Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Puerto Rico Addresses Impact of the NRRA

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The Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”) provisions are applicable in Puerto Rico. The Office of the Commissioner of Insurance issued a circular letter setting forth the standards for the placement of surplus lines insurance for exempt commercial purchasers (as established by the NRRA). The definition of an exempt commercial customer is set forth in the letter.

Additionally, the letter states that “in order for a nonadmitted insurer domiciled in the United States to be considered an insurer that is eligible to write surplus lines insurance in Puerto Rico, such insurer must be admitted in the insurer’s home state to enter into insurance contracts for the class or classes of insurers which it proposes to contract as surplus lines insurance and shall maintain a minimum capital and surplus in the amount of $15 million.”

Government of Puerto Rico Office of the Commissioner of Insurance Circular Letter CC-2018-1936-D, August 16, 2018.

This post written by Nora A. Valenza-Frost.

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Eleventh Circuit Reverses Order Compelling Arbitration between Non-Signatories

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Plaintiff Outokumpu Stainless USA, LLC (“Outokumpu”) contracted with F.L. Industries, Inc. “”FLI”), a German company, to provide cold rolling mills (“CRMs”), which are used in the production of certain steel products. FLI later contracted with GE Energy Conversion France SAS (“GE Energy”). Both contracts contained arbitration agreements.

Outokumpu and GE Energy became involved in a dispute over failed CRMs. Outokumpu filed suit in Alabama state court and GE Energy removed to Alabama federal court, and moved to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Outokumpu sought to remand to state court. The District Court denied remand and granted GE Energy’s motion to compel arbitration. Outokumpu appealed.

The Eleventh Circuit reversed, finding that, while the District Court properly maintained jurisdiction because the dispute “related to” the arbitration agreement at issue, it reversed the granting of the motion to compel arbitration, as the New York Convention requires that the parties signed a written agreement to arbitrate. Here, no agreement was “signed” by both parties, as, at the time Outokumpu entered into the contract with FLI, GE Energy was a stranger to that contract, and had not yet entered into its own contract with GE Energy, through which it ultimately sought to enforce the Outokumpu – FLI arbitration agreement.

The Court remanded for further proceedings before the Alabama federal district court.

Outokumpu Stainless USA, LLC v. Converteam SAS, No. 17-10944 (11th Cir. Aug. 30, 2018)

This post written by John Pitblado.

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Financial Stability Oversight Council Determines Bank Holding Company Will Not Be Treated As a Nonbank Financial Company Post Merger

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Following its impending merger, Zions Bankcorporation requested the Financial Stability Oversight Council not treat the bank holding company, as a nonbank financial company supervised by the Board of Governors of the Federal Reserve System (“Board of Governors”). The company argued, among other things that:

  • Any material financial distress at the company would not pose a risk to U.S. financial stability;
  • The company was relatively small, lacked complexity and had low levels of interconnectedness; and
  • The company was a source of credit for low interest, minority, and underserved communities.

The Council scrutinized the company and resolved that “if the company were to fail, its expected post-merger legal and operational structure does not appear to have features that would have the likelihood of a disorderly resolution that would pose a threat to U.S. financial stability.”

In determining whether to grant the request, the Council considered the extent to which the company would be subject to regulation and supervision if it were not treated as a nonbank financial institution. It looked at: (1) whether regulators could impose capital and liquidity requirements; (2) whether regulators would have the authority to bring enforcement actions; (3) impose detailed and timely reporting obligations; (4) whether regulators would have the ability to dissolve the company; and (5) the existence and effectiveness of consolidated supervision. Finding there to be sufficient oversight and regulation, the Council granted the company’s request to not be treated as a nonbank financial company post-merger.

FSOC has been criticized in the past for imposing “bank centric” requirements and analyses on insurance companies and other nonbank financial companies.  It remains to be seen whether the analysis in this decision, which focuses more than previous decisions on the activities at issue, marks a departure from the “bank centric” approach to FSOC’s decision making with respect to nonbank financial companies.

Final Decision of the Financial Stability Oversight Council Regarding the Appeal of Zions Bankcorporation, September 12, 2018.

This post written by Nora A. Valenza-Frost.

