Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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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EIGHTH CIRCUIT HOLDS THAT QUESTION OF CLASS ARBITRATION IS FOR COURTS, NOT ARBITRATORS, TO DECIDE

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In this case, the question presented was whether a court or an arbitrator should determine whether an arbitration agreement authorizes class arbitration. The U.S. Supreme Court has not yet resolved this issue. Several circuit courts of appeal have considered this issue, but this was the first time it was presented in the Eighth Circuit.

The Eighth Circuit held that courts, not arbitrators, should answer the “who decides” question when the arbitration agreement at issue is silent on the subject, joining the Third, Fourth, and Sixth Circuits. In so holding, the court concluded that the question of “who decides” is a substantive question of arbitrability rather than a preliminary procedural question. Therefore, according to the Eighth Circuit, courts are the proper authority to answer the question, whereas arbitrators decide preliminary procedural questions. The Eighth Circuit noted that courts must play a threshold role to determine whether parties have submitted a particular dispute to arbitration because such issues presumptively lie with the courts. The Eighth Circuit also expressed some concerns about class arbitration, including the loss of confidentiality, due process concerns, and the lack of appellate review. Thus, the Eighth Circuit reversed the district court’s order denying plaintiff-appellant’s motion for summary judgment because the district court erred when concluding that the question of class arbitration was procedural rather than substantive. The court also remanded to the district court to determine whether there was a contractual basis for class arbitration.

Catamaran Corporation v. Towncrest Pharmacy et al., No. 16-3275 (8th Cir. July 28, 2017).

This post written by Jeanne Kohler.

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COURT DECLINES TO DETERMINE WHETHER REINSURANCE SYNDICATE FOR WHICH A COMPANY FRONTED SHOULD BE INVOLVED IN AN ARBITRATION

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The parties in this case presented to a court the issue of whether a reinsurance syndicate for which Federal Insurance acted as “a front” was a real party in interest and should be involved in an arbitration between Federal Insurance and its reinsured. Although the Petitioner and Respondent agreed that the parties’ dispute was governed by an arbitration clause, the parties differed as to whether the reinsurer syndicate would have a role in the arbitration and, if so, the parameters of that role. With respect to that issue, Respondent’s cross-petition requested, in part, that the Court order Petitioner to arbitrate “which entities are the real parties in interest in the arbitration”.

Relying on the Supreme Court’s decision in PacifiCare Health Sys., Inc. v. Book, the Court stated that “[w]hether this issue will ever arise, whether [the syndicate’s] involvement will raise an issue of arbitrability that should be resolved by the Court, and whether the arbitrator will ever rule on it, is entirely speculative at this juncture.” The Court compelled arbitration, and declined to decide whether Respondent’s hypothetical motion would raise an issue of arbitrability. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Federal Ins. Co., 1:16-cv-08821 (USDC S.D.N.Y. June 8, 2017)

This post written by Nora A. Valenza-Frost.
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