Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

California District Court Denies Motion to Vacate FINRA Arbitration Award

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A California district court recently denied a motion to vacate an arbitration award which had denied a plaintiff’s claims brought before the Financial Industry Regulatory Authority (“FINRA”).

The background of this case can be found here. In sum, in 2005, plaintiff Winnie Fang delivered certificates for shares of stock in Peet’s Coffee & Tea, Inc. (“Peet’s”) to Merrill Lynch that her deceased husband had previously held. In 2010, Fang was notified that the California Controller had received the Peet’s stock as unclaimed property. Fang then commenced an action against Peet’s and others in California state court for allegedly mishandling her investment, which was resolved by a “partial settlement.” Later, in 2015, Fang brought a FINRA arbitration against Merrill Lynch for breach of fiduciary duties and breach of contract. In February 2018, a FINRA arbitration panel issued an award, denying Fang’s claims in their entirety, and ordered her to pay $6,000 in expert witness fees incurred by Merrill Lynch. In the award, the panel detailed the prior proceedings. Among others, the panel noted that a hearing had been scheduled in October 2016, but that Fang failed to submit pre-hearing materials per an order of the panel. Instead, according to the panel, Fang filed an ex parte motion to continue the hearing on the grounds that Merrill Lynch had not provided certain discovery, and that Fang was planning to file a class action on the same claims, even though Fang had not filed any discovery motion by the deadline in the panel’s scheduling order, and had not filed a class action case. The panel denied Fang’s motion for a continuance. Fang then filed a motion to dismiss her claims without prejudice, and a motion for reconsideration of the denial of the continuance. The panel maintained the October 2016 hearing date, but said that it would take up Fang’s motions at the arbitration hearing. However, just before the hearing, Fang filed an action in California federal court, with a motion for a temporary restraining order to stop the FINRA arbitration for alleged procedural violations. The California district court denied a TRO. Fang then appealed to the Ninth Circuit, which affirmed the district court’s order. While the court proceedings were ongoing, the arbitration also proceeded. Fang and her counsel failed to appear at the October 2016 hearing. Merrill Lynch did appear, and an evidentiary hearing took place under FINRA rules. Merrill Lynch then sent the panel a copy of the Ninth Circuit decision affirming the denial of the TRO, and Fang submitted a “responsive” document that the panel interpreted to be another motion to dismiss without prejudice. The panel then suspended the arbitration until the California district court decided class certification in the case. The California district court, however, had already stayed that case, at the parties’ joint request, to allow for completion of the arbitration. Merrill Lynch then made a motion for the issuance of an award in the arbitration. A hearing took place in January 2018 on that motion and Fang’s new motion to dismiss. At the hearing, Fang’s lawyer said he could not attend the October 2016 hearing because “he had to appear in a matter for the United Nations,” which the panel noted had not been raised in his continuance papers. The panel then denied Fang’s motion to dismiss and issued the February 2018 award. Fang then moved in the California district court to vacate the award. Although she mentioned all four grounds in Section 10(a) of the Federal Arbitration Act (“FAA”) as a basis for overturning the panel’s award, the motion was based mainly on the claims that the award was the product of corruption, fraud and undue means, and exceeded the arbitrators’ authority.

The California district court, in denying the motion to vacate the award, noted that “courts may vacate an arbitrator’s decision ‘only in very unusual circumstances’” and that the party seeking to vacate the award bears a high “burden of establishing that one of the grounds . . . justifies vacating the award.” The court noted that Fang chose not to litigate the arbitration she had voluntarily commenced, and that there was no evidence indicating that the arbitrators were corrupt or partial to Merrill Lynch or that there was an actual bias against her, nor were there any facts that might create a reasonable impression of bias or otherwise indicate “evident corruption.” The court also held that Fang’s argument that the arbitrators exceeded their powers was also unavailing. In this regard, Fang argued that the panel misapplied FINRA rules to proceed with the arbitration. However, the court noted that interpretation of the FINRA rules is up to the arbitrators to decide. The court also found that Fang failed to show that the arbitrators somehow exceeded the bounds of the agreement that empowered them to hear Fang’s arbitration demand, and that Fang did not identify a FINRA rule stating that the arbitration should have been terminated after she expressed a desire to file a class action lawsuit, or any case that supports that proposition. The court noted that Fang was perfectly free to withdraw her claims at any time under FINRA rules, but the consequence would have been a withdrawal with prejudice, “which apparently did not suit Fang’s litigation plans.” Finally, the court held that Fang had also not shown that the arbitrators were “completely irrational” or guilty of “a manifest disregard of law.”

