Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Arbitrator’s Decision Not Based On Manifest Disregard Of The Law, But Challenge To That Decision Was Not So Meritless As To Warrant Sanctions

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Jonathan Kessler brought a claim in arbitration against his former employer, Kent Building Services, after he was fired from his job as Kent’s president, asserting that he had not been fired for cause and was thus owed severance. The arbitrator determined that Kent breached Kessler’s contract by firing him without cause, a decision the arbitrator found was arbitrary and irrational and thus a breach of the implied covenant of good faith and fair dealing, and thus awarded him six month’s severance pay.

Kent challenged this award in federal court, arguing that the arbitrator’s decision on good faith and fair dealing demonstrated a manifest disregard of New York contract law. Kent based this argument on a New York trial court decision holding that termination of employment only breaches the implied covenant of good faith and fair dealing if it results from a “constitutionally impermissible purpose or [violates] statutory or decisional law,” something not shown during the arbitration. The court rejected this argument, finding that other case law makes it clear that unconstitutionality or illegality are “sufficient but not necessary” to support a claim based on the breach of the implied covenant of good faith and fair dealing. Further, the court found that the arbitrator applied the correct law in finding that Kent had discretion regarding whether to fire Kessler and that the irrational exercise of this discretion could support a breach of the implied covenant of good faith and fair dealing. The court therefore found that the arbitrator had not acted in manifest disregard of the law.

However, the court rejected Kessler’s motion for sanctions under 28 U.S.C. § 1927 for filing a meritless petition to vacate. While the court disagreed with Kent’s argument regarding the requirements of good faith and fair dealing claims under New York law, it found that making argument was not unreasonable. Kessler had also argued that Kent had acted in bad faith when it included in its petition allegations of numerous failures by Kessler in his job performance while failing to mention that the arbitrator had specifically found that these failures were not the basis for Kent’s decision to fire Kessler. The court found that this should be interpreted as simply an attempt by Kent “to provide greater context for the parties’ employment dispute,” rather than a bad faith attempt to mislead the court. Finding no frivolous argument and no bad faith, the court declined to award sanctions.

Kent Building Services, LLC v. Kessler, 17-CV-3509 (JPO) (S.D.N.Y. Mar. 14, 2018)

This post written by Jason Brost.

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Minor Not Bound—Directly Or Indirectly—By Arbitration Agreement In Mother’s Credit Card Agreement

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Last month the Seventh Circuit reversed a lower court order enforcing an arbitration agreement contained in cardholder agreement as applied against the minor daughter (“A.D.”) of the cardholder, rejecting the bank’s attempt to compel arbitration of the daughter’s Telephone Consumer Protection Act (“TCPA”) putative class action lawsuit. The trial court ruled A.D. was bound by the arbitration agreement as an “authorized user” of the card—where she, on at least one occasion, used the credit card to make a purchase as instructed by her mother—and was bound under the direct benefits estoppel theory.

First, the Seventh Circuit held A.D. was not bound by the cardholder agreement and its arbitration clause. The court emphasized the specific procedures in the cardholder agreement for designating authorized users which the parties did not follow: A.D.’s mother never notified the bank or paid an annual fee, the bank never issued a new card, and A.D. was not even old enough at the time to qualify as an authorized user. The court also found A.D. never manifested consent to be bound by the arbitration agreement, did not have legal capacity as a minor to enter into a contract, and actively disaffirmed consent by filing a lawsuit.

Second, the court concluded equitable estoppel was inapplicable and did not bind A.D. to the cardholder agreement. Any benefit A.D. received was derived from her relationship with her mother, not any relationship with the bank. Nor, the court held, did A.D.’s lawsuit center on rights or benefits under the cardholder agreement. The court rejected the bank’s argument that its affirmative defense based on A.D.’s mother’s consent qualified the case as one “relying” on the agreement because the bank, not A.D., bore the burden of establishing that defense. Simply put, A.D.’s lawsuit asserted rights under the TCPA and was therefore not premised on the cardholder agreement.

