Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

REINSURER PREVAILS IN DISMISSING BREACH OF CONTRACT, BAD FAITH CLAIMS ASSERTED BY UNDERLYING POLICYHOLDER

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A federal district court in Pennsylvania recently dismissed all claims asserted by an insured against a reinsurer in a coverage dispute over an explosion at plaintiff Three Rivers Hydroponics (“Three Rivers”)’s commercial greenhouse. Three Rivers’s greenhouse was insured by Florists’ Mutual Insurance Co. (“Florists”), which in turn reinsured that policy through Hartford Steam Boiler Inspection and Insurance Company (“HSB”). Three Rivers’s amended complaint alleged breach of contract, bad faith, and civil conspiracy claims against both Florists and HSB. In this opinion the court granted defendants’ motion to dismiss aimed at removing HSB from the lawsuit and dismissing the civil conspiracy claim against both.

First, the court dismissed the breach of contract claim against HSB because there was no privity of contract between it and Three Rivers and Three Rivers was not a third-party beneficiary of the reinsurance agreement. Simply put, Three Rivers was not a party to the reinsurance agreement between HSB and Florists and HSB was not a party to the insurance policy between Three Rivers and Florists; nor had HSB assumed Florists’ obligations under the insurance policy. Additionally, Three Rivers was not a third-party beneficiary of the reinsurance agreement because the parties did not express an intention to benefit Three Rivers anywhere in the relevant contract and there were no compelling circumstances to grant third-party beneficiary status. In particular, the court rejected Three Rivers’s argument the implied covenant of good faith evidences intent to benefit third-parties because allowing it would mean that every reinsurance agreement necessarily intends to benefit individual underlying policyholders, an untenable result under Pennsylvania law.

Second, the court dismissed the bad faith claim against HSB after finding it was not an “insurer” under Pennsylvania’s bad faith statute. HSB was not identified as an insurer in policy documents, was not a party to the policy, and did not act as an insurer. Furthermore, Pennsylvania courts have held that parties lacking contractual relationships with the insured (such as reinsurers) cannot be sued under the bad faith statute.

Third, the court dismissed the civil conspiracy claim against both defendants. The court side-stepped deciding plaintiff’s argument that bad faith can be the predicate tort for a civil conspiracy claim by holding that the conspiracy claim failed to allege the required malice element where it could not allege defendants acted without a business motive.

Finally, the court partially granted Florists’ motion to strike. It struck the complaint’s introduction because it technically violated the requirement for numbered paragraphs, but denied the requested strikes otherwise because the procedural device was not intended to address the merits and defendants failed to satisfy the heavy burden required for a motion to strike.

Three Rivers Hydroponics, LLC v. Florists’ Mut. Ins. Co., Case No. 15-809 (W.D. Pa. Feb. 8, 2018).

This post written by Thaddeus Ewald .

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FIFTH CIRCUIT AFFIRMS WAIVER OF ARBITRATION WHERE PLAINTIFF FIRST SOUGHT TO COMPEL ARBITRATION AFTER REMOVAL TO FEDERAL COURT

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This case concerned a business dispute between two physicians. Despite the arbitration clause contained in their agreement, Dr. Raju sued Dr. Murphy in state court. However, after Dr. Murphy removed the case to the District Court for the Southern District of Mississippi and counterclaimed, Dr. Raju invoked the arbitration clause and moved to stay the court proceedings. The district court denied Dr. Raju’s motion to compel arbitration, which prompted this interlocutory appeal.

The Fifth Circuit affirmed the district court’s decision, reasoning that the right to arbitrate is subject to waiver when, as here, “the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.” As the court determined, “Dr. Raju clearly prefer[red] litigation over arbitration, apparently just not in this Court.” The court went on to find that Dr. Murphy had been prejudiced by “being required to answer the complaint, to file a counterclaim, to consult with two law firms, and to gear her legal strategy to court proceedings instead of arbitration” as well as by “the public nature of the lawsuit” as compared to the “private and confidential” nature of arbitration. Raju v. Murphy, No. 17-60550 (5th Cir. Jan. 26, 2018).

