Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Tenth Circuit Confirms Arbitration Award Against Non-Party Surety

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Sujit Ghosh, President of Open Orbit Corporation, entered into a Personal Guaranty for the “full and timely performance of and by” Open Orbit under a Retailer Agreement with DISH Network, LLC. The Personal Guaranty included a final and binding arbitration clause of “any and all disputes, controversies or claims arising out of or in connection with this Personal Guaranty.” A dispute arose, and arbitration commenced. Ghosh requested the arbitrator remove him from the arbitration which was denied, as the arbitrator required a written agreement signed by DISH releasing Ghosh from the Personal Guaranty. DISH prevailed and obtained a $220,000 arbitration award (plus post-award interest).

The District Court confirmed the award, and the Tenth Circuit affirmed, noting “Ghosh elected to appear in the existing arbitration, where he professed faith in the arbitrator, claimed to have provided all the evidence relevant to his request to nullify or cancel his liability under the Personal Guaranty, and acknowledged that the arbitrator’s decision would be final and binding.” There were no allegations of arbitrator misconduct.

The Tenth Circuit also rejected Ghosh’s argument that, because he was not a party to the arbitration, issue preclusion is not applicable, as Ghosh “raised and actually litigated the validity of his personal guaranty in the arbitration even though he was not a party to the arbitration itself.” Furthermore, exceptions to the rule again nonparty preclusion were present.

DISH Network, LLC v. Ghosh, No. 18-1131 (10th Cir. Oct. 11, 2018)

This post written by Nora A. Valenza-Frost.

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Seventh Circuit Affirms Ruling Denying Motion to Compel Arbitration, Holding That Company Waived Right to Arbitrate

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GC Services Limited Partnership (“GC Services”), a debt collector hired by a bank to collect an allegedly unpaid balance on a credit card, advised plaintiff Francina Smith (“Smith”) that it would commence a collection proceeding unless she disputed the debt in writing.  In July 2016, Smith filed a class action suit in Indiana federal court against GC Services, alleging violations of the Fair Debt Collections Practices Act.  The credit agreement between the creditor and Smith contained an arbitration clause and a class waiver for all disputes.  In August 2016, GC Services filed a motion to dismiss the suit on several grounds but did not mention the arbitration clause in the agreement.  Plaintiff then amended her complaint, to which GC Services responded and filed a second motion to dismiss that also did not mention the arbitration agreement.  In March 2017, while several discovery disputes were ongoing, GC Services notified Smith of the arbitration agreement and demanded arbitration.  In response, Smith refused to arbitrate.  In April 2017, GC Services filed an answer to the complaint that again did not mention the arbitration agreement.  In June 2017, the Indiana district court denied GC Services’ motion to dismiss.  Thereafter, in August 2017, GC Services then filed its motion to compel arbitration.  The Indiana district court denied the motion to compel arbitration on two grounds: 1) as a non-signatory, GC Services could not enforce the arbitration agreement; and 2) GC Services waived its right to arbitrate “by not diligently asserting that right.”  GC Services appealed.

The Seventh Circuit initially noted that it did not need to address the issue of whether GC Services, a non-signatory to the underlying agreement, can compel arbitration if the district court was correct that the right to arbitrate was waived.  Thus, the Seventh Circuit first analyzed whether GC Services waived the right to arbitrate.  In analyzing the issue, the Court first found that “GC Services acted inconsistently with the right to arbitrate.”  It noted that GC Services did not demand arbitration until eight months after suit was brought and then waited another five months thereafter before moving to compel arbitration.  The Seventh Circuit also noted that GC Services, a sophisticated debt collection agency, would be aware that credit card agreements usually include arbitration clauses and it could have found the agreement at issue by simply searching the internet.  The Court also noted that even after GC Services discovered the existence of the arbitration agreement, it made no mention of it in its answer filed in court nor did it request to supplement its briefing on the pending motions to dismiss and for class certification.  The Seventh Circuit found that such actions were “unjustified and manifestly inconsistent with an intention to arbitrate” and held that the district court’s conclusion that GC Services waived its right to arbitrate was not erroneous.  The Seventh Circuit also noted that Smith would be prejudiced if the case were to go to arbitration at that time because GC Services waited to move to compel arbitration until after it received the decisions on the motion to dismiss and class certification against it, which the Court noted was an attempt to “play heads I win, tails you lose.”  The Seventh Circuit affirmed the district court’s decision that GC Services waived its right to compel arbitration.

