Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FOLLOWING CUNNINGHAM, PENNSYLVANIA DISTRICT COURT FINDS CAPTIVE REINSURANCE PUTATIVE CLASS ACTION CLAIMS ARE TIME-BARRED

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In this putative class action, plaintiffs alleged unlawful practices related to mortgage insurance practices, including a violation of the Real Estate Settlement Procedures Act of 1974 (“RESPA”). This case was stayed pending ultimate resolution of a factually-similar case, Cunningham v. MT&T, on appeal in the Third Circuit. In both cases, the plaintiffs purchased primary mortgage insurance (“PMI”) from specific insurers, which in turn purchased reinsurance from their respective mortgagees’ captive reinsurance subsidiaries. Plaintiffs in both suits alleged that this scheme (between the mortgagee and the PMI insurer) violated RESPA’s anti-kickback and anti-fee splitting provisions between the mortgagee and the PMI insurer.

As we previously reported here, in 2016, the Third Circuit affirmed summary judgment in favor of the defendants in Cunningham, upholding its finding that plaintiffs’ claims were time-barred and that plaintiffs could not equitably toll the limitations period because they had not exercised reasonable diligence in investigating any potential RESPA claims within the statute of limitations.

The District Court for the Western District of Pennsylvania, like the Third Circuit in Cunningham, found significant that the homeowners were made aware of the captive reinsurance program through disclosures at the time of closing and did not elect to opt out, did not ask questions of the challenged scheme at or prior to closing, and did not investigate their mortgage until they were solicited by their current counsel. Moreover, the Court rejected the plaintiffs’ attempts to differentiate their case from Cunningham, which was decided at the summary judgment phase after limited discovery, and not, as in this case, on a motion for judgment on the pleadings. The Court went on to state, “[u]nfortunately for Plaintiffs, there are no answers to be had from discovery because there are no questions to ask. The similarities between this case and Cunningham cannot be overstated… Just like the plaintiffs in Cunningham, Plaintiffs had all the facts at the time of closing to allege their claim under RESPA, but their inaction during the limitations period bars the application of equitable tolling under a theory of fraudulent concealment.” The court therefore found the above claims to be time-barred, and also precluded the remaining claims under the filed-rate doctrine, which provides that a rate, such as that for PMI, filed with and approved by a governing regulatory agency is unassailable in judicial proceedings brought by ratepayers. The District Court granted defendants’ motion for judgment on the pleadings. Menichino v. Citibank, N.A., Case No. 2:12-cv-00058 (USDC W.D. Pa. Jan. 19, 2018).

This post written by Gail Jankowski.
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INSURANCE RECEIVER’S PREEMPTION ARGUMENT UNDER MCCARRAN-FERGUSON FAILS TO AVOID ARBITRATION OF REINSURANCE DISPUTE

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The receiver for Gramercy Insurance Company sought to avoid arbitration of a reinsurance dispute with Contractor’s Bonding, Ltd., by arguing the FAA was reverse preempted under the McCarran-Ferguson Act. The receiver argued the federal court should abstain from exercising jurisdiction and remand the case to state court under Burford v. Sun Oil Co. The court noted, however, that Burford abstention is appropriate only when the district court has discretion to grant or deny relief. CBL argued the court lacked discretion regarding whether to compel arbitration under the FAA. The receiver argued the FAA was inapplicable because it was reverse preempted by the McCarran-Ferguson Act.

A state law may only reverse preempt a federal statute where, among other things, the “federal statute operates to invalidate, impair, or supersede the state law.” The FAA did not impair or supersede the relevant state statute because the statute expressly provided that it did not “deprive[] a party of any contractual right to pursue arbitration.” As such, the court denied the receiver’s motion to remand and enforced the forum selection clause contained within the party’s agreement by transferring the case pursuant to CBL’s motion. Gramercy Ins. Co. v. Contractor’s Bonding, Ltd. No. AU-17-CA-00723-SS (USDC W.D. Tex. Jan. 19, 2018).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT AFFIRMS MONTANA DISTRICT COURT’S ORDER CONFIRMING ARBITRATION AWARD

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This case involves an appeal to the Ninth Circuit Court of Appeals by Appellants Schilling Livestock, Inc., Kenneth Schilling and Lesley Schilling (collectively, the “Schillings”), of a Montana federal district court’s order confirming an arbitration award in favor of Appellee Umpqua Bank, FKA Sterling Savings Bank (“Sterling”). On appeal, the Schillings contended that the arbitration award should be vacated on two grounds: 1) that the arbitrators engaged in misconduct by allowing Sterling to rely on an undisclosed defense premised on the Gramm-Leach-Bliley Act (“GLBA”); and 2) that Sterling’s expert falsely testified that Sterling was not liable for fraudulent investment advice due to a networking exception to the GLBA.

