Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Tennessee Supreme Court Permits Consideration of Extrinsic Evidence in Dispute About Capacity to Enter Power of Attorney Used to Sign Arbitration Agreement

by

The Supreme Court of Tennessee has approved a trial court’s consideration of extrinsic evidence regarding whether an individual with Down syndrome had the capacity to execute a durable power of attorney that his brother used to enter an arbitration agreement on his behalf.

James Welch’s brother David had Down syndrome. James had David execute a durable power of attorney for health care so that James could make health care decisions for David. David subsequently used the power of attorney to admit David to Oaktree Health and Rehabilitation Center LLC, doing business as Christian Care Center of Memphis. James executed an arbitration agreement as part of Christian Care’s admission process. David died several months later and James sought to sue Christian Care for negligence and wrongful death.

Christian Care moved to compel arbitration. In response, James argued that he did not have the authority to sign the arbitration agreement on David’s behalf because David did not have the mental capacity to appoint an agent through the power of attorney. The trial court looked beyond the four corners of the power of attorney over Christian Care’s objections and concluded based on that evidence that David lacked capacity. It therefore denied the motion to compel.

Christian Care appealed and the court of appeals reversed. The court of appeals “held that the trial court erred by considering evidence on whether David had the mental capacity to sign the [power of attorney].” James then appealed to the Supreme Court of Tennessee.

The Supreme Court of Tennessee held that the trial court had properly considered “evidence on the circumstances surrounding execution of the durable power of attorney for health care and whether [David] lacked the requisite mental capacity to sign it.” The court therefore remanded the case to the court of appeals for a determination on whether the evidence outside the four corners of the power of attorney created “clear and convincing evidence that David lacked the requisite mental capacity when he signed the power of attorney for health care.”

Welch v. Oaktree Health & Rehabilitation Center LLC, No. W2020-00917-SC-R11-CV (Tex. Aug. 31, 2023).

“Judicial Statements Privilege” Protects Statements in Court-Ordered Arbitration From Defamation Claims

by

The Kentucky Supreme Court affirmed the dismissal of a defamation action based on statements made during a court-ordered arbitration. The “judicial statements privilege,” as it’s known in Kentucky, provides an “absolute privilege” for communications made pursuant to judicial proceedings, even if the statements would otherwise be defamatory. The privilege is more commonly referred to outside of Kentucky as the “litigation privilege” or “judicial privilege.”

A communication must fulfill two requirements to fall within the privilege’s protection: (1) the communication must have been made “preliminary to a proposed judicial proceeding, or in the institution of, or during the course and as part of a judicial proceeding”; and (2) the communication must be material, pertinent, and relevant to the judicial proceeding. The doctrine “rests upon public policy which looks to the free and unfettered administration of justice, though, as an incidental result, it may, in some instances, afford an immunity to the evil-disposed and malignant slanderer.”

The Kentucky Supreme Court was careful to point out that it did “not decide that all arbitrations come within the judicial statements privilege.” Rather, the court held solely that “statements made pursuant to court-ordered arbitrations are protected by the judicial statements privilege to the same extent as statements made in other court proceedings.”

New Albany Main Street Properties, LLC v. Stratton, No. 2022-SC-0254-DG (Ky. Aug. 24, 2023).

Eleventh Circuit Affirms Order Compelling Arbitration of Discrimination Claims, Rejects Argument That Arbitration Agreement Was Unconscionable

by

In Payne v. Savannah College of Art and Design Inc., the Eleventh Circuit Court of Appeals affirmed a district court order denying a motion to compel arbitration of plaintiff Isaac Payne’s discrimination-based claims. The court found the mandatory arbitration agreement in Payne’s underlying employment agreement was fair, and not unconscionable, and defendant Savannah College of Art and Design (SCAD) did not waive its right to arbitrate with Payne.

Payne was hired by SCAD in August 2015 as the school’s head fishing coach. Among the documents that Payne signed as part of the new hire process was a “staff handbook acknowledgment,” which provided that Payne agreed to “comply with the policies contained in the handbook, including the Alternative Dispute Resolution Policy and Agreement.” The staff handbook also stated the school’s alternative dispute resolution policy and agreement was binding on the parties. The agreement included a dispute resolution process including arbitration in the event either party brought a claim. Payne did not dispute he signed the staff handbook acknowledgment.

After he was terminated from his position, Payne brought discrimination and retaliation claims against SCAD in federal court, alleging he was fired for reporting “race-based abuse and threats by white student-athletes to SCAD leadership.” SCAD filed a motion to dismiss the complaint and to compel arbitration. Payne opposed the motion, arguing the arbitration agreement was unconscionable for several reasons, including the cost-shifting provision that negatively impacted his rights, the process for selecting arbitrators limited the potential arbitrators to two white men, and the agreement included a confidentiality provision. Payne also argued SCAD waived its right to compel arbitration when it allegedly sought to settle claims with a student who raised similar complaints to SCAD leadership and had withdrawn from the team, and sought limited discovery related to that issue. The magistrate judge issued a report and recommendation that SCAD’s motion to dismiss and compel arbitration should be granted, which was adopted by the district court.

