Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Supreme Court Upholds Employee Individualized Arbitration Agreements Against Challenges Based On The National Labor Relations Act

by

The U.S. Supreme Court ruled that agreements between an employer and an employee providing for individualized arbitration do not violate the National Labor Relations Act (NLRA). We previously reported on the conflicting cases pending before the Supreme Court here.

Justice Gorsuch, writing for the Court, explained that Congress instructed the courts to uphold arbitration agreements through the Federal Arbitration Act and nothing in the NLRA (or its predecessor, the Norris-La Guardia Act) requires the contrary. The dissent, written by Justice Ginsberg, focuses in large part on the policy motivating the enactment of the NLRA, and finds that the “adhesive waivers” at issue here were the type of employer action the NLRA was meant to counteract. Justice Ginsberg’s dissent argues that class actions are the type of “other concerted activities for the purpose of … mutual aid or protection” shielded by § 7 of the NLRA. Justice Gorsuch, however, points out that § 7 “focuses on the right to organize unions and bargain collectively…. But it does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act – let alone accomplish that much clearly and manifestly, as our precedents demand.” Although the NLRA protects employees’ right to organize unions, it does not speak to their right to arbitrate collectively. Therefore it does not conflict with and override the FAA. As such, the NLRA presented no obstacle to the Court’s enforcement of the “liberal federal policy favoring arbitration agreements” embodied in the FAA. Epic Systems Corp. v. Lewis, Case No. 16-285 (USSC 2018).

This post written by Benjamin E. Stearns.

See our disclaimer.

New York Federal Court Dismissed Action, Finding That Insurer’s Reimbursement Under Insured’s Captive Reinsurance Agreement Did Not Breach Its Contracts With Insureds

by

In this case, plaintiffs Keller Foundations LLC, a limited liability construction company (“Keller”), Hayward Baker Inc., a construction services corporation (“HBI”), and their parent Keller Group PLC (“Keller Group”) brought a suit in New York federal court against Zurich American Insurance Company (“Zurich”) for breach of contract and breach of the contractual and statutory implied covenants of good faith and fair dealing. Zurich had issued a policy to Keller and HBI. Keller Group is also the parent company of Capital Insurance Company, a captive reinsurer that covered a portion of Zurich’s risk under a captive reinsurance agreement that provided that Capital would reimburse $450,000 per loss on the policy in excess of a $50,000 deductible.

The dispute concerns a settlement Zurich entered into with Diaz Fritz Isabel (“Diaz”). In 2009, HBI was hired by Diaz to serve as a subcontractor at an expansion project at a hospital in Florida. Groundwater seeped into the existing portions of the hospital, causing damage to the project. Diaz then sued HBI in Florida state court for breach of contract relating to the flood damage, to which HBI counterclaimed for money that it was owed for its work as subcontractor (the “Diaz/HBI Lawsuit”). Diaz also sought additional insured coverage under the Zurich policy, which was denied by Zurich. Diaz then sued Zurich in Florida federal court, alleging that it was entitled to additional insured coverage with respect to the damages allegedly caused by HBI’s breach (the “Diaz/Zurich Lawsuit”). Zurich counterclaimed, seeking a declaration that it had no duty under the policy to defend or indemnify Diaz. The parties mediated their dispute, which resulted in a settlement under which Zurich agreed to pay Diaz $450,000. Zurich paid Diaz, and then sought reinsurance reimbursement from Capital under the reinsurance agreement, which was paid by Capital. In the New York litigation, plaintiffs claimed that Zurich did not have the authority to enter into the settlement agreement with Diaz and that Zurich unlawfully damaged them by doing so. Zurich initially moved to dismiss the complaint, which the court granted, but without prejudice to the plaintiffs’ ability to bring an amended complaint or a new lawsuit against Zurich. Plaintiffs then filed an amended complaint, which Zurich again sought to dismiss.

The New York federal court again dismissed the amended complaint in its entirety for failure to state a claim. First, the court held that there are no adequate allegations that Zurich breached its duties in the Diaz/HBI Lawsuit as Zurich has paid, and continues to pay, for HBI’s defense in that action. As for the Diaz/Zurich Lawsuit, the court held that since none of the plaintiffs in the New York action were a party to that case, Zurich could not have violated a duty to defend them. The court also noted that plaintiffs did not allege that Zurich failed to repay ‘‘sums’’ for ‘‘damages’’ covered by the Zurich policy to which HBI and Keller are parties. Rather, the court noted that the New York litigation involved Capital’s reimbursement under the captive reinsurance agreement, to which none of the plaintiffs was a party. Thus, the court held “[t]o the extent Keller and HBI are aggrieved by this chain of events, their grievances do not arise under the Policy, but under the Captive Reinsurance Agreement, to which plaintiffs are not parties. And plaintiffs’ grievances are ultimately not with Zurich, but with Capital.” Thus, the court granted the motion to dismiss Keller and HBI’s breach of contract claims, and as for Keller Group, the court ruled that it lacks standing to sue Zurich under the policy. The court also dismissed plaintiffs’ claims for breach of good faith and fair dealing.

