Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT FINDS CONFIDENTIALITY PROVISION IN ARBITRATION AGREEMENT UNCONSCIONABLE, COMPELS CONSUMER ARBITRATION

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The Eleventh Circuit has determined that a confidentiality provision in an arbitration clause was substantively unconscionable. The case involved a putative class action by David Johnson alleging that KeyBank National Association (“KeyBank”) altered the order of debit card transactions to maximize their collection of overdraft fees. Johnson opened the account at issue in 2001 by signing an agreement stating that “all accounts opened under this Plan are subject to [KeyBank’s] Deposit Account Agreement” (the “2001 Agreement”).  The Deposit Account Agreement was a 1997 agreement with the arbitration clause at issue (the “1997 Agreement”).

KeyBank moved to compel arbitration of Johnson’s claims, arguing that Johnson agreed to be bound by the arbitration provision in the 1997 Agreement. The district court denied the motion, however, finding the arbitration clause to be unconscionable.

On appeal, the Eleventh Circuit first concluded that Johnson agreed to arbitrate because the 2001 Agreement expressly stated that the 2001 account was “subject to” the terms of the 1997 Agreement, including the arbitration clause. The phrase “subject to” was deemed sufficient to incorporate the 1997 Agreement into the 2001 Agreement by reference.  By executing the 2001 Agreement, the court found that Johnson agreed to be bound by the arbitration provision.

The court then reversed the district court’s determination that the arbitration provision was unconscionable. First, the court held that it was not procedurally unconscionable because it was not made without “meaningful choice;” that it was a contract of adhesion did not make it unconscionable per se.  Second, while it was not substantively unconscionable as a whole, the court held that a confidentiality clause in the provision was unconscionable in that it required the parties to “keep confidential any decision of an arbitrator.”  The court agreed that by keeping the outcomes of prior arbitrations concealed, it put KeyBank, a repeat participant in the arbitration process, at an “obvious informational advantage” at the outset of a dispute.  Moreover, prospective claimants would have little context in which to assess the value of their cases, which may discourage those individuals from pursuing valid claims.  As such, the court severed the confidentiality clause and enforced the remainder of the arbitration provision with instructions on remand. Larsen v. Citibank FSB, No. 15-10779 (871 F.3d 1295) (11th Cir. Sept. 26, 2017).

This post written by Alex Silverman.
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DISCOVERY DISPUTE IN COST OF INSURANCE CASE CONSIDERS RELEVANCE, STATUTORY PRIVILEGE, AND ADEQUACY OF OBJECTIONS

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In a putative class action alleging that a life insurer engaged in an elaborate scheme to pay stockholders huge dividends by shifting its obligations to reinsurers operating in jurisdictions with weak oversight and dramatically raising the cost of insurance on its universal life insurance policies, a federal magistrate judge in the District of Maryland has found that plaintiffs’ discovery requests went too far, while plaintiffs’ responses to discovery were “miserably deficient.”

Defendant objected to the plaintiffs’ discovery requests on the basis that they sought irrelevant documents regarding varieties of policies other than the universal life insurance policies that named plaintiffs’ owned and that received the COI increases, and the magistrate agreed. Defendant also argued that certain requested documents were protected by a Maryland statutory privilege for documents filed with the state insurance Commissioner. Plaintiffs argued that this statute only prevented the state insurance department from disclosing these documents, but the magistrate disagreed. Noting that the statute provided that such documents “may not be made public by the Commissioner, the National Association of Insurance Commissioners, or any other person,” and that the defendant clearly was a person as defined by law, the magistrate found that these documents were not discoverable and that defendant must place them on their privilege log.

Defendant also moved to compel responses to its interrogatories and requests for documents. The magistrate found that plaintiffs did not meet their essential obligations in responding to discovery—“answer the questions, provide the documents or in the alternative assert any applicable privilege.” Plaintiffs’ objections to interrogatories regarding the factual basis for the alleged fraud and for damages, including that the requests were “burdensome and annoying” and “premature at this early stage of litigation,” were inadequate, as were references to documents in response to interrogatories. As plaintiffs’ responses were “miserably deficient,” the magistrate ordered plaintiffs to answer the interrogatories, provide the requested documents, and provide a privilege log for any privileged documents.

Dickman v. Banner Life Insurance Company, Civil No. RDB-16-192 (D. Md. Sept. 28, 2017)

This post written by Jason Brost.

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CUSTOMER FAILS TO SATISFY BURDEN TO VACATE FINRA ARBITRATION AWARD IN FAVOR OF ITS BROKER

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A federal district court in California confirmed a FINRA arbitration award last month in a lawsuit by Global eBusiness against its broker for alleged mishandling of Global’s margin account. Overall, the court found that Global failed to live up to its burden to justify vacating the award on either of the two grounds asserted. First, the court observed that Global provided no evidence that the panel failed to evaluate evidence pertinent and material to its claims and concluded the procedural decisions complained of were well within the arbitrators’ broad discretion. Second, Global neglected to identify any governing law that the panel allegedly misapplied or disregarded. As an aside, the court likewise dismissed Global’s arguments for vacatur based on the California Code of Civil Procedure because it likely did not apply to the dispute, nor did Global provide sufficient support for their arguments thereunder.

