Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT AFFIRMS DISMISSAL OF CEDENT’S CLAIMS ASSERTING REINSURANCE PREMIUM FRAUD SCHEME, BASED ON EXPIRATION OF LIMITATIONS PERIOD

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The appellant (Guarantee Trust) had forwarded reinsurance premiums to the reinsurer to be held in a custodial account for the payment of claims. Guarantee Trust initially sued Kribbs, the founder of the reinsurer, alleging that he acted in concert with an employee inside Guarantee Trust’s organization to improperly obtain the funds from the account for Kribbs’ own use. During depositions (six years after filing suit), Guarantee Trust discovered the identity of two of its own employees, whom Guarantee Trust named in its re-filed action after having voluntarily dismissed the initial complaint. To address the running of the statute of limitations, Guarantee Trust argued that the limitations period was tolled due to fraudulent concealment. The trial court, however, dismissed Guarantee Trust’s claims, finding that Guarantee Trust provided no reason why it could not have discovered its claims against the two employees sooner through reasonable diligence.

On appeal, the court addressed the tolling issue under both the discovery rule and fraudulent concealment, and affirmed the circuit court’s decision. The court found it was significant that Guarantee Trust knew at the time it filed its original complaint that one of its own employees was involved in the alleged wrongdoing, and that Guarantee Trust had been provided in 2008 with discovery responses disclosing a short list of potential witnesses that included the two employees later addressed at depositions. The court concluded that the trial court correctly determined that Guarantee Trust failed the “reasonable diligence” test. The Court also found no fraudulent concealment during discovery that would toll the statute of limitations. Guarantee Trust Life Ins. Co. v. Kribbs, Case No. 15 L 11262, (Ill. App. Ct. Dec. 29, 2016).

This post written by Gail Jankowski.

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FIFTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION AGAINST NON-SIGNATORY TO ARBITRATION AGREEMENT

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The appeal arose from a consolidated case, originally three separate class actions, resulting from the alleged underfunding of Singing River Health System’s pension plan and KPMG’s alleged failure to detect that underfunding due to allegedly faulty auditing. The plaintiff from one of these class actions (Lowe) brought claims against KPMG but did not expressly rely upon KPMG’s engagement letters with Singing River – which included arbitration clauses. KPMG argued that, notwithstanding that the members of the Lowe class were not signatories to the engagement letters, the Lowe claims implicitly relied on the engagement letters because the letters “defined the scope of KPMG’s contractual role.” Therefore, KPMG argued, “equitable estoppel compel[led] the submission of Lowe’s claims to arbitration.”

Both the district court and the Fifth Circuit disagreed with KPMG’s argument. The Fifth Circuit explained, “the present case is based on tort rather than contract law. While it might well be easier for Lowe to pursue her claims based on the Engagement Letters, the standard for showing ‘direct dependence’ is what she pled, not what she might have pled … “ And, because Lowe’s tort claims were not “directly dependent” on the engagement letters, the Fifth Circuit found that KPMG’s motion was properly denied. The Court did go on to note, however, that if Lowe “later attempts to claim a remedy under the Engagement Letters, KPMG can seek relief including a renewed request for arbitration.” Thomas Jones, et al. v. Singing River Health Services Foundation, et al., Case No. 16-60263 (5th Cir. Jan. 5, 2017).

This post written by Brooke L. French.

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FIFTH CIRCUIT FOLLOWS PRECEDENT IN UPHOLDING EMPLOYMENT AGREEMENT CONTAINING CLASS ACTION WAIVERS

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Relying on D.R. Horton Inc. v. NLRB and Murphy Oil, USA v. NRLB, the Fifth Circuit found the NLRB’s decision that Citibank violated the National Labor Relations Act by requiring employees to sign an arbitration agreement containing collective/class action waiver was erroneous and reversed the Board’s decision.

As noted earlier this week, the Supreme Court will hear oral argument on this issue.

Citigroup Tech. Inc., et al. v. NLRB, No. 15-60856 (USCA 5th Cir., Dec. 8, 2016)

This post written by Nora A. Valenza-Frost.

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NEW YORK APPELLATE COURT AFFIRMS DENIAL OF MOTION FOR CHANGE OF VENUE

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In this reinsurance coverage case in a New York court, certain defendant reinsurers made a motion for a change of venue under NY CPLR 510 (2) on the ground that “an impartial trial could not be had” based on the fact that plaintiffs’ former lead counsel, who was scheduled to be a fact witness, had retired from law firm practice and was now a judge of that same court’s Commercial Division. The New York court denied the motion, and the reinsurers appealed.

On appeal, the New York appellate court noted that the lower court correctly determined that the reinsurers’ motion for a change of venue was untimely, in that they waited “until the eve of trial,” after plaintiffs’ former counsel’s was designated a judge of the court’s Commercial Division, which was nine months after he was first designated as a judge of the court. The court noted that all of the arguments raised by the reinsurers in support of the venue change when he was appointed to the Commercial Division existed at the time he was first appointed as judge of the court.

Noting that to succeed on a CPLR 510(2) motion, a movant must demonstrate by factual evidence that there is a strong possibility that an impartial trial cannot be had in the venue. But the New York appellate court concluded that the reinsurers’ arguments consisted not of factual evidence, but of conclusory allegations, beliefs, and suspicions. The court noted that “[t]here is no personal relationship between the trial judge and the judge-witness and no personal relationship between the judge-witness and the party. The mere fact that the jury may discover a nonparty witness is a judge is not enough to prejudice a defendant where a plaintiff does not seek to exploit the witness’s status to enhance his credibility. Moreover, the same concerns would exist, no matter in what venue the case is tried.” Thus, the court affirmed the lower court’s denial of the reinsurers’ motion.

U.S. Fidelity & Guaranty Co. v. American Re-Insurance Co., No. 604517/02 (N.Y. App. 1st Dep’t Dec. 22, 2016).

This post written by Jeanne Kohler.

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SUPREME COURT GRANTS CERTIORARI IN THREE CLASS ARBITRATION WAIVER CASES AMIDST DEVELOPING FEDERAL CIRCUIT SPLIT

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The Supreme Court will hear argument on whether arbitration provisions in employment agreements which waive class actions are a violation of the National Labor Relations Act (“NLRA”). The three cases are as follows:

In Epic Systems Corp. v. Lewis (USSC 16-285), which we previously reported on June 6, 2016, the Seventh Circuit held a provision of an employment agreement mandating that wage-and-hour claims could be brought only through individual arbitration and that employees waived collective action was prohibited under Section 7 of the NLRA.

In Ernst & Young, et al. v. Morris, et al. (USSC 16-300), which we previously reported on September 12, 2016, the Ninth Circuit similarly held that the waiver in the Ernst & Young employment agreement violated Sections 7 and 8 of the NLRA.

In NLRB v. Murphy Oil USA, Inc., et al. (USSC 16-307), which we previously reported on September 6, 2016, the Fifth Circuit held the opposite, finding that requiring employees to sign arbitration agreements requiring them to resolve employment-related claims through individual arbitration and waiving their rights to pursue a class arbitration to be valid.

The three cases were consolidated and a total of one hour is allotted for oral argument.

This post written by Nora A. Valenza-Frost.

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