Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UK SUPREME COURT CONFIRMS ENGLISH COURTS LACK JURISDICTION UNDER THE ARBITRATION ACT 1996 TO COMPEL PARTIES TO PROVIDE SECURITY WHEN RESISTING ENFORCEMENT OF ARBITRATION AWARDS UNDER THE NEW YORK CONVENTION

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As a condition to challenging enforcement or recognition of an arbitration award, the UK Supreme Court overturned a Court of Appeal decision which imposed a $100 Million security obligation on a New York Convention arbitral award debtor pursuant to Section 103(5) of the Arbitration Act 1996 (the “Act”).

Distinguishing Dardana v. Yukos, in which the court found there was limited power under Section 103(5) of the Act to order security in the instance of a further adjournment, the Supreme Court found that the Court of Appeals order directing the security obligation was not within the scope of the court’s jurisdiction. Here, an adjournment had not been granted, and thus there was no jurisdiction for the Court of Appeals to order the security.

Further, looking at articles V and VI of the New York Convention, which established a uniform approach for recognition and enforcement, the Supreme Court found the provision of security there was only to be used in cases where an adjournment was granted and the party was seeking to set aside or suspend the foreign proceeding’s award.

IPCO (Nigeria) Ltd. v. Nigerian National Petroleum Corp., [2017] UKSC 16 (United Kingdom Supreme Court, March 1, 2017)

This post written by Nora A. Valenza-Frost.

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LOUISIANA FEDERAL COURT FINDS REMOVAL PROPER AS DISPUTE COULD RELATE TO AN UNDERLYING ARBITRATION CLAUSE IN INSURANCE POLICY

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In this case, a Louisiana federal court denied a motion for remand of a former machinist’s asbestos-related claim, finding that an English insurer’s removal from state court was appropriate and that the dispute could relate to an underlying arbitration agreement contained in an insurance policy.

The background of this case can be found here. In short, plaintiff filed a personal injury action in Louisiana state court against defendants Cove Shipping, Inc. and Maritime Management Corp. (together, “Cove Shipping”), alleging that he now suffers from lung cancer as a result of asbestos exposure from years spent working as a machinist onboard several oil tankers in the early 1980s while he was working for Cove Shipping. Via the Louisiana Direct Action Statute, plaintiff also named West of England Shipowners Mutual Insurance Association, a P&I Club (“West of England”) as a defendant, for its role as Cove Shipping’s insurer during the years in question. West of England subsequently removed the action, invoking the removal provision of the Uniform Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”).

As justification for using the Convention for removal, West of England cited an arbitration clause found in its Club Rules that it contends were in effect at the time of plaintiff’s alleged employment and now apply to his lawsuit, notwithstanding the fact that plaintiff is a third-party to the insurance agreement between West of England and Cove Shipping. In his motion for remand, plaintiff made various arguments in support of the contention that he is not bound by the arbitration clause and, thus, the case should be remanded: First, West of England has failed to demonstrate it is entitled to arbitration under documents it submitted with removal as the arbitration agreement at issue was not attached. Second, English law forbids the application of this arbitration agreement to non-signatories such as plaintiff. Third, the arbitration agreement is unenforceable because the prohibitive costs of the agreement prevent plaintiff from vindicating his federal statutory rights. Fourth, West of England waived its right to arbitrate. Fifth, Jones Act Claims are not subject to arbitration. And sixth, the law of Louisiana forbids arbitration in insurance disputes, which does not run afoul of the Convention.

Rejecting all of plaintiff’s arguments and/or finding them premature merit-based challenges to arbitration, the Louisiana federal court denied the motion to remand, finding that removal of the direct action plaintiff’s lawsuit against a foreign insurer was appropriate based on the existence of an arbitration clause found in the Club Rules of the insurer. The court noted that what was at issue in the present motion was a jurisdictional question, and that the plaintiff is not left without redress, as merit-based arguments may be presented in the form of an opposition to a motion to compel arbitration, which is typically the first matter to be raised after removal under 9 U.S.C. § 205 of the Convention. Finally, the court found that the arbitration clause at issue could conceivably have an effect on the outcome of plaintiff’s lawsuit, such that the two are related, and that therefore section 205 of the Convention confers subject matter jurisdiction on the court, making removal of the case by West of England proper.

O’Connor v. Maritime Management Corp., et al., No. 16-16201 (E.D. La. Mar. 16, 2017).

This post written by Jeanne Kohler.

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CALIFORNIA SUPREME COURT FINDS WAIVER OF STATUTORY REMEDY IN ARBITRATION AGREEMENT CONTRARY TO PUBLIC POLICY

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“Agreements to arbitrate claims for public injunctive relief under [California’s Consumers Legal Remedy Act or Unfair Competition Law], or the false advertising law are not enforceable in California.” The California Supreme Court was tasked with determining whether an “arbitration provision is valid and enforceable insofar as it purports to waive [the Plaintiff’s] right to seek public injunctive relief in any forum.”