Smith v. GC Services Limited Partnership, No. 18-1361 (7th Cir. Oct. 22, 2018).

This post written by Jeanne Kohler.
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FSOC Rescinds Prudential’s Designation as Systemically Important Financial Institution

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The Financial Stability Oversight Council (“FSOC”) announced on October 17, 2018 that it has voted unanimously to rescind the designation of Prudential Financial Inc. (“Prudential”) as a systemically important financial institution (“SIFI”). Prudential is currently the largest life insurance company and the seventh largest insurer and bank holding company in the United States.  Due to the size, scope and complexity of its business, it was labeled a SIFI in 2013 and added to the list of nonbanks considered “too big to fail” – those whose collapse the Treasury Department believed could threaten the stability of U.S. financial markets.  SIFIs are subject to strict supervision and oversight by the Federal Reserve.  Pursuant to the Dodd-Frank Act, the FSOC must annually reevaluate the continued necessity of a SIFI-designation.

The FSOC previously identified three channels through which the negative effects of a SIFI’s distressed finances could be transmitted to the market, including exposure to the SIFI by market participants, asset liquidation, and the inability or unwillingness of the SIFI to carry out critical functions or services. In 2013, the FSOC found the threat posed by Prudential arose primarily from exposure and asset liquidation channels.  According to the FSOC’s most recent evaluation, although certain aspects of Prudential’s business and activities have not materially changed since 2013, several factors have significantly affected its previous conclusion that Prudential could cause financial instability if it experienced material financial distress.  The factors include actions taken directly by Prudential, such as creating and dissolving captive reinsurance companies and restructuring debt, as well as certain critical regulatory developments and related initiatives by the National Association of Insurance Commissioners.

Notwithstanding the FSOC’s determination, Prudential and eight other insurance companies remain designated as globally significant SIFIs by the International Association of Insurance Supervisors and the Financial Stability Board. Two of these insurers had also been designated as SIFIs under the Dodd-Frank Act, but the labels were since rescinded or otherwise removed.

This post written by Alex Silverman.
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European Reinsurers Question Whether Proposed Changes to the Credit for Reinsurance Models Would Ensure Compliance with the Covered Agreement

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We have posted a number of times on the Covered Agreement between the U.S. and the E.U. concerning the reduction of collateral requirements for reinsurance provided by reinsurers domiciled in the E.U. The approach of the National Association of Insurance Commissioners (“NAIC”) to the implementation of the Covered Agreement, through its Reinsurance Task Force, has been based upon proposed amendments to the Credit for Reinsurance Model Act and Credit for Reinsurance Model Regulation, with the assumption being that the adoption of the revised Models by the individual states would ensure compliance with the Covered Agreement. Drafts of the revised Models have been under consideration, and are scheduled to be presented for a vote at the NAIC’s Fall National Meeting in approximately two weeks. The Reinsurance Advisory Board (“RAB”), which is a trade association composed of European domiciled reinsurers that purport to account for “approximately 60% of worldwide reinsurance business,” has submitted a comment letter to the chair of the NAIC’s Reinsurance Task Force expressing doubts over whether the proposed revisions to the Models would appropriately implement the Covered Agreement. This is potentially a serious issue, because if the revised Models do not appropriately implement the requirements of the Covered Agreement, the adoption of the revised Models by the states might not save state credit for reinsurance laws from preemption by the Covered Agreement. The RAB is represented at the CEO level by Gen Re, Hannover Re, Lloyd’s of London, Munich Re, Partner Re, Scor, and Swiss Re.

