Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

DISTRICT COURT FIND NO FEDERAL QUESTION JURISDICTION IN ACTION CHALLENGING ARBITRATION AWARD BASED ON ARBITRATOR BIAS

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A federal court has rejected the attempt of the losing party in an arbitration to engage in discovery regarding the potential bias of the arbitrator, finding that it had no jurisdiction over the matter because it did not involve a question of federal law and that it was not appropriate to allow discovery on this issue based solely on speculation.
The arbitration arose out of a dispute over allegedly defective work performed by a building contractor, BCI Construction, Inc., resulting in an award of approximately $586,000 in damages and attorney’s fees to 797 Broadway Group, LLC. BCI filed an action to vacate the award in federal court on the basis that the arbitrator was biased and moved to compel the arbitrator’s deposition.

The district court began with the question of it jurisdiction over the matter, repeating the well-established rule that the Federal Arbitration Act does not create an independent basis for jurisdiction in federal court. BCI argued that it was premature to consider the jurisdictional question because the court had “not had the opportunity look through the pleadings and conduct an analysis of the underlying dispute to determine if jurisdiction is appropriate.” The court disagreed, finding that there was no apparent federal question in the underlying dispute and that it would not allow BCI to depose the arbitrator “in hopes that an underlying federal question will present itself.” Having found no basis for federal jurisdiction, the court dismissed the matter. The court also awarded 797 Broadway’s motion for costs and an attorney’s fees, finding that BCI had failed to “articulate[] a colorable reason why the parties’ underlying dispute presented a federal question.” BCI Construction, Inc. v. 797 Broadway Group, LLC, Case No. 1:16-cv-1077 (FJS) (N.D.N.Y. March 15, 2017)

This post written by Jason Brost.

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NEW JERSEY STATE COURT REFUSES TO BIND PLAINTIFFS TO A BERMUDA COURT JUDGMENT WHERE THEY WERE NOT PARTIES TO THAT ACTION

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A New Jersey state court recently held that the former shareholders of an insurance holding company suing its E&O insurers were not bound by a Bermuda court’s prior judgment where they were not parties to the suit in which the judgment was issued.

Raydon Underwriting Management Company (“Raydon”), as a managing general agent, purportedly gave bad advice to two operating companies (“Clarendon”) held by Lion Holding, Inc. Plaintiffs were former shareholders of Lion Holding. Plaintiffs sued Raydon in a Bermuda court for the allegedly bad advice that led to millions in losses. Shortly before the Bermuda court issued a judgment in that case, Travelers and ERSIC—Raydon’s E&O insurers—informed plaintiffs that they would not be covering the claims against Raydon. Thereafter, the E&O insurers filed suit in Bermuda against Raydon seeking a declaration that the E&O policy were void, and prevailed on that suit.

Plaintiffs filed the present action against the E&O insurers regarding the E&O insurance coverage, and the E&O insurers defended the suit by claiming plaintiffs were bound by the judgment in the Bermuda action. The court disagreed, holding that the Bermuda judgment was not binding against the plaintiffs because they were not made parties to the suit. The court applied the general rule that a party cannot be bound by a judgment in a case in which it was not a party, finding none of the six exceptions laid out in Taylor v. Sturgell applicable. It noted that the plaintiffs’ interests were not adequately represented in the Bermuda case and in fact were inimical to the E&O insurers’ interests in that case.

Furthermore, the court refused to apply the doctrine of collateral estoppel to plaintiffs’ claims because the issues were not identical. In the Bermuda case, the issue was whether the E&O coverage was procured by fraud in the inducement. In this case, the issue was whether Travelers should be compelled to provide coverage.

Lastly, the court refused to decline jurisdiction under forum non conveniens, finding that the lower court had erroneously weighed the factors based on the assumption that the Bermuda judgment was binding on plaintiffs. The factors were split, but there was no basis for finding New Jersey a demonstrably inappropriate venue.

