Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL COURT DENIES REINSURER’S POST-TRIAL MOTIONS IN LONG-RUNNING DISPUTE WHICH RESULTED IN A VERDICT IN ITS CEDENT’S FAVOR

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A federal district court has denied both a motion for judgment as a matter of law or for a new trial and a motion to correct the interest calculation filed by Fireman’s Fund Insurance Company after a jury award of $35 million in damages and $29 million in prejudgment interest against Fireman’s Fund based on its reinsurance obligations to Utica Mutual Insurance Company.

Fireman’s Fund motion argued that there was insufficient evidence that it had breached the relevant reinsurance contracts with Utica because: (1) the facultative certificates at issue did not cover the underlying loss; (2) the follow the settlements doctrine did not apply; and (3) Utica’s late notice either economically prejudiced Fireman’s Fund or was the result of gross negligence or recklessness by Utica.  The court began by finding that the follow the settlements doctrine applied to the facts of the dispute unless Fireman’s Fund could show that Utica’s settlement decisions, by which it allocated portions of a settlement to certain reinsured policies, were objectively unreasonable.  The court found that, based on the evidence presented at trial, a reasonable jury could have concluded that Utica’ settlement decisions were objectively reasonable, and therefore that the follow the settlements doctrine obligated Fireman’s Fund to indemnify Utica for the amounts sought under the certificates.

Regarding Fireman’s Fund’s late notice defense, the court found that a reasonable jury could have concluded that Fireman’s Fund failed to prove that it suffered tangible economic injury from any late notice on Utica’s part with respect to the claims for which it sought reinsurance coverage. The court also found that evidence Utica presented of its routine procedures related to its search for applicable reinsurance and reporting claims to reinsurers was sufficient for the jury to conclude that Utica’s late notice to Fireman’s fund in this instance was not the result of gross negligence or recklessness.  Because the court found the jury’s decisions on these issues to be reasonable and not against the weight of the evidence, the court refused to grant Fireman’s Fund’s motion for either judgment as a matter of law or a new trial.

As regards Fireman’s Fund’s motion to correct the interest calculation, it argued that this interest was based on the faulty assumption that the entire $35 million that the jury found Fireman’s Fund owed Utica came due on September 22, 2008, when Utica first provided Fireman’s Fund with a claims narrative and billings. The court found the motion to be procedurally improper, as the revision requested “would be substantive rather than clerical,” as it required findings regarding each of the multiple days on which Fireman’s Fund’s argued its obligation to pay Utica accrued, findings that would contradict the jury’s finding that Utica provided Fireman’s Fund’s with sufficient proof of loss as of September 22, 2008.  The court found that such a reconsideration of the jury’s factual findings was beyond its authority under Rule 60, and it denied the motion.

Utica Mutual Insurance Company v. Fireman’s Fund Insurance Company, Case No. 6:09-CV-853 (N.D.N.Y. Feb. 28, 2018).

This post written by Jason Brost.
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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.
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