Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Reinsurer Permitted to Intervene in Affiliate’s Lawsuit Related to Breach of MGA Agreement

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Texas Insurance Co. sued Talisman Specialty Underwriters Inc. for breaching the parties’ managing general agent (MGA) agreement by authorizing the issuance of hundreds of insurance policies by Texas Insurance in sectors (like marine and energy) where Talisman Specialty did not have the authority to do so. Texas Insurance further alleged that Talisman Specialty had withheld $10 million in premiums owed to Texas Insurance and that it had failed to segregate them in a fiduciary account for Texas Insurance’s benefit as required by the MGA agreement.

Talisman Insurance Co., an affiliate of Talisman Specialty, filed a motion to intervene. Talisman Insurance alleged that it had entered into a quota share reinsurance agreement with Texas Insurance, pursuant to which Talisman Insurance agreed to reinsure the insurance sold by Talisman Specialty. In turn, Texas Insurance agreed to pay Talisman Insurance 94% of the insurance premiums it received, pursuant to the reinsurance agreement. Talisman Insurance argued additionally that Texas Insurance agreed that Talisman Specialty would remit these payments directly to Talisman Insurance, bypassing Texas Insurance. Talisman Insurance alleged that Texas Insurance breached the reinsurance agreement by initiating the lawsuit and by claiming that Talisman Specialty must first remit the premiums to Texas Insurance, thereby interfering with Talisman Insurance’s right to payment.

The district court found that Talisman Insurance was entitled to intervene as of right because it timely filed its motion early in the case and because it had a direct and substantial interest in the insurance premiums which interest would not be adequately represented by the existing parties and which could be impaired if it were not permitted to intervene. Talisman Insurance timely sought to intervene as the motion, although filed approximately two months after Talisman Insurance learned of the suit, came before discovery had opened in the matter, and further, Talisman Insurance did not seek to reopen any prior proceedings in the case.

The court found that Talisman Insurance had a direct and substantial property interest in the premiums and the method of payment, as its alleged contractual right to receive its share of the premiums directly from Talisman Specialty allegedly resulted in administrative cost-savings. If Talisman Insurance were not permitted to intervene and instead was required to institute a separate proceeding, its interests in the premiums and method of payment could be impaired by rulings in the instant lawsuit. Finally, the court found that Talisman Insurance’s interests were not adequately represented by its affiliate, Talisman Specialty, even though the two shared the same counsel, as Talisman Specialty was not a party to the reinsurance agreement and the two entities sought to enforce different contractual rights derived from their individual contracts with Texas Insurance.

As such, the court granted the motion to intervene, finding Talisman Insurance satisfied all of the requirements necessary to establish its entitlement to intervention.

Texas Insurance Co. v. Talisman Specialty Underwriters, Inc., No. 2:23-cv-03412 (E.D. La. Dec. 1, 2023).

Second Circuit Affirms Schwab Victory in FINRA Arbitration

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The Second Circuit Court of Appeals recently affirmed a decision confirming an arbitration award in favor of Charles Schwab & Co. over allegations of discovery abuses that purportedly rendered the arbitration proceeding unfair. We previously wrote about the district court decision confirming the arbitration award in a prior post.

The appellant again argued to the Second Circuit that the arbitration panel had “refused to hear evidence pertinent and material to the controversy and thereby rendered the proceedings fundamentally unfair.” But the Second Circuit found the appellant failed to carry its burden to demonstrate the panel’s discovery-related decisions rendered the proceeding unfair. To the contrary, the court noted that the panel considered numerous discovery motions, including hearing oral argument, and further that Schwab produced more than 5,500 documents to the appellant over 14 different document productions.

In concluding, the court stated that “in light of the ‘great deference’ accorded to arbitrators ‘in their evidentiary determinations,” the court found the arbitration proceeding was not fundamentally unfair.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 22-2748 (2d Cir. Nov. 29, 2023).

Eleventh Circuit Finds District Court Lacked Jurisdiction to Freeze Defendant’s Assets During Pendency of Action to Confirm Arbitration Award Against Him

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In Noble Prestige Ltd. v. Galle, the Eleventh Circuit Court of Appeals considered whether the trial court properly granted a preliminary injunction barring the defendants from dispersing assets during the pendency of the plaintiff’s motion to confirm an arbitration award rendered in its favor and against the defendants.

In that case, plaintiff Noble Prestige Ltd. issued a $500,000 loan to defendant Paul Horn to pursue litigation against AT&T, a telecommunications company. Under the terms of the loan, Horn agreed to repay Noble $5 million or 5% of his recovery from the litigation, whichever was greater. Noble also obtained a “security interest lien” in that portion of any recovery from AT&T. Thereafter, a Colorado state court found that Horn was unable to manage his own affairs due to various neurological disorders and placed Horn’s estate into a conservatorship. The Colorado court named defendant Craig Thomas Galle, Horn’s long-time attorney, as conservator of his estate.

The AT&T litigation ultimately settled for $57.5 million, and Noble sought to collect the $5 million it claimed it was owed by Horn under the loan. But the Colorado probate court refused to authorize Galle to repay the loan from Horn’s estate, and Noble initiated an arbitration proceeding in Hong Kong to enforce the terms of the loan. The arbitral panel found in Noble’s favor, and Noble filed a petition to confirm the award in federal court in the Southern District of Florida.

In the proceeding before the district court, Noble sought an order confirming the award rendered by the arbitral panel, and also sought an order freezing the AT&T settlement funds pending judgment in the confirmation proceeding. The district court denied the defendants’ motion to dismiss the petition and issued an order freezing the AT&T settlement funds pending a final judgment as requested by Noble. The defendants appealed.