Fang v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 16-cv-06071 (N.D. Ca. Nov. 23, 2018).

This post written by Jeanne Kohler.

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Fourth Circuit Reverses Dismissal, Finding Federal Question Jurisdiction for Review of Arbitral Award

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The Fourth Circuit Court of Appeals reversed a Virginia federal court’s dismissal of a challenge to an arbitration award. The underlying dispute arose out of a lawsuit filed by Alvin Moore against his email service provider, America Online, Inc. (“AOL”), for divulging information about his account to law enforcement who sought the information as part of an investigation into a claimed imminent threat. Moore sued AOL in state court, alleging a claim under Title II of the Electronic Communications Privacy Act of 1986 (known as the Stored Communications Act), 18 U.S.C. § 2701 et seq., for divulging the information about him without a warrant, a subpoena, or his consent. Moore also alleged that AOL had, without his consent, deleted all his emails, causing him damages in the amount of $74,999 (presumably just under the jurisdictional requirement for diversity jurisdiction in order to avoid removal to federal court).

However, AOL successfully compelled arbitration under its service provider agreement with Moore, and prevailed in the arbitration. Moore filed a petition to vacate the award in Virginia federal court, alleging both federal question and diversity jurisdiction. The court granted AOL’s motion to dismiss the petition for want of jurisdiction, finding it did not satisfy the amount in controversy requirement to sustain diversity jurisdiction. It did not address the issue of whether it had federal question jurisdiction due to the fact that the subject of the arbitration included a claim under the federal Stored Communications Act.

The Fourth Circuit reversed and remanded, for a merits consideration of Moore’s petition, given its finding that the district court has jurisdiction. It sided with the First and Second Circuits in a circuit split about whether the enforcement mechanisms under the FAA §§ 10 and 11 required the court to “look through” the petition to determine if the underlying dispute could have been brought in federal court, absent the arbitration agreement. Other Circuits have held in favor of an approach treating petitions to vacate or confirm as strictly matters of contract under an arbitration agreement, regardless of the subject matter of the dispute, and thus governed by state law, providing no independent basis for federal question jurisdiction. The Fourth Circuit explicitly rejected that approach, based on U.S. Supreme Court precedent adopting the “look through” approach with respect to petitions to compel arbitration under FAA § 4, and finding no reason that this approach should not also apply to the FAA’s enforcement mechanisms under §§ 10 and 11.

McCormick v. America Online, Inc., No. 17-1542 (4th Cir. Nov. 29, 2018).

This post written by John Pitblado.

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Court Declines to Reconsider Summary Judgment Decision in Latest Development in Ongoing Asbestos Liability Reinsurance Litigation

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The Northern District of New York declined to reconsider a September 2018 decision on competing motions for partial summary judgment we previously reported on in a long-running reinsurance dispute related to asbestos liability exposure. Subsequent to the court’s decision, Century Indemnity Co. moved for reconsideration of the court’s denial of summary judgment on its collateral estoppel defense and denial of its motion to dismiss for lack of standing because the court allegedly overlooked “controlling” evidence and decisions on these issues.

First, on the collateral estoppel claim, the court rejected Century’s argument that the court’s September decision improperly relied on a similar decision in a case involving Utica because that decision was issued after the summary judgment briefing was complete and the court cited the decision “without the benefit of briefing” on the decision’s impact. The court explained the September decision merely recognized the similar decision as involving a “similar estoppel argument” and did not improperly “adopt” the decision’s conclusions or impute a controlling effect to the decision.

Second, on standing, the court disagreed with Century’s contention that the September decision relieved Utica of its burden to establish standing. Harkening back to its September decision, the court emphasized Utica submitted evidence “tending to establish” standing and Century failed to “conclusively undermine” that showing.

Thus, the court denied the motion for reconsideration.

Utica Mutual Ins. Co. v. Century Indemnity Co., Case No. 13-995 (USDC N.D.N.Y. Nov. 30, 2018).

This post written by Thaddeus Ewald .

