Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT COMPELS DISCOVERY OF REINSURANCE ALLOCATION INFORMATION

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In an action involving claims under facultative reinsurance for the reinsurance of asbestos risks, the reinsurer sought discovery of documents concerning the allocation of losses among the reinsurers on the program, and concerning other reinsurance.  The court, in a perfunctory Order, granted the motion to compel with respect to the allocation of asbestos losses to other reinsurers in the program at issue, but denied the motion to compel with respect to information regarding other reinsurance.  Lamorak Insurance Co. v. Everest Reinsurance Co., Case No. 15-13425 (USDC D. Mass. May 26, 2017).

This post written by Rollie Goss.
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AUTOMOBILE WARRANTY SERVICES PROVIDER LOSES ON MOTION TO DISMISS DEALERSHIP’S COUNTERCLAIMS AND REQUEST FOR PRELIMINARY INJUNCTION

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In a dispute between providers of automobile warranty services (“Plaintiffs” or “American Guardian”) and a Florida car dealership (“Defendants” or “JCR”), an Illinois federal district court recently dealt two blows to the Plaintiffs by refusing to dismiss the Defendants’ counterclaims and refusing to grant a requested preliminary injunction. The parties entered into an agreement in which American Guardian would provide warranties to JCR’s customers, as well as administer and approve payments for all claims under the American Guardian contracts sold by JCR, secure insurance policies indemnifying the parties against obligations, and administer reimbursement to JCR for the cost of repairs. The agreement contained a modification clause requiring amendments be supplemented by writing, which the parties utilized to make subsequent changes, including adding a production agreement requiring JCR to sell a minimum number of warranty and service contracts monthly for five-years and inserting an exclusivity provision.

The parties’ relationship eventually broke down and JCR stopped selling American Guardian contracts, leading American Guardian to file suit. Defendants counterclaimed for fraud in the inducement as well as breach of contract and the duty of good faith and fair dealing. The fraudulent inducement counterclaim was based on an American Guardian agent’s alleged representation before the master agreement was signed to JCR’s owner that Plaintiffs would establish an “offshore reinsurance company” to allow JCR to retain the warrant payments paid by customers as well as earn investment income. The good faith and fair dealing claim was based on American Guardian’s alleged failure to monitor JCR’s loss ratio on claims made by its customers on American Guardian contracts. The district court denied Plaintiffs’ motion to dismiss on each of these claims.

First, Plaintiffs challenged the fraud counterclaim’s sufficiency of pleadings regarding the elements of fraud and the specificity of pleadings in light of Rule 9(b)’s heightened pleading standard. The court rejected Plaintiffs’ argument that JCR’s allegations regarding false statements were non-actionable as representations of intent regarding future conduct. The court read the claim as one for promissory fraud rather than fraudulent inducement, finding that JCR had sufficiently alleged that American Guardian’s agent made a fraudulent promise regarding the formation of a reinsurance company with no intent to fulfill it. Furthermore, the court rejected Plaintiffs’ argument that the agreement’s integration clause was a no-reliance clause which precluded a fraud suit. Finally, the court found that JCR had alleged its fraud claim with sufficient particularity as to “when” the fraudulent promise occurred.

Second, Plaintiffs challenged the good faith and fair dealing counterclaim only on damage grounds—that any excess payments on claims would harm Plaintiffs, and not Defendants, because only American Guardian was responsible for payment on claims. The court concluded this misread the agreement, which provided for both parties making payments for repairs and expenses incurred by JCR customers, and thus declined to dismiss the claim. Interestingly, the court did go on to note “a few of the intricacies at play” with the claim that Plaintiffs did not mention in their motion but which might affect the claim later in the litigation—a bone thrown by the court to counter Plaintiffs’ “misapprehension of many of the salient issues” in the case.

The district court also denied Plaintiffs’ request for a preliminary injunction blocking Defendants from selling vehicle service contracts and related warranty products on behalf of Plaintiffs’ competitors. The court held that Plaintiffs had failed to show a likelihood of success on the merits because they failed to adequately address the host of Defendants’ affirmative defenses that would preclude recovery. The court noted that for the defenses of estoppel and accord and satisfaction in particular, the Plaintiffs introduced inapposite evidence or no evidence at all, thus failing to show a likelihood of overcoming those defenses. Furthermore, the court noted, Plaintiffs’ requested injunction of preventing JCR’s sales of competitor warranties would do nothing to redress the alleged injury (denied profits on JCR’s warranty sales). Nor had Plaintiffs shown that loses could not be compensated for purely by monetary damages later at trial, that waiting for a final judgment would fail to redress their injury, or that their goodwill had been harmed in any way. Thus, the court refused to impose a preliminary injunction.

Am. Guardian Warranty Servs., Inc. v. JCR-Wesley Chapel, LLC, Case No. 16 C 11407 (USDC N.D. Ill. May 22, 2017)

This post written by Thaddeus Ewald .

