Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT FINDS THAT REINSURANCE TRANSACTION DID NOT BREACH INVESTMENT CONTRACT UNDERLYING AN ERISA PLAN

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MetLife acquired the rights to a fixed investment option contract with Midco, a trust established to administer a retirement plan for the employees of Midco International, Inc. Midco plan participants received interest each year pursuant to a “declared rate” which would be determined at MetLife’s discretion “from time to time.” Several years later, MetLife sold its 401(k) administration business to Great-West Life & Annuity Insurance Company in the form of a 100% indemnity reinsurance transaction, whereby the Midco assets backing the Midco contract were transferred to Great-West, and MetLife delegated responsibility for setting the declared rate to Great-West. MetLife informed Midco that its business had been transferred to Great-West and that Great-West would provide “recordkeeping and administrative services” going forward, but did not disclose that Midco’s assets would be transferred to Great-West and that Great-West would be delegated the responsibility to set the declared rate. The declared rate selected by Great-West in the subsequent years continually decreased, falling from 6.7% in 2007 to 1.2% in 2016. Later, upon learning that Midco’s assets were no longer with MetLife, Midco filed suit, alleging that Great-West’s control over the declared rate amounted to a breach of MetLife’s obligation to set the rate in good faith.

MetLife moved for summary judgment, which the court granted. The Court found significant that Midco provided no evidence that the parties expected that MetLife would not transfer assets or rate-setting responsibility to a third party. The court rejected Midco’s claim that MetLife’s lack of full disclosure about Great-West’s role in investment decisions violated the contract, stating, “as long as MetLife exercised its discretion in good faith, its failure to disclose how it exercised its discretion is not a breach of the implied covenant.” The Court also noted that Midco failed to provide evidence of industry custom to “show that delegating assets and responsibility to a third party without policyholder consent was an unusual act for an insurance company….” Midco Int’l, Inc. Employees Profit Sharing Trust v. Metro. Life Ins. Co., Case No. 14-9470 (USDC N.D. Ill. July 5, 2017).

This post written by Gail Jankowski.

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ELEVENTH CIRCUIT DEFERS TO ARBITRATOR’S INTERPRETATION OF FORUM SELECTION CLAUSE IN INTERNATIONAL DISPUTE AND AFFIRMS AWARD

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Questions of arbitral venue, even in international arbitration, are presumptively for the arbitrator to decide. The court so ruled despite arguments from an Israeli company that the arbitrator’s interpretation of an arbitration agreement with an American company violated Article V of the New York Convention and Section 10(a)(4) of the Federal Arbitration Act. The court’s decision was guided by a set of presumptions regarding the intent of the arbitrating parties. On the one hand, courts presume the parties intend courts to determine issues of “arbitrability” (i.e., whether the parties are bound by an arbitration clause or whether an arbitration clause applies to a particular controversy), but on the other, arbitrators are presumed to be the intended deciders regarding the “meaning and application of particular procedural preconditions for the use of arbitration.”

The court held that disputes over the interpretation of forum selection clauses presumptively fall into the latter category, because they are disputes over where an arbitration is conducted, not whether it is conducted. Therefore, when an arbitrator “even arguably” engages with the language of the venue provision in making his determination, the court must defer to that determination, “however good, bad, or ugly.” The court noted, however, that if the parties do not want the arbitrator determining the arbitral venue, they may limit the issues they choose to arbitrate. Bamberger Rosenheim 11th Cir 7.17.17, Case No. 16-16163 (11th Cir. July 17, 2017).

This post written by Benjamin E. Stearns.

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NEW YORK APPELLATE COURT SIDES AGAINST THE SECOND CIRCUIT AND HOLDS CLASS ACTION WAIVERS VIOLATE THE NLRA

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Plaintiffs, former insurance agents for defendants New York Life Insurance Company and its related companies, brought a putative class action seeking recovery for allegedly illegal wage deductions and violations of overtime and minimum wage laws. The main issue on appeal, and an issue of first impression for New York state courts, was the validity of an arbitration provision in one plaintiff’s agent contract that waived any right to a jury trial and agreed that no claim could be brought or maintained “on a class action, collective action or representative action basis either in court or arbitration.” The court held that arbitration provisions which prohibit class, collective, or representative claims violate the National Labor Relations Act (NLRA) and are therefore unenforceable. In addition, the Court agreed with the Seventh Circuit’s reasoning that arbitration provisions like the one at issue here fail to meet the criteria of the FAA’s Saving Clause for nonenforcement because the provision is unlawful under the NLRA. In holding that class waivers violated the NLRA, the court aligned itself with the Seventh and Ninth Federal Circuits and disagreed with the Second, Fifth, and Eighth Circuits. The Court noted that the Supreme Court would soon address this circuit split. Gold v. New York Life Ins. Co., Case No. 653923/12 (N.Y. App. Div. July 18, 2017).

This post written by Gail Jankowski.

