Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SECOND CIRCUIT FINDS ARBITRATOR DID NOT COMMIT A MANIFEST DISREGARD OF THE LAW IN DISPUTE OVER CONSTRUCTION WORK AT THE WHITESTONE BRIDGE

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In a dispute between a construction company hired by New York State to replace a portion of the Whitestone Bridge and a steel company regarding the timeliness of certain deliveries related to the project, the Second Circuit Court of Appeals affirmed the confirmation of the roughly $6.5 million net arbitration award in favor of the construction company. The steel company contended that the arbitrator committed a “manifest disregard of the law” by disregarding an order issued by a New Hampshire court in a related action. The order contained statements suggesting that the steel company was not liable in the instant dispute. The Second Circuit, however, rejected the steel company’s argument, agreeing with the lower court that there was “ample support for the arbitrator’s ruling” that the cited language from the New Hampshire court’s order was only dicta.

The steel company also argued that the arbitrator manifestly disregarded the terms of a “Letter Agreement” between the parties, but the court found that there was insufficient evidence to conclude that arbitrator had no “colorable justification” for finding that the alleged agreement was never finalized and was not binding. The court also rejected an argument from the steel company that the arbitrator erroneously imposed liability on the company for a time period that was not covered by the parties’ agreements. The court held that the steel company failed to show beyond speculation why the arbitrator decided to award certain percentages of the claims at issue. The court also held that to the extent the steel company was arguing that the arbitrator manifestly disregarded the evidence, the Second Circuit “does not recognize” that reason as “a proper ground for vacating an arbitrator’s award.” Tully Construction Co., Inc. et al. v. Canam Steel Corp., Case No. 16-1324-cv (2d Cir. Mar. 23, 2017).

This post written by Michael Wolgin.

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COURT UPHOLDS ARBITRATION AWARD DESPITE CHALLENGE TO ARBITRATOR’S USE OF EXCLUDED EVIDENCE

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Jersey Shore University Medical Center discharged a staff nurse employee for her actions when a female patient was assaulted by another patient in the nurse’s assigned work area. A labor organization that represents employees at the medical center, submitted a grievance to arbitration on behalf of the discharged nurse, pursuant to the parties’ collective bargaining agreement. The arbitrator issued an opinion and award which rescinded the medical center’s decision to terminate the nurse and replaced it with a suspension without pay for time served. The arbitrator based his decision on a number of factual findings, including findings related to three pieces of evidence (a medical record, a record of post-incident staffing changes, and the nurse’s work history) that the arbitrator excluded or never heard at the hearing.

The medical center filed an action in court to vacate the award, arguing that (1) the arbitrator disregarded certain evidentiary rulings made at the arbitration hearing and (2) the award was a “manifest disregard of the law.” The medical center explained that the arbitrator’s exclusion of certain pieces of evidence at the hearing and subsequent reliance on that evidence in his ruling, unreasonably prejudiced the medical center’s right to a fair hearing and contradicted the arbitrator’s own legal rulings. The court, however, disagreed and denied the medical center’s petition to vacate the award. The court found that the medical center failed to demonstrate that any of the three evidentiary issues amounted to misconduct or prejudice. The court also found that “even if ‘manifest disregard or the law’ remains a viable argument in the Third Circuit in the wake of Hall Street Associates, [the medical center] has failed to meet the relevant standard.” Jersey Shore University Medical Center v. Local 5058, Health Professionals & Allied Employees, AFT/AFL-CIO, Case No. 16-cv-04840 (USDC D.N.J. Mar. 16, 2017).

This post written by Gail Jankowski.

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PUTATIVE CLASS ACTION INVOLVING A PATENTED REINSURANCE ARRANGEMENT FOR WORKERS’ COMPENSATION COVERAGE LARGELY SURVIVES DISMISSAL

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The case is pending in a federal district court in New York, and involves three allegedly interconnected contracts purportedly “designed to circumvent [state] insurance laws,” including the laws of New York. The three contracts include: (1) a workers’ compensation insurance contract between a licensed insurer and an insured; (2) a reinsurance contract between the licensed insurer and an affiliated reinsurer; and (3) a “reinsurance and profit sharing” contract between the reinsurer and the insured. The plaintiffs (insured employers) allege that the “reinsurance and profit sharing” contract was an illegal contract of insurance that modified the workers’ compensation insurance contract issued by the licensed insurer. The plaintiffs also claim that the “reinsurance and profit sharing” contract was materially misleading, and misled insureds to assume liability for a portion of the losses they believed they had insured. Additional claims asserted by the plaintiffs include breach of contract, rescission, violation of New York law prohibiting deceptive trade practices, and unjust enrichment. The defendants (various alleged members of the Berkshire Hathaway Group) moved to dismiss the complaint for failure to state a claim.

