Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

EIGHTH CIRCUIT UPHOLDS DISMISSAL OF CLAIM AGAINST DEPARTMENT OF HEALTH & HUMAN SERVICES UNDER ACA TRANSITIONAL REINSURANCE PROGRAM FOR LACK OF SUBJECT MATTER JURISDICTION

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Seeking reimbursement of fees paid, allegedly by mistake, under the transitional reinsurance program in the Patient Protection and Affordable Care Act (“ACA”), the trustees of the Twin City Pipe Trades Welfare Fund’s sued the U.S. Department of Health and Human Services to recoup the payment. The Fund argued the Administrative Procedure Act (“APA”) waived the Department of Health & Human Services’ sovereign immunity.  The district court held that sovereign immunity was waived by the APA only if the suit challenges final agency action, seeks relief other than money damages, and the plaintiff has no other adequate remedy in a court.  5 U.S.C. §§ 702, 704.  Finding that the Complaint sought money damages, and that without sovereign immunity the suit should have been filed in the United States Court of Federal Claims, the district court found that the APA did not waive sovereign immunity and dismissed the Complaint.  The Eighth Circuit found the district court’s decision well-reasoned and affirmed.

Trustees of the Twin City Pipe Trades Welfare Fund, et al. v. Price, No. 16-403 (8th Cir. Nov. 27, 2017).

This post written by Nora A. Valenza-Frost.
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FIFTH CIRCUIT AFFIRMS COURT’S AUTHORITY TO RULE ON QUESTION OF ARBITRABILITY AND FINDS INJUNCTIVE RELIEF WAS NOT SUBJECT TO ARBITRATION

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A Texas federal court determined that, pursuant to the parties’ contract, the dispute was not arbitrable because the plain language of the arbitration clause expressly excluded suits that involved requests for injunctive relief, despite the incorporation of the AAA Rules. The clause stated as follows:

This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of Pelton & Crane), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.

Defendants argued that, “under the plain language of the clause, disputes about arbitrability do not fall within the carve-out and thus, belong to the arbitrator.” Plaintiff, on the other hand, argued that “the structure of the specific carve-out at issue here leads to the natural reading that the AAA Rules only apply to the category of cases that are subject to binding arbitration under the Dealer Agreement – namely, those outside of the contract’s express carve-out.”

The District Court held that the arguments for arbitrability were “wholly without merit” based on the plain language of the arbitration clause itself and thus fell squarely within the “wholly groundless” exception created by Douglas v. Regions Bank, 757 F. 3d 460 (5th Cir. 2014). On appeal, the Fifth Circuit Court of Appeals affirmed, stating that, “[t]he mere fact that the arbitration clause allows [Plaintiff] to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning.”

Archer and White Sales, Inc. v. Henry Schein, Inc., et al., No. 16-41674 (5th Cir. Dec. 21, 2017).

This post written by Nora A. Valenza-Frost.
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NEW YORK’S HIGH COURT SCALES BACK REINSURANCE LIABILITY CAP

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In Excess Insurance Co. Ltd. v Factory Mutual Insurance Co., 3 NY3d 577 (N.Y. 2004), New York’s high court held that, under a facultative reinsurance agreement, the reinsurer’s liability was limited to a per occurrence cap, despite the fact that that the underlying policy covered expenses, such as underlying defense costs, in addition to indemnity for losses.

On a certified question from the Second Circuit Court of Appeals, that same court addressed the scope of its holding in Excess, finding that its prior decision does not impose a per se cap, but that rather the question of the limits of liability under a facultative reinsurance agreement is governed by the specific terms and provisions of the facultative agreement at issue. The Court noted that its decision in Excess was limited to the facts before it, and did not announce a presumption or rule of construction favoring a cap in all factual circumstances: “Under New York law generally, and in Excess in particular, there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured’s defense costs.”

It distinguished Excess on its facts, noting that in Excess, the loss adjustment expenses were incurred in litigation between the insurer and its policyholder, and they were not costs that the insurer was obligated to pay under the terms of the underlying policy itself. It thus held that, “[w]hether a similar (or even identical) limitation clause would apply to third-party defense costs, in a certificate reinsuring a liability insurance policy, was never at issue” in Excess.

Limiting its ruling to the certified question before it, the Court did not analyze the issue further to determine the ultimate outcome. Rather, the case now reverts back to the Second Circuit, given this guidance.

