Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Cryptocurrency Theft Class Not Estopped From Avoiding Enforcement Of Arbitration Clause Under Either California Or Florida Law

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The Eleventh Circuit recently affirmed the denial of a motion to compel arbitration based on equitable estoppel in a putative class action by victims of a cryptocurrency exchange website (Cryptsy) CEO’s theft of money derived from the conversion of cryptocurrencies into cash, regardless of which state’s law applied. The class complaint filed on behalf of Crypsty customers and the Cryptsy receiver alleged Coinbase, an online marketplace for the sale, exchange, and purchase of cryptocurrencies, failed to adequately monitor Crypsty, detect the theft, and report suspicious activity as required under the federal Bank Secrecy Act. The court analyzed the equitable estoppel basis to compel arbitration under both California and Florida law and found that regardless of which applied, the motion to compel must be denied.

First, the court assessed the present claims under Florida’s two standards for compelling arbitration under an equitable estoppel theory: the narrow scope of arbitration clauses requiring arbitration for claims “arising out of” the subject contract and the broad scope for clauses requiring arbitration for claims “arising out of or relating to” the contract. The Eleventh Circuit concluded that because the claims were based on duties and obligations imposed by the Bank Secrecy Act—intended to detect money laundering, not protect customers—and imposed by the underlying contract, they did not rely on nor bear a significant relationship to the underlying contract sufficient to trigger application of the arbitration clause. Because the claims failed to satisfy the lower burden of broader scope standard, the court held they would likewise not be able to satisfy the higher burden required for the narrow scope analysis.

Second, the court reached a similar conclusion under California’s inquiry on whether equitable estoppel requires compulsion of an arbitration agreement for claims that are “dependent upon, or inextricably intertwined with” the underlying contract obligations. Even if claims are related to the contract, California does not compel arbitration unless a complaint “relies” on the agreement to establish its cause(s) of action. Here, the court found the class representative did not seek to enforce any terms or obligations of the underlying user agreements, but rather sought to enforce duties and obligations imposed by federal statutes and regulations and state common law. Therefore, because plaintiffs’ claims, if viable, would be so viable without any reference to the user agreements, the complaint did not rely on them and plaintiffs were not estopped from avoiding the arbitration clauses.

Leidel v. Coinbase, Inc., No. 17-12728 (11th Cir. Apr. 23, 2018).

This post written by Thaddeus Ewald .

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Fifth Circuit Allows Non-Signatories To Enforce Arbitration Agreement

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The Fifth Circuit has affirmed an order compelling arbitration, despite the fact that the parties seeking to compel arbitration were not signatories to the relevant arbitration agreement.

The litigation arose out of a 1998 transaction in which Henry House purchased a home and real property from Jim Walter Homes, Inc. and Mid-State Trust IV. The sale contract contained an arbitration agreement under which the parties agreed to arbitrate any disputes “in accordance with the Comprehensive Arbitration Rules and Procedures administered by J●A●M●S/Endispute.”

In 2016, Mr. House sued Green Tree Servicing, L.L.C. and Walter Investment Management Corporation (WIMC), alleging that they conspired with Jim Walter Homes and Mid-State Trust IV to induce Mr. House to enter into the 1998 agreement based on the false premise that he would get a properly constructed home. Green Tree and WIMC moved in federal court to compel arbitration. Mr. House argued that Green Tree and WIMC, as non-signatories to the arbitration agreement, lacked standing to enforce it, but the district court found that they had standing under Mississippi’s intertwined claims test and that the arbitration agreement, by incorporating the JAMS rules, delegated questions of arbitrability to the arbitrator.

On appeal, Mr. House argued (1) that the intertwined claims test did not apply because Green Tree and WIMC did not exist at the time the arbitration agreement was executed; (2) that Mr. House, as an unsophisticated party, could not agree to delegate the question of arbitrability by agreeing to the JAMS rules; and (3) that the arbitration agreement was invalid because it was fraudulently induced.

The court quickly disposed of the second argument, refusing to consider it at all because Mr. House had not raised the issue of his lack of sophistication before the trial court.