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COURT MUST RULE ON MOTION TO COMPEL ARBITRATION FIRST

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Plaintiff sued his former employer in a putative class action alleging that a payroll practice violated Pennsylvania law. The defendant filed a motion to compel arbitration and a separate motion to dismiss. The district court opted to “delay ruling” on the motion to compel arbitration and proceeded to deny the motion to dismiss. The former employer appealed. The Court of Appeal found that the district court erred in not ruling on the motion to compel arbitration first, vacated, and remanded for the district court to consider the motion to compel arbitration in the first instance.

The Court held that the Federal Arbitration Act requires that the gateway issue of arbitrability must be addressed first. Therefore, once a motion to compel arbitration is filed the court must refrain from further action until it determines arbitrability.  The court noted that there is an exception if the record is unclear as to the agreement to arbitrate, in which case limited discovery should be permitted limited to the issue of arbitrability. Since the plaintiff did not deny receipt of and consent to the agreement to arbitrate, and did not seek discovery with respect to arbitrability, the district court should have proceeded to consider the motion to compel arbitration before considering the pending motion to dismiss. Silfee v. Automatic Data Processing, Inc., No. 16-3725 (3rd Cir. June 13, 2017).

This post written by Rollie Goss.
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BANKRUPTCY COURT REQUIRES AN MF GLOBAL HOLDINGS BERMUDA REINSURER TO POST $15 MILLION BOND BEFORE DECIDING MOTION TO COMPEL ARBITRATION

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In the most recent decision in an ongoing dispute between MF Global Holdings Ltd. and its (re)insurers, the Bankruptcy Court for the Southern District of New York ordered Allied World to post a $15 million bond before the court would consider its pending motion to compel arbitration. As previously reported on this blog, the Bankruptcy Court found the Bermuda Insurers violated the Barton Doctrine by initiating suits in Bermuda which resulted in anti-suit injunctions. Following that decision the Bermuda Insurers dismissed the Bermuda actions and the anti-suit injunctions were lifted. MF Global Holdings has since reached a settlement with one Bermuda Insurer and has been able to respond to another Bermuda Insurer (Allied World)’s pending motions to dismiss and to compel arbitration in Bermuda.

In response MF Global Holdings argued that, pursuant to New York Insurance Law § 1213, Allied World was required as an unauthorized foreign insurer to post a bond sufficient to secure payment of any possible final judgment (or procure a license to do insurance business in the state) before it filed any pleading in the proceeding against it. Allied World contended that its motions are not “pleadings” covered by the statute, its policy was not issued or delivered in New York (and thus not subject to section 1213), and that the statute is preempted by the New York Convention. Concluding that Allied World cannot “so easily avoid” the protections provided by New York Insurance Law, the Bankruptcy Court rejected each of those arguments in an opinion dated June 12, 2017.

First, the court rejected the reading of the term “pleading” offered by Allied World. Allied World claimed the statute covered only pleadings that defend against the complaint on the merits, such as an answer, but the court relied on precedent interpreting the bond requirement broadly to include motions to dismiss or compel within the definition of “pleading.” Second, the court rejected the notion that Allied World delivering the insurance policy to MF Global’s Bermuda broker meant that it did not deliver a policy in New York and come under the purview of New York Insurance Law. To accept that argument would allow foreign unlicensed insurers to subvert the law’s intent of regulating such insurers, the Court found, by using a broker or intermediary to physically deliver a policy that the insurer knew would provide coverage to a New York company insuring risks in New York. Finally, the court found no conflict between section 1213 and the New York Convention.

The court, however, did not require a bond in the full $60 million amount requested by MF Global. Instead, the court used its discretion to fix the bond amount at $15 million—the policy limit of Allied World’s policy—before it would consider the insurer’s pending motion to compel arbitration or to dismiss.

In re: MF Global Holdings Ltd., Case No. 16-01251 (Bankr. S.D.N.Y. June 12, 2017)

This post written by Thaddeus Ewald .

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MONTANA ENACTS CAPTIVE INSURANCE LAW IMPACTING RECIPROCAL AND DORMANT INSURERS

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On May 4, 2017 Montana enacted a new law that will remove the requirement that reciprocal captive insurers have 25 or more persons domiciled in Montana. The law also permits captive insurers to go into dormancy. The certificate of dormancy is subject to expiration at the end of a five-year period and includes a $1,000 annual dormancy tax and a requirement to maintain paid-in capital and surplus of not less than $25,000. Previously, a captive that no longer desired to operate would terminate its license and pay no insurance premium tax after termination. The law also removes the requirements of examinations and investigations of companies existing under a certificate of dormancy. The law went into effect upon its approval on May 4, 2017. 2017 Montana S.B. 245.

This post written by Michael Wolgin.

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