Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Southern District Confirms Arbitration Award Over Challenge Based on Failure of Arbitrators to Disclose Information

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The Southern District of New York has rejected a petition to vacate an arbitration award on the basis that the arbitrators failed to disclose allegedly material information.

Michael Miller worked as a financial advisor in a UBS branch. UBS gave Miller six loans, and Miller agreed any disputes regarding the loans could be arbitrated. A dispute regarding the loans arose after Miller left his job. Miller and UBS selected arbitrators in accordance with FINRA’s rules. The arbitrators ruled in favor of UBS. Miller unsuccessfully sought to vacate their award in the Southern District.

In his effort to vacate the award, Miller claimed the arbitrators failed to disclose pertinent information during the selection process resulting in the award (1) exceeding the arbitrators’ powers; and (2) an award that was the result of partiality or corruption in violation of FINRA’s rules. Specifically, Miller claimed one arbitrator (Teveris) failed to disclose she had represented an investor before FINRA in an unrelated matter in her initial disclosure and failed to sufficiently disclose the representation in her oath. He also claimed that another arbitrator (Rolnick) failed to disclose he was a defendant in an unrelated federal lawsuit. But Miller failed to explain how such information prevented the arbitrators from being objective. The court also rejected Miller’s argument that the information was material and would have affected how he ranked the arbitrators. That was not the standard, and the usefulness of the information was irrelevant, the court explained.

Miller also argued Rolnick had a potential interest in UBS securities that he failed to fully explain after he answered “yes” to a question asking if he or an immediate family member invested in or held securities that were the subject of the arbitration. While interest in UBS was a potential problem, it was disclosed and Miller was therefore on notice of a fact potentially indicative of bias. The applicable rules did not clearly require additional disclosures, and Miller failed to object to the allegedly incomplete disclosure, thereby waiving any right to challenge it. Moreover, Miller had been expressly told that he could object to the arbitrators after he was informed about the potential conflict.

If you don’t act as soon as practical on your right to challenge arbitrators based on information you know (or should know) about them, don’t expect to be able to vacate the award later.

Miller v. UBS Fin. Servs. Inc., No. 1:18-cv-08415 (S.D.N.Y. May 6, 2019)

U.K. Court of Appeal Prohibits “Spiking” in Mesothelioma Cases in Win for Reinsurers

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In a closely watched case, the Court of Appeal of England and Wales has given reinsurers a win with respect to reinsurance claims related to mesothelioma and other asbestos-related diseases. The decision bars insurers from engaging in “spiking.” Under that practice, insurers were making a single reinsurance claim for the entire loss to an injured employee under a single reinsurance policy of their choosing rather than allocating the loss on a pro rata basis between the various policy years in which the employee was exposed to asbestos. Prohibiting “spiking” is a significant win for reinsurers.

The decision stemmed from a dispute between insurer Municipal Mutual Insurance Limited (MMI) and reinsurer Equitas Insurance Limited.

For decades, MMI has issued employers’ liability (EL) policies to insured entities on an annual basis. Many of the entities insured by MMI faced claims from their employees for mesothelioma and other diseases related to exposure to asbestos in the workplace. Because of unique developments in the law of the United Kingdom regarding asbestos litigation, employees who made such claims did not need to prove which employer caused the critical exposure or the year in which the critical exposure occurred. (Under the Fairchild jurisprudence, all employers who made a material contribution to the risk of mesothelioma are jointly and severally liable for the employee’s injury. Pursuant to an act of Parliament that reversed a Barker decision, an employee can recover their entire damages from any employer during the years in question.) As a result, MMI did not need to, nor did it, identify which policy provided coverage for a particular claim when it paid claims. Nor did MMI apportion the claims among policy years.