In a lengthy opinion, the court granted in part and denied in part the motion to dismiss. Regarding claims for rescission based on alleged violations of the New York Insurance Laws governing workers’ compensation insurance, the court granted dismissal, reasoning that enforcement of those laws rests with the Superintendent of Insurance and that no private right of action exists. The court permitted claims for rescissory damages to proceed however, as reimbursement of amounts charged and paid over and above the filed rates of the policies is contemplated by New York law and “promotes the legislative purpose of the NYIL to ensure that parties adhere to filed rates.” The court also held that the claims for breach of contract (based on plaintiffs’ contention that the reinsurance and profit sharing contract modified the workers’ compensation insurance policies) and unjust enrichment, should survive dismissal. As to the claims for deceptive trade practices, the court held that for certain named plaintiffs, the claims were time-barred, but for other plaintiffs, the claims could proceed. National Convention Services, L.L.C. et al. v. Applied Underwriters Captive Risk Assurance Co., Inc., et al., Case No. 15-cv-07063 (USDC S.D.N.Y. Mar. 9, 2017).

This post written by Michael Wolgin.

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APPELLATE COURT PRECLUDES ASSIGNEE OF REINSURANCE CLAIMS FROM RE-LITIGATING LACK OF ENTITLEMENT TO ARBITRATION

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In 1986, Pine Top Insurance Company became insolvent and was placed into liquidation. The liquidator eventually sold Pine Top’s accounts receivable, including reinsurance claims, to an entity named Pine Top Receivables of Illinois, LLC. In 2015, Pine Top Receivables sued Transfercom, Ltd. to collect on an assigned reinsurance claim and sought to compel Transfercom to arbitrate the claim pursuant to the underlying reinsurance agreement.

Several years earlier, Pine Top had unsuccessfully sued a Uruguayan entity in a federal district court in Illinois, and similarly sought to compel arbitration. That court and the Seventh Circuit Court of Appeals determined that Pine Top Receivables had no right to enforce the arbitration clause in the reinsurance contract because, among other reasons, the assignment of the reinsurance claims from the liquidator conveyed only the right to collect the debt but did not convey the contractual right to demand arbitration.

In the current litigation, Transfercom argued that the Seventh Circuit’s decision collaterally estopped Pine Top Receivables from relitigating the issue of whether it was entitled to demand arbitration with respect to the assigned reinsurance claims. The trial court agreed with Transfercom and denied Pine Top’s motion to compel. And on appeal, the court affirmed the judgment of the trial court. The appellate court reasoned that the earlier case resolved on the merits the issue of whether Pine Top Receivables was entitled to demand arbitration of claims assigned to it by the liquidator. The appellate court further explained that once the Seventh Circuit resolved the arbitration issue in Pine Top Receivables’s interlocutory appeal in the earlier litigation, the issue could not be revisited and the judgment on that issue was final. Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., Case No. 15 L 009145, (Ill. App. Ct. Mar. 31, 2017).

This post written by Gail Jankowski.

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NINTH CIRCUIT AFFIRMS DISTRICT COURT’S DISMISSAL OF PLAINTIFF’S PROCEDURAL DUE PROCESS CLAIM

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In this action, plaintiff Sherri Roberts appealed a Montana federal district court’s order which granted her former employer/defendant Lame Deer Public Schools’ summary judgment motion because plaintiff’s procedural due process claim was foreclosed by claim preclusion, and that even if preclusion did not bar her claim, her claim failed on the merits because she was accorded adequate procedural due process.

On appeal, plaintiff argued that her post-termination arbitration hearing and the statutory limits on judicial review of the arbitration’s result violated her procedural due process rights. The Ninth Circuit, however, noted that plaintiff could have brought her procedural due process claim in Montana state court where she challenged the arbitrator’s decision, but instead she chose only to attempt to vacate the arbitration decision in that previous lawsuit. Therefore, the Ninth Circuit held that claim preclusion bars her from litigating a claim that she could have raised in the earlier proceeding. Further, the Ninth Circuit held that even if plaintiff’s claim was not barred by claim preclusion, the Montana district court correctly concluded that plaintiff was accorded adequate procedural due process. She received a hearing before she was terminated by Lame Deer Public School. She was able to challenge her termination in an arbitration, as mandated by the collective bargaining agreement to which she was a party. After losing the arbitration, she was then permitted to challenge the arbitrator’s decision in court, which she did in Montana state court and lost. Thus, according to the Ninth Circuit, she received more than adequate procedural due process. The Court noted that Montana law does not give her a right to a court hearing on the merits post-arbitration, and that Montana’s statute, limiting judicial review of arbitration decisions, does not violate the Constitution. In fact, the Ninth Circuit noted that the Montana statute is “in many ways identical to its (constitutional) federal version, 9 U.S.C. § 10,” which affords “an extremely limited [judicial] review authority, a limitation that is designed to preserve due process but not to permit unnecessary public intrusion into private arbitration procedures.” (citations omitted).

Roberts v. Lame Deer Public Schools, No. 12-cv-0083 (9th Cir. Mar. 13, 2017).

This post written by Jeanne Kohler.

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