Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NATIONAL FLOOD INSURANCE PROGRAM IS RELIEVED OF $16 BILLION OF DEBT

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On October 26, 2017, President Donald Trump signed H.R. 2266, a disaster relief bill. Pursuant to section 308 of the bill, the Department of the Treasury will forgive $16 billion in debt owed by FEMA under the National Flood Insurance Program. The forgiven debt is designated as an emergency requirement under the Statutory Pay-As-You-Go Act of 2010 and the Balanced Budget and Emergency Deficit Control Act of 1985. See the full text H.R. 2266 here.

This post written by Jeanne Kohler.
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DISTRICT OF COLORADO AFFIRMS FINRA ARBITRATION AWARD

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A Colorado federal court affirmed a FINRA arbitration award, despite a cross-motion to vacate the award on the bases of alleged panel misconduct; exceeding its powers; manifest disregard of the law; and that the award did not contain a showing as to how the evidence justifies the award.

First, the Court rejected defendant’s argument that the Panel’s refusal to grant a second continuance did not amount to misconduct. Following the first continuance, defendant was given ample time – three months – to obtain new counsel and have them prepare for the hearing.

Second, the Court also rejected defendant’s argument that the panel exceeded its powers by hearing and ruling on claims that were beyond the Panel’s jurisdiction under FINRA rules. The Court reasoned that, “because it was for the Panel and not this Court to decide whether Plaintiff’s claims fell within Rule 12206(a)’s six-year time frame, the Court reject[ed] Defendant’s invitation to second-guess the Panel’s interpretation of FINRA Rule 12206(a).”

Third, the Court rejected defendant’s argument that the Panel acted in manifest disregard of the law by hearing, and ruling on, claims which were barred by state law under the relevant statutes of limitations. The Court reasoned that, even if the Panel had erroneously applied the applicable statutes of limitations, “incorrect application of a state’s statute of limitations does not rise to the level of manifest disregard of the law.”

Lastly, the Court rejected defendant’s argument that the award did not contain a showing as to how the evidence justifies the award, findings of fact or conclusions of law. Despite this argument being improperly raised in defendant’s reply, the arbitration provision specifically stated the arbitrators do not have to explain the reasons for their award, and the “Panel could have reasonably concluded that this provision allowed the Panel to dispense with written findings of fact and conclusions of law”.

Huitt v. Wilbanks Securities, Inc., 1:17-cv-00919 (USDC D. Col. Oct. 19, 2017)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

COURT RULES AGAIN ON MOTION TO DISMISS IN MATTER INVOLVING UNFILED RATES CHARGED UNDER REINSURANCE AGREEMENT

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On July 21, 2016, we reported on a putative class action filed in a California U.S. district court by Shasta Linen Company against Applied Underwriters, Inc. and its affiliated entities, alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated California insurance law and regulations. Shasta asserted that the defendants unlawfully used a Reinsurance Participation Agreement (“RPA”) to control workers’ compensation rates (and thus, charge higher rates) without first having the RPA filed and approved by the department of insurance as required by law. The court dismissed Shasta Linen’s claims to the extent that they sought to invalidate the RPA’s rates on the theory that the RPA was an unfiled plan pursuant to section 11735 of the California Insurance Code. The court reasoned that the use of a rate that has not been filed is not an unlawful rate unless and until the commissioner conducts a hearing and disapproves the rate.

On December 1, 2016, we reported that subsequent to the court’s ruling, the California Commissioner issued an order in an administrative proceeding, finding that the RPA was void because it had not been filed and approved by the department. Shasta Linen then sought reconsideration of the court’s prior dismissal, arguing that the Commissioner’s Order was a “change in controlling authority meriting reconsideration” by the court. On October 17, 2016, the court held that the Commissioner’s order misinterpreted the law, and was not “controlling.” The court denied reconsideration, but it did so “without prejudice as to attempts by plaintiff to invalidate the [RPA] on grounds other than the theory that defendants violated” section 11735.

Since our last blog on the case, Pet Food Express filed a separate class action against Applied Underwriters and its affiliates in California state court, which was removed to federal court. As they had in the Shasta case, the defendants moved to dismiss Pet Food’s complaint to the extent it sought to invalidate the RPA on the ground that it is an unfiled plan in violation of section 11735. The court denied the motion as Pet Food’s complaint did not rely on section 11735. Both plaintiffs in the two action then filed nearly identical amended complaints, asserting claims under RICO, the California Unfair Competition Law (“UCL”), California Business and Professional Code and for unjust enrichment. Defendants moved to dismiss. The court consolidated the actions for pre-trial purposes.

