Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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LOUISIANA LOSES BID TO VACATE DENIAL OF RECONSIDERATION OF ARBITRAL DECISION IN FEMA ASSISTANCE DISPUTE

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FEMA denied a request by the Louisiana Department of Natural Resources (“LDNR”) for assistance restoring barrier islands following Hurricanes Rita and Katrina. LDNR appealed the decision via arbitration, but the arbitral panel upheld FEMA’s denial and dismissed the arbitration entirely. LDNR moved for reconsideration on the grounds the panel did not provide LDNR an opportunity for oral presentation and did not have all the available evidence at the time it made its decision. The panel denied reconsideration because LDNR failed to indicate any new evidence it intended to produce or prove that any such evidence would be material and change the arbitral outcome.

In a lawsuit, LDNR sought vacatur of the panel’s denial of reconsideration—not the underlying arbitral award. The district court refused to vacate the decision and LDNR appealed. The Fifth Circuit declined to disturb the district court’s decision. Because LDNR did not challenge the arbitral panel’s merits decision, the court narrowly reviewed the denial of reconsideration for whether the panel deprived LDNR of a fair hearing. The court concluded that LDNR failed to show the arbitral panel refused to hear any of its evidence, failed to claim any of that evidence was even material, and failed to demonstrate any prejudice as a result.

La. Dep’t of Natural Res. v. Fed. Emergency Mgmt. Agency, No. 17-30140 (5th Cir. Jan. 29, 2018).

This post written by Thaddeus Ewald .

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SECOND CIRCUIT REBUFFS ATTEMPT TO ADDRESS IN FEDERAL COURT ACTION RELIEF PREVIOUSLY DENIED IN STATE COURT SUIT

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The Second Circuit has held that a federal district court reached the correct result but for the wrong reason when it dismissed a complaint seeking a declaratory judgment that the plaintiff was not subject to a contract containing an arbitration clause.

The complaint, filed by KIPP Academy Charter School, arose out of a dispute between KIPP and the United Federation of Teachers (UFT) regarding whether KIPP teachers were represented by the UFT. In an attempt to settle this dispute, UFT served KIPP with a demand for arbitration under the provisions of the UFT’s collective bargaining agreement (CBA) with the New York City Department of Education. KIPP filed a complaint in New York state court seeking a stay of arbitration on the basis that it was not subject to the CBA, and the court dismissed that complaint. KIPP then filed a complaint in federal district court in which it sought a declaratory judgment that it was not subject to the CBA. The UFT moved to dismiss on the basis that the action was barred by res judicata and by the Rooker-Feldman doctrine, which, broadly speaking, prevents parties from using federal suits to reverse state court judgments. The district court dismissed KIPP’s complaint based on the Rooker-Feldman doctrine without deciding whether res judicata would also bar the suit.

On appeal, the Second Circuit explained that the Rooker-Feldman doctrine applies only when “(1) the plaintiff lost in state court; (2) the plaintiff complains of injuries caused by the state court judgment; (3) the plaintiff invites district court review of that judgment; and (4) the state court judgment was entered before the plaintiff’s federal suit commenced.” The court found that the second factor was not satisfied, because KIPP’s alleged injury was caused by the UFT’s arbitration demand, not by the state court judgment, which merely ratified the UFT’s allegedly injurious conduct. However, the court found that the suit was barred by res judicata. While KIPP argued that its claim for declaratory relief was unique to the federal court action, the Second Circuit found that the state court action was a final judgment on the merits by a court of competent jurisdiction involving the same parties and the same cause of action, while the claim for declaratory relief was “unique in name only,” based on substantially identical facts, and thus duplicative for res judicata purposes.

KIPP Acad. Charter Sch. v. United Fed’n of Teachers, AFT NYSUT, AFL-CIO, 17-1905-CV (2d Cir. Jan. 30, 2018)

This post written by Jason Brost.

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