Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SEVENTH CIRCUIT AFFIRMS DISMISSAL OF POST-LIQUIDATION REINSURANCE CLAIM AS TIME-BARRED

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We previously posted on the trial court’s ruling addressing the statute of limitations in this case on June 23, 2016. By way of background, the underlying contract between the insurer and the reinsurer required the insurer to calculate the balances due to the respective parties and send statements to the reinsurer reflecting those balances on a quarterly basis.  The liquidator complied with this requirement for a number of years until it stopped without explanation.  Then, 15 years later, the liquidator sent the reinsurer a statement netting all of the balances purportedly due to the parties under the contract and a demand for $2 million.

The plaintiff assignee of the reinsurance balance (Pine Top) argued that the Illinois statute governing set-offs and counterclaims permitted the liquidator to ignore the underlying contractual provisions requiring quarterly statements and to instead wait until the end of the liquidation, at which point it would submit one bill netting all of the balances due to the parties. The Seventh Circuit disagreed. Although the court acknowledged a possible exception for cases where a liquidator proposes a time for netting and a judge approves that proposal after notice and a hearing, the opinion states that in the absence of such an agreement, the underlying contractual provisions continue to apply.  As a result, the liquidator’s demand for the balance due was barred by the statute of limitations.  Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 16-3499 (7th Cir. Aug. 7, 2017).

This post written by Benjamin E. Stearns.
See our disclaimer.

FIRST CIRCUIT UPHOLDS ARBITRATOR’S DENIAL OF ARBITRABILITY OF REINSURANCE AGREEMENT, FINDING NO MANIFEST DISREGARD OF THE LAW

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Mountain Valley Property, Inc (MVP) entered into a three-year reinsurance participation agreement with Applied Underwriters Captive Risk Assurance Co. Inc. (AUCRA), which contained a mandatory arbitration clause as well as a Nebraska choice-of-law clause.   Thereafter, MVP filed a complaint asserting breach of contract and various tort claims, alleging that the reinsurance was overpriced and imposed unlawful fees. After removal to federal court, AUCRA counterclaimed in the amount of the outstanding premiums.

The trial court referred the case to arbitration for a determination of arbitrability, whereupon the arbitrator decided that the case was not arbitrable. The arbitrator reasoned that the FAA, if applied to enforce the arbitration clause, would “invalidate, impair, or supersede” the Nebraska Uniform Arbitration Act (NUAA) by requiring the parties to an insurance-related contract to arbitrate — which is exactly what the NUAA forbids.  Therefore, the arbitrator concluded that the McCarran-Ferguson Act applied and the FAA was reverse-preempted by NUAA, which, in turn, precluded the case from being arbitrated as a matter of law.

The First Circuit, reviewing de novo, affirmed, finding no manifest disregard of the law in the arbitrator’s determination that the NUAA bans arbitration of insurance-related cases, regardless of the parties’ intent to arbitrate. Specifically, the First Circuit reasoned that the arbitrator’s decision was not “unfounded in reason and fact” or “based on reasoning so palpably faulty that no judge, or group of judges, ever could conceivably have made such a ruling.” Mountain Valley Property, Inc. v. Applied Risk Services., Inc., No. 16-2189 (1st Cir. July 13, 2017).

This post written by Gail Jankowski.
See our disclaimer.

FOURTH CIRCUIT REVERSES RULING THAT REINSURANCE AGREEMENT IS AN “INSURANCE CONTRACT” UNDER VIRGINIA LAW

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Applying the doctrine of judicial estoppel, a district court refused to compel arbitration finding that the arbitration clause in a reinsurance agreement was unenforceable under a Virginia statute that voided a mandatory arbitration clause in an “insurance contract.” On appeal, the issue was whether an arbitrator can be delegated the authority to decide if a contract is an “insurance contract” under the statute. The Fourth Circuit held that the district court properly refused to compel arbitration, but committed reversible error by applying judicial estoppel to reach that conclusion.

The contract here was a Reinsurance Participation Agreement (“RPA”). An arbitration clause in the RPA had a “delegation provision” granting authority to resolve all questions of arbitrability to the arbitrator. This included the right to decide if the RPA was an “insurance contract” under Virginia law, and, in turn, whether the arbitration clause was void. The Fourth Circuit narrowed the issue to the enforceability of the delegation provision itself and applied a two-prong test: (1) did the insured specifically challenge the delegation provision, not the entire arbitration clause; and if so (2) was the provision unenforceable “upon such grounds as exist at law or in equity.”

