Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

U.K. COURT FINDS ARBITRATION RESPONDENT DID NOT WAIVE OBJECTION TO JURISDICTION OF ARBITRATION TRIBUNAL

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The Queen’s Bench Division of the U.K.’s High Court of Justice has reversed a partial award by a tribunal of the London Court of International Arbitration (“LCIA”), which held that an arbitration respondent lost its right to challenge the validity of a request for arbitration by failing to object until after serving its Response and shortly before its Statement of Defence was due. The court agreed with the tribunal that the request for arbitration violated LCIA Rules by seeking to join two disputes arising under separate contracts in a single proceeding. The court disagreed, however, with the conclusion that the respondent untimely challenged the tribunal’s jurisdiction based on the invalid request. Reading Section 31 of the 1996 Arbitration Act together with Article 23.3 of the LCIA Rules, the court found that objections to jurisdiction must be made no later than the time for the Statement of Defence.

A v. B, [2017] EWHC 3417 (Comm)

This post written by Alex Silverman.

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CALIFORNIA FEDERAL COURT CONFIRMS ARBITRATION AWARD BENEFITTING THIRD-PARTY

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The U.S. District Court for the Northern District of California denied a petitioner’s motion to vacate an arbitration award on the grounds of the award being “irrational and illogical,” erroneous, and that the arbitrator manifestly disregarded the law and engaged in prejudicial misconduct.

The Court found the arbitration award was not irrational or erroneous because the parties’ agreement provided authority for the arbitrator’s decision to order petitioner to pay money to a third-party (which was an affiliate of the respondent). With respect to the argument that the arbitration award was erroneous, the Court noted that “neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award under the [Federal Arbitration Act] statute, which is unambiguous in this regard.”

The Court also found the arbitrator did not manifestly disregard the law, as petitioner did “not cite any clear and established law that prohibits arbitrators from issuing awards that benefit third parties. Moreover, even if there were an applicable law prohibiting arbitration awards to third parties, [petitioner] does not show that the arbitrator ‘recognized’ and ‘ignored’ that law.”

Lastly, the Court found the arbitrator did not engage in prejudicial misconduct or misbehavior, finding that the parties received a fundamentally fair hearing. While petitioner argued that it was prejudiced because it did not have notice of the third-party claims against it for unpaid premiums, the Court noted that petitioner did “not identify any other evidence it would have attempted to introduce, or other arguments it would have made, had it known that the arbitrator contemplated ordering [petitioner] to pay [the third-party] for the outstanding premiums. In essence, [petitioner] takes issue with the arbitrator’s factual findings and legal conclusions, and not the fairness of the proceeding.”

American, Etc., Inc., v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 17-cv-03660-DMR (USDC N.D. Cal. Dec. 28, 2017)

This post written by Nora A. Valenza-Frost.

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COURT ENFORCES ARBITRATION AWARD, FINDS REINSURER MUST PAY SETTLEMENT BETWEEN RETROCESSIONAIRE AND POLICYHOLDER

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Granting a motion to enforce an arbitration award, the U.S. District Court for the Southern District of New York has held that a reinsurer is liable for a $5 million settlement entered into between a policyholder and the reinsurer’s retrocessionaire.

The action arises out of insurance policies issued to Companhia Siderurgica Nacional S.A. (“CSN”), which were reinsured by defendant, IRB Brasil Resseguros S.A. (“IRB”), and retroceded to plaintiff, National Indemnity Company (“NICO”). In settlement of an action between CSN and IRB arising out of a large loss suffered by CSN, the two executed an agreement in which they agreed that IRB had not retroceded CSN-related risks to NICO, and that IRB would cooperate in CSN’s effort to recoup a $9 million Premium that CSN had paid to NICO for the retrocessional coverage (the “Premium”). In a related arbitration between NICO and IRB, however, the panel subsequently issued an award holding that NICO was entitled to retain the Premium, and that IRB must hold harmless and indemnify NICO against CSN’s claim for repayment thereof (the “Award”). The Award was subsequently confirmed by the S.D.N.Y. and affirmed by the Second Circuit. While confirmation of the Award was pending, CSN filed an action against NICO in New Jersey District Court regarding liability for the Premium. CSN and NICO later settled that action for $5 million and agreed that, instead of NICO paying the $5 million from its own funds, NICO would seek a judgment against IRB based on its hold harmless and indemnity rights against IRB under the Award. The instant action followed.