The Ninth Circuit held that the Schillings failed to meet the high standard for vacating an arbitration award. First, the Court noted that the Schillings’ assertion that they were deprived of adequate notice of Sterling’s reliance on the GLBA defense was not supported by the record. The Court further noted that the district court correctly found that the Schillings opened the door to Sterling’s introduction of a rebuttal witness concerning the bank’s statutory duties, and that they were afforded an opportunity to submit supplemental briefing on the GLBA defense, but did not do so. Thus, the Court held that the arbitrators did not engage in misconduct in permitting rebuttal expert testimony regarding the GLBA defense, and that the arbitrators’ decision did not deprive the Schillings of a fair hearing. The Ninth Circuit also found that the record did not support the Schillings’ argument that Sterling’s expert falsely testified concerning the GLBA defense. Rather, it noted that the district court found that the expert responded to an ambiguous question and did not otherwise provide false testimony. The Court further noted that the arbitrators’ award did not refer to the expert’s testimony in finding that Sterling was not liable. Thus, the Ninth Circuit held that the Schillings failed to demonstrate by clear and convincing evidence that any fraud or false testimony warranted vacating the arbitration award. Based on the foregoing, the Ninth Circuit affirmed the Montana district court’s order confirming the arbitration award.

Schilling Livestock, Inc. et al v. Umpqua Bank, FKA Sterling Savings Bank, No. 15-35995 (9th Cir. Dec. 28, 2017).

This post written by Jeanne Kohler.
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CALIFORNIA COURT OF APPEAL REMANDS MATTER FOR SUPERIOR COURT TO DECIDE ISSUE OF ARBITRABILITY AND WHETHER DELEGATION CLAUSE WAS UNCONSCIONABLE

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Plaintiff argued both the delegation clause and the arbitration provision of the agreement at issue were unconscionable, requiring the trial court to resolve the merits of the challenge, which it did not. “If the party’s challenge is directed to the agreement as a whole – even if it applies equally to the delegation clause – the delegation clause is severed out and enforced; thus, the arbitrator, not the court, will determine whether the agreement is enforceable. By contrast, if the party is making a specific challenge to the delegation clause, the court must determine whether the delegation clause itself may be enforced (and can only delegate the general issue of enforceability to the arbitrator if it first determines the delegation clause is enforceable).”

Under California law, a delegation clause must be clear and unmistakable to be enforceable. The delegation clause at issue stated “[a]ll disputes arising with respect to any provision of this Agreement shall be fully subject to the terms of this arbitration clause” and incorporated the AAA procedures. Relying on this, the Court determined the language of the AAA rules was sufficiently clear and unmistakable, and thus the delegation clause was enforceable unless it was unconscionable. The trial court erred by not deciding the arbitrability of the delegation clause in light of the unconscionability concerns raised by the Plaintiff. The case was remanded.

Ramar Prod. Servs., Inc. v. Applied Underwriters, Inc., D071443 (Cal. Ct. App. Dec. 22, 2017).

This post written by Nora A. Valenza-Frost.
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S.D.N.Y. DISMISSES INSURER’S CLAIMS AGAINST REINSURANCE BROKER UNDER ECONOMIC LOSS DOCTRINE, FINDS NO SPECIAL RELATIONSHIP

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A New York federal court has dismissed a ceding insurer’s counterclaims against its reinsurance broker, finding the insurer’s claims for negligence and breach of fiduciary were barred by New York’s economic loss doctrine, and that there was no special relationship between the parties.

Sawgrass Mutual Insurance Company (Sawgrass) alleged that Holborn Corporation (Holborn) breached a fiduciary duty by failing to recommend that Sawgrass purchase a specific reinsurance product that Sawgrass claimed would have saved it hundreds of thousands of dollars. Holborn moved to dismiss the claims under the economic loss doctrine, which bars tort-based actions premised on purely economic injury that resulted from a breach of contract. Arguing that the law of the state in which the tort occurred should apply, Sawgrass contended that New York’s version of the economic loss doctrine was inapplicable because Florida law governed the dispute. But the court rejected this argument, holding that New York has the greatest interest in the litigation since it is the only state in which the wrongful conduct allegedly took place. The court also rejected Sawgrass’ argument that the “special relationship” exception to the economic loss doctrine applied. The court noted that, under New York law, brokers “have no continuing duty to advise, guide or direct a client to obtain additional coverage.” Therefore, absent allegations that the parties engaged in conversations regarding the specific reinsurance product at issue, general discussions between them about “the most advantageous” coverage for Sawgrass were insufficient to create a special relationship.

Holborn Corp. v. Sawgrass Mutual Insurance Co., No. 16-09147 (USDC S.D.N.Y. Jan. 17, 2018)

This post written by Alex Silverman.

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