Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

South Carolina Federal Court Denies Motion to Stay and Orders Insurer to Produce Documents

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The background of this case is as follows. In 2014, ContraVest Inc., ContraVest Construction Co., and Plantation Point Horizontal Property Regime Owners Association Inc. (collectively, “Plaintiffs”) brought suit in South Carolina state court against Mt. Hawley Insurance Company (“Mt. Hawley”) for declaratory judgment, bad faith, breach of contract and unjust enrichment based on the insurer’s refusal to provide benefits allegedly owed under excess commercial liability insurance policies with respect to an allegedly defective construction project. The case was removed to South Carolina federal court. In March 2017, the South Carolina district court granted a motion to compel filed by Plaintiffs. In April 2018, Mt. Hawley moved to stay the case pending resolution of a mandamus petition to the Fourth Circuit and a motion to certify a question of attorney-client privilege waiver in bad faith insurance claims to the South Carolina Supreme Court. It also submitted to the court a privilege log and various documents for in camera review. The privilege log had four main categories of documents at issue: attorney-client privilege documents, work-product documents, reinsurance documents and reserves documents.

The South Carolina district court denied Mt. Hawley’s motion without prejudice and ordered that it produce all documents except those claiming attorney-client privilege in light of the mandamus petition. It declined to conduct an in camera review of the work-product documents and ordered production of those documents. The court also held that it would not consider whether an in camera review is necessary to determine if the reinsurance and reserves documents are relevant or privileged, and also ordered production of those documents. Mt. Hawley also took the position that it had not waived its objection regarding documents referencing mediation. However, the court noted that Mt. Hawley cited no South Carolina case law discussing a mediation privilege and the court noted that its own research did not reveal any such case law. It also noted that if Mt. Hawley meant to reference attorney-client privilege, “it does not appear that Mt. Hawley believes these documents to be attorney-client privileged as the privilege log does not identify them as such.” Thus, the court found that “[i]f Mt. Hawley means to reference general confidentiality rules about mediation, those rules are not applicable to the current issue” because “producing a document during discovery is not the same as introducing a document in a proceeding.” Thus, the court ordered that Mt. Hawley produce the mediation documents.

As for Mt. Hawley’s request to stay the case pending resolution of its petition for mandamus in the Fourth Circuit, the South Carolina district court noted that Mt. Hawley’s petition relates only to the attorney-client privilege issue, and that the Fourth Circuit already “stay[ed] any district court discovery that implicates the attorney-client issue pending further order of [the Fourth Circuit].” Thus, the court declined to stay the entire case “due to this discrete issue when there are other pending discovery issues unrelated to the attorney-client privilege issue,” and denied Mt. Hawley’s motion without prejudice.

ContraVest Inc., et al. v. Mt. Hawley Insurance Co., No.15-00304 (USDC D.S.C., Oct. 24, 2018).

This post written by Jeanne Kohler.

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Tenth Circuit Strikes Offending Arbitration Provision Clause in Au Pair Agreements

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Plaintiffs had entered into various au pair agreements which contained arbitration provisions, which defendants sought to enforce when a class action was filed. The District Court of Colorado denied the defendants’ motion to compel arbitration, finding the au pair agreements “were contracts of adhesion and procedurally unconscionable because the au pairs were relatively young at the time they signed the contracts, were foreigners, spoke English as a second language, and had no experience with contracts or contract law.”

The Circuit Court agreed that the arbitration provision was unconscionable, but reached “that conclusion for reasons more limited than those found by the district court.” The Court found the agreements were procedurally unconscionable “to a moderate degree,” as contracts of adhesion. As to substantive unconscionability, the Court analyzed three clauses: (1) allowing AuPairCar, Inc. to select unilaterally the arbitration provider has a high degree of substantive unconscionability; (2) a California forum selection clause was not unconscionable; and (3) bilateral fee shifting was not unconscionable. “Because the au pair agreements have moderate procedural unconscionability and significant substantive unconscionability due to the arbitration provider selection clause, the au pair agree is unconscionable and unenforceable as written.”

The Circuit Court ordered the District Court to sever the provision allowing AuPairCar, Inc. to unilaterally select the arbitration provider, as both California and federal law provide a default method for appointing an arbitrator, and, consistent with its opinion, to further compel the parties to arbitrate.

Beltran v. Interexchange, Inc., No. 17-1359 (USCA 10th Cir. Oct. 30, 2018)

This post written by Nora A. Valenza-Frost.