On NICO’s motion to enforce the Award, IRB argued that the $5 million CSN-NICO settlement was not subject to the Award because it did not require NICO to pay CSN $5 million from its own funds. IRB argued that, under New York law, an insurer’s obligation to indemnify extends only to the damages the insured is legally obligated to pay. But the court rejected the argument, reasoning that IRB’s obligation to pay any amount NICO owed to CSN was embodied in a court-ordered judgment predating the CSN-NICO settlement. As such, it was irrelevant that the CSN-NICO settlement released NICO from any liability for the $5 million settlement. In addition, the court rejected IRB’s argument that the CSN-NICO settlement was unreasonable or was reached in bad faith, emphasizing that the $5 million was $4 million less than the $9 million Premium that IRB was actually required to indemnify.

National Indemnity Co. v. IRB Brasil Resseguros S.A., No. 15-3975 (USDC S.D.N.Y. Jan. 23, 2008)

This post written by Alex Silverman.

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FOURTH CIRCUIT FINDS INCORPORATION OF JAMS RULES CONSTITUTES PARTIES’ INTENT TO DELEGATE QUESTION OF ARBITRABILITY TO ARBITRATOR

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The Fourth Circuit, noting that expansive general arbitration clauses will not suffice to force the arbitration of arbitrability disputes, looked at whether the parties’ express incorporation of JAMS Rules constituted “clear and unmistakable evidence of the parties’ intent to delegate to the arbitrator questions of arbitrability.”

Though not previously addressed by the Fourth Circuit, both the Tenth and Fifth Circuits have concluded that the incorporation of JAMS Rules constitutes “clear and unmistakable” evidence of intent to delegate arbitrability to the arbitrator. Other circuits – the First, Second, Eighth, Ninth, Eleventh, D.C. and Federal circuits – “have concluded that the incorporation of arbitral rules substantively identical to those found in JAMS Rule 11(b) constitutes clear and unmistakable evidence of the parties’ intent to arbitrate arbitrability.”

Adopting its sister circuit courts’ reasoning, the Fourth Circuit similarly held that “the explicit incorporation of JAMS Rules serves as ‘clear and unmistakable’ evidence of the parties’ intent to arbitrate arbitrability. Because the JAMS Rules expressly delegate arbitrability questions to the arbitrator,” the matter should have been referred to the arbitrator on that basis.

Simply Wireless, Inc. v. T-Mobile US, Inc., No. 16-1123 (4th Cir. Dec. 13, 2017)

This post written by Nora A. Valenza-Frost.

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SEC SETTLES CLAIMS AGAINST INDIVIDUAL AND ENTITIES IT CLAIMED USED INVESTMENTS IN REINSURANCE BUSINESS TO FINANCE LAVISH LIFESTYLE

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A federal district court in Connecticut has entered final judgments pursuant to agreements between the SEC and three defendants—David Haddad, Trafalgar Square Risk Management, LLC, and New England RE, LLC—in a case alleging that Haddad deceived investors into investing in Trafalgar and New England RE by representing that he would use their investments to grow these businesses, when in reality he used those investments to fund his own lavish lifestyle and pay off earlier investors.

According to the SEC’s complaint, Haddad created Trafalgar in 2009 and held it out to be, variously, “a stop-loss insurance sales underwriting consulting and marketing firm and a private investment firm that aggregates funds to invest in entities including marketing firms, managing general underwriters, third party administrators, and reinsurance companies.” The SEC alleged that, over the next seven years, Trafalgar took in commissions and fees that far exceeded its legitimate business expenditures, that Haddad spent Trafalgar’s cash to pay his personal expenses, and that, when this spending outpaced Trafalgar’s income, Haddad began raising money from investors to make up the difference. The SEC alleged that Haddad misled investors by falsely claiming that he would use their money to grow Trafalgar’s business, failing to tell them that he would be spending their money on his personal expenses and promising high returns that the business could not support. The SEC further alleged that Haddad created New England RE in 2014, purportedly to operate as a reinsurer that would market, underwrite, and bind stop-loss insurance coverage to self-insured employers, but actually as a vehicle for soliciting investments that he could use to pay off investors in Trafalgar and to finance his personal expenditures. The SEC claimed that Haddad and the two entities violated section 17(a) of the Securities Act and section 10(b) of the Exchange Act by deceiving investors through false statements and omissions into investing in Trafalgar and New England Re.

The three separate final judgments—with respect to New England Re, Trafalgar, and Haddad—were entered pursuant to the consent of the SEC and each of the defendants, with defendants neither admitting nor denying the factual allegations contained in the complaint. Per those judgments, defendants are permanently restrained from further violating the securities laws and from soliciting investments in securities without providing written disclosures regarding their “prior regulatory history,” and they must pay $1,097,257.07 in disgorgement, prejudgment interest, and civil penalties.

S.E.C. v. Haddad, et al., Civil Action No. 3:18-Cv-00055 (D. Conn. January 18, 2018)

This post written by Jason Brost.
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