, finding that the lower court’s “interference in ongoing arbitration proceedings raises the specter” of confusion in the court system, and creates “new and important problems” and an issue of law of first impression. In re Sussex, No. 14-70158 (9th Cir. Jan. 27, 2015).

This post written by Michael Wolgin.

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MOTION FOR RECONSIDERATION OF PARTIAL SUMMARY JUDGMENT DENIED CONCERNING LIABILITY CAP ON REINSURANCE CERTIFICATES

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A district court in New York denied an insurer’s motion for reconsideration of a partial summary judgment order in favor of the reinsurer that concluded that the reinsurance limits set forth nine certificates of reinsurance at issue in the case were inclusive of costs and expenses, and created an overall cap of liability on the certificates. The insured moved for reconsideration of the district court’s opinion based on the Second Circuit’s intervening unpublished opinion, not to be cited as precedent, in Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., 594 F. App’x 700 (2d Cir. 2014). The district court denied the motion for reconsideration because the insurer conceded that the Utica decision represented an important clarification of existing law and was not in of itself an intervening change in law. Thus, the insurer failed to point to any change in controlling law or any new evidence that might reasonably be expected to alter the conclusion reached by the Court in granting the reinsurer’s partial summary motion. Global Reinsurance Corp. v. Century Indemnity Co., Case No. 13 Civ. 06577 (USDC S.D.N.Y. April 15, 2015).

This post written by Kelly A. Cruz-Brown.

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