Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Ninth Circuit Finds Foreign Bank Did Not Waive Personal Jurisdiction by Litigating Other Defenses and Counterclaims in a Related Matter

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The Ninth Circuit recently reversed a California District Court’s finding of personal jurisdiction against a foreign bank, and found it did not waive appeal on that issue by asserting defenses. The Ninth Circuit stated that “[o]ur cases are clear that once the issue of personal jurisdiction has been adjudicated on the merits against a party, that party may fully participate and defend the litigation up to and including filing its own counterclaim.” It distinguished cases relied upon by the Central District of California as inapposite, as they involved circumstances where: (1) the defense was listed in the answer but never affirmatively litigated; and (2) where the defendant did not avail himself of the opportunity to conduct discovery on the jurisdictional issue and renew its motion to dismiss if the evidence supported a lack of personal jurisdiction. Here, the Bank timely asserted personal jurisdiction as a defense and litigated the issue to a decision from the district court: “[n]othing more was required to preserve the issue, and subsequent litigation of defenses and counterclaims did not waive the Bank’s properly preserved defense of personal jurisdiction.”

The Court further found that the Bank did not have sufficient contacts with the United States to establish personal jurisdiction over the contract claims asserted by Plaintiffs. The Bank “entered into a contract with a Cayman Islands corporation to provide pre-paid cards in the UAE. There is no indication that the Bank conducted any unilateral activities in California… [and] certainly no evidence that any minimal contacts with California, through email and phone calls to California or through an investigation conducted in California by one of the Bank’s agents, form the basis for [Plaintiff’s] contract-focused claims, which raise from the Bank’s and [Plaintiff’s] conduct in the UAE.”

The Court also reversed the judgment compelling arbitration the contract claims and remanded for dismissal due to the lack of personal jurisdiction over the Bank.

InfoSpan, Inc. v. Emirates NBD Bank PJSC, 16-55090 (USCA 9th Cir. Sept. 7, 2018)

This post written by Nora A. Valenza-Frost.

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New York Federal Court Confirms Arbitration Award in Credit Insurance Dispute Over Material Misrepresentations Based, In Part, on Underwriters’ Testimony of Materiality

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The Southern District of New York federal confirmed an arbitral award related to a credit insurance policy claim over claims of manifest disregard of the law related to the materiality of misrepresentations in the insurance application. In the underlying credit agreement, HSBC Bank Brasil (“HSBC”) agreed to extend $50 million in credit to Casablanca International Holdings (“Casablanca”) with repayment guaranteed by Schahin Engenharia S.A. (“Schahin”). The credit insurers required HSBC to complete an application that included questions regarding past defaults, history of late payments, and repayment difficulties in the course of insuring the credit agreement if Schahin failed or refused to honor its guarantor obligations. When Casablanca eventually defaulted on its obligations and both Casablanca and Schahin filed bankruptcy, HSBC submitted a claim to the insurers. An arbitrator dismissed HSBC’s claims after finding that it made material misrepresentations in the insurance application that rendered the policy void ab initio, where HSBC denied knowledge of any circumstances that would raise the likelihood of loss.

The central dispute was whether the arbitrator manifestly disregarded the law on materiality of misstatements in an insurance application, specifically whether underwriters’ testimony alone can prove materiality.

First, the court found the arbitrator’s decision did not manifestly disregard the law on materiality. The court distinguished the cases cited by HSBC’s successor-in-interest because those cases all addressed the sufficiency of underwriters’ testimony in the context of motions for summary judgment. In the context of a summary judgment standard, the issue is whether underwriters’ testimony alone demonstrates materiality as a matter of law. In the present context, however, the parties did not move for summary judgment and instead conducted a full hearing on the merits. Therefore, the insurers in this setting were not required to prove material misrepresentation as a matter of law, but merely a matter of fact to the fact-finder. Furthermore, the court noted that even if the arbitrator incorrectly interpreted the law, he had a colorable justification sufficient to preclude vacatur.

Next, the court concluded that even if the insurers were required to introduce additional evidence of materiality beyond the underwriters’ testimony, it was satisfied they had done so. Specifically, the court noted that the issuance of the policy was “expressly conditioned” upon completion of the insurance application and the insurers’ satisfaction with the answers contained therein. Additionally, the court pointed to the plain text of the insurance policy, credit agreement, and insurance application, credit review reports produced, and New York law as all supporting the arbitrators’ determination that the misrepresentations were material.

