Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Eleventh Circuit Reverses Sanction Imposed Against Party That Defaulted in Arbitration to Determine Whether Party Acted in Bad Faith

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The Eleventh Circuit reversed a lower court’s entry of a default judgment against Acosta Tractors, Inc., that was based solely on Acosta’s default in the underlying arbitration. Julio Hernandez had filed a claim for unpaid wages against Acosta under the Fair Labor Standards Act, and Acosta compelled arbitration. However, the arbitration did not “proceed as planned,” as the arbitrator refused to consolidate Mr. Hernandez’s case with two similar actions and allowed “extensive discovery,” including 29 depositions, across the three separate arbitrations. Arbitration fees quickly added up to over $100,000, far exceeding the amount of the plaintiffs’ claims. Acosta refused to pay the arbitration fees and sought to return to the trial court. Instead, the trial court entered a default judgment against Acosta, based on its admission that it had refused to pay the costs of the arbitration and the lack of evidence establishing its inability to do so.

On appeal, the Eleventh Circuit vacated the trial court’s ruling. The Eleventh Circuit noted that it was within the lower court’s inherent power to enter a default judgment against Acosta, but held that it was error to do so “solely because a party defaulted in the underlying arbitration.” In order to impose a sanction against a party pursuant to its inherent power, the court “must make a finding that the sanctioned party acted with subjective bad faith.” The case was remanded to the District Court to determine whether the requisite bad faith existed. Hernandez v. Acosta Tractors, Inc., Case Nos. 17-13057; 17-13673 (11th Cir. August 8, 2018).

This post written by Benjamin E. Stearns.

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Eighth Circuit Finds All Claims Involving Consumer Credit Dispute Subject to Arbitration

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A federal court in Minnesota determined that three of Plaintiffs’ claims were not subject to the applicable arbitration clause: (1) state-law usury claims; (2) state and federal financial disclosure claims; and (3) state-law unjust enrichment counts. The Eighth Circuit reversed, directing the District Court to compel arbitration of all claims.

The Circuit Court first looked at whether the arbitration clause was broad or narrow, given that arbitration clauses which cover claims “arising out of” or “relating to” an agreement are treated broadly, so the clause at issue here, which contained both terms, was broad.

The Circuit Court then looked at whether “the underlying factual allegations simply touch matters covered by the arbitration provision.” Looking at the three claims, the Court found that “each claim implicates the credit offered or provided to the consumers because the facts underlying every claim overwhelmingly detail the financing relationship between the consumers and Bluestem.”

Lastly, the Circuit Court noted that the district court had “flipped the inquiry. The question is not whether there was a way to interpret the claims as falling outside the scope of the agreements; instead, where a valid arbitration agreement exists, the claims are arbitrable unless it may be said with positive assurance that the arbitration clause is not susceptible of any interpretation that covers the asserted dispute.”

Parm v. Bluestem Brands, Inc., No. 17-1931, 17-1932 (8th Cir. Aug. 7, 2018)

This post written by Nora A. Valenza-Frost.

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Promissory Note Issued In Satisfaction of Unpaid Insurance Premiums Is Valid And Enforceable, Even If Allegedly Derived From Unapproved Reinsurance Agreement

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Plaintiff sells workers’ compensation insurance through its “EquityComp” program approved by New Jersey law. Defendant purchased an EquityComp policy. Unable to pay its insurance premiums, defendant executed a promissory note acknowledging its indebtedness and promising to pay plaintiff a stated amount in full settlement. Defendant made no payments toward the note, however, leading plaintiff to commence a lawsuit.

Defendant argued that the note was void as against public policy because it derived from a Reinsurance Participation Agreement (RPA) that was executed as part of the EquityComp program, but which was not itself approved by New Jersey regulators. According to defendant, plaintiff used the RPA to unlawfully circumvent state regulations governing policies issued with guaranteed versus loss-sensitive premiums. According to the court, however, the note was valid and enforceable regardless of whether it violated New Jersey insurance regulations. Citing Nebraska law, the court determined that the note was a distinct, unconditional agreement to “settle” a delinquent account. The court refused to “look behind” and nullify that agreement based on defendant’s allegations, particularly where there were no allegations of fraud or mistake in the issuance of the note.

Applied Underwriters, Inc. v. Top’s Personnel, Inc., No. 8:15-cv-00090-JMG-CRZ (USDC D. Neb. Aug. 2, 2018)

This post written by Alex Silverman.
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Federal Court in Puerto Rico Voids Marine Insurance Policy Based Upon Misrepresentation in Insurance Application

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QBE Seguros brought a successful action declaring a marine insurance policy was void ab initio under the doctrine of uberrimae fidei and the breach of the warranty of truthfulness in the application for insurance.

In Morales’ application for insurance, he did not include the fact that he had previously grounded a 40’ yacht and listed only two of the seven vessels that he had owned and operated when asked. Following an endorsement, Morales held hull insurance for a vessel named Making Waves, which sustained damage as a result of a fire. Thereafter, QBE rescinded the policy.

The Court first looked at uberrimae fidei, or the duty of utmost good faith, which requires the insurer to show that the insured misrepresented a material fact. Having determined Morales misrepresented his prior boating history and prior loss history on his application, the Court looked at whether such misrepresentation was material. “A fact is material if it can possibly influence the mind of a prudent and intelligent insurer in determining whether it will accept the risk.” QBE testified that prior loss history is an important factor to take into consideration when evaluating the risk posed by issuing a particular policy. The Court determined this information was material: “it is entirely logical that an insured’s loss history would affect their premiums and whether an insurance company would want to accept the risk of issuing them a policy.”

The Court then looked at whether the contract between the parties included a warranty of truthfulness, and if so, the insured’s misrepresentation of fact in that contract will also excuse the insurer from the policy contract. The insurance application stated the information provided therein is warranted by the applicant “to be true and correct in all respects.” The Court found the “warranty of truthfulness was material to the risk assumed by QBE in issuing the policy.” The Court rejected Morales’ affirmative defenses, finding that “Morales breached the warranty of truthfulness in the QBE Application and policy by failing to disclose his prior loss history and his prior boating experiences. His breach gives QBE the right to void the policy.”

The Court denied Morales’ counterclaims for breach of contract and consequential damages due to QBE’s bad-faith adjustment.

QBE Seguros v. Morales-Vázquez, No. 15-2091 (USDC D.P.R. Aug 7, 2018)

This post written by Nora A. Valenza-Frost.

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Special Focus: Follow the Fortunes Doctrine

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The follow the fortunes (or follow the settlements) doctrine has been an important part of many reinsurance relationships. This Special Focus article focuses on divergent case law as to whether the doctrine is purely a matter of contract, or whether it should be implied into every reinsurance contract, whether or not the contract refers to the doctrine.

This post written by Rollie Goss.
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