The Eleventh Circuit affirmed the district court’s order finding the fee-shifting provisions included in the arbitration agreement did not make it unconscionable. The court addressed precedent in the circuit confirming that to establish the arbitration’s fee-shifting provision was unconscionable, Payne would have to provide evidence of “(1) the amount of fees he is likely to incur and (2) his inability to pay those fees.” The court concluded Payne could not establish these facts and further rejected Payne’s arguments that the terms that controlled the arbitrator selection process were contradictory. The court also rejected Payne’s contention that SCAD waived its right to arbitrate, concluding: “We have never held that a party waives its right to arbitrate based on its actions taken in a previous legal action — especially when that party did not bring the lawsuit at bar and has repeatedly insisted that arbitration is the proper dispute resolution channel.” The court affirmed the order of the district court dismissing the action and compelling arbitration.

Payne v. Savannah College of Art & Design, Inc., No. 22-11556 (11th Cir. Aug. 31, 2023).

Munich Re Prevails in Alabama Reinsurance Dispute

by

A federal court recently agreed with Munich Re that it was not obligated to reimburse an insurer for losses and fees the insurer incurred in litigation with its professional liability carrier regarding a bad faith claim stemming from a personal injury suit subject to the reinsurance treaty.

Alabama Municipal Insurance Corp. (AMIC) issued a commercial automobile insurance policy to the town of Woodland, Alabama. A Woodland employee driving a Woodland vehicle was subsequently involved in an accident in which two passengers were seriously injured. The passengers sued Woodland. AMIC defended Woodland against those claims. The passengers obtained jury awards that exceeded AMIC’s applicable policy limits.

The passengers then sued AMIC claiming AMIC acted in bad faith when it failed to settle within policy limits. AMIC tendered the bad faith claim to Scottsdale Insurance Co., which had issued a professional liability errors and omissions policy to AMIC. Scottsdale and AMIC settled the bad faith suit, but Scottsdale then filed a declaratory judgment action seeking a declaration that it had not been obligated to pay any part of the settlement. AMIC counterclaimed for breach of contract and bad faith. Scottsdale prevailed in the declaratory judgment action, AMIC lost on its counterclaims, and Scottsdale obtained its costs and fees.

AMIC requested partial reimbursement for all of this litigation from its reinsurer, Munich Re. Munich Re reimbursed most of the requested sum but concluded that it was not required to reimburse AMIC for AMIC’s costs and fees and Scottsdale’s costs and fees, which AMIC had been ordered to pay, in AMIC’s litigation with Scottsdale (the declaratory judgment action). AMIC sued, claiming that Munich Re was required to reimburse it for those sums as well.

The U.S. District Court for the Middle District of Alabama disagreed with AMIC and held that Munich Re did not owe AMIC any money for AMIC’s losses to Scottsdale.

The district court analyzed the applicable treaties and concluded that Munich Re was “not generally liable for costs that AMIC decided to pay above and beyond its obligations to its insured clients (in this case, Woodland).” AMIC nevertheless maintained that the treaties “obligated AMIC to pursue any other reinsurances or insurances that might inure to Munich [Re]’s benefit, and that this obligation, in turn, further obligated Munich [Re] to reimburse AMIC for th[at] pursuit.” The district court disagreed, noting that the treaty language did not establish any such obligation. Moreover, although “AMIC would have been obligated to reimburse Munich [Re] for any amount of the Woodland settlement that it was able to recover from Scottsdale,” it did not follow (as AMIC claimed) that Munich Re was “obligated to reimburse AMIC for the money it spent while attempting to secure such a recovery.” The treaty did not support that.

This decision was one of several pending disputes between AMIC and Munich Re.

Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20-cv-00300 (M.D. Ala. Aug. 30, 2023).

Nevada Supreme Court Reverses Order Denying Motion to Compel Arbitration

by

The Nevada Supreme Court recently reversed the denial of a motion to compel arbitration, explaining that the plaintiff’s arguments that the contract at issue was illegal were not a valid basis to deny arbitration because those arguments did not challenge the validity of the arbitration clause or delegation clause specifically, as is required to preclude arbitration.

Several individuals sued a company that operates the Uber app, including Uber’s Uber Pool feature. They claimed that Uber Pool was operating in Nevada illegally, without required licenses.

The company, Rasier LLC, moved to compel arbitration under the Uber app’s terms of service. The district court denied that motion, holding that the Federal Arbitration Act did not apply and that the terms of service were void in light of the allegations that Uber Pool was operating illegally.

The Supreme Court of Nevada reversed. It noted that “the FAA applies to contracts evidencing a transaction involving interstate commerce” and that the FAA therefore applied here. The court also noted that a party must challenge an arbitration clause itself, not the validity of a contract generally, to avoid arbitration. The plaintiffs only “generally challenge the Terms of Service and not the arbitration agreement or delegation clause specifically.” The motion to compel therefore should have been granted for the arbitrator to consider the merits.

Rasier, LLC v. Boykin, No. 84814 (Nev. Aug. 24, 2023).