Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

U.S. Supreme Court Holds Arbitrability Questions Not Subject to A “Wholly Groundless” Exception

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Archer & White Sales, Inc. (“Archer”) sued Henry Schein, Inc. (“Schein”) in federal court seeking both monetary and injunctive relief. A contract between the parties required arbitration of all claims arising from the agreement, except those seeking injunctive relief.  Schein moved to compel arbitration based on the request for monetary damages.  Archer objected, pointing to its demand for injunctive relief.  The issue thus became one of arbitrability—who decides whether the dispute is subject to arbitration, the court or an arbitrator?  The contract at issue incorporated the rules of the American Arbitration Association, under which arbitrators are to decide arbitrability issues.  The district court nonetheless decided the issue and denied Schein’s motion, holding it was “wholly groundless” because an arbitrator would inevitably conclude that the dispute is not arbitrable and refer it back to the district court.  The Fifth Circuit affirmed, but the U.S. Supreme Court unanimously vacated the judgment.

Even where a contract expressly delegates the arbitrability question to an arbitrator, the Supreme Court explained that several federal courts “short-circuit” the process and decide the question themselves when they think a request for arbitration is “wholly groundless.” To these courts, this “wholly groundless” exception is a means of blocking “frivolous” attempts to transfer cases out of the court system.  But the Supreme Court found the exception to be inconsistent with the Federal Arbitration Act (“FAA”) and Supreme Court precedent.  The FAA, Justice Kavanaugh wrote, does not contain a “wholly groundless” exception, and the Court must interpret the FAA as written.  The FAA, in turn, requires interpreting the relevant contract as written.  As a result, if a contract delegates the arbitrability issue to an arbitrator, courts have no power to decide the issue, even if they think a particular dispute is not ultimately arbitrable.  The Court held that the wholly groundless exception therefore “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.”  And such was the case here, where neither of the lower courts actually decided whether the Archer/Schein contract delegated the arbitrability question to an arbitrator, instead short-circuiting the issue based on the wholly groundless exception.  Having rejected the applicability of such exception, the Court vacated the judgment and remanded for this threshold determination.

Schein v. Archer & White Sales, Inc., No. 17–1272, 586 U. S. ____ (Jan. 8, 2019) (Slip Op.)

This post written by Alex Silverman.
See our disclaimer.

In Dispute Over Consolidation, California Federal Court Grants Petition to Compel Appointment of an Arbitrator in One of the Actions, and Denies Other Party’s Motion to Compel the Appointment of a Single Panel to Decide Consolidation Issue

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The background of this case in California federal court is that The Hartford (“Hartford”) issued reinsurance billings to Employers Insurance Company of Wausau (“Wausau”) for settlement payments made to one insured under nineteen different reinsurance treaties between Wausau and three of Hartford’s affiliates, which billings were denied by Wausau. In response, Hartford demanded arbitration and requested that the parties consolidate all the related disputes in a single arbitration. Wausau, in response, proposed that the parties agree to three arbitrations and identified three arbitrators for three separate panels for each of the three Hartford affiliates involved. Hartford refused and identified one arbitrator for a single arbitration and if other arbitrations were necessary, the same arbitrator was identified as arbitrator for such other arbitrations. Wausau’s arbitrators then requested that Hartford’s arbitrator select umpires for three separate arbitrations. In response, Hartford again requested that the parties agree to a methodology to select a single panel to decide how the matter should be consolidated. Wausau then filed four separate petitions in three jurisdictions to compel arbitration: one in California federal court, two in Massachusetts state court and one in Connecticut state court. In the California action, which involved one treaty, Hartford cross-moved to compel a single arbitration in order to adjudicate the parties’ dispute regarding consolidation and, in the alternative, a motion to stay pending arbitration of related proceedings.

As an initial matter, the California federal court noted that the issue of whether arbitrations may be consolidated is a question for the arbitrators and not the court to decide. However, the court noted that the parties remained at an impasse due to Hartford’s insistence of one consolidated arbitration. The court then rejected Hartford’s argument that its three affiliates who had entered into the nineteen treaties could act as a single party for the purpose of seeking reimbursement from Wausau. Noting that it was limited to the terms of the agreements, the court stated that Hartford was only named in two of the nineteen treaties, that the treaties entered into by two of the affiliates required arbitration in Massachusetts and the others required arbitration in Los Angeles. The court also noted that each of the treaties was a separate agreement, with different arbitration clauses. The California federal court then found that the treaty before it contained an arbitration clause which provided a procedure for selecting an umpire, and that once that panel is in place, it can decide the issue of consolidation. Accordingly, the court granted Wausau’s petition to compel appointment of an arbitrator, and denied Hartford’s motions to compel and stay pending arbitration of related proceedings.

Employers Ins. Co. of Wausau v. The Hartford, No. 2:18-cv-07240 (USDC C.D. Cal. Dec. 3, 2018)

This post written by Jeanne Kohler.

See our disclaimer.

Texas Adopts New Regulations Regarding Captive Insurance

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In 2017, the Texas legislature enacted a number of changes to the regulation of captive insurers. In September 2018, the Texas Department of Insurance proposed one new regulation and amendments to several other regulations in order to implement those changes. These amendments were adopted on December 7, 2018. Among other things, these amendments:

  • include new or revised definitions;
  • implement procedural changes regarding the creation of captive insurance companies by the Secretary of State;
  • eliminated references to certificates of general good;
  • add provisions regarding attorneys in fact who manage operations of captive exchanges;
  • adopt by reference a revised Texas Captive Annual Report;
  • establish procedures for requesting approval of dividends and distributions; and
  • establish requirements for determining acceptable qualified jurisdictions and acceptable national and international rating agencies.

2018 Texas Regulation Text 504443 (NS)

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

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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

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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)