Ferguson v. Travelers Indem. Co., Case No. A-0028-15T1 (N.J. Super. Ct. App. Div. Mar. 10, 2017)

This post written by Thaddeus Ewald .

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EXTENSIVE USE OF ATTORNEY-CLIENT MEMO IN PRIOR LAWSUIT DESTROYED ATTORNEY-CLIENT PRIVILEGE

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Insured companies sued Travelers for allegedly misrepresenting the scope of coverage afforded for asbestos injury claims under certain Excess Overlayer Indemnity policies. At issue has been the discoverability of a memorandum prepared by Travelers in preparation for and involuntarily produced by Travelers in an earlier related lawsuit in federal court in Pennsylvania and, ultimately, the Third Circuit Court of Appeals. See Travelers Cas. & Sur. Co. v. Ins. Co. of N. Am., previously discussed here. That case involved a dispute surrounding layers of insurance provided for losses relating to breast implants and chemical products. In preparation for that litigation, Travelers requested that its general counsel prepare a reinsurance analysis memo addressing the reinsurance implications of different coverage scenarios for the breast implant claims.

In the present lawsuit, plaintiffs requested production of this memo on the theory that it likely contained information relevant to the current plaintiffs’ claims and Travelers’ prior interpretation of its policies. Travelers, however, refused to produce the memo, claiming that it was protected by attorney-client privilege. A January 2017 discovery ruling ordered an in camera review of the memo. Following the in camera review, the court has now ruled that the significant discussion and quotation of the memo’s contents by the Third Circuit in the earlier lawsuit destroyed the privilege. While the general rule is that a party does not waive privilege for documents which it is compelled to produce, “the exhaustive discussion of it by the Third Circuit makes it impossible to consider it” privileged. The order cited the fact that the memo was admitted as an exhibit at trial as well as the fact that the Third Circuit extensively quoted from the memo and summarized testimony about it, all of which appeared in a published court ruling. As such, the memo was in the public domain, notwithstanding that the court records were later sealed. Travelers was ordered to produce the sections of the memo addressed by the Third Circuit to plaintiffs’ counsel “for attorney’s eyes only.” ITT Corp. v. Travelers Cas. & Sur. Co., Case No. 12-38 (USDC D. Conn. Feb. 27, 2017).

This post written by Gail Jankowski.

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NEW YORK FEDERAL COURT DENIES CROSS MOTIONS FOR SUMMARY JUDGMENT ON FOLLOW THE SETTLEMENTS DOCTRINE

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In a lengthy February 24, 2017 opinion, a New York federal court denied cross motions for summary judgment on the Follow the Settlements Doctrine, filed by Utica Mutual Insurance Company and Utica’s reinsurer, Fireman’s Fund Insurance Company. Utica sought to enforce certain reinsurance contracts against FFIC with respect to $35,000,000 Utica spent in settling a dispute with its insured, Goulds, regarding coverage for thousands of asbestos claims filed against Goulds in the 1990s. It is undisputed that, in settling the case, Utica and Goulds agreed that there were aggregate limits in Utica’s primary policies, which would allow penetration of the umbrella policy (this was a central issue in the underlying case, as the primary policies, dated 1966-1972, had been lost) and that the $325,000,000 settlement would come from Utica’s umbrella policy, thereby triggering the reinsurance policies.

Under the Follow the Settlements Doctrine, “as long as the cedent settles in good faith, reasonably, and within the applicable policies, the reinsurer is bound by the settlement and cannot relitigate the underlying coverage issues.” A cedent’s motive to reach reinsurance, while singularly unimportant, may, however, invalidate the follow the settlement protection if it causes the cedent to make an unreasonable settlement allocation.

Utica argued that the undisputed facts established a reasonable basis for the settlement, while FFIC argued that they established Utica’s bad faith. The court disagreed with them both, finding that, while the central facts were undisputed, reasonable inferences could lead to either conclusion and, as such, summary judgment was inappropriate. Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., Case No. 6:09-cv-00853 (USDC N.D.N.Y. Feb. 24, 2017).

This post written by Brooke L. French.

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