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Illinois Legislation Revises Laws Applicable to Captive Insurance Companies

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Illinois has adopted a bill that includes a number of revisions to its laws regarding captive insurance companies. These include, inter alia:

  •  changes to the types of risk that a captive insurance company may insure;
  • new requirements regarding minimum capital and surplus;
  • a new requirement that captive insurance companies include with their annual reports of financial condition a statement of actuarial opinion regarding the reasonableness of their losses and loss adjustment expense reserves;
  • a provision allowing captive insurance companies to make loans to affiliates with the prior approval of the Director of Insurance;
  • new notice requirements for reinsurance agreements;
  • a provision allowing captive insurance companies to accept risks from or cede risks to captive reinsurance pools or affiliated captive insurance companies with the prior approval of the Director of Insurance;
  • standards for the approval of captive reinsurance pools;
  • authority for the Director of Insurance to issue standards for risk management of controlled unaffiliated businesses;
  • rules regarding the issuance of dividends by captive insurance companies;
  • rule regarding credits allowed to ceding insurers for reinsurance;
  • reporting and certification requirements for assuming insurers regarding trust funds, capital and surplus requirements, and financial strength ratings;
  • a requirement that the Director of Insurance create and publish a list of jurisdictions with rules sufficient to allow assuming insurers licensed in those jurisdictions to be certified in Illinois and standards for determining the sufficiency of those rules.

These revisions went into effect immediately upon the adoption of the law on November 27, 2018.

2017 Illinois Senate Bill No. 1737, Illinois One Hundredth General Assembly – Second Regular Session

This post written by Jason Brost.

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D.C. Federal Court Permits Insured to Amend Complaint in Reinsurance Dispute Related to Credit Insurance Policy

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A District of Columbia federal court partially granted and partially denied a reinsured’s motion to amend its complaint in a dispute over a reinsurance agreement for a credit insurance policy. Assured Risk Transfer (“ART”) extended a credit insurance policy to Vantage. The policy was reinsured under a contract with the reinsurer defendants, which was placed through a broker, the Willis Defendants. ART denied a claim under the credit insurance policy made by Vantage, and Vantage won an arbitration award against ART based on the denial. Vantage sued ART, the Willis Defendants, and the reinsurers after the reinsurers declined to pay under ART’s reinsurance agreement, but the court dismissed for jurisdictional issues. Thereafter, Vantage moved to amend.

First, the court denied Vantage’s effort to amend its complaint regarding its breach of contract and accompanying declaratory judgment claims. Vantage’s proposed amended complaint alleges that the parties created a contractual relationship via credit insurance “binders” which purportedly confirmed that the underlying credit insurance policy was reinsured, but the court concluded such allegations were insufficient because insurance binders describing a reinsurance agreement do not create a binding contractual relationship with the Willis Defendants or reinsurers.

Second, the court accepted Vantage’s proposed amendments related to the breach of implied contract, promissory estoppel, and unjust enrichment claims. On the implied contract claim, the amendments sufficiently alleged that ART and the Willis Defendants acted as agents for the reinsurers by claiming ART facilitated the transaction and the reinsurers delegated their underwriting authority to ART. Additionally, the allegations that reinsurers’ agents gave the insurance binders to Vantage and the reinsurers knew ART was unable to pay Vantage’s loses without reinsurance led he court to conclude it was plausible the reinsurers knew Vantage expected the reinsurers to pay and agreed to that arrangement.

On the promissory estoppel claim, the court interpreted the reinsurers’ agents’ delivery of the binders as a sufficiently alleged “promise” to pay any losses according to the credit insurance policy terms. Furthermore, Vantage plausibly alleged reliance upon the promise and an agency relationship between ART, the Willis Defendants, and the reinsurers. On the unjust enrichment claim, the court found the amendments adequately pleaded that reinsurers indirectly benefited through receipt of premiums to allow the claim to proceed. The court noted that Vantage is unable to prevail on its unjust enrichment and promissory estoppel claims if it prevails on its implied contract claim, but allowed amendment to permit Vantage to pursue all three until a conflict arises.

Lastly, the court granted Vantage’s request for leave to attempt to serve the reinsurers, declined to require the D.C. Department of Insurance, Securities, and Banking to accept service on their behalf, and dismissed Vantage’s complaint as to ART as a defendant where Vantage failed to establish the necessity for ART to remain.

Vantage Commodities Fin. Servs. I, LLC v. Assured Risk Transfer PCC, LLC, Case No. 17-1451 (USDC D.D.C. Nov. 16, 2018).

This post written by Thaddeus Ewald .

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