As regards the first, the court found that the exact date when the entities formed was irrelevant. Mississippi’s intertwined claims test allows a non-signatory to enforce an arbitration agreement against a party who makes “‘allegations of substantially interdependent and concerted misconduct’ between a non-signatory and a signatory that have a close legal relationship.” The court found that this was satisfied by Mr. House’s complaint, which alleged that Green Tree and WIMC were coconspirators and joint venturers with the parties to the 1998 arbitration agreement in a scheme to get Mr. House to enter into that transaction.

Finally, the court held that when the parties have delegated questions of arbitrability to the arbitrator, a court may only find that the arbitration agreement was procured by fraud if the party seeking to avoid arbitration challenges the validity of the arbitration agreement specifically, rather than the contract as a whole. Mr. House did not do that, however, instead alleging generally that his signature on the 1998 sales contract and related documents was procured through fraud, which the court found was not specific enough to take this question out of the hands of the arbitrator.

Green Tree Servicing, L.L.C., et al. v. House, et al., (5th Cir. May 14, 2018)

This post written by Jason Brost.

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Following New York High Court’s Answer To Certified Question, Second Circuit Remands Reinsurance Dispute To District Court

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The Second Circuit vacated and remanded for reconsideration a district court opinion in a dispute concerning the limits available under certain facultative reinsurance certificates after the New York Court of Appeals answered a certified question on that issue. Specifically, the Second Circuit had questioned whether Excess Insurance Co. v. Factory Mutual Insurance Co. imposed a rule of construction or a presumption that the per occurrence liability caps in facultative reinsurance certificates strictly limit the reinsurance coverage regardless of whether the operative language is understood to cover defense costs or other expenses. The N.Y. Court of Appeals answered there is no such rule of construction or presumption, and instead, reinsurance agreements are governed by standard contractual interpretation principles that place utmost importance on the language of the contract. Given that answer, the Second Circuit remanded the case to the district court to interpret, in the first instance, the reinsurance contracts terms as they relate to liability caps.

Global Reinsurance Corp. of Am. v. Century Indemn. Co., No. 15-2164 (2d Cir. May 9, 2018).

This post written by Thaddeus Ewald .

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Georgia Joins Growing List Of States That Allow For Domestic Surplus Lines Insurers

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Earlier this month, Georgia enacted SB 381, which provides that a non-admitted insurer domiciled in Georgia is deemed a domestic surplus lines insurer, if all qualifications are met, and can sell surplus line products in Georgia. Georgia joins a growing list of states, including Arizona, Arkansas, Delaware, Illinois, Louisiana, Missouri, North Dakota, New Hampshire, New Jersey, Oklahoma, Texas, and Wisconsin that have passed similar legislation. Among the criteria are (1) that the insurer possesses a policyholder surplus of at least $15 million, (2) that the insurer is an eligible surplus lines insurer in at least one jurisdiction other than Georgia, (3) that the insurer’s board of directors has passed a resolution seeking to be a domestic surplus lines insurer in Georgia, and (4) that the insurance commissioner has issued a certificate of authority or other written approval of the same. The bill also states that all financial and solvency requirements imposed on Georgia’s domestic admitted insurers shall apply to domestic surplus lines insurers unless otherwise specifically exempted. GA SB 381 (signed 5/8/2018).

This post written by Gail Jankowski.

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Minnesota Implements The 2011 Naic Credit For Reinsurance Model Law And Regulations

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On May 8, 2018, the governor of Minnesota signed H.F. 3622, a bill implementing the 2011 NAIC Credit for Reinsurance Model Law and Regulations. The bill creates a new classification of reinsurer: the “certified reinsurer.” A certified reinsurer does not need to be licensed as an insurer in Minnesota or any other state. However, it must hold assets between 0 and 100% of its reinsurance obligations, depending on its financial stability, and meet recordkeeping and other requirements provided in the bill. The bill allows a domestic ceding insurer to receive credit for risk transferred to a certified reinsurer. The bill takes effect on January 1, 2019, and will apply to reinsurance contracts entered into or renewed on or after that date. Minnesota H.F. 3622 (signed 5/8/2018) (legislative analysis).

This post written by Benjamin E. Stearns.

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