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The Third Circuit Affirms District Court’s Confirmation of Arbitration Award, Finding That the Panel Did Not Exceed its Powers or Manifestly Disregard the Law

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The complete procedural background of this “not precedential” case can be found here. In sum, this case stems from a 2007 lease agreement between Ross Dress for Less, Inc. (“Ross”) and VIWY, L.P. (“VIWY”) for Ross to be a tenant in VIWY’s shopping center. The lease included a provision which required VIWY to maintain a minimum amount of tenants in the shopping center, and allowed Ross to pay a reduced rent if the provision was not satisfied. In March 2011, Ross wrote to VIWY, claiming that the provision had not been met, it had overpaid its rent for two years and that VIWY must refund the excess rent payments, to which VIWY refused. In response, Ross paid a reduced rent from March 2011 until September 2011, at which time VIWY terminated the lease. In January 2012, Ross filed a lawsuit in Pennsylvania federal court against VIWY, alleging that VIWY breached the lease causing Ross to overpay rent (the “overpayment claim”). VIWY counter-claimed that Ross had improperly offset its rent from March 2011 to September 2011 (the “offset claim”), and moved to compel arbitration and dismiss the complaint. The Pennsylvania district court denied VIWY’s motion and stayed the offset claim, pending resolution of the overpayment claim. VIWY appealed to the Third Circuit, which vacated the order and remanded the matter to the Pennsylvania district court. The Third Circuit found that the terms of the lease required arbitration of the offset claim, but did not require arbitration of the overpayment claim. However, because the claims were “inextricably linked,” the Third Circuit held that arbitration of both claims was appropriate. On remand, the Pennsylvania district court stayed the litigation pending the completion of the arbitration. Thereafter, in March 2015, Ross demanded arbitration. VIWY raised a statute of limitations defense, arguing that because Ross had filed its demand more than four years after the alleged breach, his overpayment claim was untimely under Pennsylvania’s four-year statute of limitations. The Arbitration Panel rejected this argument, finding that Ross’s filing of its complaint had suspended the running of the limitations period, assuming the statute of limitations applied to arbitration proceedings (which the Panel noted was unsettled under Pennsylvania law). The Panel also concluded that VIWY breached the lease agreement, awarding Ross over $1.8 million. Ross then moved in the Pennsylvania district court to confirm the arbitration award, and VIWY cross-moved to vacate, arguing that the Panel exceeded its powers under the Federal Arbitration Act, or alternatively acted in manifest disregard of Pennsylvania law. The district court denied VIWY’s motion to vacate, and granted Ross’s motion to confirm. VIWY appealed to the Third Circuit.

First, in reviewing VIWY’s contention that the Panel exceeded its powers when it allegedly misapplied Pennsylvania’s statute of limitations, the Third Circuit noted that the Arbitration Panel assumed the statute of limitations applied to arbitration proceedings and analyzed whether tolling was warranted. Thus, the Third Circuit noted that Ross’s complaint asserting the overpayment claim — which was filed well within the four-year statute of limitations — tolled the limitations period. The Third Circuit also noted that, in any event, an erroneous ruling that Ross’s lawsuit tolled the statute of limitations does not amount to an excessive abuse of the Panel’s power. In its analysis, the Third Circuit also noted that VIWY previously took the position that an arbitrator should resolve Ross’s overpayment claim. Thus, according to the Third Circuit, resolution of Ross’s overpayment claim necessarily included determining how Pennsylvania law, and in particular Pennsylvania’s statute of limitations, affected the parties’ rights under the lease. Thus, the Court found that because the Panel’s interpretation “went against” VIWY does not now give VIWY the right “to rerun the matter in a court.” As to VIWY’s alternative argument that the arbitration award should be vacated because the Panel acted in manifest disregard of the law when it allegedly misapplied Pennsylvania’s statute of limitations, the Third Circuit noted that the Panel did not “willfully flout” Pennsylvania’s statute of limitations and its tolling jurisprudence. The Third Circuit held that because the answer to the tolling question was not obvious, it could not say that the Panel manifestly disregarded Pennsylvania’s law concerning the statute of limitations. Thus, the Third Circuit affirmed the Pennsylvania district court’s decision.

Ross Dress for Less Inc. v. VIWP, L.P., et al, No. 17-3145 (3rd Cir. Oct. 24, 2018).

This post written by Jeanne Kohler.

