Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

ON RECONSIDERATION, APPLIED UNDERWRITERS AGAIN LOSES ARGUMENT TO ENFORCE MANDATORY FORUM SELECTION CLAUSE IN REINSURANCE CONTRACT

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As we previously reported, the District of Connecticut in September denied a motion to transfer based on a mandatory forum selection clause in a reinsurance contract in a dispute between Applied Underwriters, Inc. and its affiliates, and Aiello Home Services (“Aiello”), over a workers’ compensation insurance product. There, the court held the forum selection clause did not bind Aiello relative to defendants other than Applied affiliate Applied Underwriters Captive Risk Assurance Company (“AUCRAC”), did not apply to Aiello’s specific claims against AUCRAC, and was generally unenforceable under Nebraska and federal law. In the present opinion, the court granted a motion for reconsideration to clarify its prior ruling, but denied the requested relief.

The court addressed whether the claims and parties are subject to the forum selection clause and whether the resisting party showed that the enforcement of the clause would be unjust or the clause was otherwise invalid.

On reconsideration, AUCRAC first argued that the claims, while not “arising out of” the contract, are “related to” the reinsurance contract. Noting that the Second Circuit interprets the language “related to” broadly, the court reaffirmed its original ruling the claims fall outside the scope of the forum selection clause. Aiello’s statutory claims concern deceptive behavior that predated the reinsurance contract and the court was unable to determine the extent to which the alleged misrepresentations induced the parties to agree to the contract, concluding that those claims were not “related to” the contract.

Despite not needing to reach the enforceability of the forum selection clause because the court held Aiello’s claims did not “relate to” the reinsurance contract, the court analyzed the clause’s enforceability to clarify statements from its September ruling. Because Second Circuit precedent for evaluating enforceability provides that federal law controls, the court clarified that although it found the forum selection clause is unenforceable under Nebraska law, it did not ground the decision on the motion to transfer on state law. The court then doubled-down on its assessment that the forum selection clause was unenforceable under federal law because of the accompanying inefficiencies and risk of inconsistent judgments. However, it specified that it was not suggesting inefficiency alone renders the clause unenforceable, but rather in the circumstances here the inefficiency constituted sufficient injustice.

Charter Oak Oil Co. v. Aiello Home Servs., Case No. 17-689 (D. Conn. Feb. 26, 2018).

This post written by Thaddeus Ewald .

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SIXTH CIRCUIT FINDS THAT COMPELLING ARBITRATION DOES NOT IMPAIR STATE INTEREST IN EXCLUSIVE JURISDICTION OVER MATTER ALREADY REMOVED TO FEDERAL COURT

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The Sixth Circuit Court of Appeals has found that Kentucky’s Insurers Rehabilitation and Liquidation Law (IRLL) did not reverse-preempt the Federal Arbitration Act so as to prohibit the arbitration of a dispute when that dispute had already been removed to a federal district court.

The case arose out of the insolvency of the Kentucky Health Co-op, a non-profit health insurance company. The Kentucky Department of Insurance instituted a delinquency proceeding in Franklin County Circuit court and, as liquidator, brought a collateral proceeding against CGI Technologies and Solutions, Inc. CGI had provided claims processing services to the Kentucky Health Co-op under an agreement providing that all disputes would be resolved by arbitration and that Kentucky law would apply. CGI removed the case to federal court based on diversity jurisdiction and moved to compel arbitration, and the liquidator moved to remand the matter to state court. The district court refused to remand the case but denied the motion to compel arbitration, and CGI appealed the denial of the motion to compel arbitration, but did not appeal the denial of the motion to remand.

On appeal, the liquidator argued that federal law favoring arbitration was reverse-preempted by Kentucky law providing that the Franklin Circuit Court has exclusive jurisdiction over all matters relating to an insolvent insurer’s liquidation. Such reverse preemption, which is authorized by the McCarran-Ferguson Act, applies when 1) the state statute was enacted for the purpose of regulating the business of insurance; 2) the federal statute involved does not specifically relate to the business of insurance; and 3) the application of the federal statute would invalidate, impair, or supersede the state statute regulating insurance. The Sixth Circuit easily found that the first two of the requirement for preemption were satisfied, but found that the third was not. The alleged impairment of the state statute was the fact that it would deny the Franklin Circuit Court of exclusive jurisdiction over the matter as provided for by the IRLL. But since the Liquidator had not appealed the denial of the motion to remand, no matter what the court decided the action would remain in federal court, and not be returned to state court. Finding that enforcing the arbitration clause would thus not invalidate, impair, or supersede a state statute regulating insurance, the Sixth Circuit vacated the order denying CGI’s motion to compel arbitration.