On appeal, the Eleventh Circuit declined to exercise appellate jurisdiction over the district court’s denial of the motion to dismiss, noting that the denial of the defendants’ motion was not a final, appealable judgment. But the court held that the asset freeze order was immediately appealable as a preliminary injunction under 28 U.S.C. § 1292(a)(1). The court then vacated the preliminary injunction on two main grounds. First, the court applied the doctrine of “prior exclusive jurisdiction,” holding that because the Colorado probate court had already exercised exclusive in rem jurisdiction over Horn’s estate pursuant to Colorado probate law, the district court lacked the jurisdiction to assert equitable control over the same real property in the form of an asset freeze.

Second, the court held that the district court lacked authority to award preliminary injunctive relief under Federal Rule of Civil Procedure 65(b), noting that Noble’s petition in the district court sought final relief only in the form of a legal remedy (confirmation of the arbitration award) and did not otherwise invoke the court’s equitable jurisdiction. In so holding, the court noted that the existence of Noble’s lien against the Horn estate, standing alone, was insufficient to invoke the court’s equitable jurisdiction, as Noble had not affirmatively petitioned the district court to exercise its equitable authority in the form of an order of foreclosure on that lien. The court otherwise took no position as to whether Noble could state a claim for foreclosure of the lien in the district court.

The Eleventh Circuit rejected Noble’s remaining arguments, vacated the asset freeze order, and remanded to the district court to address the merits of Noble’s pending petition to confirm the arbitration award.

Court Refuses to Compel Arbitration Based on Dissolution of Arbitral Forum

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The U.S. District Court for the Eastern District of Louisiana recently refused to compel arbitration on the ground that the arbitral forum had ceased to exist and that a purported replacement forum was not the same forum and that a party could thus not be compelled to arbitrate there under the terms of an arbitration agreement requiring arbitration in the now defunct forum.

Baker Hughes Saudi Arabia Co. Ltd. contracted with Dynamic Industries Inc., Dynamic Industries International LLC, and Dynamic Industries International Holdings Inc. for materials and services related to an oil and gas project in Saudi Arabia. The agreement included an arbitration clause requiring arbitration with the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA).

Baker Hughes claimed that Dynamic breached the contract and filed suit in the U.S. District Court for the Eastern District of Louisiana. Dynamic moved to compel arbitration pursuant to the arbitration clause. Baker Hughes opposed the motion on the grounds that the government of Dubai had issued a decree abolishing the DIFC-LCIA and replacing it with the Dubai International Arbitration Centre (DIAC). Dynamic responded that the government of Dubai had transferred the assets, rights, and obligations of the DIFC-LCIA to the DIAC and had deemed all arbitration agreements subject to the DIFC-LCIA valid.

The district court denied the motion to compel arbitration. It noted that arbitration is based on consent and that binding Fifth Circuit precedent precluded compelling arbitration where “the agreed upon arbitration tribunal is unavailable or no longer exists.” The court rejected Dynamic’s arguments about the government of Dubai’s transfer and provision, noting that the DIAC was “not the same forum in which the parties agreed to arbitrate” and that the government of Dubai did not have the authority to compel Baker Hughes to arbitrate in a different forum.

Baker Hughes Saudi Arabia Co. v. Dynamic Industries, Inc., No. 2:23-cv-01396 (E.D. La. Nov. 6, 2023).

District of Illinois Directs Insurer to Supplement Record to Support Privilege Based on “Common Interest Doctrine”

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In Ansur America Insurance Co. v. Borland, the U.S. District Court for the Southern District of Illinois addressed a discovery dispute involving claims brought by Ansur America Insurance Co. against the law firm Ansur retained to defend an insured in an underlying product liability action. Ansur alleged that the defendants failed to defend the case in a reasonable manner, which resulted in Ansur having to settle the case at a substantially increased amount. The defendants sought the production of several categories of documents from Ansur regarding its handling of the underlying claim. Ansur withheld or redacted numerous documents asserting the attorney-client and work product privileges. The defendants filed a motion to compel production disputing Ansur’s privilege assertions.

The court first addressed whether certain claims department and corporate officers listed on Ansur’s privilege log were control group members, which would support the application of the privileges to their communications. The court found Ansur established that some of the individuals were in fact members of the control group and that their communications were privileged. With regard to the other individuals who were not within the control group, the court directed Ansur to produce their communications.

The court then addressed the defendants’ arguments that Ansur should be required to produce documents Ansur shared with its reinsurers regarding the underlying product liability claim. Ansur opposed production, contending the common interest doctrine provides a basis for withholding the production of the reinsurance-related documents at issue. The common interest doctrine “extends a preexisting privilege to communications made in the presence of third parties for the purpose of coordinating a defense strategy or pooling information for common legal purpose.” Ansur argued the doctrine applied because it “shared an identical interest with its reinsurers and therefore, the privilege was not lost by their sharing of documents.” The court concluded that, based on the motion papers, it was unable to determine whether the common interest doctrine was applicable. The court noted it must first examine the communications at issue to determine whether the underlying privileges exist. Recognizing Ansur and its reinsurers do share a common legal interest, and that the common interest doctrine could apply to certain communications and documents, the court directed Ansur to review the documents and determine if they were “made in connection with the provision of legal services and was not just discussing the availability of reinsurance,” after which the court would conduct an in camera review of the documents.

Ansur America Insurance Co. v. Borland, No. 3:21-cv-00059 (S.D. Ill. Oct. 23, 2023).