Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Connecticut Superior Court Holds That Consolidation Is a Procedural Question to Be Considered by an Arbitrator

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The Hartford and Employers Insurance Co. of Wausau entered into a Non-Obligatory Casualty Excess of Loss Reinsurance Agreement (the “Agreement”). The Agreement contained an arbitration provision that provides that the arbitration panel should consist of three arbitrators, one chosen by each party and then the third chosen by the two chosen.

Hartford demanded arbitration under the Agreement and 18 other contracts arising out of eight different reinsurance programs between Wausau and four subsidiaries of Hartford. Wausau responded to the arbitration demand arguing that each contract required separate arbitrators and to avoid this Wausau proposed consolidating the arbitrations into three separate proceedings against Hartford and its subsidiaries. Hartford would not proceed with Wausau’s proposal, arguing that any consolidation was for the arbitrators to determine, not the parties.

Wausau filed a summons with the Connecticut Superior Court demanding that Hartford appoint an arbitrator under the Agreement, and Hartford responded by filing a cross-motion to compel arbitration in this action. The court explained that if the parties have an agreement to arbitrate and one of the parties refuses to submit to arbitration, the party seeking arbitration may petition a court for an order compelling arbitration. Whether a dispute is subject to arbitration is a question for the court; however, “procedural questions which grow out of the [parties’] dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Further, whether an arbitration proceeding should be consolidated with one or more other arbitration proceedings is a question for the arbitrator.

In this case, the parties did not dispute that they entered into a valid arbitration agreement and that their dispute fell within the scope of the agreement. Therefore, the court held that the procedural question of consolidation is for the arbitrators and not for the court to decide.

Employers Ins. Co. of Wausau v. The Hartford, No. HHD CV 18 6099158 S (Conn. Super. Ct. Feb. 13, 2019)

District Court Denies Summary Judgment to Trustee of Trust Account Maintained for Beneficiary of “Fronted” Reinsurance Program

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The U.S. District Court for the District of South Carolina denied summary judgment to the trustee of an account established pursuant to a “fronted” reinsurance program. The plaintiff, Accident Insurance Co. (AIC), participated in the program with non-party Freestone Insurance Co. Freestone paid AIC a fee to use its name and paper as a “front,” while bearing the actual risk of the fronted policies by reinsuring them under a “Program Agreement” with AIC. That agreement required Freestone to deposit funds into a separate trust account to be maintained by a trustee for AIC’s benefit. The defendant, U.S. Bank National Association, was the trustee. After Freeman went into receivership, AIC sued U.S. Bank for civil conspiracy and breach of fiduciary duty, among other things, after learning that nearly $7 million in trust assets seemingly disappeared. U.S. Bank moved for summary judgment on the civil conspiracy claim, arguing AIC could not have conspired with its wholly owned subsidiaries, and had no evidence of a “meeting of the minds” between these entities to “illegally transfer” trust assets. The court denied the motion, finding a genuine issue of fact as to each element of the civil conspiracy claim, and that breach of fiduciary duty is an independent tort that can give rise to a civil conspiracy claim under Delaware law.

Accident Ins. Co. v. U.S. Bank Nat’l Ass’n, No. 3:16-cv-02621-JMC (D. S.C. Mar. 22, 2019).

S.D.N.Y. Vacates Amended Arbitration Award, Confirms Original $39 Million Award, Finding Panel Exceeded Authority and Manifestly Disregarded Law

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The Southern District of New York recently vacated a $37 million arbitration award (“Amended Award”), and confirmed an original award of $39 million (“Original Award”), finding the panel exceeded its authority and acted in “manifest disregard” of the law by imposing the $2 million reduction. The petitioners argued the reduction was beyond the scope of the panel’s power under American Arbitration Association (AAA) rules because it was based on substantive accounting issues already decided on the merits of the Original Award. Under AAA rules, the petitioners asserted, the panel was only authorized to correct “clerical, typographical, or computational errors” in the Original Award. The respondents insisted that the Amended Award reflected only a computational error and was therefore within the scope of the panel’s authority.

The district court disagreed that the reduction was merely computational, instead finding it involved substantive legal issues as to the method for calculating the award. By calculating the Original and Amended Awards differently, the court agreed with the petitioners that the panel exceeded its authority under AAA rules and that the Amended Award must be vacated pursuant to section 10(a)(4) of the FAA. The court also held, however, that the panel acted in manifest disregard of the law by reducing the award. While the panel itself acknowledged “well-defined, explicit and clearly applicable law prohibiting [it] from exercising jurisdiction over an issue of law already determined … and raised for the first time after the [original] award issued,” the court held that the panel ignored that law by changing course on the method of calculating the petitioner’s damages. The court found this to be an independent basis for vacating the Amended Award and confirming the Original Award under Second Circuit precedent.