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Eleventh Circuit Finds that Arbitration Clause in One Agreement Applies to Disputes Regarding a Related Agreement

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Does an arbitration clause in a one but not the other of two contracts executed by the same parties at the same time apply to a dispute regarding the contract that does not contain the arbitration clause? The Eleventh Circuit has determined that it can and, under Georgia law and the particular circumstances of this case, it does.

The dispute arose out of Theodore Wood’s resignation from his employment with Parks IP Law, LLC and creation of his own firm—Wood IP, LLC. As part of this separation, the parties entered into two agreements: a Separation Agreement, which included an agreement to arbitrate any disputes in Atlanta, Georgia, and a Promissory Note, which did not include an arbitration provision but did include a venue provision stating that “[a]ny action or proceeding” between the parties “must be brought in the State of Georgia, Fulton County . . . .” When Parks IP brought suit alleging a breach of the Promissory Note, Wood moved to compel arbitration, but the trial court denied his motion.

On appeal, Parks IP argued that the arbitration provision in the Separation Agreement did not apply to the Promissory Note, because the Promissory Note did not reference the Separation Agreement. The Eleventh Circuit disagreed. Noting that documents executed at the same time in the course of the same transaction are construed together under Georgia law, the court found that this applied to the Separation Agreement and the Promissory Note. While the Promissory Note did not reference the Separation Agreement, the Separation Agreement did reference the Promissory Note, as the Promissory Noted spelled out the terms by which debts discussed in the Separation Agreement were to be paid.

Parks IP further argued that the Promissory Note’s venue provision was in direct conflict with the arbitration provision, but the court found that the phrase “any action or proceeding” in the venue provision was not limited to actions in court, and was broad enough to include an arbitration proceeding. Further, the court found no conflict between the Promissory Note’s specification of venue in Fulton County and the Separation Agreement’s specification of arbitration in Atlanta, as the two could reasonably be construed together to mean that arbitration should occur in the part of Atlanta that is within Fulton County.

Parks IP Law, LLC v. Wood et al., No. 18-11178 (11th Cir. Nov. 8, 2018)

This post written by Jason Brost.

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District Court Finds that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards is Not Preempted By State Law Prohibiting Arbitration of Insurance Disputes

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A district court judge in the U.S. District Court for the Eastern District of Louisiana has issued an order attempting to resolve the apparent tension created by Louisiana law barring compulsory arbitration provisions in insurance contracts, a contract containing both an arbitration provision and a “conformity to statute” clause, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), and the McCarran-Ferguson Act.

The matter arose out of the defendant’s refusal to pay claims under an insurance policy covering hail and wind damage. Plaintiffs sued in Louisiana state court, but defendant, which is a citizen of the United Kingdom, removed the matter to federal court pursuant to the Convention. Plaintiff Pannagl then moved to remand on several grounds.

First, plaintiff argued that the removal was untimely, as it was not filed within 30 days after service of the complaint, as is required for removal based on diversity jurisdiction. The court found that the timeliness argument would not apply if the Convention applied, as removal under the Convention may occur at any time before trial. The court further found that the basic requirements for application of the convention— (1) an agreement arising out of a commercial legal relationship, (2) a written agreement to arbitrate in the territory of a Convention signatory, and (3) a party that is not an American citizen—were all met.

Second, plaintiff argued that the Convention only applies to the recognition of arbitral awards, but the court held that the plain language of the statute implementing the Convention requires its application to attempts to enforce covered arbitration agreements.
Third, plaintiff argued that the policy’s “conformity to statute” clause required the policy to be amended to remove the arbitration provision in order to comply with Louisiana law barring compulsory arbitration provisions in insurance contracts. The court held, however, that the Convention preempts state law, such that the policy could not be amended to remove an arbitration provision covered by the Convention.

Finally, plaintiff argued that Louisiana’s prohibition of arbitration in insurance disputes reverse-preempts the Convention under the McCarran-Ferguson Act, as the Convention as applied is contrary to a Louisiana public policy enacted for the purpose of regulating the business of insurance. But the court held that while the McCarran-Ferguson Act applies generally to federal statutes, it does not apply to treaties such as the Convention. As a result, the court denied the motion to remand.

Plaintiff immediately appealed this ruling to the Fifth Circuit Court of Appeals, which denied the appeal on the basis that denial of a motion to remand is interlocutory and not appealable unless the district court certifies the issue, which had not occurred in this case.

Gulledge and Pannagl v. Certain Underwriters at Lloyds, London, Case No. 18-6657 (USDC E.D. La. Sept. 27, 2018)

This post written by Jason Brost.
See our disclaimer.