Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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NINTH CIRCUIT FINDS ARBITRATION CLAUSE SHOWED CLEAR AND UNMISTAKABLE INTENT TO RESOLVE ARBITRABILITY QUESTIONS BY ARBITRATION

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Finding Montana law was inapplicable to the subject insurance policy under both federal maritime choice-of-law principles and the policy language, the Ninth Circuit Court of Appeals determined that an arbitration clause was not unenforceable, and remanded the matter to the Montana District Court with instructions to grant a motion to compel arbitration in its entirety.

As the insurance policy at issue concerned marine insurance, and the FAA specifically applies to “maritime transactions,” Montana state law did not govern the validity of the agreement’s arbitration provision. Nor was federal maritime law precluded by Montana law under the McCarran-Ferguson Act, as Montana’s insurance law is not invalidated, impaired or superseded by the application of federal maritime law.  The same result was reached by applying maritime choice-of-law principles to the policy’s choice-of-law provisions.

Lastly, looking at the policy’s arbitration provision, in which the parties agreed “that any and all disputes arising under [the] policy shall be resolved exclusively by binding arbitration … conducted pursuant to the Rules” of the AAA, the Court found the parties “clearly and unmistakably indicated their intent to submit arbitrability questions to an arbitrator.” The AAA rules provide that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”

Galilea, LLC v. AGCS Marine Ins. Co., No. 16-35474 (9th Cir. Jan. 16, 2018).

This post written by Nora A. Valenza-Frost.
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CALIFORNIA COURT CONSIDERS ENFORCEABILITY OF ARBITRATION CLAUSE IN REINSURANCE RELATED AGREEMENT APPLYING NEBRASKA LAW

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In a case involving a reinsurance participation agreement (RPA), a California trial court has examined the interplay between two seemingly irreconcilable contract provisions: one that provided for the arbitration of any disputes thereunder, and another that chose Nebraska law for purposes of construction, pursuant to which agreements to arbitrate disputes implicating certain insurance contracts are invalid.

Plaintiffs were a set of affiliated companies that entered into a series of agreements with defendants, including a set of workers’ compensation insurance policies, a reinsurance treaty, and the RPA. The RPA (1) provided that any disputes would be arbitrated and delegated issues of arbitrability to the arbitrator, and (2) provided that it should be construed in accordance with Nebraska law. Plaintiffs filed suit seeking a declaration that the RPA was void and unenforceable, and defendants moved to compel arbitration. Plaintiffs argued that the arbitration provision was unenforceable under Nebraska Revised Statute § 25-2602.01(f)(4), which prohibits agreements to arbitrate future disputes regarding “any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.”

Under the McCarran Ferguson Act, a state law may prohibit arbitration otherwise required by the FAA (known as “reverse preemption”) if that statute “regulates the business of insurance.” The court determined that § 25-2602.01(f)(4) regulates the business of insurance and thus reverse preempts the FAA. The court went on to note that while parties may generally agree to delegate the power to determine issues of arbitrability to the arbitrator, if the very validity of the agreement to arbitrate is challenged, the court must consider this challenge before compelling arbitration. Finding that plaintiffs had made such a challenge, the court found that it was required to determine whether the RPA was the type of agreement covered by § 25-2602.01(f)(4).

Defendants argued that the RPA was an investment contract, not an insurance policy, and thus not covered by § 25-2602.01(f)(4), but the court disagreed, finding that the RPA was sufficiently related to the relevant workers’ compensation policies to merit such coverage. As such, it was the kind of agreement for which § 25-2602.01(f)(4) prohibits arbitration agreements, and the court denied defendants’ motion to compel arbitration. Parties drafting insurance-related contracts containing arbitration provisions would thus be well advised to consider the impact of applicable state laws on the enforceability of such provisions.

Milmar Food Group II, LLC et al. v. Applied Underwriters, Inc. et al., EF003101-2017 (Orange Cty. Sup. Ct. Dec. 5, 2017)

This post written by Jason Brost.

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