Finally, the court granted the cross-motion to confirm the arbitral award. Pursuant to both the New York Convention and the Federal Arbitration Act, there are limited grounds that justify refusal to confirm an arbitral award. The court found none of the grounds articulated under either framework were satisfied in this case, and thus confirmed the award.

Banco Bradesco S.A. v. Steadfast Ins. Co., Case No. 18-331 (USDC S.D.N.Y. Sept. 7, 2018).

This post written by Thaddeus Ewald .

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Texas Department of Insurance Proposes Rule Changes Regarding Captive Insurance

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The Texas Department of Insurance has proposed a set of amendments to its regulations concerning captive insurance in order to implement changes passed into law by the Texas legislature in 2015 and 2017. The 2015 legislation allowed the Department to approve dividends and distributions to holders of an equity interests in a captive insurance company, while the 2017 legislation allowed captive insurance companies to be formed as captive exchanges, allowed the Commissioner to waive the actuarial opinion required for captive insurers under certain circumstances, allowed the Secretary of State to form a captive insurer  before the Department approves that insurer’s formation documents, allowed the Department to approve distributions to policyholders, and provided a procedure for making determinations regarding acceptable qualified jurisdictions and rating agencies for reinsurance transactions.

The proposed regulations establish rules and procedures meant to implement each of these changes.

The Department will be accepting public comments on these proposed regulations through October 22, 2018.

This post written by Jason Brost.

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Minnesota Federal Mutual Court Adopts “Look Through” Basis for Federal Question Jurisdiction in FAA Section 9 Disputes

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The District of Minnesota issued several opinions this summer in a dispute between two insurance companies, Federated Mutual Insurance Co. (“Federated Mutual”) and Federated National Holding Co. (“Federated National”), regarding the similarities between the two companies’ names. Federated Mutual owned the trademark rights to several iterations of the word “Federated” related to insurance. The parties resolved their trademark dispute in 2013 with a co-existence agreement under which Federated National agreed to stop using the term “Federated” in its name within 7 years and minimize industry confusion. By 2016 Federated Mutual initiated arbitration against Federated National because of the latter’s failure to abide by the agreement. An arbitrator concluded that Federated National had indeed breached the agreement but denied a trademark infringement claim asserted by Federated Mutual. Federated Mutual moved to confirm the arbitral award and Federated National responded by moving to confirm the award related to the denial of the trademark infringement claim and to vacate the award otherwise. On June 22, 2018, the court issued a decision on Federated National’s motion to dismiss the petition and Federated Mutual’s petition to confirm.

First, the district court resolved a circuit split on the appropriate approach when courts assess subject matter jurisdiction in the context of FAA Section 9 petitions. Rejecting the approach that courts should consider the face of the petition alone, the court concluded it should “look through” the petition to the underlying arbitration to determine whether a federal question exists. Here, the court “looked through” the petition and because the underlying arbitration involved a federal trademark claim, federal question jurisdiction existed.

Second, the court held that even if federal question jurisdiction did not exist, the court had diversity jurisdiction over the dispute. Even though Federal Mutual primarily sought injunctive relief, the court decided the value of the “object of the litigation”—resolving the confusion surrounding the names in the insurance industry—satisfied the $75,000 jurisdictional minimum.

Third, the court determined it could not exercise general jurisdiction over Federated National but it could exercise specific jurisdiction based on the particular contacts with Minnesota regarding the co-existence agreement. While Federated National did not exercise sufficient control or domination over its subsidiaries with Minnesota contacts to warrant general jurisdiction, the court found specific jurisdiction because the co-existence agreement was governed by Minnesota law and contemplated performance that affected Federated Mutual’s business in the state.

Fourth, the court found proper venue in Minnesota where Federated National was subject to personal jurisdiction there, and therefore deemed to reside in the state. Likewise, the court rejected Federated National’s request to transfer the case to Illinois where it had filed a case to vacate the award.

