Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

MISSOURI COURT FINDS INSURANCE CONTRACT’S ARBITRATION CLAUSE UNENFORCEABLE AS AGAINST PUBLIC POLICY

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This case arose from an accident at the General Motors plant in Kansas City, Kansas, where an electrician employed by Capital Electric Construction Company, Inc. was severely injured due to negligence by Solaris Power Services, LLC in failing to de-energize equipment on which he was working. Capital was insured by Liberty Mutual Fire Insurance Company. Associate Electric & Gas Insurance Services, LTD. (AEGIS), provided excess liability insurance to Capital. A coverage dispute arose after an uncontested $44 million judgment was entered against Solaris. Solaris alleged it was or should have been an additional insured under both policies, but that both insurance companies wrongly denied it coverage.

AEGIS moved to stay the litigation and compel arbitration on the grounds that its policy contained a mandatory arbitration clause. AEGIS argued that North Dakota law, rather than Missouri law, should apply to the dispute. While Section 435.350 of the Missouri Arbitration Act prohibits mandatory arbitration provisions in insurance contracts, AEGIS argued that under North Dakota law, the policy’s arbitration clause was valid and enforceable. The Court disagreed, reasoning that a Missouri court would apply the law of another jurisdiction only where “not contrary to a fundamental policy of Missouri.” The Court refused to do so here because the arbitration clause at issue directly contravened Missouri public policy. Alternatively, the Court found that the arbitration provision would still be found unenforceable even if it were to apply Kansas law per the policy’s choice of law provision. Simon v. Liberty Mut. Fire Ins. Co., Case No. 17-cv-0152 (USDC W.D. Mo. Dec. 8, 2017)

This post written by Gail Jankowski.

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ENGLISH HIGH COURT OF JUSTICE ORDERS DISCLOSURE OF BANK’S RECORDS RELATED TO MISDIRECTED REINSURANCE PREMIUMS

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In a proceeding seeking an order for disclosure of documents from Barclays Bank, the English High Court of Justice considered the scope of the agency involved in a run-off agreement between a reinsurance broker and another entity (“SMP”) in connection with collecting and transmitting of premiums under an Excess of Loss reinsurance policy issued by a Lloyd’s consortium. After SMP allegedly failed to pay $541,884.90 in premiums that it had received, a dispute arose whether the broker was responsible to repay the missing funds, or alternatively, whether the broker itself was damaged by SMP’s misuse of the funds. The consortium contended that the SMP was the agent of the broker, while the broker contended that SMP was simply entitled to collect the premiums due under the policy and pay them to the consortium, but that no agency relationship existed in that regard.

The court analyzed the run-off agreement and determined that the broker was entitled to assert that it was the beneficial owner of the premiums held in the account, even if it held those premiums on trust for the reinsured or was itself subject to obligations to pay them to the Consortium. The court therefore ruled that the order of disclosure from the bank was needed to enable the broker to identify the persons responsible for instructing the bank to pay the monies away, and to defend itself from the consortium’s potential claim. The court further found that the bank may have some culpability, which further supports its production of the documents. Miles Smith Broking Ltd. v. Barclays Bank PLC [2017] EWHC 3338 (Ch) (Dec. 15, 2017).

This post written by Michael Wolgin.

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NINTH CIRCUIT AFFIRMS ORDER REJECTING FIRST AMENDMENT CHALLENGE TO MOTION TO COMPEL ARBITRATION

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Consumers filed a putative class action alleging statutory and common law consumer protection and false advertising claims under California and Alabama law, specifically alleging that AT&T falsely advertised their mobile service plans as “unlimited” when in fact it intentionally slowed data at certain usage levels. AT&T moved to compel arbitration pursuant the arbitration agreements included in their wireless data service plans and in light of the Supreme Court’s 2011 ruling in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act preempts state law deeming AT&T’s arbitration provision to be unconscionable.

Plaintiffs opposed the motion on First Amendment grounds, arguing that an order forcing arbitration would violate the Petition Clause because they “did not knowingly and voluntarily give up their right to have a court adjudicate their claims” and could not “bring their claims in small claims court.” The district court granted AT&T’s motion to compel arbitration, finding that there was no state action in this case to bring the dispute within the ambit of the First Amendment. After denying reconsideration, the district court granted plaintiffs’ motion to certify the order compelling arbitration for immediate interlocutory appeal, finding that there was substantial ground for difference of opinion as to whether state action existed under (1) Denver Area Edu. Telecom. Consortium, Inc. v. FCC or (2) the “encouragement” test. The Ninth Circuit granted permission to appeal.

