Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Eighth Circuit Rejects Claim that Arbitral Award Was Insufficiently Broken Down or Explained

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Great American denied a claim for coverage for damage to an insured’s corn and soybean crops in three Missouri counties, asserting that the insured had failed “to substantiate an insurable cause of loss” and “fail[ed] to provided adequate records to establish production ‘by unit.'” The insured brought an arbitration seeking coverage, and a three-arbitrator panel awarded him $1.4 million for the damages to his corn crop. Great American moved to vacate the award, arguing that the panel had “imperfectly executed” its powers by failing properly to break down the award “by claim” as required by federal regulations for arbitrations regarding such federally reinsured crop insurance. The district court, finding that the “by claim” requirement meant that an award must break down such claims by county and that the panel had not done this, found this argument sufficient to nullify the entire award.

On appeal, the Eighth Circuit rejected this argument entirely. Recognizing that the regulations require the insurer to determine losses “on a unit basis” and that a unit cannot cover more than one county, the court nonetheless found that a “unit” and a “claim” were not the same thing, and that the arbitrators’ obligation was to break down the award by claim, not by unit. In fact, it was Great American who chose to treat all of these alleged crop losses as one claim, and the panel simply accepted that decision.

Great American also argued that the panel’s explanation for the award amount was insufficient because it merely adopted the calculations of the insured’s expert, but the Eighth Circuit found that this was acceptable, particularly because Great American neither contested this calculation nor offered an alternative calculation. The court thus remanded the case to the trial court so that it could consider Great American’s alternative argument that the panel’s decision rested on an improper interpretation of the applicable regulations.

Great American Insurance Company v. Jonathan L. Russel, No. 17-2441 (8th Cir. Jan. 31, 2019)

Tenth Circuit Affirms District Court’s Confirmation of Arbitration Award While Applying “One of the Narrowest Standards of Review Known to Law”

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Plaintiffs-Appellants MEMC II, LLC and Mike McDaniel (collectively, “MEMC”) contracted to have Defendant-Appellee Cannon Storage Systems, Inc. (“Cannon”) build a commercial storage facility in Dallas, Texas. The contract included, among other things, precise design specifications and required that any disputes between the parties be resolved by binding arbitration. During construction, Cannon deviated from the agreed-upon design specifications, and MEMC began withholding payments, arguing that Cannon had materially breached the Contract by deviating from those specifications. Cannon continued construction without payment for nearly five months until the parties proceeded to arbitration.

Cannon brought claims for breach of contract based on MEMC’s nonpayment, to which MEMC responded with an affirmative defense, arguing that Cannon’s departure from the design specifications constituted a material breach that discharged MEMC of its payment obligations. Additionally, MEMC counterclaimed for breach of contract due to Cannon’s failure to use the approved plans and specifications. Ultimately, the arbitrator found that MEMC breached the contract by refusing to pay Cannon and that Cannon breached the contract by failing to construct the storage facility according to the agreed-upon specifications. Importantly, the arbitrator did not find Cannon’s breach to be material under Texas law, and therefore, held that MEMC could not evade liability for its refusal to pay.

The District Court for the Western District of Oklahoma confirmed the award and the Tenth Circuit affirmed. The Panel reiterated the narrow scope of judicial review of arbitral awards and found that nothing in the arbitrator’s decision suggested that she did not interpret the contract; in fact, the Panel found the opposite—that the arbitrator considered the respective clauses using relevant case law, weighed the evidence, and decided that, even though Cannon breached the operative contract, its breach did not excuse MEMC from payment obligations. As such, and “[b]ecause the arbitrator interpreted the Contract and applied the law of the jurisdiction selected by the parties, she did not dispense [of] her own brand of industrial justice or exceed her authority under the agreement.”

MEMC II, LLC v. Cannon Storage Sys., Inc., No. 18-6079, 2019 WL 549633 (10th Cir. Feb. 12, 2019).

Second Circuit Rejects Claims Against Insurer for Settlement Using Policy Funds

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Three plaintiffs—a subcontractor (HBI), an affiliated entity (Keller Foundations), and their parent (Keller Group)—brought a claim against Zurich, which had issued a liability policy (the Policy) to the Keller Foundations for which HBI was an additional insured. A general contractor (Diaz) sued HBI in one lawsuit and Zurich in another, claiming that Zurich should defend it in the first lawsuit because it was an additional insured under the Policy. Zurich settled the lawsuit by paying Diaz $450,000. Zurich then sought and received reimbursement from Capital, a captive reinsurer owned by plaintiff Keller Group. Claiming that Zurich’s payment to Diaz was not covered by the Policy, plaintiff brought causes of action for breach of contract, breach of the duty of good faith, and declaratory relief. Zurich filed a motion to dismiss all claims, which the trial court granted, and plaintiffs appealed.