MMI reinsured its liability under its EL policies with Lloyd’s syndicates whose liabilities are currently held by Equitas. Unsurprisingly, MMI presented its claims for asbestos-related losses to Equitas initially on a pro rata basis whereby the loss was divided over the years the claimant was exposed to asbestos. However, after several years, MMI began presenting each claim under a single year of reinsurance. MMI claimed that, because each underlying insurance policy was liable in full for the loss, each claim could be presented to a single annual reinsurance policy of its choice, i.e., “spiking.” Spiking benefited MMI because it maximized its recovery. By spiking, MMI avoided multiple retentions, submitting claims to reinsurers who were insolvent and reducing paperwork and potential disputes. Spiking was detrimental to Equitas because, by MMI’s spiking, MMI had fewer retentions and was able to submit more to reinsurance, and Equitas could find itself paying for years it had not provided reinsurance.

Equitas and MMI arbitrated whether MMI could engage in “spiking.” A judge-arbitrator ruled in favor of MMI, agreeing that, because developments in the law made each annual EL policy liable for all of an insured’s loss, MMI had a contractual right to present its claim for reinsurance under any reinsurance policy year that corresponded to an EL policy year that was liable for the individual claimant’s loss. The judge-arbitrator further concluded, among other things, that even if MMI had a duty of good faith with respect to how it presented its reinsurance claims, MMI did not breach that duty because it had “expressly acknowledged that there was a need for equitable recoupment and contribution to redress any anomalies.”

Equitas obtained leave to appeal the judge-arbitrator’s decision.

The Court of Appeal reversed. The court rested its decision on the duty of good faith. (Notably, the court (and the judge-arbitrator) explained that the duty of good faith in New York differs significantly from the duty of good faith under the law of the United Kingdom.) Lord Justice Males, whose decision was joined by Lord Justice Leggatt (who also wrote a concurrence) and Lord Justice Patten, summarized his reasoning regarding the duty as follows:

In my judgment there are powerful reasons to support the implication of a term in the very specific reinsurance context existing within the Fairchild enclave that the insurer’s right to present its reinsurance claims must be exercised in a manner which is not arbitrary, irrational or capricious, and that in that context rationality requires that they be presented by reference to each year’s contribution to the risk, which will normally be measured by reference to time on risk unless in the particular circumstances there is a good reason (such as differing intensity of exposure) for some other basis of presentation.

The reasons supporting applying the duty of good faith in that manner included the fact that “spiking is inconsistent with the presumed intentions and reasonable expectations of the parties at the time when the contracts were concluded,” which was long before the unique Fairchild jurisprudence that allowed MMI to choose between numerous policies existed.

The Court of Appeal therefore adopted the method proposed by Equitas: Reinsurance claims based on exposure in multiple policy years for which the insurer has not allocated its loss among the various policy years at issue must nevertheless be presented to the reinsurer on a pro rata basis for purposes of calculating the applicable reinsurance payment.

MMI will likely appeal the decision to the Supreme Court of the United Kingdom.

Assuming it stands, the Court of Appeal’s decision constitutes a significant win for reinsurers exposed to asbestos-related claims in the United Kingdom. Spreading reinsurance claims regarding asbestos injuries across multiple policy years will require compliance with multiple retentions and potentially mean that more than one reinsurer is involved in each claim.

Equitas Ins. Ltd. v. Municipal Mut. Ins. Ltd., [2019] EWCA Civ 718 (Apr. 17, 2019).

Fifth Circuit Affirms Ruling That Policy’s Conformity Provision Does Not Negate the Agreement to Arbitrate Despite Statute Prohibiting Arbitration Agreements in Insurance Contracts Covering Property in Louisiana

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McDonnel Group LLC obtained a builder’s risk policy for a construction project on a property located in New Orleans, Louisiana. When the insured was denied coverage, it filed suit seeking damages for breach of contract and breach of the duty of good faith and fair dealing. The insurers responded by filing a motion to dismiss for lack of subject-matter jurisdiction and improper venue, invoking the contract’s arbitration provision under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The policy also contained a “conformity to statute” provision stating, “In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” The insured “responded that any obligation to arbitrate under the Convention did not apply to the instant dispute because the policy’s arbitration agreement was, as a matter of law, invalid” as it was contrary to title 22, section 868(A)(2) of the Louisiana Revised Statutes, “which prohibits arbitration agreements in insurance contracts covering property located in the state.” The insured argued the conformity provision “amended” the arbitration provision out of the contract in order to “conform” with Louisiana law.