Atkins v. CGI Technologies and Solutions, Inc., Case No. 17-5506 (6th Cir. Feb. 9. 2018)

This post written by Jason Brost.

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ELEVENTH CIRCUIT SLAPS DOWN BANK’S THIRD ATTEMPT TO COMPEL ARBITRATION IN OVERDRAFT LITIGATION FIGHT

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The Eleventh Circuit recently upheld a district court’s denial of RBC Bank’s latest attempt to compel arbitration of a dispute with banking customers over allegedly fraudulent overdraft practices. The bank had previously lost its bid to enforce the arbitration provision in a 2008 customer account agreement (“CAA”). PNC Bank, which had acquired RBC, issued a new CAA in 2012 that lacked an arbitration provision and purported to be binding on account holders who did not opt out. The lower court then denied RBC’s renewed motion to compel arbitration based on the 2008 CAA, finding the 2012 CAA superseded the 2008 CAA. Shortly thereafter, PNC distributed a 2013 amended CAA including an arbitration provision that purported to apply retroactively to existing claims and to be binding on account holders who did not opt out. The present opinion came in review of the district court’s subsequent denial of another motion to compel arbitration, this one based upon the 2013 CAA, finding that PNC waived the right to pursue arbitration under the 2013 CAA where it did not issue the amendment until three years after this litigation began, failed to argue the 2013 CAA for almost two years after its purported effective date, and previously pursued arbitration under the 2008 CAA instead. The court also alternatively held the 2013 CAA amendment was not effective because both parties did not “expressly” agree to the arbitration provision addition.

Upon review, the Eleventh Circuit affirmed the denial of arbitration but for different reasons than the trial court articulated. The appellate court did not address waiver because it instead found PNC failed to demonstrate the necessary meeting of the minds regarding arbitration via the 2013 CAA. The court’s analysis centered on two primary considerations: (1) that PNC communicated with the plaintiff regarding the purported retroactive effect of the arbitration provision (which would effectively end the litigation) directly rather than through counsel, and (2) plaintiff repeatedly evinced his resistance to arbitration notwithstanding his failure to opt out of the 2013 CAA. Specifically, the court found PNC’s failure to communicate through plaintiff’s counsel to be material to its interpretation of the 2013 CAA’s retroactive effect. The contrast between plaintiff’s “uncounseled,” non-response to the opt out offer and the “counseled” response of repeated and ongoing opposition to arbitration demonstrated plaintiff could not have agreed to retroactive application of the arbitration agreement.

The court rejected PNC’s argument that refusing to enforce the 2013 CAA would be asymmetric considering the court previously enforced the 2012 CAA, because then plaintiff was not demonstrating inconsistent behavior, was seeking to enforce an agreement against PNC that PNC drafted, and did not exhibit ethically questionable behavior. Additionally, the court rejected PNC’s argument that plaintiff’s filing of an amended complaint revived its arbitration rights because the court’s conclusion that plaintiff did not agree to the 2013 CAA necessarily meant there were no arbitration rights to revive, and that the amended complaint’s changes would not warrant revival.

Dasher v. RBC Bank (USA), No. 15-13871 (11th Cir. Feb. 13, 2018).

This post written by Thaddeus Ewald .

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DELEGATION CLAUSE MUST CLEARLY CONTEMPLATE ARBITRABILITY OF DISPUTES WITH NON-SIGNATORIES TO BE ENFORCED IN THOSE DISPUTES

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A delegation clause that gave the arbitrators “exclusive jurisdiction over the entire matter in dispute, including any question as to its arbitrability,” was found insufficient to require submission to the arbitrators of whether a non-signatory to the arbitration agreement was subject to it. The court so held because the arbitration agreement did not “clearly and unmistakably” evidence an agreement by the non-signatory to have an arbitrator determine whether the agreement was arbitrable. Rather, nothing in the agreement “mention[ed]” or “reference[d]” the non-signatory.

The court distinguished cases wherein the non-signatory was successful in compelling a signatory to arbitrate. The court reasoned that, while the signatory in those cases could not disown its agreed-to obligation to arbitrate all disputes, the non-signatory in this case had never made such an agreement. Furthermore, one of the cases involved a party that was undeniably a successor-in-interest to a signatory, a fact that was contested in this case.

