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New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

ARBITRATION DENIED IN CLASS ACTION WHERE PLAINTIFF’S TRUST WAS A PARTY TO ARBITRATION AGREEMENT, BUT PLAINTIFF WAS NOT

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In a life settlement transaction, in which a life insurance policy is sold by its owner to another for more than its cash-surrender value but less than the net death benefit, the seller contended that the broker and purchaser conspired to rig the bidding process, resulting in undisclosed kickbacks to the broker. The seller filed a putative class action against the broker, purchaser, and related entities alleging fraud and other similar claims. The defendants moved to compel arbitration (among other things), relying on an arbitration clause in the purchase agreement. The seller, however, had formed a trust to acquire the policy and never personally participated in the purchase agreement. The trial court thus denied arbitration, finding that the seller was a non-signatory against whom arbitration could not be compelled. The defendants appealed, and the Third Circuit affirmed, holding that the seller of the policy could not be equitably estopped from avoiding the reach of the purchase agreement. The court explained that the “alleged fraud was related to the purchase agreement—it set the purchase price and, allegedly, the inflated, undisclosed broker’s commission. But that alone is not sufficient to compel arbitration under the equitable estoppel doctrine: the claims must be based directly on the agreement.” Here, the allegedly fraudulent kickback agreement “took place prior to and apart from the execution of the purchase agreement.” Griswold v. Coventry First LLC, Case No. 13-1879 (3d Cir. Aug. 11, 2014).

This post written by Michael Wolgin.

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COURT DENIES MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

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In prior proceedings, Glory Wealth obtained an England arbitration award against Industrial Carriers, Inc. (ICI) and a confirmation of the award in the United States District Court for the Southern District of New York.

Glory Wealth instituted an admiralty case in the Eastern District of Virginia to attach a vessel to satisfy the confirmed arbitration award, naming ICE and Freight Bulk PTE, Inc. (FBP) as defendants. FBP moved to vacate the arbitration confirmation judgment of the Southern District of New York, relying on Rule 60(b)(4), Fed.R.Civ.P., contending the New York judgment was void for lack of jurisdiction. The Virginia district court held that FBP could not collaterally attach the New York confirmation judgment, since FBP was not a party to the New York proceeding. Strong elements of judicial estoppel appear to have influenced the Virginia district court’s decision, since the court noted that FBP had repeatedly denied any status as ICI’s alter ego, yet in the motion at bar to dismiss Glory Wealth’s action, FBP contended it had standing as a party to the New York case to move to vacate the New York judgment. Flame S.A and Glory Wealth Shipping PTE Ltd. v. Industrial Carriers, Inc., Vista Shipping, Inc. and Freight Bulk PTE, Inc., Case No. 2:13-cv-658 (U.S.D.C., E.D. Va., July 17, 2014).

This post written by Kelly A. Cruz-Brown.

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NEW JERSEY’S “DIRECT ACTION STATUTE” IS NOT A BAR TO JUDGMENT CREDITOR’S COVERAGE ACTION

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A New Jersey appellate court recently addressed that state’s “direct action statute,” concluding that it did not prevent judgment creditors from pursuing a coverage action arising out of an LMX reinsurance spiral. The plaintiffs in the underlying action were former shareholders of certain insurance companies, and they sued the insurers’ managing general agent for professional negligence. The MGA, now defunct, failed to answer. On the eve of the damages hearing, the MGA’s professional liability and excess carriers (Travelers and ERSIC) asserted a variety of coverage defenses, and denied the claim. The plaintiffs obtained a $92 million judgment against the MGA.

After obtaining their judgment, the plaintiffs filed suit in New Jersey against Travelers and ERSIC seeking coverage under the two policies. The trial court dismissed the coverage case due to lack of standing. The trial court based its decision, in part, on New Jersey’s so-called “direct action statute,” N.J.S.A 17:28-2. That statute requires that certain types of policies (those addressing injury to a person and certain loss or damage to property) contain a provision “that the insolvency or bankruptcy of the person insured shall not release the insurance carrier from the payment of damages for injury sustained or loss occasioned during the life of the policy, and stating that in case execution against the insured is returned unsatisfied in an action brought by the insured person because of the insolvency or bankruptcy, then an action may be maintained by the injured person against the [insurer] under the terms of the policy.” The trial court accepted the defendants’ argument that the statute authorizes a direct action against an insurer only for the particular personal injury and property damage risk specified in the statute.

