Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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ODYSSEY REINSURANCE OBTAINS $3.2 MILLION DEFAULT JUDGMENT AND INJUNCTIONS STEMMING FROM FRAUDULENT TRANSFERS MADE BY UNDERWRITER

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Odyssey Reinsurance Company obtained a $3.2 million default judgment on October 4, 2017, against Cal-Regent Insurance Services Corporation and Pacific Brokers Insurance Services (“PBIS”) as a result of fraudulent transfers made between the two companies and the owner/officers of both companies, Richard and Diane Nagby. Cal-Regent underwrote a number of insurance risks which were subsequently reinsured by Odyssey. The two companies entered into a series of reinsurance agreements that required an annual “provisional commission” to be paid to Cal-Regent. The provisional commission was “adjusted” at year-end depending on the profitability of the business underwritten by Cal-Regent. After settlement of a lawsuit by another company involved in the transactions, it became clear that the amount of “return commissions” Cal-Regent would owe Odyssey due to the annual adjustments were likely to substantially increase. Recognizing this possibility, the Nagbys “embarked on a plan to strip Cal-Regent of assets.”

Odyssey obtained a judgment against Cal-Regent in 2015 for $3.2 million to recover the amount of return commissions it was owed. The Nagbys, however, had previously formed PBIS and “caused Cal-Regent to transfer substantially all of its assets to PBIS.” Three months after oral argument in Odyssey’s initial action against Cal-Regent and three months before judgment was entered, the Nagby’s “caused PBIS to sell substantially all of its assets to AmTrust for $5 million.” AmTrust made an initial payment of $3 million which was distributed to the Nagbys. Odyssey filed the present action on March 21, 2017, alleging liability under California’s Uniform Voidable Transactions Act and alter ego and successor liability law.

The court granted default judgments as well as preliminary injunctions against the Nagbys enjoining them from disposing of the AmTrust proceeds despite recognizing that such an injunction was an “extraordinary and drastic remedy.” Because the Defendants defaulted on Odyssey’s 2017 complaint, the “well-pleaded factual allegations of the complaint, except those relating to the amount of damages, [were] taken as true.” The Court found that Odyssey had sufficiently pled facts to support each of its causes of action as well as sufficient evidence to support an award of the full amount prayed for, plus post-judgment interest running from the 2015 judgment. Odyssey Reinsurance Co. v. Nagby, Case No. 16-cv-03038 (S.D. Cal. Oct. 4, 2017).

This post written by Benjamin E. Stearns.

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COURT AFFIRMS DISMISSAL OF CLAIM FOR COMMISSIONS FOR PLACEMENT OF PUERTO RICAN PUBLIC LIABILITY INSURANCE

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Plaintiffs Berkley Risk Solutions LLC, an insurance and reinsurance management services provider, and Admiral Insurance Co., an excess and surplus lines insurer, sued Industrial Re-International Inc., a New York reinsurance intermediary, and its founder, concerning certain commissions for public liability insurance placed with municipalities in Puerto Rico through American Foreign Underwriters Corp. (AFU), a licensed general agency. The dispute began when AFU filed a lawsuit against Industrial Re and Plaintiffs in Puerto Rico alleging that Industrial Re had agreed to split the commissions on policies written for 2006-2007 equally with AFU. Industrial Re and AFU resolved their dispute and executed a settlement agreement in which they agreed that the commission on any future policies with the municipalities would be split 60 percent to Industrial Re and 40 percent to AFU. Industrial Re obtained a judgment against AFU for the payment of its portion of the commissions that AFU received on subsequent policies according to the settlement; however, Industrial Re’s attempts to collect against AFU were unsuccessful. Industrial Re then claimed that Plaintiffs owed it for the judgment obtained against AFU. Plaintiffs filed the lawsuit underlying this appeal, seeking a declaration that they were not obligated to Industrial Re for the 2008-2009 and 2009-2010 policy commissions. Industrial Re responded by asserting counterclaims based on promissory estoppel, unjust enrichment and tortious interference.

Plaintiffs prevailed in the trial court, and the appellate court has now affirmed the trial court’s ruling. Regarding promissory estoppel, the court held that Industrial Re did “not dispute that plaintiffs were not parties to the Settlement Agreement [with AFU] and have produced no evidence that plaintiffs agreed to be bound by the Settlement Agreement at any time.” Moreover, it found that “[a]lthough plaintiffs acknowledged in an August 2008 email they ‘were previously advised’ to distribute the commission in accordance with the Settlement Agreement, their willingness to do so […] was explicitly dependent upon receiving a written stipulation from both defendants and AFU to that effect,” which never occurred, and thus, never became binding. The court also affirmed the dismissal of Industrial Re’s claim based on the expiration of the statute of limitations of the State of New Jersey; New Jersey had a “substantial interest” in resolving disputes arising out of business dealings between two of its own corporations and no “exceptional circumstances” justified the application of the law of Puerto Rico. Berkley Risk Solutions LLC v. Indus. Re-Int’l Inc., Case No. A-2366-15T1 (N.J. Super. Ct. App. Div. Sept. 20, 2017).

This post written by Gail Jankowski.

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