Relying on Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009), which held that the Convention superseded the Louisiana statute, the district court found that, because the “state statute was preempted by federal law … no conflict existed between the policy and state law so as to trigger the conformity provision of the policy.”

Although Safety National determined the Louisiana statute was preempted by the Convention, the Fifth Circuit now had to determine the impact of the conformity provision. The court held that because the statue does not and cannot apply to the policy, “there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.”

McDonnel Grp., LLC v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427 (5th Cir. May 13, 2019)

Third Circuit Interprets Unique Arbitrability Language in Arbitration Clause

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The Third Circuit determined that a former employee’s claim for retaliation against her employer was subject to arbitration per the arbitration clause in her employment agreement, which stated:

Except for actions for specific performance or injunctive relief, if a dispute or claim should arise that does not get resolved through negotiation of the parties, the parties will attempt in good faith to resolve the dispute or claim by mediation administered by the American Arbitration Association (AAA) under its Employment Mediation Rules, before resorting to arbitration.

The court noted that “[i]t does not appear that any federal court has addressed an arbitration agreement with language similar to this one. But in light of the presumption in favor of arbitrability, we think the phrase ‘if a dispute or claim should arise’ is best understood as functionally equivalent to more standard language that would expressly sweep in any claim relating to Dr. Monfared’s employment.”

The Eastern District of Pennsylvania’s decision confirming the arbitration award was affirmed.

Monfared v. St. Luke’s Univ. Health Network, No. 18-2850 (3d Cir. May 10, 2019)

California Court Denies Defendants’ Motions for Summary Judgment, Finding Evidentiary Support for Odyssey Re’s Fraudulent Transfer Claims

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A California district court issued its latest decision arising from Odyssey Reinsurance Company’s ongoing effort to collect a $3.2 million default judgment against insurance agency Cal-Regent, its successor PBIS, and their owners, Richard and Diane Nagby. We have been tracking the case on our blog, previously writing about it here, here, here, here, and here.

In this latest iteration, Claims Technology Services (CTS) and its CEO, David Dostalik, sought summary judgment on four causes of action against them. CTS and Dostalik allegedly conspired with Mr. Nagby to conceal funds that Cal-Regent and PBIS owed Odyssey by transferring them into accounts held by CTS. Dostalik also allegedly released portions of the funds directly to the Nagbys. Odyssey’s fifth and sixth causes of action were against CTS for unlawful transfers under California’s Uniform Fraudulent Transfer Act (UFTA). The seventh was against Dostalik for intentional fraudulent transfers. The 13th was against CTS as a “subsequent transferee” of unlawfully transferred funds. The court denied summary judgment on the fifth, sixth and seventh causes of action, but granted CTS summary judgment on the 13th.

Regarding the avoidable transfer claims, the court found sufficient evidence that Cal-Regent’s assets were fraudulently transferred, and that CTS and Dostalik acted in furtherance of the transfers. As to CTS, the evidence was deemed sufficient to support an avoidable transfer claim under either an intentional or constructive fraud theory. While Dostalik argued he had no involvement in an intentional fraud, the court found the evidence suggested otherwise and thus precluded summary judgment on the seventh cause of action. The court granted CTS summary judgment on the 13th cause of action, however, since Odyssey conceded that discovery produced no evidence that CTS was a “subsequent transferee” of funds derived from a sale of Cal-Regent and PBIS assets.

Odyssey Reinsurance Co. v. Richard Keith Nagby, et al., No. 16-3038, 2019 U.S. Distr. LEXIS 68950 (S.D. Cal. Apr. 22, 2019).