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REINSURERS’ MOTION TO VACATE ARBITRATION AWARD HELD TIME-BARRED

May 26, 2015 by Carlton Fields

A federal judge in New York has denied reinsurers’ motions for relief from a prior judgment. The reinsurers, Equitas Insurance Limited and Certain Underwriters at Lloyd’s of London, argued that they were entitled to judicial relief because the insured, Arrowood Indemnity Company, procured an arbitration award later confirmed by the Southern District through fraud. Arrowood entered into a casualty reinsurance agreement with the underwriters. To recover under this agreement, claims needed to fall within one of three types of coverage. The underwriters denied a series of Arrowood’s asbestos claims under the “Common Cause Coverage” because it believed that the asbestos claims needed to be noticed during the original contract period. The parties submitted the matter to arbitration, where the panel agreed that Arrowood’s interpretation of the contract: that Common Cause Coverage was intended only to prevent recovery on known losses whose “common cause” occurred before the term of the original contract. The court confirmed the award.

Months later, the underwriters obtained a letter produced by Arrowood in a separate action that revealed Arrowood interpreted the Common Cause Coverage clause in the same way the underwriters had posited in the previous arbitration. The underwriters filed a motion seeking to relieve it from the judgment because of fraud. While relief on this basis under the Federal Rules of Civil Procedure is not time-limited, similar relief under the Federal Arbitration Act imposes a time limit – a motion to vacate an arbitration award must be served upon the adverse party within three months after the award is filed or delivered. Because the Act trumps civil rules when those rules conflict, the underwriters were time-barred. Arrowood Indemnity Co. v. Equitas Insurance Ltd., Case No. 13 Civ. 7680 (USDC S.D.N.Y. May 14, 2015).

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

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U.S. SUPREME COURT TO HEAR APPEAL ON ENFORCEABILITY OF ARBITRATION AGREEMENTS IN CALIFORNIA

May 18, 2015 by John Pitblado

The United States Supreme Court has granted DIRECTV’s petition for Writ of Certiorari and will hear the following question presented: Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

As reported here previously, DIRECTV had moved to dismiss or stay a class action litigation filed against it and to compel individual arbitration pursuant to the arbitration clause contained in DIRECTV’s customer agreements in California, which specifically prohibit class actions. The trial court denied the motion and the California Court of Appeal affirmed. The Court of Appeal focused on the arbitration clause’s non-severability provision and its reference to “state” law to hold that the class-action waiver in the arbitration clause was invalid under California law and the entire arbitration agreement was therefore unenforceable. In its petition, DIRECTV argued that the Court of Appeal did precisely what the Supreme Court’s Concepcion decision prohibits: “It applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver.” DIRECTV further argued that because the decision is in direct conflict with a recent Ninth Circuit decision, creates an acknowledged conflict between state and federal courts on a matter of federal law, and “evinces the very hostility to arbitration that led to the enactment of the FAA in the first place,” the Supreme Court’s review was warranted. Petitioner’s brief on the merits is to be filed with the Court by May 29, 2015, and Respondents’ brief is to be filed by July 17, 2015. The Court is scheduled to hear the case during its October 2015 term. DIRECTV, Inc. v. Imburgia, et al., Case No. 14-462.

This post written by Renee Schimkat.

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IRS PROPOSES REGULATIONS DIRECTED TO “PASSIVE” HEDGE FUND FOREIGN INSURANCE ENTITIES

May 12, 2015 by Carlton Fields

On April 24, 2015, the Internal Revenue Service proposed regulations directed to “situations in which a hedge fund establishes a purported foreign reinsurance company in order to defer and reduce the tax that otherwise would be due with respect to investment income.” The IRS proposed regulations designed to clarify its applicable tax rules, by attempting to define exceptions to “passive income” from foreign insurance companies. Such income (earned from investments) is taxed at higher rates than income from insurance business, which is taxed only when it is realized, and at lower capital gains rates. The proposed regulations seek to clarify when investment income earned by a foreign insurance company is derived in the “active conduct” of an “insurance business,” and thus whether it qualifies for the passive income exception.

The proposal provides that “insurance business” means “the business activity of issuing insurance and annuity contracts and the reinsuring of risks underwritten by insurance companies, together with those investment activities and administrative services that are required to support or are substantially related to insurance and annuity contracts issued or reinsured by the foreign insurance company.” The proposed regulations “do not set forth a method to determine the portion of assets held to meet obligations under insurance and annuity contracts.” The IRS requests comments by July 23, 2015, “on appropriate methodologies for determining the extent to which assets are held to meet obligations under insurance and annuity contracts.”

This post written by Michael Wolgin.

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VOLUNTARY-INVOLUNTARY RULE IMPLICATED IN REMOVAL PROCEEDING

May 11, 2015 by Carlton Fields

In late April, a district court in New York granted plaintiff Utica Mutual Insurance Company’s (“Utica”) motion to remand, implicating the voluntary-involuntary removal rule. Utica originally filed a breach of contract lawsuit against defendant American Re-Insurance Company (“American”). The lawsuit also named as co-defendant, Transatlantic Reinsurance Company (“Transatlantic”), a corporation domiciled and with a principal place of business in New York. American was initially unable to remove the case to federal court due to lack of diversity among the co-defendants.

A New York state court severed the claims against American and Transatlantic, thereby eliminating the diversity impediment for removal. Utica argued that “removability can only be created by Utica’s voluntary conduct,” and not by the court’s involuntary severance order. American argued that the voluntary-involuntary rule’s fraudulent misjoinder exception applied, as Transatlantic was improperly joined. The court found—citing second circuit precedent—that an action was not removable when non-diverse parties were made diverse by a court’s involuntary severance order. The voluntary-involuntary rule was designed to “protect against the possibility that a party might secure a reversal on appeal in state court of the non-diverse party’s dismissal, producing renewed lack of complete diversity in the state court action….in order to be removable, be one which could have been brought in federal court in the first instance.” The case turned on whether the order was final, and not simply voluntary.

As Utica’s severance order appeal was not yet final, a requirement under the voluntary-involuntary rule, the district court remanded the case back to the New York State Supreme Court. The court noted that American’s fraudulent misjoinder claim was “time barred” as defendants failed to file within thirty days after receipt. The court also noted that American understood “Utica’s motivation for joining Transatlantic and [American] as defendants in the same action,” an admission that went against their claim for fraudulent misjoinder.

Utica Mutual Ins. Co. v. American Re-Ins. Co., No. 6:14-CV-1558 (USDC N.D.N.Y. Apr. 27, 2015).

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

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COUNCIL OF THE EUROPEAN UNION AGREES TO NEGOTIATIONS ON REINSURANCE

May 5, 2015 by John Pitblado

On April 21, 2015, the Council of the European Union (“Council”) issued a mandate to the European Commission (“Commission”) to negotiate an agreement with the United States on reinsurance. The mandate consists of a decision authorizing the opening of talks and directives for the negotiation of the agreement. The Commission will negotiate on the EU’s behalf, in consultation with a Council committee. The agreement will be concluded by the Council with the consent of the European Parliament.

These negotiations would be initial steps towards possible removal of collateral requirements in both jurisdictions in order to ensure a risk-based determination for all reinsurers in relation to credit for reinsurance. The Commission likely will negotiate with the Federal Insurance Office (“FIO”), which has authority under the Dodd-Frank Act to negotiate international agreements on behalf of the United States. Any such agreement reached by the FIO would pre-empt state laws, in this case the Model Credit for Reinsurance Act. It will be interesting to see how the NAIC reacts to this development.

This post written by Kelly A. Cruz-Brown.

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