This post written by Gail Jankowski.
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ARBITRATION AGREEMENT SELECTING MARYLAND LAW HELD UNENFORCEABLE AS TO PRIVATE ATTORNEY GENERAL CLAIMS BROUGHT UNDER CALIFORNIA LAW

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A choice of law provision within an arbitration agreement selecting Maryland law was held unenforceable in so far as it would result in waiver of claims under the California Private Attorneys General Act (PAGA), contrary to California’s “fundamental policy.”

Because the diversity action was brought in federal court in California, the court was required to follow California’s choice-of-law rules. California law provides that application of choice of law provisions that would yield results conflicting with California’s fundamental policy is error. The Ninth Circuit stated that PAGA represents a “fundamental California policy.” Therefore, the arbitration agreement’s choice of law rules selecting Maryland law could not be enforced, because they would waive the plaintiff’s PAGA claims.

However, the plaintiff’s claims for unpaid wages under California law were distinguishable from her PAGA claims. Arbitration of the unpaid wages claims was not contrary to any fundamental policy. As a result, the court ordered arbitration of the plaintiff’s personal unpaid wages claims, while prohibiting arbitration of her PAGA claims. Mandviwala v. Five Star Quality Care, Inc., No. 16-55084 (9th Cir. Feb. 2, 2018).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT REAFFIRMS THAT WASHINGTON STATE’S PROHIBITION OF ARBITRATION CLAUSES IN INSURANCE CONTRACTS REVERSE-PREEMPTS FAA

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This case concerned a coverage dispute between Technical Security Integration Inc. and its insurer, Philadelphia Indemnity. The District Court for the District of Oregon denied Philadelphia Indemnity’s motion to compel arbitration, which prompted this interlocutory appeal. Because Washington Code § 48.18.200 prohibits mandatory arbitration agreements in insurance contracts, while Oregon lacks any analogous provision, the issue on appeal was whether the district court erred when it applied Washington law, rather than Oregon law, to the dispute. Reviewing de novo and applying Oregon’s multi-factor test for determining “the most appropriate” law in the absence of an effective choice of law provision, the Ninth Circuit affirmed that Washington law applied, and therefore, it affirmed the denial of Philadelphia Indemnity’s motion to compel arbitration. The court found that the district court properly followed Washington Supreme Court precedent interpreting Washington’s statute as prohibiting mandatory arbitration clauses in insurance contracts, and moreover, that the statute “reverse-preempts” the Federal Arbitration Act, rather than being preempted by it.  Tech. Sec. Integration, Inc. v. Philadelphia Indem. Ins. Co., No. 15-35683 (9th Cir. Feb. 1, 2018).

This post written by Gail Jankowski.
See our disclaimer.

PARTICIPATION IN LITIGATION TO AVOID A DEFAULT JUDGMENT DOES NOT WAIVE A PARTY’S RIGHT TO COMPEL ARBITRATION

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An employer did not waive its right to compel arbitration under an employment agreement by seeking to set aside a default in an employment discrimination suit brought against it by its employee. Due to an “administrative oversight,” the employer’s counsel did not become aware it had been served with a complaint until after a default had been entered. The employer was successful in its effort to set aside the default, however, the employee argued that the employer’s participation in the litigation resulted in a waiver of its right to compel arbitration.

The Eleventh Circuit disagreed. A two-part test controls whether a party has waived its right to arbitration. The first prong inquires whether, under the totality of the circumstances, the party has “acted inconsistently with the arbitration right.” This occurs when the party “substantially invokes the litigation machinery prior to demanding arbitration.” The second prong asks whether the invocation of litigation has prejudiced the other party.

The employer’s participation in the litigation was not substantial enough to be considered inconsistent with an intent to arbitrate. In so holding, the court noted that moving to set aside the default was the only procedure the employer could have used to permit it to seek arbitration of the employee’s claims. Because the employer’s participation in the litigation failed to satisfy the first prong of the two-part test, the employer did not waive and was permitted to enforce its right to compel arbitration.  Sherrard v. Macy’s Sys. and Tech. Inc., Case No. 17-11766 (11th Cir. Feb. 5, 2018).

This post written by Benjamin E. Stearns.
See our disclaimer.