Credit Agricole Corp. & Inv. Bank v. Black Diamond Capital Mgmt. LLC, No. 1:18-cv-07620-KNF (S.D.N.Y. Mar. 22, 2019).

California Appellate Court Holds U.S. Supreme Court’s Epic Systems Ruling Does Not Authorize Waiver of Class Relief or Arbitration of PAGA Claims Absent Consent From California

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Former employees sued their former employer, alleging wage and hour violations and seeking civil penalties under the California Private Attorneys General Act of 2004 (PAGA). In response, the employer petitioned for arbitration under the parties’ arbitration agreement. The agreement provided that arbitration shall be the exclusive forum for any dispute and prohibited employees from bringing a “representative action.”

The trial court granted the arbitration petition on all causes of action except for the PAGA claim, relying on the California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles LLC, which held that agreements that waived the right to bring PAGA representative actions in any forum were unenforceable. The trial court stayed the PAGA claim pending the conclusion of the arbitration.

On appeal, the employer argued that the court erred because Iskanian is inconsistent with a recent Epic Systems decision by the U.S. Supreme Court. The appellate court rejected this argument, finding that Epic Systems did not address the scenario in Iskanian, which involved a claim under PAGA brought on behalf of the government, and the enforceability of an agreement barring a PAGA representative action in any forum. The court concluded that the trial court properly ruled that the waiver of representative claims in any forum is unenforceable. The appellate court agreed with other California court rulings that held that Iskanian’s view of a PAGA representative action — that a PAGA litigant is an agent of the state — means that this claim cannot be compelled to arbitration based on an employee’s arbitration agreement absent some evidence that the state consented to the waiver of the right to bring the PAGA claim in court. There was no such evidence in this case.

The employer also argued that the parties’ arbitration agreement should be interpreted to mean that if the representative-action waiver is unenforceable, the PAGA claim for statutory penalties remains subject to arbitration. The court rejected this argument on the basis that several California courts of appeal have held that a PAGA arbitration requirement is unenforceable based on Iskanian’s view that the state is the real party in interest in a PAGA claim for penalties.

The court also distinguished federal courts that have reached a different conclusion regarding the arbitrability of a PAGA representative claim, finding that these decisions were unpersuasive because the courts did not fully consider the implications of the qui tam nature of a PAGA claim on the enforceability of an employer-employee arbitration agreement.

Correia v. NB Baker Elec., Inc., No. D073798 (Cal. Ct. App. Feb. 25, 2019).

Discovery Under Section 1782 Denied Based on Finding That Chinese Arbitration Organization Was Not a “Foreign or International Tribunal”

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Section 1782(a) permits a person to seek a court order for the production of documents for use “in a proceeding in a foreign or international tribunal. …” To obtain discovery under the statute, the petitioner must meet three requirements: (1) the person from whom discovery is sought must reside or be found in the district where the application was made; (2) the discovery must be for use in a foreign proceeding before a foreign or international tribunal; and (3) the applicant must be either a foreign tribunal or an interested person.

Here, the court relied on precedent in the Second Circuit holding that when Congress enacted section 1782, “it intended to cover governmental or intergovernmental arbitral tribunals and conventional courts and other state-sponsored adjudicatory bodies,” but did not intend to cover “arbitral bodies established by private parties.” Based on this precedent, the court found that the China International Economic and Trade Arbitration Commission (CIETAC) did not qualify as a foreign tribunal under section 1782(a). While the court acknowledged that CIETAC was originally established in 1954 by the Chinese government, the court explained that: (1) CIETAC’s jurisdiction is derived exclusively from the private agreement of the parties to arbitration proceedings; (2) the parties, not the state, are permitted to choose their own arbitrator; (3) the arbitrator’s decision is final and binding upon both parties; and (4) CIETAC itself emphasizes it is “independent of the administrative organs of the Chinese government, and free from any administrative interference in handling cases.” The court also noted that permitting parties to seek discovery through American courts under section 1782(a) would undermine significant advantages of arbitration, specifically, its efficiency and cost-effectiveness, and thereby conflict with the strong federal policy favoring arbitration. The court therefore held that CIETAC is not a “foreign or international tribunal” within the meaning of section 1782(a).

In re Application of Hanwei Guo, No. 1:18-mc-00561-JMF (S.D.N.Y. Feb. 25, 2019).