On appeal, the Ninth Circuit read Denver Area narrowly, reasoning that the case “did not broadly rule that the government is the relevant state actor whenever there is a direct constitutional challenge to a “permissive” statute. The court also found unpersuasive plaintiffs’ argument that the Federal Arbitration Act, including judicial interpretations thereof, “encourages” arbitration such that AT&T’s actions are attributable to the state. The panel concluded, “[p]ermission of a private choice cannot support a finding of state action,” and “private parties [do not] face constitutional litigation whenever they seek to rely on some [statute] governing their interactions with the community surrounding them.” The Ninth Circuit affirmed the district court’s ruling. Roberts v. AT&T Mobility, Case No. 16-16915 (9th Cir. Dec. 11, 2017).

This post written by Gail Jankowski.

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THE FEDERAL ARBITRATION ACT DOES NOT GRANT ARBITRATORS THE POWER TO COMPEL PRE-HEARING PRODUCTION OF DOCUMENTS FROM NON-PARTIES

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While the FAA grants arbitrators authority to compel non-parties to appear before them and produce documents at a hearing, it does not authorize them to compel pre-hearing production. The Ninth Circuit Court of Appeals joined the Second, Third and Fourth Circuits in so holding. The Eighth Circuit, however, disagrees, having ruled previously that “implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” It is also worth noting, as the Ninth Circuit did, that “because arbitration is a creation of contract, arbitration agreements may provide arbitrators greater discovery powers with respect to the parties bound by such agreements.” CVS Health Corp. v. Vividus, LLC, Case No. 16-16187 (9th Cir. Dec. 21, 2017).

This post written by Benjamin E. Stearns.

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SECOND CIRCUIT AFFIRMS COURT’S CONFIRMATION OF MULTIPLE ARBITRATION AWARDS

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This matter involved appeals by appellant Best Made Floors Inc. (“Best Made”) from a December 22, 2016 corrected judgment of a district court confirming two arbitration awards in favor of appellees, and from the district court’s denial of its motion to vacate a third arbitration award in favor of the appellees.

Three arbitration hearings on claims asserted against Best Made, which resulted in three arbitration awards in favor of the appellees. On November 3, 2015, the arbitrator found that Best Made failed to pay an employee for 98 hours of work and ordered that Best Made pay $5,399.60 in wages, less statutory deductions (“November 3 Award”). On June 7, 2016, the arbitrator found that Best Made violated collective bargaining agreement procedures for cash payments and ordered that Best Made pay a $50,000 penalty (“June 7 Award”). On August 15, 2016, the arbitrator also found that Best Made failed to remit required payments to appellees and ordered that Best Made pay $20,424.55 (“August 15 Award”). Best Made attended only the first hearing, which culminated in the November 3 Award.  Best Made sought to vacate all three awards, which was denied by order dated November 23, 2016, and the district court confirmed the November 3 and August 15 Awards.  A corrected judgment was then entered on December 22, 2016, which also confirmed only the November 3 and August 15 Awards, and did not address the June 7 Award. Best Made then appealed.  After the notice of appeal was filed, on June 10, 2017, the arbitrator issued a new award superseding the June 7 Award, and which reduced the original $50,000 penalty to $10,000. No party had moved to confirm or vacate the June 10, 2017 Award.

 On appeal, Best Made argued that the three initial arbitration awards should be vacated because: (1) the arbitration procedures were fundamentally flawed; (2) the arbitrator was biased; (3) the appellee provided inadequate notice of a hearing; and (4) the appellee committed fraud by failing to present Best Made’s evidence to the arbitrator at the hearings that Best Made failed to attend. The Second Circuit concluded that these arguments were without merit, that Best Made had not established that the arbitration proceedings were fundamentally unfair, and that the district court properly confirmed the awards.  N.Y. City District Council of Carpenters et al. v. Best Made Floors, Inc., No. 16-4281 (2nd Cir. Dec. 15, 2017).

This post written by Jeanne Kohler.
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