The appellate court disagreed, first noting the general principle that after an injured plaintiff obtains a judgment against an insured tortfeasor that remains unsatisfied due to insolvency, the plaintiff “stands in the shoes” of the insured with respect to the insurance policy and thus acquires standing to pursue an action against the insurer. The court rejected the “direct action statute” argument, holding that just because the statute mandates that certain specifically identified types of policies must contractually provide for the right to a post-judgment action, it does not follow that no such right exists in connection with other types of policies. The appellate court noted that “direct action statute” is a misnomer because the statute does not actually authorize direct actions. Rather, it prohibits insurers from contractually disclaiming, in the specifically enumerated policy types, an injured party’s right to sue the insurer for an unsatisfied judgment. The statute does not provide that derivative or post-judgment actions are available only in regard to those certain types of policies. Accordingly, the plaintiffs had standing to pursue their coverage action. Ferguson v. Travelers Indem. Co., Case No. A-3530-12T3 (N.J. Super. Ct. App. Div. August 4, 2014).

This post written by Catherine Acree.

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COURT REJECTS CLAIMS OF PRIVILEGE, WORK PRODUCT, AND THE COMMON INTEREST DOCTRINE TO REINSURANCE INFORMATION

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In a discovery dispute between insurer Progressive and the FDIC, as receiver of the insured bank, a federal district court has rejected all claims of attorney-client privilege and work product protection to reinsurance information the court had previously directed Progressive to produce. As reported here, the court had compelled Progressive to produce certain reinsurance information to the FDIC, including communications with its reinsurers regarding potential coverage of the FDIC’s lawsuit against the bank’s directors and officers. Progressive then redacted portions of the communications on the grounds of attorney-client privilege and/or protected work product. The FDIC challenged both grounds. The court first found that the reinsurance information was not protected by work product because the information was created in the ordinary course of business and not “prepared or obtained because of the prospect of litigation.” The court then found that even if the documents contained attorney-client communications, any privilege was waived when Progressive voluntarily disclosed the documents to its reinsurers and broker. Progressive had argued that the common interest doctrine applied to the communications and, therefore, the attorney-client privilege was preserved. The court disagreed, finding the doctrine applied only when the parties shared a common legal interest, not a commercial or financial one. Further, there was no evidence establishing a joint strategy or legal enterprise, which is “central” to the common interest doctrine.

The court did reject the FDIC’s other claims as to alleged deficiencies in Progressive’s production, including Progressive’s failure to produce electronically stored information because Progressive was never previously required to retrieve it. Finally, the court rejected all of the reinsurer’s arguments that it need not comply with the FDIC’s subpoena for documents, including those of privilege, undue burden, and relevance. Progressive Casualty Ins. Co. v. FDIC, Case No. 12-CV-04041 (USDC N.D. Iowa Aug. 22, 2014).

This post written by Renee Schimkat.

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SECOND CIRCUIT FINDS THAT LATE NOTICE BARS CLAIMS AGAINST REINSURER

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The Court of Appeals for the Second Circuit affirmed a lower court’s ruling in favor of TIG Insurance Company, finding that AIU Insurance Company’s belated notice of claim to TIG under nine certificates of facultative reinsurance issued by TIG barred AIU’s claim. AIU submitted its claim almost four years after it settled with its insured regarding numerous asbestos-related lawsuits. Central to the Second Circuit’s ruling was its conclusion that, under New York’s choice of law rules, the substantive law of Illinois – and not New York – applied to the question as to the legal effect of the late notice. Under Illinois law, TIG was not required to prove it was prejudiced resulting from AIU’s late notice. AIU Insurance Co. v. TIG Insurance Co., No. 13-1580-cv (2d Cir. Aug. 27, 2014).

This post written by Leonor Lagomasino.

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