The Court held that the first prong was satisfied because the insured challenged “any” arbitration provision in the RPA, and asserted that the delegation provision was unenforceable under Virginia law. It explained that, to grant an arbitrator the authority to answer a “core” question of Virginia insurance law—whether a contract is an “insurance contract”—would undermine “the precise outcome Virginia sought to prevent” in enacting the statute; namely, guaranteeing insureds access to Virginia courts. Thus, the Court found that delegation provisions in even “putative” insurance contracts governed by Virginia law are invalid, “at least to the extent such provisions authorize an arbitrator to resolve whether the contract at issue is an ‘insurance contract.’”

Finally, the Court held that the district court abused its discretion in applying judicial estoppel to preclude the insurer from arguing on the merits that the RPA was not an “insurance contract” for purposes of Virginia law. The Court therefore remanded the case for full briefing on that issue.

MinnieLand Private Dayschool, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 16-1511 (4th Cir. Aug. 11, 2017)

This post written by Alex Silverman.

See our disclaimer.

NINTH CIRCUIT FINDS PLAINTIFF ENTITLED TO TRIAL ON ISSUE OF WHETHER AN ARBITRATION AGREEMENT WAS EXECUTED

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Defendant provided the district court with copies of two contracts – a Reinsurance Participation Agreement and a Request to Bind – that were purportedly signed by Plaintiff’s CEO and contained arbitration clauses. However, Plaintiff submitted a declaration by the CEO’s son and successor, stating that “he is very familiar with his father’s signature an did not recognize the signatures or believe they were written by his father.”  Thus, the Court concluded Plaintiff raised a genuine issue of fact with respect to the execution of the agreements and was entitled to a trial pursuant to Section 4 of the FAA, as it states that “if the making of the arbitration … be in issue, the court shall proceed summarily to a trial thereof.”  9 U.S.C. § 4.

Arevalo Tortilleria, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 15-56830 (9th Cir. Aug. 4, 2017)

This post written by Nora A. Valenza-Frost.
See our disclaimer.

SIXTH CIRCUIT AFFIRMS VACATUR OF ARBITRATION AWARD BASED ON PRIOR TERMINATION OF SALES CONTRACT

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The Sixth Circuit has affirmed an order vacating an arbitration award, agreeing with the district court that the mandatory arbitration clause at issue was unenforceable upon termination of the agreement in which it was contained.

The plaintiff, Gridsmart Technologies, Inc. (“Gridsmart”), manufactured camera equipment that it sold to the defendant, Marlin Controls, Inc. (“Marlin”). The parties had an agreement granting Marlin the exclusive right to distribute Gridsmart’s products within a defined region of the United States (the “Agreement”). An arbitration clause in the Agreement required the parties to submit all disputes arising under it to the American Arbitration Association.

Gridsmart exercised its right to terminate the Agreement in June 2015. Thereafter, the parties tried to reconcile the handling of outstanding orders that Gridsmart first delivered to Marlin in September 2015. Marlin ultimately returned these items to Gridsmart, claiming it was unable to sell them due to a lost construction contract. Gridsmart nevertheless demanded payment for the items and Marlin refused. Gridsmart filed an arbitration claim to resolve the issue, but Marlin did not participate. As such, the arbitrator granted an award in favor of Gridsmart, which Gridsmart then sought to enforce against Marlin in a Tennessee state court action.

Marlin removed the enforcement action to district court and moved to have the award vacated. The district court granted the motion, finding that the arbitration clause in the Agreement did not survive after it was terminated by Gridsmart in June 2015. The Sixth Circuit affirmed. Under the plain language of the Agreement, the Court found it was clear that the parties’ rights as to orders outstanding upon termination were to be governed by a separate “mutual agreement.” No such agreement existed here. The Court ruled that, absent a separate contract concerning the handling of outstanding orders, it was equally clear that the parties rights under the Agreement with respect to such orders – including the right to enforce the arbitration clause – immediately ceased when the Agreement was terminated in June 2015.

The Court held that Tennessee Uniform Commercial Code demanded the same conclusion. It provided that when, as here, a party terminates a contract for the sale of goods, all executory obligations on both sides are “discharged.” Moreover, after finding that Gridsmart waived additional contractual interpretation arguments, the Court went on to reject them in dicta. It held that the presence of “survival” language in certain other provisions of the Agreement – but not in the arbitration clause – plainly demonstrated that the parties did not intend for the arbitration clause to survive upon termination of the agreement.

Gridsmart Technologies, Inc. v. Marlin Controls, Inc., No. 17-5121 (6th Cir. July 20, 2017).

This post written by Alex Silverman.
See our disclaimer.