Keller Foundations LLC, et al. v. Zurich American Insurance Co., No. 16-6751 (USDC S.D.N.Y. Mar. 29, 2018).

This post written by Jeanne Kohler.
See our disclaimer.

Colorado Federal Court Adopts Report & Recommendation to Compel Arbitration Despite Challenge

by

Plaintiff sought to compel arbitration and enjoin defendant from pursuing claims of negligence and violations of the Colorado Consumer Protection Act (“CCPA”) in state court. Defendant argued the Court should abstain from ruling and allow the state court to address the arbitration issue or dismiss the complaint since the arbitration agreement is unenforceable under state law. As to the abstention argument, the Court applied the Colorado River factors.  It found the state and federal actions to be parallel, but there were no exceptional “factors supporting Defendant’s position in favor of abstention, and since there are several factors that are neutral (or point the other way), the court has little choice but to exercise jurisdiction.” The arbitration agreement’s enforceability was largely dictated by whether Colorado’s Health Care Availability Act (“HCAA”) is preempted by the Federal Arbitration Act (“FAA”). Finding the HCAA was preempted by the FAA, the arbitration agreement was found to be valid and enforceable.

The District Court adopted the Magistrate’s Report & Recommendation, granting the motion to compel and staying the state court proceeding.

Watermark Harvard Square, LLC, et al. v. Willie Lee Calvin, Case No. 1:17-cv-00446 (USDC D. Colo. Mar. 29, 2018).

This post written by Nora A. Valenza-Frost.

See our disclaimer.

Missouri Federal Court Remands Action To State Court Because Missouri Law “Reverse Preempts” The New York Convention Based On The McCarran-Ferguson Act

by

Foresight Energy, LLC (“Foresight”) brought an action in Missouri state court against various domestic and Bermuda and London market insurers for declaratory judgment, breach of contract and statutory vexatious refusal to pay a claim related to an event at a coal mine in Hillsboro, Illinois. The policies at issue provided for an arbitration in London and that the policies were to be governed by Missouri law. One of the insurers removed the action to Missouri federal court, asserting that federal subject matter jurisdiction existed under Chapter 2 of the Federal Arbitration Act (the “New York Convention”) because the agreement did not arise out of a relationship “entirely between citizens of the United States,” given the involvement of the non-U.S. insurers/defendants. Foresight then moved in Missouri federal court to remand the action back to state court because the federal court lacked subject matter jurisdiction, arguing that Missouri law, the law governing the policies, prohibits mandatory arbitration clauses in insurance policies and that Missouri law “reverse preempts” the New York Convention in light of the McCarran-Ferguson Act.

The Missouri federal court noted that McCarran-Ferguson states that “[n]o act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance.” The court then found that the New York Convention, an act of Congress, was not a self-executing treaty and could not itself provide the rule of decision, and that the Missouri anti-arbitration statute was a state law regulating the business of insurance. The court also found that application of the New York Convention to enforce the arbitration agreement in the policies at issue would “invalidate, impair or supersede” the Missouri anti-arbitration statute. The court then held that because the New York Convention was an act of Congress and was not self-executing, McCarran-Ferguson “reverse preempted” the New York Convention, which thus eliminated the basis for federal subject matter jurisdiction. Thus, the Missouri federal court granted Foresight’s motion to remand the action to state court.

Foresight Energy, LLC. v. Certain London Market Ins. Cos., No. 17-CV-2266 (USDC E.D. Mo. Apr. 25, 2018).

This post written by Jeanne Kohler.
See our disclaimer.

Texas Federal Court Enforces Arbitration Award Under the New York Convention Despite Jurisdictional Challenge

by

Respondent argued against the confirmation of the arbitral award as it was based upon the consent of the parties, rather than a disputed hearing, which it contended made the award not subject to the New York Convention, resulting in a lack of jurisdiction.  The Court disagreed that it lacked subject matter jurisdiction, citing to Albtelecom SH.A. v. UNIFI Commc’ns, Inc., 2017 WL 2364365 (S.D.N.Y. May 30, 2017). The court noted that “[w]hile the tribunal did not make findings or reach legal conclusions, it made an award that bound parties, with its power.  No binding or persuasive statutory language or case law requires a court to hold that a tribunal must reach its own conclusions, separate from the parties’ agreement, to make a valid binding award subject to the Convention.”

As Respondent did not argue that the award should not be confirmed on any ground but lack of subject-matter jurisdiction, the Court found the award must be confirmed.

Transocean Offshore Gulf of Guinea VII Ltd., et al. v. Erin Energy Corp., No. H-17-2623 (USDC S.D. Tex. Mar. 12, 2018)

This post written by Nora A. Valenza-Frost.
See our disclaimer.