Global eBusiness Servs., Inc. v. Interactive Brokers LLC, Case No. 16-1264 (N.D. Cal. Oct. 30, 2017).

This post written by Thaddeus Ewald .

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TREASURY RELEASES REPORT ON ASSET MANAGEMENT AND INSURANCE

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The U.S. Department of the Treasury has released a report entitled “A Financial System that Creates Economic Opportunities: Asset Management and Insurance,” the third of four reports to be issued by the Department in response to Executive Order 13772 of February 3, 2017, in which President Trump set forth a set of “Core Principles” to be applied by his administration in the regulation of the financial system.  The report includes numerous recommendations, including:

  • moving away from entity-based system risk evaluations of insurance companies and towards an activities-based approach that would identify business activities that have higher systemic risk characteristics;
  • harmonizing the group capital initiative of the NAIC, the states, and the Federal Reserve to reduce the existence of duplicative regulatory burdens for insurers;
  • recommending that the International Association of Insurance Supervisors, in developing its Insurance Capital Standard, “recognize the diverse approaches to solvency” by various regulators to ensure that the business model of U.S. insurance companies and the state-based insurance regulatory system of the U.S. are accommodated;
  • clarifying, through legislative action, the “business of insurance” exception of Dodd-Frank to ensure that the CFPB is not overseeing activities already regulated by state insurance regulators;
  • taking steps to encourage private insurers to participate in the market for terrorism insurance;
  • recommending that states adopt the NAIC Insurance Data Security Model Law and, if uniform requirements are not adopted in five years, passing federal legislation setting forth data breach notification standards specific to insurers;
  • encouraging the sharing of information within the insurance industry regarding issues related to cybersecurity;
  • encouraging the consultation of and participation by state governments when the business of insurance is impacted by the decisions of federal agencies and regulators;
  • directing the Federal Insurance Office to advocate for the U.S. state-based insurance regulatory system before the International Association of Insurance Supervisors and recommending that the FIO have a permanent, voting membership on the IAIS Executive Committee.

While some of these recommendations are within the direct power of the executive branch, most will require the cooperation of Congress, state regulators, or other bodies outside of the President’s control, making it an open question how successful President Trump will be in implementing the ideas described in the report.

This post written by Jason Brost.
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COURT DENIES MF GLOBAL HOLDINGS’ BID TO APPEAL BANKRUPTCY COURT ORDER COMPELLING ARBITRATION

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On October 30, 2017 the Southern District of New York rejected MF Global Holdings’ (“MF Global”) latest attempt to avoid a bankruptcy court order compelling it to submit to arbitration in Bermuda in its coverage dispute with Allied World Assurance Company (“Allied World”) regarding MF Global’s bankruptcy. The court denied MF Global’s motion seeking leave to appeal the bankruptcy court’s arbitration order and for a stay of the arbitration pending that appeal.

Allied World argued that 9 U.S.C. § 16(b) prohibits interlocutory appeals for orders compelling arbitration, and that the exception to the statute was not satisfied in this case. The listed exception, 28 U.S.C. § 1292(b), provides for district court certification of interlocutory orders for appeal to circuit courts but does not apply to appeals from bankruptcy courts to district courts under § 158(a). The court declined to accept that interpretation, instead concluding that § 16(b) was not intended to cover, and did not apply to, decisions of bankruptcy courts. Additionally, the court noted that accepting Allied World’s argument would lead to like cases being treated differently because cases in bankruptcy court could never obtain an interlocutory appeal while cases in which a district court declines to refer the matter to the bankruptcy court could obtain interlocutory appeal. Therefore, the court held, § 16(b) did not bar MF Global’s attempted appeal.

Nevertheless, the court found there were no “exceptional circumstances” justifying an interlocutory appeal of the bankruptcy court’s order. The proposed issue on appeal was whether a bankruptcy plan provision retaining jurisdiction over future and related disputes supersedes pre-bankruptcy arbitration rights, absent an express provision to that effect and when the adversary proceeding began after confirmation of the bankruptcy plan. The court found this issue to be a controlling question of law, even though a resolution on it would not terminate the case, because it would offer helpful guidance for future parties encountering the issue. It also found there was “substantial ground for difference of opinion” based on cases from other courts reaching conclusions contrary to that of the bankruptcy court. Interlocutory appeal was inappropriate, however, because reversal of the bankruptcy court on this issue would not, by itself, “materially advance the ultimate termination of the litigation” where the defendant made several independent arguments for why the jurisdiction provision should not be enforced that would each need to be addressed.

Because the court denied MF Global’s motion for leave to appeal, it also denied the motion to stay as moot.

In re: MF Global Holdings Ltd., Case No. 17-7332 (S.D.N.Y. Oct. 30, 2017).

This post written by Thaddeus Ewald .

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