With respect to the motions to dismiss, the court granted them as to the RICO claims because plaintiffs had not sufficiently alleged a plausible basis to infer a specific intent to defraud with respect to the RPA. Consistent with its earlier rulings, it also again granted defendants’ motions to dismiss as to plaintiffs’ attempts to invalidate the RPA on the theory that defendants violated Insurance Code section 11735. The court denied as to plaintiffs’ UCL claim and unjust enrichment claim, and on the ground that plaintiffs lacked standing to seek injunctive relief and to seek restitution.

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-00158 and Pet Food Express Ltd. V. Applied Underwriters, Inc., Case No. 2:16-cv-012111 (E.D. Cal. Oct. 17, 2017).

This post written by Jeanne Kohler.

See our disclaimer.

ENGLAND’S HIGH COURT OF JUSTICE UPHOLDS ARBITRATION AWARD FINDING NO “SERIOUS IRREGULARITY”

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Claimant’s application under s. 68(2)(d) of the Arbitration Act 1996 alleged serious irregularity in the award of an arbitral tribunal alleging the tribunal failed to deal with all the issues that were put before it, and requested that the Court set aside or vary the award rather than remit it to the tribunal, as one of the arbitrators had acted inappropriately.

Claimant listed four aspects of its defense which were not addressed: (1) collateral estoppel; (2) conclusive evidence; (3) failure to meet the burden of proof; and (4) overstatement. The Court concluded none of the complaints were justified.

With respect to the alleged inappropriate behavior, claimant’s party-appointed arbitrator sent an email to its counsel, not copying the petitioner or any other member of the Tribunal, stating that “both party-appointed arbitrators were upset by the conduct of the chairman,” expressed highly negative views about him, and that the party-appointed arbitrator was going to ask the chairman to resign. The email was marked “highly confidential: not to be used in the arbitration” and explicitly stated that the email “could not be referred to in the arbitration or afterwards.” The chairman did not resign and the arbitration proceeded “with no suggestion that there were any other internal difficulties on the Tribunal.”

The Court was astonished that the email was sent, stating that “any communication by one arbitrator with one party which concerns the arbitration may give rise to concerns that that arbitrator is not acting fairly or impartially for the simple reason that it creates the impression of a close relationship between the arbitrator and the party and rises the specter of other such communications.” Despite this, the Court did not set aside the Award, noting that disclosure of the email “might have created a somewhat awkward working environment, it is not something that experienced, professional people could not deal with.”

With respect to the claimant’s request for confidentiality, the Court concluded that as the Award was not confidential by a U.S. lawsuit, it was “unrealistic to argue that [claimant] continues to have any expectation of confidentiality in the Award.”

Symbion Power LLC v. Venco Imtiaz Construction Company, Case No: HT-2016-000211 (Royal Courts of Justice, London March 10, 2017)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

TENNESSEE REVISES RULES REGARDING CAPTIVE INSURANCE COMPANIES

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The Tennessee Department of Commerce and Insurance has substantially revised its rules for captive insurance companies. Significant changes include:

  • a requirement that captive insurance companies use the OPTins system to file premium tax, penalty, and interest forms and payments;
  • a requirement that annual financial reporting be done using a form included in the appendix to the new rules;
  • revisions to the rules regarding the required financial reports, audits, and examinations of captive insurance companies, including the addition of requirements specific to “protected cell captive insurance companies,” which may omit from their financial reports individual cells for which no premiums were collected or policies written during the relevant year;
  • authorization for the commissioner to order “limited scope examinations” to be conducted upon captive insurance companies “when questions arise about a captive insurance company’s solvency, governance, operating practices, or other” areas determined by the commissioner;
  • a provision allowing a captive insurance company to request that the commissioner or a designee conduct an “informal visitation” of such company, for which a report making suggestions and recommendations will be issued.

These rules will become effective December 21, 2017, and will be codified at Tenn. Comp. R. & Regs. 0780-01-41-.01 through 0780-01-41-.15.

This post written by Jason Brost.

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