The Second Circuit affirmed the dismissal. First, the court found that plaintiffs had not plausibly alleged a breach of the Policy, as Zurich had broad discretion to settle claims and plaintiffs were not directly harmed by Zurich’s decision to settle the claim, even if they had to reimburse Capital for its reimbursement of Zurich. As the court explained, plaintiffs’ payments to Capital did not relate to Zurich’s duties under the Policy, but instead “flow from Capital’s choice to reimburse Zurich under the Reinsurance Agreement, as well as whatever arrangements exist for inter-company reimbursements between Keller Group and its subsidiaries.” Any complaint regarding Capital’s obligation to reimburse Zurich was Capitals’ to make, not Plaintiffs’.

Second, as to the claim for breach of the duty of good faith, the court found that Zurich’s decision to settle the Diaz claim was not arbitrary and unreasonable, and again emphasized that plaintiffs had not plausibly alleged that this decision deprived them of the benefits of the Policy. Finally, the court rejected the request for declaratory relief, finding that plaintiffs had failed to plead any facts demonstrating even a possibility that Zurich’s payment to Diaz would cause the Policy’s $5 million cap to be exhausted and thus cause plaintiffs to lose the benefit of the Policy.

Keller Foundations, LLC et. al v. Zurich American Insurance Company, 18-1280-cv (2d Cir. Dec. 6, 2018)

First Circuit Affirms Denial of a Motion to Compel Arbitration Based on Principles of Collateral Estoppel

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In a procedurally complex case, the First Circuit reviewed the lower court’s denial of a motion to compel arbitration based on principles of collateral estoppel. In 2007, two plaintiffs sought legal representation to pursue a products liability claim. They signed an Attorney Representation Agreement (“ARA”) with the Johnson Law Firm (“JLF”), who later involved local counsel to assist them with the matter. Importantly, the ARA contained an arbitration provision, although the paragraphs related to arbitration in the ARA were not initialed by the plaintiffs. After the case settled, a dispute arose between the plaintiffs, JLF, and local counsel John Deaton (“Deaton”).

JLF initiated an arbitration proceeding with the plaintiffs in Texas. The plaintiffs challenged the validity of the arbitration agreement because the “uninitialed arbitration paragraphs in the ARA were of no effect.” The arbitrator agreed and dismissed the proceeding, finding that the arbitration provision was not valid and enforceable.

The plaintiffs later sued JLF and Deaton in Rhode Island state court, bringing malpractice and other tort claims. The defendants removed the action to the U.S. District Court for the District of Rhode Island and moved to compel arbitration. The district court found that the validity of the arbitration agreement was previously addressed during the initial arbitration proceeding, and principles of collateral estoppel precluded any attempts to invoke the arbitration provision of the ARA. The motion to compel arbitration was denied.

On appeal, the First Circuit affirmed the decision of the lower court, finding that the district court properly applied the principles of collateral estoppel to the issue of arbitrability, and that the arbitrator had the proper authority to make a determination about the arbitrability of the claims at issue. The case was remanded for further proceedings.

Patton v. Johnson, Case No. 18-1750 (1st Cir. Feb. 11, 2019).

Fifth Circuit Affirms Order Compelling Arbitration of Employment Discrimination Claims by Physician Against Medical Center

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Plaintiff, an emergency room physician, was employed by Defendants, a hospital and its affiliates, pursuant to an employment agreement and subsequent independent contractor agreement, both of which contained an arbitration clause providing for the arbitration of disputes arising out of those agreements. Following the termination of her employment, Plaintiff filed suit in the Northern District of Mississippi alleging claims under Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act, as well as several state law claims including wrongful termination, intentional interference with contract, intentional interference with business relations, and fraud. Defendants filed a motion to compel arbitration, which the district court granted, rejecting Plaintiff’s arguments that the arbitration requirements were unconscionable, that further discovery was required, and that her wrongful termination claims were not subject to arbitration.

On appeal, the Fifth Circuit agreed with the district court and consequently affirmed, compelling arbitration of Plaintiff’s claims. Concerning Plaintiff’s procedural unconscionability allegation, the panel rejected Plaintiff’s claim that the inconsistency between the term sheet (which did not mention the arbitration provision) and the employment agreements (which contained the arbitration provision) rendered the arbitration provision unconscionable, deeming it “an issue that would have been remedied by simply reading the contract.” The panel also rejected Plaintiff’s argument that the arbitration clause was rendered substantively unconscionable due to the fact that the parties conceded that another provision in the employment agreement, the punitive damages waiver, was unconscionable. Instead, the panel found that the punitive damages waiver provision was severable and therefore the arbitration provision was unaffected. In addition, the panel found that Plaintiff’s wrongful termination claim was predicated on her contractual relationship with Defendants and therefore arose “out of” or “under” those contracts and subject to arbitration. Last, the panel rejected Plaintiff’s equitable estoppel argument that her tort claims against her supervising physician were not subject to arbitration because he was a non-signatory to the agreements containing arbitration provisions. The Panel reasoned that those claims similarly centered around interference with her contractual, employment relationship with Defendants.

Begole v. North Mississippi Med. Ctr. Inc., Case No. 18-60369 (5th Cir. Feb. 7, 2019).