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Contract Claims Dismissed Against Reinsurers and Reinsurance Service Providers, but Negligence Claim Against Service Providers Allowed to Go Forward

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Vantage, the plaintiff, had purchased insurance from Assured Risk Transfer (ART) against the risk that a company to which Vantage had loaned $22 million would default. ART then reinsured 90% of its risk with seven reinsurance companies. When the borrower defaulted, Vantage made a $22 million claim, which ART denied. An arbitrator decided that ART owed Vantage $22 million plus interest and costs. ART did not pay, claiming it had insufficient assets to satisfy the award and that the only source of funding was amounts owed to it under its reinsurance contracts. The reinsurers, however, refused to pay on the claim. Vantage filed suit in U.S. District Court of the District of Columbia, asserting a claims for breach of contract against the seven reinsurers and negligence and breach of contract against three related companies that provided services to ART—Willis Captive Management, Willis Re, Inc. and Willis Towers Watson Management (the Willis Defendants).

The court first addressed the argument that it could not exert personal jurisdiction over the seven reinsurers. While it found that the requirements for specific jurisdiction over these reinsurers had been met, the court found that Vantage had not effected service of process on these defendants. Vantage had served them through a law firm that was listed in the relevant reinsurance contracts as their agent for service of process, but those contracts authorized service only if ART sued to compel arbitration or enforce an arbitration award. The court found that Vantage could not show that it was a party to any of the reinsurance contracts or overcome the general rule that a reinsurer does not have a contractual relationship with the original insured, and thus that it could not take advantage of the service of process provisions within those contracts. The court then denied Vantage an extension of time to effect service, as Vantage’s lack of a contractual relationship with the reinsurers meant that its breach of contract claims against those reinsurers must necessarily fail.

The court then addressed the breach of contract claims against the Willis Defendants. Vantage alleged that they had breached their contractual obligation to transmit information to the reinsurers when they failed to timely notify them of Vantage’s $22 million claim—a failure the reinsurers relied upon when denying the claim. However, the court found that the contracts at issue were between the Willis Defendants and ART, not Vantage, giving ART no enforceable right under these contracts, and the court dismissed these claims. However, while no contractual duty existed, the court found that a tort duty might, as the Willis Defendants were alleged to have undertaken to render services to one party (ART) that was necessary for the protection of a third party (Vantage). Thus, the court found that the complaint sufficiently alleged the existence of such a duty to Vantage to avoid dismissal.

Vantage Commodities Financial Service I, LLC, v. Assured Risk Transfer PCC, LLC, et al., Case no. 1:17-cv-01451(TNM) (D.D.C. Aug. 6, 2018)

This post written by Jason Brost.

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Ninth Circuit Upholds Lower Court Rulings on Nurse Staffing and Work Break Arbitration Awards

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The Ninth Circuit recently decided two cases related to arbitration awards arising out of a settlement agreement between the Washington State Nurses Association (WSNA) and MultiCare Health System governing nurses’ breaks and staffing plans. The settlement agreement required MultiCare to adopt practices such that each nurse receives a 15-minute break every four hours of work, but also to ensure that such practices do not violate the staffing plan. An arbitrator agreed that MultiCare had violated these requirements and ordered MultiCare cease using the “buddy system” as a practice to provide breaks and required assignment of a reserve or floating nurse to ensure compliance. The district court vacated the award as to the buddy system but did not address the reserve or floating nurse component.

First, the Ninth Circuit held that the lower court erred in its conclusion that the settlement agreement did not allow the arbitrator to eliminate the practice of using the buddy system. Citing precedent severely restricting vacatur where the arbitrator even arguably construed the contract, the court found the arbitrator appropriately considered the buddy system and the settlement and determined that the buddy system violated the essence of the settlement agreement.

Second, the court found no reason to vacate the award regarding the use of reserve or float nurses where the district court declined to rule on MultiCare’s objection because it had already vacated the award regarding the use of the buddy system. Even if there was ambiguity in the basis of the award, the court noted, that would not be grounds to vacate the award.

Finally, the court affirmed the lower court’s finding that MultiCare failed to show any bias, partiality, or other wrongdoing on the arbitrator’s behalf to warrant reassigning the case to a different arbitrator for any further proceedings.

Multicare Health Sys. v. Wash. State Nurses Ass’n, No. 16-36048 (9th Cir. July 23, 2018).

This post written by Thaddeus Ewald .

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