Week's Best Posts

COURT ADDRESSES HONORABLE ENGAGEMENT PROVISION IN ARBITRATION CLAUSE

April 14, 2015 by Carlton Fields

In First State Insurance Company v. National Cas. Co., 2015 WL 1263147, No. 14-1644 (1st Cir. March 20, 2015), the U.S. Court of Appeals for the 1st Circuit (the “Court of Appeals”) affirmed the lower court’s refusal to vacate an arbitration award involving contract interpretation and addressed the operation and effect of an “honorable engagement provision” in an arbitration clause.

In this case, the Appellant/Reinsurer sought to vacate a contract interpretation award involving eight reinsurance and retrocessional agreements because the arbitrators exceeded their scope of powers by re-writing the terms of the parties’ agreements. Specifically, the Appellant/Reinsurer asserted that the payment protocol set forth in the arbitration award was not based on the parties’ agreements and obligated Appellant/Reinsurer to pay billings that may not fall within the terms and conditions of the agreements. The Appellant/Reinsurer further asserted that the payment protocol would foreclose or impair its broad access rights under certain inspection and audit provisions of the agreements by conditioning those rights on the transmittal of an appropriate time-of-payment reservation of rights.

Regarding the payment protocol, the Court of Appeals determined that the payment protocol in the award tracked the plain language of the relevant portions of the parties’ reinsurance agreements. Concerning the challenge to the reservation of rights procedure, the Court of Appeals noted that the arbitration clauses for the reinsurance agreements contained an honorable engagement provision, which directed the arbitrators to consider each agreement as an “honorable engagement rather than merely a legal obligation” and further stated that the arbitrators “are relieved or all judicial formalities and may abstain from following the strict rules of law.” The Court of Appeals held that the honorable engagement provisions empowered arbitrators to grant forms of relief, including equitable remedies not explicitly mentioned in the underlying agreement. The Court of Appeal viewed the honorable engagement provisions as enhancing the prospects for a successful arbitration because they provided the arbitrators with the flexibility to custom-tailor remedies to fit particular circumstances.

This post written by Kelly A. Cruz-Brown.

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SECOND CIRCUIT AFFIRMS APPLICATION OF ILLINOIS NOTICE/PREJUDICE RULE IN REINSURANCE ROW

April 13, 2015 by Carlton Fields

Granite State Insurance Company (“Granite State”) brought an action against Clearwater Insurance Company (“Clearwater”) regarding a dispute over reinsurance claims Granite State made, and which Clearwater denied based on late notice. The claims pertained to underlying settlements of a large number of asbestos claims. The reinsurance certificates required prompt notice “of any event or development” which Granite State “reasonably believe[d] might result in a claim.” The district court found that Granite State’s notice to Clearwater under the reinsurance certificates at issue was untimely, and the Second Circuit affirmed.

In particular, the Second Circuit resolved a question raised on appeal pertaining to which state law applied. The parties agreed that, if there was a conflict of laws, Illinois law would apply under a “significant contacts” analysis, versus the law of the state where the action was pending – New York. But Granite State argued that Illinois law did not clearly conflict with New York law, and that therefore the New York federal court should have applied New York’s late notice rule, which requires an affirmative showing of prejudice on the part of the party asserting late notice as a bar to recovery.

The Second Circuit affirmed, finding that Illinois law was sufficiently clear on the issue, and does not require a showing of prejudice. Therefore, the laws were truly in conflict, and conflict of law analysis required application of Illinois law. Clearwater was thus not required to demonstrate that it was prejudiced by Granite State’s late notice in order to refuse to pay Granite State’s claims for reinsurance coverage. Granite State Ins. Co v. Clearwater Ins. Co., No. 14-1494 (2d Cir. April 2, 2015).

This post written by Catherine Acree.

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NATURE OF REINSURANCE RELATIONSHIP PRECLUDES DISMISSAL OF NEGLIGENCE CLAIM BROUGHT BY REINSURER AGAINST CEDENT

April 7, 2015 by Carlton Fields

A federal district court has denied a cedent’s motion to dismiss a negligence claim brought against it by its reinsurer, Old Republic National Title Insurance. The dispute between Old Republic and First American Title arose out of a reinsurance agreement where Old Republic agreed to assume a specified share of First American’s contractual liability under certain title insurance policies. First American negotiated a settlement of claims brought under those title policies and then asserted that Old Republic was obligated under the reinsurance agreement to pay its proportionate share of that sum. Old Republic paid the amount under a full reservation of rights, then sued First American for several causes of action, including negligence. The negligence claim alleged that when Old Republic made the offer for the reinsurance agreement, “First American undertook a duty to underwrite the Title Policies in a reasonably prudent manner and created a special relationship” with Old Republic that First American then breached.