The court found these distinctions significant, and, in the absence of a “clear and unmistakable” reference in the arbitration agreement indicating the non-signatory was subject to the agreement, determined that it would decide this question of arbitrability, rather than submit it to the arbitrators pursuant to the delegation clause. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Stucco Sys., LLC, 17 Civ. 7936 (USDC S.D.N.Y. Jan. 26, 2018).

This post written by Benjamin E. Stearns.

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UPDATE ON NAIC ACTION TO IMPLEMENT THE COVERED AGREEMENT

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We recently posted a Special Focus article on a hearing held by the NAIC’s Reinsurance Task Force concerning the implementation of the reduced collateral for reinsurance provisions of the Covered Agreement between the U.S. and the E.U. The NAIC is attempting to move quickly on the implementation of the Covered Agreement, with a recent flurry of activity.  At the NAIC Spring National Meeting earlier this week, the Reinsurance Task Force approved and forwarded to the Financial Condition (E) Committee a Memorandum report on the February 20, 2018 public hearing, which also contained a number of recommendations for action.  The next day the Financial Condition (E) Committee adopted those recommendations and included them in its report to the Executive (EX) Committee, which “received” the report of the (E) Committee the following day.

The description of the hearing in the report of the Task Force and its recommendations are consistent with the discussion in our Special Focus article.  The basic approach in the Task Force’s Memorandum report is to revise the Model Credit for Reinsurance Model Law and Model Regulation so that they comply with the requirements of the Covered Agreement, and to extend the reduced collateral benefit of the Covered Agreement to reinsurers domiciled in the non-E.U. NAIC-approved Qualified Jurisdictions, on condition that those jurisdictions agree to the group supervision, group capital, and information-sharing provisions in the Covered Agreement.  Qualified jurisdictions outside the E.U. that would benefit from this approach include Bermuda, Japan, Switzerland, and, after Brexit, the United Kingdom.  This portion of this process is anticipated to be completed by the NAIC’s 2018 Fall National Meeting in November of this year.  The concern raised in the context of the public hearing concerning the possible need for “guardrails” due to the increased credit and collection risk to which ceding insurers would be exposed as a result of reduced collateral resulted in recommendations by the Reinsurance Task Force for review and monitoring of the financial and risk impact of the collateral changes, and recommendations for modifications to the Models, risk-based capital rules, and financial statement presentation requirements, if needed, with this portion of the process to take longer, with target completion dates for different aspects of this part of the implementation process of the NAIC’s 2019 and 2020 Fall National meetings.

The Task force made a number of specific recommendations to the Financial Condition (E) Committee, which took the following action:

  1. Adopted the Reinsurance Task Force’s request for the development of revisions to the Model Credit for Reinsurance Model Law and Model Regulation to bring the Models into compliance with the terms of the Covered Agreement.  The NAIC has a process for the development of model laws and regulations.
  2. Adopted charges to the Reinsurance Task Force, the Qualified Jurisdiction (E) Working Group, and the Reinsurance Financial Analysis (E) Working Group, which would have to develop processes to implement the anticipated revisions to the Models.
  3. Adopted charges to the Capital Adequacy (E) Task Force and the Statutory Accounting Principles (E) Working Group to address related reduced reinsurance collateral issues.

Details of the actions of the Financial Condition (E) Committee are found in the Reinsurance Task Force’s Memorandum report.  This process anticipates a very aggressive schedule, with the proposed revisions to the Models (and possibly other changes) being ready for consideration by the Reinsurance Task Force at the NAIC’s 2018 Summer National meetings in August, and by the NAIC’s membership at the NAIC’s 2018 Fall National meetings in November.  One possible timing complication is that any agreement of non-E.U. Qualified Jurisdictions to the group supervision, group capital, and information-sharing provisions in the Covered Agreement might have to be documented through a Memorandum of Understanding with each such jurisdiction, which might take more time to negotiate and finalize.  It was the clear sense of the participants in the public hearing, and of the Reinsurance Task Force’s subsequent Memorandum report to the Financial Condition (E) Committee, that reinsurers domiciled outside the E.U. should not have the benefit of reduced collateral for reinsurance without there being an agreement with their domiciliary jurisdictions with respect to group supervision, group capital, and information-sharing issues.  Absent such an agreement, reinsurers domiciled in non-E.U. jurisdictions would, from the standpoint of the United States and U.S. domiciled ceding insurers, have a more favorable agreement than those domiciled in Covered Agreement jurisdictions.  There is likely to be great resistance to such a potential scenario.

This post written by Rollie Goss.
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