While many of the comments in the RAB’s letter concern fairly modest wording issues, one of the concerns expressed by the RAB is that “some of the language in the exposure drafts [of the proposed Model revisions] deviates significantly from the language of the bilateral agreement [i.e., the Covered Agreement] and thereby provides extensive discretion to state regulators in their compliance with the terms of the bilateral agreement.” We raised this issue as a possible concern in our last post on the Covered Agreement. One of the criticisms of the Covered Agreement in the Congressional hearing on the agreement shortly after it was announced was that it was too rigid, and took away the discretion and flexibility that individual state insurance commissioners have in our state-based structure of insurance regulation. The focus of the letter on the ability of individual state insurance commissioners to exercise some discretion in the implementation of the Models raises an issue that may be problematic. It will be interesting to see if and how the NAIC responds to this letter.

On a related note, the U.S. Department of the Treasury has announced plans to engage in discussions with the United Kingdom aimed at agreeing to a Covered Agreement with the U.K. that would be similar to that in place with the E.U. The NAIC has stated its position on that announcement.

This post written by Rollie Goss.
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Southern District of New York Confirms Arbitration Award Despite Allegation of Undisclosed Real Party in Interest

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After Hurricane Sandy hit the east coast in 2012, the Army Corps of Engineers contracted with Environmental Chemical Corp. (ECC) to conduct clean up on Fire Island, New York. ECC subcontracted most of the work to Coastal Environmental Group, Inc. (Coastal). Both entities incurred unexpected costs, which ECC blamed on Coastal and Coastal blamed on factors outside of its control. ECC then refused to pay Coastal a portion of the money it was otherwise due under the contract, and Coastal commenced an arbitration that ended with an award in Coastal’s favor.

ECC moved to vacate the award, focusing on two main issues: (1) Coastal’s failure to disclose the interest of its creditor Signature Bank in the matter; and (2) the arbitrator’s decision that ECC was estopped from challenging certain calculations of costs that Coastal had provided during the litigation because ECC has used those same calculations in submissions to the Army Corps of Engineers.

Documents filed after the award was issued showed that all of Coastal’s rights to payment under its agreement with ECC had been assigned to Signature Bank, which had agreed to take over all efforts to collect amounts due under the contract. ECC argued that Signature Bank was thus the real party in interest, and that Coastal’s failure to disclose this assignment of claims tainted the entire proceeding, including because this prevented the arbitrator from performing a proper conflict check. However, the court found that ECC had presented no evidence that Coastal or its attorneys ever made any affirmative misrepresentations on the question of Signature Bank’s role in the matter and that Coastal had informed ECC prior to the arbitration that one of its attorneys was also an attorney for Signature Bank. The court also found that ECC presented no evidence that a conflict check that included Signature Bank would have led the arbitrator to be conflicted out of the matter, and that “raising only the specter of potential but totally unknown conflicts” was not enough to show objective facts inconsistent with impartiality, as is needed to vacate an award on the basis of “evident partiality.”

Regarding the arbitrator’s invocation of equitable estoppel, ECC argued that, by raising the issue sua sponte and without briefing from the parties, the arbitrator exceeded his authority. The court disagreed, finding that the relevant portion of the contract specifically said that Coastal’s rights to certain compensation should be based on what “is equitable under all of the circumstances,” thus inviting the arbitrator to consider the equitable doctrine of estoppel. The court also noted that ECC had provided no authority suggesting that an arbitrator cannot consider an issue that was not briefed by the parties. Thus, the court confirmed the award.

Environmental Chemical Corp. v. Coastal Environmental Group, Inc., 18 Civ. 3082 (S.D.N.Y. Sept. 14, 2018).

This post written by Jason Brost.

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