Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

STATE CONTRACT LAW GOVERNS WHICH PARTIES MAY ENFORCE AN ARBITRATION AGREEMENT

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Courts must apply state contract law principles to determine who may enforce an arbitration agreement.  These “background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)” are not altered by substantive federal arbitration law.  Applying Wisconsin law to a claim for equitable estoppel, the court held that a company may not enforce an arbitration agreement contained in a contract between an employee and a second company, where the first company did not know of the arbitration agreement and therefore could not have relied on it in employing the individual.  In this case, the employing company was not permitted to force an employee to arbitrate a sexual harassment claim where the employee had actually contracted with a staffing company, rather than the employing company.  The employing company did not know of the agreement until discovery, and therefore could not possibly have relied on it in choosing to employ the individual.

The court distinguished another case in which a non-party to an arbitration agreement was permitted to compel arbitration, where the plaintiff employee sued both the staffing company she had actually contracted with and the employing company.  “Once a court knows a dispute is going to be arbitrated, the reasons for requiring claims against affiliated parties to be arbitrated become more powerful.”  Here, the employee did not sue the staffing company, only the employing company, therefore this enhanced basis for compelling arbitration did not exist.   Scheurer v. Fromm Family Foods, LLC, No. 16-3327 (7th Cir. July 17, 2017).

This post written by Benjamin E. Stearns.
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COURT FAVORS CANDIDATE’S EXPERIENCE IN SELECTING UMPIRE FOR INSURANCE ARBITRATION

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The court was petitioned to appoint an umpire when the arbitrators appointed by the litigants – an insurer and certain insureds – failed to do so. The insureds opposed the petition, arguing that the party arbitrators should be ordered to select one of the candidates that the arbitrators had been proposing. The arbitration agreement stated, however, that “if the two arbitrators fail to agree on a third party arbitrator within 30 days of their appointment, [then] either party may make application to a court of competent jurisdiction in . . . New York.” Section 5 of the FAA also directs the district court to “designate and appoint an arbitrator . . . or umpire, as the case may require,” following “a lapse in the naming of an arbitrator . . . or umpire.” The court thus held that the arbitration agreement and the FAA authorized the court to appoint an umpire.

The court then considered the field of proposed candidates, and selected one of the individuals proposed by the insurer. The court rejected the insureds’ argument that the selected umpire was likely to be partial to the insurer due to his certification by ARIAS (which, according to the insureds, could be biased towards insurance companies). The court found that the insureds’ candidates were less qualified in that they did not have any personal experience serving as an arbitrator or as an umpire. The insurer’s candidates, in contrast, had previously served as umpires in numerous arbitrations. The court selected the most experienced candidate among the group proposed by the insurer, explaining that, while certification with a particular organization or specific arbitration experience is not required to serve as an umpire, “reason dictates” that those credentials should be determinative. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Beelman Truck Co., Case No. 17-CV-2946 (USDC S.D.N.Y. July 17, 2017).

This post written by Gail Jankowski.
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CFPB ISSUES FINAL RULE PROHIBITING CLASS ACTION WAIVER ARBITRATION AGREEMENTS IN CERTAIN CONSUMER FINANCIAL CONTRACTS

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The Consumer Financial Protection Bureau issued a final rule on July 10, 2017, prohibiting providers of certain consumer financial products and services from including within consumer agreements a requirement that any future disputes that might otherwise be the basis of a class action to instead be arbitrated on an individual basis. The rule also requires providers to insert a provision into their arbitration agreements acknowledging this limitation. The rule is based on the Bureau’s finding that pre-dispute arbitration agreements “are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.”

The final rule also requires providers that use pre-dispute arbitration agreements to submit records relating to arbitral and court proceedings to the Bureau. The rule applies to providers engaged in extending consumer credit, extending or brokering automobile leases, providing debt management or debt settlement services, providing assistance in avoiding foreclosure or modifying consumer credit, providing check cashing, collection or guaranty services, and collecting debt arising from any of these services, among other consumer services and products. The rule becomes effective September 18, 2017, and consumer agreements entered into as of March 19, 2018, must comply with the rule. 12 C.F.R. Part 1040 (July 10, 2017).

This post written by Benjamin E. Stearns.
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COURT UPHOLDS ATTORNEY-CLIENT PRIVILEGE DESPITE ADVICE OF COUNSEL DEFENSE IN TAX CASE INVOLVING REINSURANCE TRANSACTIONS

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This case involves a tax dispute centering on whether certain “purported” insurance and reinsurance transactions “lacked economic substance.” Following an in camera review of communications identified in Respondents’ privilege logs, the Court denied Petitioner’s motion to compel the production of communications between Respondents’ and counsel. Petitioner’s argued the privilege was waived upon Respondents’ assertion of the advice of counsel defense, and that the substance of the insurance transactions were put in issue, including all underlying facts claimed protected by the attorney-client privilege. Respondents’ argued the subject matter in the withheld emails is not related to the reasonable cause and good-faith defense raised in their petition before the Tax Court.

The Court, looking at “counsel, ownership history, management, insured operation/ownership, and personnel” and the “real-world structure of the relationships, including the joint retention of the law firm and need for legal advice on identical issues and concerns”, found a common-interest privilege existed “despite the separate ownership of the later captives”, and thus, there was no third-party waiver.

With respect to whether Respondents’ advice of counsel or “reasonable cause” defense put the communications at issue, the Court held that, because the Tax Court litigation is in an early stage, if Respondents persist in asserting the “reasonable cause” defense, then “disclosure of privileged documents may later result before the Tax Court. This, however, is a strategic choice that must be made by Respondents in the Tax Court proceedings at some later point in time. Should Respondents make the strategic choice to persist with their ‘reasonable cause’ defense and produce the privileged communications setting forth the legal advice they purportedly relied on, the Tax Court will be in a far better position to determine which of these emails are related to the legal advice.” United States of America v. Owensboro Dermatology Assocs., P.S.C., et al., 4:16-mc-00003, 00004, 00005 (USDC W.D. Ky. July 7, 2017)

This post written by Nora A. Valenza-Frost.

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PENNSYLVANIA FEDERAL COURT GRANTS MOTION TO DISMISS BASED ON LACK OF SUBJECT MATTER JURISDICTION

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Plaintiff RAD Manufacturing, LLC (“RAD”), a Delaware corporation with its principal place of business in Pennsylvania, and its insurer and reinsurer (as subrogees) brought an action in federal court in Pennsylvania against Advanced Fabrication Services, Inc. (“AFS”), a Pennsylvania corporation with its principal place of business in Pennsylvania. The underlying dispute involves allegations that RAD had hired and contracted with AFS to design, install and service a boiler control system on its premises, and the boiler dry-fired and caused damage to RAD’s property. RAD filed a motion to dismiss primarily based on lack of subject matter jurisdiction.

The Pennsylvania federal court noted that RAD’s presence in the action destroyed complete diversity and that RAD, the insured, is a necessary party and thus an indispensable party, and thus cannot be dismissed from the action to cure the jurisdictional defect. In particular, the court noted that there is another state court action pending involving the same parties. Thus, the court was particularly concerned with RAD’s ability to protect its interest in the state court if the federal action proceeded without RAD and was resolved first, and thus would likely have a res judicata effect on that state court action.

Thus, the Pennsylvania federal court held that RAD, the insured/subrogor, is an indispensable party and that the action cannot proceed without RAD, and as such, the complaint was dismissed for lack of subject matter jurisdiction.

RAD Manufacturing LLC, et al. v. Advanced Fabrication Services, No. 3:16-2138 (M.D. Pa. June 20, 2107).

This post written by Jeanne Kohler.

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