First American moved to dismiss the negligence claim, arguing that the “gist of the action” doctrine precludes it. That doctrine states that an action in tort will not arise for breach of contract unless the tort action arises independent of the existence of the contract. First American argued that its liability stems from the parties’ reinsurance agreement and any duty owed by First American to Old Republic arises solely out of that contractual relationship. The court rejected that argument and the doctrine’s application, stating that the nature of the relationship between reinsurers and cedents, including the exercise of utmost good faith between them, supported a duty grounded in social policy, not solely in contract. The court further found that irrespective of the source of the duty owed, the negligence claim would not be dismissed because Old Republic, in the alternative, sought to rescind the reinsurance agreement and if the rescission claim ultimately prevailed, then the “gist of the action” would no longer be contractual. Old Republic National Title Insurance Co. v. First American Title Insurance Co., No. 8:15-cv-126 (USDC M.D. Fla. March 25, 2015).

This post written by Renee Schimkat.

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COURT FINDS IN FAVOR OF HARBINGER ON $50 MILLION CLAIM INVOLVING PURCHASE OF OLD MUTUAL FINANCIAL LIFE INSURANCE COMPANY

April 6, 2015 by Carlton Fields

In a lengthy opinion detailing extensive findings of fact and law, a New York federal district court entered its order in favor of Harbinger F&G, LLC and against OM Group (UK) Limited in an action stemming from claims arising from the stock purchase agreement for the purchase of Old Mutual Financial Life Insurance Company by Harbinger from OM Group. Under the Agreement, Harbinger was entitled to a $50 million purchase price reduction if the Maryland insurance regulators did not approve a post-closing transaction between Old Mutual and Front Street Re, a reinsurance company owned indirectly by Harbinger, and if Harbinger fulfilled certain other conditions precedent. Harbinger was required to prepare and file certain approval documentation in the form agreed to by the parties, to use reasonable best efforts to obtain governmental approval for the reinsurance transaction and, if the transaction was not approved, Harbinger was required to engage in certain remedial efforts. When the post-closing transaction was not approved but OM Group failed to make the purchase price reduction payment, Harbinger sued. After holding a bench trial on those issues not disposed of on summary judgment, the trial court entered judgment in favor of Harbinger but found OM Group was entitled to the payment of certain fees from Harbinger. “>Harbinger F&G, LLC v. OM Group (UK) Limited, Case No. 12 Civ. 05315 (CRK) (USDC S.D.N.Y. Mar. 18, 2015).

This post written by Leonor Lagomasino.

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COURT APPLIES CONCEPCION AND COMPELS ARBITRATION, REJECTING CLAIM THAT AGREEMENT PRECLUDED “EFFECTIVE VINDICATION OF STATE STATUTORY RIGHTS”

March 31, 2015 by Carlton Fields

In a putative class action alleging violation of Pennsylvania labor laws, unfair trade practices, and other state law claims brought by a franchisee against the franchisor and two subsidiaries, the court stayed the proceedings and compelled individual arbitration. The franchise agreement contained an arbitration clause and a class arbitration waiver provision, among other provisions limiting litigation, discovery, and certain damages, and shifting certain fees and costs. The plaintiff franchisee argued that the arbitration provision was unenforceable because it prevented him from effectively vindicating his state statutory rights. The court rejected this argument, holding that Concepcion and other U.S. Supreme Court precedent confirmed that there is “absolutely no rule that prevents arbitration when a person cannot effectively vindicate his or her state statutory rights,” and that the “effective-vindication” rule may apply only when the FAA is alleged to conflict with another federal law. The court also applied equitable estoppel to reject the franchisee’s alternative argument that only the franchisor, the sole signatory to the franchise agreement, could compel arbitration; the court found that the franchisee relied on the franchise agreement in his pleading, and that a close relationship existed among the defendant entities. The court also construed the agreements between the parties to find that the claims asserted by the franchisee fell within the scope of the arbitration agreement. Last, the court construed the scope of the arbitration provision and held that it applied to the franchisee’s claims, notwithstanding the franchisee’s argument that his claims did not arise out of the franchise agreement. The provision covered disputes “arising out of or relating to” the “rights and obligations of the parties,” which clearly applied. Moreover, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so” (citing Stolt-Nielsen). Torres v. Cleannet, U.S.A., Inc., et al., Case No. 2:14-cv-02818 (USDC E.D. Pa. Feb. 5, 2015).

This post written by Michael Wolgin.

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