Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

California Appellate Court Holds Arbitration Agreement and Delegation Clause Unenforceable for Failure to File with State Regulators

by

The California Court of Appeals became the latest court to determine that a common arbitration agreement related to the EquityComp workers’ compensation insurance program and accompanying reinsurance agreements is unenforceable because it was not filed with appropriate state regulatory authorities. This dispute arose from Luxor Cabs’s lawsuit over its workers’ compensation insurance, and the reinsurers’ motion to compel arbitration thereof pursuant to a reinsurance agreement it entered into with Luxor. Luxor challenged the enforceability of the arbitration agreement and delegation clause, and the trial court ultimately agreed and denied the motion to compel arbitration.

This case follows on the heels of a California insurance administrative decision declaring the EquityComp program violated state insurance laws and a reinsurance agreement (and arbitration clause) between the same reinsurers in this case and another insured were void and a case “essentially identical to this one” regarding arbitrability under a reinsurance agreement. On appeal, the court agreed with those recent precedents and the lower court, holding the arbitration clause was unenforceable.

First, the court upheld the trial court’s determination that the arbitration clause was unenforceable against claims that the arbitrability of the dispute should have been decided by the arbitrator pursuant to a delegation clause. The reinsurers argued that Luxor failed to “specifically and directly” challenge the delegation clause as required by the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson . The court dismissed that contention, finding Luxor sufficiently challenged the clause when it argued that the delegation clause was unfiled and unapproved by state regulators and that Nebraska law prohibited arbitration of insurance policy disputes. It likewise rejected the argument that Luxor’s challenge was insufficiently targeted at the delegation clause where Luxor made the same arguments against the delegation clause as against the arbitration clause more generally.

Second, the court agreed with the lower court that the reinsurance agreement (containing the arbitration and delegation clauses) should have been filed with state regulators and, because they weren’t, were unenforceable. The specifics of the agreement, and the arbitration and delegation clauses in particular, made clear that they were “collateral agreement[s]” that modified the underlying insurance policy’s dispute resolution procedures and therefore which required regulatory approval. In so concluding, the court referenced the recent precedents and how both reached similar conclusions with respect to “the specific RPA at issue in this case.”

Finally, the court concluded that the application of Nebraska substantive law provided an additional basis to hold the arbitration agreement unenforceable. Nebraska law, the law designated in the reinsurance agreement, explicitly prohibits arbitration of insurance policy disputes. Even though the lower court punted this issue, the court held that the Nebraska law reverse preempted the Federal Arbitration Act under McCarran-Ferguson.

Luxor Cabs, Inc. v. Applied Underwriters Captive Risk Assurance, Co., A147962 (Cal. Ct. App. Dec. 4, 2018).

District Court Vacates Award Based on Violation of FINRA Rules for Manifest Disregard of the Law

by

A district court has decided against giving an arbitration panel a third chance to get it right after the court found that the panel manifestly disregarded the law in its initial and modified arbitration awards.

The arbitration was initiated after claimants lost all of the money they had put into a set of investment accounts that they had opened with respondent Interactive Brokers LLC. Claimants alleged, among other things, that Interactive should not have allowed them to engage in the types of trades they did using the portfolio margin account they had with Interactive, as this violated FINRA Rule 4210. The panel issued an arbitration award in claimants’ favor, and claimants moved for confirmation. The court declined to do so, however, finding that it could not make sense of the award of compensatory damages, in part because the award stated that “[a]ny and all claims for relief not specifically addressed herein . . . are denied,” without explaining which claims had been specifically addressed. The court remanded the case to the arbitration panel with instructions to clarify the basis for its award.

The panel then issued a second award, and once again claimants moved to have it confirmed, while Interactive moved to have it vacated. The court found that the panel had done little to clarify its original award and focused on the panel’s emphasis on Interactive’s alleged violations of FINRA Rule 4210, which the court determined was the predicate for finding Interactive liable and denying its counterclaim.

Interactive argued that this reliance on Rule 4210 met the stringent standards for vacating an arbitral award based on manifest disregard for the law. Under Fourth Circuit precedent, this requires that the law at issue be “clearly defined and . . . not subject to reasonable debate, and that arbitrator was “aware of the law, understood it correctly, found it applicable to the case before [him], and yet chose to ignore it in propounding [his] decision.” The court found this standard was met based on the following:

  • it is clearly established that there is no private right of action for violations of FINRA Rules;
  • based on Interactive’s briefs explaining this law and the panel’s own references to that briefing, the panel was aware of that law;
  • the court’s own instructions to the panel to make clear the predicate for liability, to which the panel responded by further emphasize the alleged violation of FINRA Rule 4210, established that the panel understood the law, found it applicable to the case, and chose to ignore it.

The court thus vacated the award and reinstated Interactive’s counterclaims. Finding that the panel had both flagrantly ignored the law and struggled to follow the court’s prior order, the court remanded the matter to a new panel of arbitrators for reconsideration of Interactive’s counterclaims.