Fifth, the court confirmed the arbitral award. It noted the limited circumstances under which a court can vacate an award pursuant to the FAA and that Federated National did not assert any of the applicable bases—instead, the court dismissed the argument as Federated National merely disagreeing with the arbitrator’s analysis.

After the court issued its June 22, 2018 opinion, Federated National appealed and moved to stay the court’s decision pending appeal.  In a September 11, 2018 opinion, the District of Minnesota denied that motion. Federated National moved on the grounds that there were substantial questions of law regarding the “look through” basis for Federated Mutual question jurisdiction, doubt that the injunctive relief satisfies the amount in controversy requirement, and whether Federated National had sufficient Minnesota contacts. The court denied the motion largely because Federated National failed to make a strong showing that it was likely to succeed on the merits. All of Federated National’s arguments regarding “substantial questions of law” presented merely the possibility of success on the merits that fail to satisfy the high burden to warrant a stay pending appeal. Additionally, Federated National did not establish any irreparable injury absent a stay, a stay would further injure Federated Mutual by delaying resolution, and the public interest did not support a stay.

This post written by Thaddeus Ewald .

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Second Circuit partially vacates summary judgment ruling in asbestos risk reinsurance case

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The Second Circuit has partially vacated summary judgment rulings in a case involving the reinsurance of asbestos-related risks. The case involves Utica Mutual Insurance Company and it reinsurer Clearwater Insurance Company, regarding Clearwater’s reinsurance obligations arising from claims of Utica’s insured, Goulds Pumps, Inc. Utica had issued various primary and umbrella liability insurance policies to Goulds from the 1950s to the 1990s.  In the 1990s, Goulds faced many thousands of asbestos-related person injury claims, for which it turned to Utica for coverage.  Clearwater had reinsured the 1978 and 1979 umbrella policies under two reinsurance certificates (the “Clearwater Certificates”) and the 1979-1981 umbrella policies under three reinsurance contacts as part of a pool of reinsurers managed by Towers, Perrin, Forster & Crosby, Inc. (the “TPF&C Memoranda”). When Utica sought coverage from Clearwater, Clearwater objected on three grounds: (1) Utica had no liability for the asbestos-related claims under the umbrella policies reinsured by Clearwater; (2) Clearwater’s liability under the Clearwater Certificates was capped at $5 million and $2 million for 1978 and 1979, inclusive of expenses; and (3) Clearwater was not obligated to pay amounts Utica had voluntarily paid Goulds through settlements.

The Second Circuit found that Clearwater’s first objection turned on language in the Utica umbrella policies stating that Utica would cover expenses “not covered by” the primary policies. Clearwater argued this meant that the umbrella policies did not cover asbestos-related claims because such claims were covered by the primary polices, but Utica said it meant the umbrella policies had to cover amounts that Utica did not pay under the primary policies because it interpreted those policies to have aggregate limits of liability that were exceeded. The trial court, which had granted Clearwater summary judgment on other grounds, had not decided what “not covered” meant in this context, and the Second Circuit remanded the matter so the trial court could rule on this issue.

The Second Circuit rejected Clearwater’s second objection, because the Clearwater Certificates contained “follow the form” clauses, the umbrella policies specifically stated that Utica would “reimburse the insured for all reasonable expenses . . . in addition to the applicable limit of liability of this policy,” and the Clearwater Certificates contained nothing inconsistent with an obligation to cover expenses in addition to the limits of liability contained in those Certificates.

Finally, the Second Circuit agreed with Clearwater’s third objection, finding that Clearwater was not obligated to reimburse Utica for its voluntary settlements with Goulds because the Clearwater Certificates did not contain an express follow-the-settlements clause and no such obligation was implied under New York Law. Further, it found that the TPF&C Memoranda only required Clearwater to reimburse Utica for settlements that were authorized by TPF&C, which authorization had never been requested or given.  Utica objected that this condition was excused because it was impossible, as TPF&C had stopped managing the reinsurance pools decades ago, but the court found that, regardless of impossibility, such prior approval was still a condition precedent to Clearwater’s obligation to reimburse Utica for the settlements.

Utica Mutual Insurance Company v. Clearwater Insurance Company, Nos. 16-2535 (L), 16-2824 (XAP) (2d Cir. Sep. 25, 2018).

This post written by Jason Brost.
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