Looking at Plaintiff’s complaint and allegations, the Court determined the arbitration provision at issue did in fact waive Plaintiff’s right to request in any forum public injunctive relief, invalidating the arbitration provision. The Court found the California rule was not preempted by the FAA, as § 2 of the FAA “permits arbitration agreements to be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract.” Thus, arbitration agreements “like other contracts, may be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.” Here, the contract defense at issue is that “a law established for a public reason cannot be contravened by a private agreement”.

Sharon McGill v. Citibank, N.A., Case No. S224086 (Cal. Sup. Ct. April 6, 2017)

This post written by Nora A. Valenza-Frost.

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ARKANSAS REVISES REGULATION OF CAPTIVE INSURANCE COMPANIES TO CREATE INCORPORATED PROTECTED CELLS AND DORMANT CAPTIVE INSURANCE COMPANIES

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Arkansas has amended its statutory regulation of captive insurance companies in two significant ways. First, following the lead of several other states and foreign jurisdictions, the amendment provides for the creation of “incorporated protected cells,” which it defines as “a protected cell that is established as a corporation or other legal entity separate from the sponsored captive insurance company or producer reinsurance captive insurance company of which it is a part.” Second, it provides for the designation of a captive insurance company as a “dormant captive insurance company.”

Under the new regulation, the creation of an incorporated protected cell requires the prior written approval of the Arkansas insurance commissioner, and a protected cell may be converted into an incorporated protected cell “without affecting the protected cell’s assets, rights, benefits, obligations, and liabilities.” Once created, an incorporated protected cell may enter into its own contracts, and counterparties have no recourse against the sponsored captive insurance company and its assets “other than against assets properly attributable to the incorporated protected cell that is a party to the contract or obligation.”

The law defines “dormant captive insurance company” as “a pure captive insurance company, sponsored captive insurance company, or industrial insured captive insurance company that has: (1) Ceased transacting the business of insurance, (2) No remaining liabilities associated with insurance business transactions, or insurance policies issued before the filing of its application.” Such a company must apply for a certificate of dormancy, which is subject to renewal every five years. Once granted this certificate, a dormant captive insurance company must maintain unimpaired, paid-in capital and surplus of $25,000 and pay a periodic license renewal fee, but it is not subject to Arkansas’ minimum premium tax. Before it may resume issuing insurance policies, it must get approval from the commissioner of insurance.

This amendment made two other changes. First, it removed restrictions on the corporate forms that captive insurance companies may take, which were previously limited to domestic stock insurers, stock insurers with their capital divided into shares and held by shareholders, mutual insurers without capital stock, and reciprocal stock insurers, depending on the type of captive. Under the new law, any “captive insurance company may be formed and operated in any form of business organization authorized under Arkansas law and approved by the Insurance Commissioner.” Second, it gave the commissioner discretion to determine whether business written by a sponsored captive insurance company must be fronted by an insurance company, something that was previously mandatory. 2017 Arkansas Laws Act 370 (H.B. 1476)

This post written by Jason Brost.

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UK COURT REFUSES TO REMOVE ARBITRATOR FOR ALLEGED BIAS

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A court in the United Kingdom refused to remove an arbitrator for perceived bias where the arbitrator was appointed to arbitrate multiple disputes arising from the same underlying incident triggering insurance coverage. A company (“H”) was adjudged in a US proceeding to be liable and subsequently settled the claims before judgment. A Bermudan insurance company (“L”) wrote the top layer of H’s liability insurance and refused H’s claim for the full coverage of its layer, on the grounds that the settlement was not reasonable and L had reasonably not consented to it. The dispute was subject to arbitration in London, and the instant opinion addressed H’s arguments that the third, neutral arbitrator appointed (“M”) was partial and biased, warranting removal.

The claims of partiality concerned the revelation that M had accepted arbitral appointments in two other cases arising out of the same underlying incident and another party (“R”)’s disputes with its excess liability insurers—including a claim by R against L. H made three arguments regarding M’s conduct allegedly demonstrating bias: M’s acceptance of the R arbitral appointments, M’s failure to disclose those appointments, and M’s response to H’s challenge to his impartiality.

The court rejected the first argument, finding that no fair-minded or informed observer would doubt M’s impartiality because it was receiving remuneration for arbitrating other disputes involving L and that overlapping subject matter was a regular feature of international arbitration in London. The court rejected the second argument because—already having found the other arbitral appointments were not problematic—there was no reason to disclose the appointments; alternatively, the court found even if M should have disclosed the appointments, the failure to do so did not give rise to a real possibility of apparent bias. Finally, the court rejected the third argument, holding that if an arbitrator were biased merely because a party had challenged his impartiality, any party would be able to self-select neutral arbitrators by unjustifiably challenging disfavored arbitrator’s impartiality.

H v. L [2017] EWHIC 137 (Comm) (Mar. 3, 2017).

This post written by Thaddeus Ewald .

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