Because A.D. was not bound to the cardholder agreement directly as a signatory nor indirectly through estoppel, the court reversed and refused to compel arbitration.

A.D. v. Credit One Bank, N.A., No. 17-1486 (7th Cir. Mar. 22, 2018).

This post written by Thaddeus Ewald .

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Court Vacates Arbitration Award In Crop Insurance Dispute That Awarded Remedies Preempted By Federal Law

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The plaintiff, a farming company, demanded arbitration against Diversified Crop Insurance Services over the nonpayment of federally reinsured claims. The plaintiff brought several claims under policies it had purchased from Diversified, to which Diversified denied coverage, due to a misstatement of the farm’s location and a separate clerical omission as to the number of acres covered, both of which were allegedly errors committed by Diversified’s agent. The arbitrator found for the plaintiff and trebled damages against Diversified.

When the plaintiff moved to confirm the award, the court considered whether the arbitrator exceeded her authority by basing her decision on extra-contractual state law remedies, which are preempted by federal law associated with Diversified’s reinsurance coverage from the Federal Crop Insurance Corporation. The court found that the arbitrator did exceed her authority by finding that “the farm was uninsured, and therefore not covered by the policy, yet award[ing] damages in negligence, breach of fiduciary duty, and constructive fraud because she attributed the lack of coverage to Diversified and its agents.” The court found further evidence of the arbitrator’s exceeding the scope of her authority in the fact that she trebled the awards under North Carolina’s Unfair and Deceptive Trade Practices Act. As such, the court vacated the award. Williamson Farm v. Diversified Crop Insurance Services, Case No. 5:17-CV-513-D (USDC E.D.N.C. Mar. 26, 2018).

This post written by Gail Jankowski.

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West Virginia Amends Credit For Reinsurance Statute To Conform To NAIC Model, Effective January 1, 2019

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West Virginia House Bill 4230, approved by Governor Justice on March 27, amends the statutory requirements relating to when an insurer may claim credit for reinsurance to conform to the NAIC model law. The bill establishes requirements for:

  • Domestic insurers to be allowed credit;
  • Reinsurers to meet in order for credit to be granted to ceding insurers;
  • The location where assets that provide security to fund United States obligations must be maintained by a non-United States insurer or reinsurer;
  • The filing and valuation of claims; and
  • Provision of an asset or reduction from liability for reinsurance ceded by a domestic insurer.

The bill also provides for the distribution of assets of an insolvent non-United States insurer or reinsurer, in addition to providing the Insurance Commissioner with authority to promulgate related legislative and emergency rules.

The bill takes effect January 1, 2019 and applies to all cessions under reinsurance agreements that have an inception, anniversary, or renewal date on or after that date.

This post written by Benjamin E. Stearns.
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Fourth Circuit Dismisses Appeal Of Order Compelling Arbitration In Voluntarily Dismissed Class Action

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This case arose from a putative class action alleging claims against Groupon on the basis of its reimbursement policies. After the trial court ordered the parties to arbitrate pursuant to an arbitration clause in the parties’ agreement, the plaintiff moved to amend the arbitration order, requesting that the district court dismiss her complaint with prejudice, advising the court that she would not pursue arbitration due to its costs outweighing her potential recovery. After the court dismissed the case, the plaintiff appealed the arbitration ruling, contending that the Fourth Circuit had jurisdiction over her appeal under 28 U.S.C. § 1291, which gives appellate courts jurisdiction of appeals from “final decisions” of district courts.

The plaintiff’s appeal was stayed pending a decision by the U.S. Supreme Court in Microsoft Corp. v. Baker as to whether a voluntarily dismissed action is final for purposes of 28 U.S.C. § 1291. Following the Supreme Court’s ruling that a voluntary dismissal does not qualify as a final decision, the Fourth Circuit followed the high court’s precedent and dismissed the appeal. Keena v. Groupon, Inc., Case No. 16-1973 (4th Cir. Mar. 27, 2018).

This post written by Gail Jankowski.

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