Global Reinsurance Corporation of America v. Century Indemnity Co., No. 124 (N.Y. Dec. 14, 2017).

This post written by John Pitblado.
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COURT REFUSES TO RECONSIDER ARBITRATOR’S FACTUAL DETERMINATIONS

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In a case emphasizing the deference courts give to factual findings of arbitrators, a magistrate judge in the Eastern District of New York has confirmed an arbitration award granting damages and attorneys’ fees to a company that repossessed a leased car when the leasee fell behind on his payments.

The case arose out of the lease of a car by plaintiff Kevin Love and his wife Maria. After the Loves failed to make timely payments on the lease, defendant BMW Financial Services repossessed the car, sold it at auction, and sought payment of a deficiency balance. Mr. Love sued BMW in state court, where he asserted Fair Credit Reporting Act, tort, and contract claims. BMW removed the case to federal court, then successfully moved to compel arbitration per the terms of the lease agreement. The arbitrator entered an award in favor of BMW, rejecting all of Mr. Love’s claims and awarding BMW $34,826.64 in damages plus interest and $50,000 in attorneys’ fees. BMW then moved in federal court to confirm the award and sought its fees incurred in connection with that proceeding, and Mr. Love cross-moved to vacate the award.

The court confirmed the award, emphasizing that courts in the Second Circuit will not vacate an arbitration award except in narrowly-defined circumstances described in the Federal Arbitration Act or if the court finds that it was rendered in “‘manifest disregard’ of the law or the terms of the parties’ agreement.” The court further emphasized that manifest disregard of the evidence is not a grounds for vacatur within the Second Circuit. Thus, the court rejected Mr. Love’s claim that the arbitration award was too large because the arbitrator failed to properly account for the time that the car was not available to Mr. Love, finding that it had no power to review such a factual finding. The court likewise rejected Mr. Love’s argument that the arbitrator’s decision dismissing his FCRA claim should be vacated, as this was also based on a non-reviewable finding of fact. The court also found that because the plain language of the lease provided for attorneys’ fees incurred in connection with a default on the lease, BMW was entitled to recover the $12,690.02 in attorneys’ fees it incurred in seeking to have the award confirmed and responding to Mr. Love’s motion for vacatur.

Love v. BMW Financial Services NA, LLC, No. 15-cv-0124 (E.D.N.Y. Dec. 5, 2017)

This post written by Jason Brost.

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MISSOURI COURT HOLDS ARBITRATION CLAUSE IN INSURANCE CONTRACT UNENFORCEABLE AS AGAINST PUBLIC POLICY AND UNDER GOVERNING LAW

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A Missouri district court recently held a mandatory arbitration provision was unenforceable in an insurance coverage dispute after an electrician was injured on the job and won an uncontested judgment in state court against Solaris Power Services (“Solaris”). His employer was insured by Liberty Mutual and had excess insurance through AEGIS. The plaintiffs in the present case, including Solaris, sued both insurers and alleged they should have been additional insureds under both policies and their coverage claims were wrongly denied. AEGIS moved to stay the proceedings and compel arbitration pursuant to a mandatory arbitration provision in its excess insurance policy. The various parties disputed which state’s law applied. The court ultimately denied the motion, holding the mandatory arbitration provision was unenforceable.

First, the court concluded the arbitration clause was unenforceable as it contravened Missouri public policy. Missouri choice of law rules allow for the application of another state’s law as long as the law “is not contrary to a fundamental policy of Missouri.” Application of North Dakota law (as advocated for by AEGIS) or any other state’s law that would enforce the arbitration provision was inappropriate as it would contravene Missouri law prohibiting mandatory arbitration clauses in insurance contracts.

Next, the court concluded that even under a traditional choice of law analysis, the arbitration clause was still unenforceable. Missouri choice of law for insurance coverage disputes provides certain factors to consider in determining what law to apply, “[i]n the absence of effective choice of law by the parties.” Here, the court found the insurance policy contained an effective choice of law provision where it stated construction “in accordance with the laws of the jurisdiction in which the situation forming the basis for the controversy arose.” The accident’s location in Kansas therefore dictated Kansas law governed. Because arbitration provisions in insurance contracts are unenforceable under Kansas law, the court reached the same conclusion it previously did that the provision was unenforceable.

Simon v. Liberty Mut. Fire Ins. Co., Case No. 17-152 (W.D. Mo. Dec. 8, 2017).

This post written by Thaddeus Ewald .

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