Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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 The lower court then denied RBC’s renewed motion to compel arbitration based on the 2008 CAA, finding the 2012 CAA superseded the 2008 CAA.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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NEW YORK DISTRICT COURT CONFIRMS FOREIGN ARBITRATION AWARD, REASONING THAT COURTS WITH SECONDARY JURISDICTION MAY NOT REFUSE TO CONFIRM AN AWARD DUE TO AMBIGUITY

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Pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, codified at 9 U.S.C. § 201 et seq. (the “Convention”), Petitioner, a German corporation, sought an order confirming a final arbitration award of a money judgment against Respondent, a Turkish national, issued by a Swiss tribunal. In opposition to Petitioner’s motion to confirm the final award, Respondent argued, among other things, that the final award was so ambiguous as to be unenforceable.

The District Court, however, was not persuaded by that argument. Specifically, the Court held, “[w]hatever ambiguity existed by looking solely to the award section of the Final Award, it is resolvable by the record and the Arbitral Tribunal’s thorough Final Award opinion; it is clear what the Arbitral Tribunal decided.” More significant was the Court’s holding on ambiguity as grounds for refusal to confirm the award generally. In this regard, the Court held that “[w]hen sitting in secondary jurisdiction, as the Second Circuit has recently reminded district courts, the parameters within which a district court may refuse enforcement are rigidly circumscribed: ‘[T]he [New York] Convention is equally clear that when an action for enforcement is brought in a foreign state, the state may refuse to enforce the award only on the grounds explicitly set forth in Article V of the [New York] Convention.’” Therefore, because ambiguity is not a ground “explicitly set forth” in Article V, the Court determined that it is not a ground for consideration when determining whether or not to confirm a foreign award. BSH Hausgeräte GMBH v. Jak Kamhi, Case No. 17-5776, (USDC S.D.N.Y. Mar. 3, 2018).

This post written by Gail Jankowski.

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THE FAA’S PRESUMPTION IN FAVOR OF ARBITRATION DOES NOT REQUIRE ARGUABLE AMBIGUITIES IN ARBITRATION AGREEMENTS TO BE INTERPRETED AS “BROADLY AS POSSIBLE”

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In a dispute over the scope of a mandatory arbitration provision, the Sixth Circuit rejected the argument that it is required by the Federal Arbitration Act’s presumption in favor of arbitration to interpret an arbitration agreement “as broadly as possible” to compel arbitration. Rather, the FAA requires a court to interpret ambiguous provisions “only as broadly as [] remains consistent with the terms of the contract and the intention of the parties.”

The court found that the plain language of the provision required the parties to submit to arbitration only any disagreements that were included in a “Notice of Disagreement.” The district court interpreted (and the parties agreed) that this language only reached any disagreements that were “properly” included in the notice, although the word “properly” did not appear in the agreement. The defendant, however, sought to argue that the arbitration provision still applied to issues that arguably affected the proper subject matter of the notice, even though those issues themselves would not have been properly included in the notice. The court disagreed, distinguishing cases involving broadly written arbitration provisions from the relatively circumscribed provision involved here, noting that the FAA’s presumption “applies only where the arbitration provision could ‘fairly be read to cover’ the particular dispute.” Smith v. Altisource Solutions, Case No. 17-501 (6th Cir. Mar. 2, 2018).

This post written by Benjamin E. Stearns.

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