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ILLINOIS COURT HOLDS THAT REINSURERS AND INSURER NEED TO FILE COMPLAINT IN LEGAL MALPRACTICE LAWSUIT IN THEIR OWN NAMES PURSUANT TO ILLINOIS STATUTE

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In this case, an Illinois appellate court held that Section 2-403 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-403, required the reinsurers and insurer of Developers Surety and Indemnity Co. (“DSI”) a surety, to file a complaint as plaintiffs against an attorney in their own names, or by the surety “for the use of” the reinsurers and the insurer, and thus dismissed DSI’s legal malpractice lawsuit.

The background of the case, which arose from an underlying construction dispute, can be found here. The University of Chicago hired a general contractor to construct a building, which subcontracted some of the work to F.E. Moran Inc. (“Moran”), which, in turn, subcontracted some of its work to 3D Industries Inc. (“3D”). DSI issued performance and payment bonds to 3D. 3D’s employees walked off the job, leaving 3D’s work incomplete. DSI retained Marc Lipinski as surety counsel. 3D then sued Moran in Illinois state court, claiming that Moran breached its contract by failing to make payments when due. 3D claimed that Moran’s failure to pay left 3D with inadequate funds to pay its employees, leading them to walk off the job. Moran counterclaimed against 3D for breach of contract and fraud. Moran added a third-party claim against DSI for failure to fulfill its duties as surety and for acting in bad faith. DSI’s general counsel later brought in another law firm to help with preparing for trial. DSI and Moran eventually settled, with DSI paying Moran $3.7 million. DSI then filed a complaint for legal malpractice against Lipinski and the firms at which he worked for breach of his duties as an attorney and that because of his failures, DSI lost the opportunity to settle for less than $3.7 million. In discovery, Lipinski requested information concerning DSI’s recovery from insurance and reinsurance for the settlement payment, to which DSI eventually admitted that an insurer and two reinsurers had paid a total of $2,901,914.05 of the total settlement plus costs, leaving DSI with unreimbursed damages of $1,871,378.18. Lipinski then moved in limine to bar DSI from recovering as damages amounts covered by the insurer and two reinsurers. The court held that the collateral source rule did not apply in legal malpractice actions and, thus, Lipinski could present evidence of DSI’s recovery from the insurer and the reinsurers and use that recovery to offset any damages awarded to DSI. DSI could then not prove its damage element (as it admitted it would have paid Moran an amount exceeding the amount left unreimbursed by the reinsurers and insurer), and the court dismissed the case.

DSI then appealed, arguing that the collateral source rule does not apply because the reinsurers and insurer do not count as collateral sources. The Illinois appeals court noted that DSI admitted that its reinsurers and insurer covered all of the damages it suffered due to Lipinski’s legal malpractice. Therefore, the appellate court ruled that Section 2-403(c) of the Illinois Code of Civil Procedure required DSI’s reinsurers and insurer to file the complaint against Lipinski in their own name, or for DSI to file the complaint ‘‘for the use of’’ the reinsurers and the insurer, as they were the real parties in interest. Thus, the court held that trial court did not err when it dismissed the complaint.

Developers Surety and Indem. Co. and Insco Ins. Services Inc. v. Lipinski, et al., No. 1-15-2658 (Ill. App. June 30, 2017).

This post written by Jeanne Kohler.

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NORTHERN DISTRICT OF ILLINOIS DISMISSES LAWSUIT INVOLVING REINSURANCE FOR PRIVATE MORTGAGE INSURANCE

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In a lawsuit filed by the Rehabilitator for a private mortgage insurance provider, the District Court found that the causes of action either failed to meet the Iqbal pleading standard, contained implausible allegations, or was barred by the protection of RESPA’s “safe harbor” provision and its four year statute of limitations.

The PMI program was described by the Court as follows: home purchasers seeking to borrow more than 80% of the home’s purchase price were able to do so if they purchased PMI to compensate the lender in case the borrower defaulted. “In order to protect themselves from losses due to defaults, insurance providers of PMI would purchase reinsurance in order to shift some of the risk of default. The PMI provider would pass on the reinsurance premium to the borrower in the form of a higher premium for the PMI. The PMI provider would split the premium with the reinsurer, which is called a ‘ceding payment’ in accordance with the risk assumed.”

With respect to the provisions of the PMI provider and the reinsurer, the Court found the provisions contained therein “say nothing which could give rise to a duty requiring [the reinsurer] to make any disclosures to the borrowers at all.” Furthermore, the Court found the Complaint did not allege “who the affected borrower was, the specific regulation violated, how it was violated, and most important, how [the PMI provider] was damaged.”

People of the State of Illinois, ex rel., Anne Melissa Dowling, Acting Director of Insurance of the State of Illinois, as Rehabilitator for Triad Guaranty Insurance Corporation and Triad Guaranty Assurance Corporation v. AAMB Reinsurance, Inc., and Bank of America Corporation, 1:16-cv-07477 (USDC N.D. Ill. June 1, 2017)

This post written by Nora A. Valenza-Frost.

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