Interactive Brokers LLC v. Saroop et al., Civil Action No. 3:17-cv-127 (E.D. Va. Dec. 19, 2018)

Sixth Circuit Compels Arbitration in Putative Class Action between Shell Oil and Ohio Landowners

by

Plaintiff entered into a lease agreement with Defendants (Shell Oil entities) governing extraction of oil and gas from his five-acre property located in Guernsey County, Ohio. The agreement provided a signing bonus to Plaintiff of $5,000 per acre, contingent upon Shell’s timely verification that he possessed good title to the property. The lease also contained a broad arbitration clause providing that any dispute under the lease was to be resolved by binding arbitration. Plaintiff brought suit, individually and on behalf of other landowners having similar contracts with Shell, for breach of contract after Shell allegedly failed to pay the signing bonus. The District Court for the Southern District of Ohio subsequently denied Shell’s motion to compel arbitration, and Shell appealed.

The Sixth Circuit reversed and remanded, compelling arbitration and a directing the district court to decide whether the lease allowed for class-wide arbitration. The panel found that the district court failed to address the threshold issue of who decides arbitrability and further reasoned that Plaintiff did not attack the enforceability of the “specific arbitration clause” but rather “argued that much of the contract, which happens to include the arbitration clause, is unenforceable.” In so finding, the panel determined that the arbitration clause was triggered at signing, leading to the applicability of the severability doctrine and the determination that an arbitrator must consider the issue first. As to the class-wide arbitration question, the Panel reasoned that because the parties did not identify a provision in the contract that clearly and unmistakably gave the arbitrator the power to decide the matter, and in light of “the importance of this issue to the case, given that the class could include hundreds of Ohio landowners,” that question would be for the district court to decide upon remand. In a dissenting opinion, Judge Moore opined that the district court was the proper body to decide whether the dispute should be arbitrated in light of the lease agreement’s two distinct triggering events – the signing of the agreement and the payment of the bonus. As such, Judge Moore opined that only after payment of the bonus would the arbitration clause apply.

Rogers v. Swepi LP, No. 18-3229 (6th Cir. Dec. 10, 2018).

This post written by Gail Jankowski.

See our disclaimer.

Missouri Supreme Court Upholds Denial of Petition to Compel Arbitration Where Agreement Designated an Arbitration Forum that Later Became Defunct

by

After a loan company sued a customer in default and the customer asserted counterclaims on a class-wide basis, the company sought to compel arbitration. However, the particular arbitral forum designated in the arbitration agreement had stopped providing arbitration services after entering a consent decree following another state’s fraud and unfair practices investigation. The lower courts declined the company’s request to designate a new arbitrator and ultimately denied its request to compel arbitration.

On appeal, the Missouri high court found no error in the lower court’s refusal to compel arbitration. Channeling the principle that arbitration is a matter of contract, the court evaluated the arbitration agreement to determine whether the parties agreed to arbitrate regardless of the named arbitrator’s availability or whether they agreed to arbitrate “before – but only before” the named arbitrator. Based on the plain language of the agreement, the court concluded the latter – the parties agreed to arbitrate only before the defunct arbitrator. It noted that the company drafted the agreement, which specified a particular arbitrator, and could not now avoid that specific choice because the arbitrator is unavailable. Moreover, the court was unable to reconcile other parts of the agreement with the idea that the designated arbitrator was not exclusive. The agreement provided that arbitration was to proceed under the designated arbitrator’s procedures, and that arbitration claims must be filed at the designated arbitrator’s home office only. The court emphasized that an agreement’s designation of a specific arbitrator does not always demand this result when the arbitrator later becomes unavailable; rather, the language of this particular agreement required the conclusion that the agreement to arbitrate was limited to the defunct arbitrator only. Thus, the court affirmed. A-1 Premium Acceptance, Inc. v. Hunter, Case No. SC96672 (Mo. Oct. 16, 2018).

Munich Re Wins Arbitration it Initially Resisted, and Parties Agree to Dismiss Federal Lawsuit Against Munich Re as a Result

by

Alabama Municipal Insurance Corporation (AMIC) has agreed to dismiss with prejudice its federal lawsuit against Munich Re after an arbitrator rendered judgment against AMIC in a case we previously wrote about here. Munich Re had resisted arbitration, contending that AMIC’s claim did not arise under a contract which contained an arbitration clause. The district court disagreed, finding that another contract applied to the claim and that contract provided for “final and binding” arbitration of disputes. Despite losing the initial round, Munich Re has emerged victorious from the arbitration it initially sought to avoid, and the court dismissed AMIC’s lawsuit with prejudice on December 7, 2018, pursuant to the parties’ joint request. Alabama Municipal Insurance Corporation v. Munich Reinsurance America, Inc., Case No. 2:16-cv-00948-WHA-SRW (USDC M.D. Ala. Dec. 7, 2018) (final judgment); (Nov. 9, 2018 Joint Status Report Regarding Arbitration).

This post written by Benjamin E. Stearns.

See our disclaimer.