Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NY HIGHEST COURT ASKED CERTIFIED QUESTION ON REINSURER LIABILITY CAP

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The Second Circuit certified to the New York Court of Appeals the question of whether its 2004 decision (Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004)) imposed
“either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total insurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?”

Relying on the Second Circuit’s decision in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., the SDNY previously determined the limits in the reinsurance certificates capped the reinsurer’s liabilities for both the cedent’s indemnity payments (“losses”) and its defense costs (“expenses”). Courts across the United States have reached different results on this issue.

Noting the potential economic impact of a reversal of Bellefonte and Unigard Security Insurance Co. Inc. v. North River Insurance Co., the panel stated its intention “is to seek the New York Court of Appeals as to whether a consistent rule of construction specifically applicable to reinsurance contracts exists” and that the “interpretation of the certificates at issue here is a question of New York law that the New York Court of Appeals has a greater interest and greater expertise in deciding.”

Global Reinsurance Corp. of Am. v. Century Indem. Co., Docket No. 15-2164-cv (2d Cir. Dec. 8, 2016).

This post written by Nora A. Valenza-Frost.

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SIXTH CIRCUIT AFFIRMS OHIO FEDERAL COURT’S RULING DENYING MOTION TO COMPEL ARBITRATION BECAUSE ARBITRATION CLAUSE IN AN EXPIRED AND DISPUTED CONTRACT WAS NOT ENFORCEABLE

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This case involves a dispute between Shandong Linglong Tire Co. Ltd., a Chinese tire manufacturer, its Thai and U.S. subsidiaries (collectively, “Linglong”) and Horizon Tire, Inc., Linglong’s U.S. distributor.

A brief history of the case is as follows. In 2015, Horizon sued Linglong in California federal court, alleging that Linglong had not repaid a $3.6 million loan, failed to fulfill a November 2014 order for tires, and failed to honor Horizon’s exclusive distributorship rights for Linglong’s tires. Linglong then sued Horizon in Ohio federal court, seeking, among other things, a declaration that Horizon did not have an exclusive distributorship arrangement with Linglong. Horizon dismissed its California suit, and filed an answer and counterclaims in Ohio. Linglong amended its complaint, and Horizon then filed an answer and amended counterclaims for declaratory relief, breach of contract, and misappropriation of trade secrets, among other claims. Linglong filed a motion under Rule 12(b)(1) to dismiss or stay Horizon’s amended counterclaims pending arbitration based on an arbitration clause in a Collaboration Agreement between them entered into in 2006, which expired in 2011 (the “Agreement”). The Ohio district court denied the motion, reasoning that Horizon’s claims were not based on the Agreement, that the Agreement had expired, and that Linglong had waived any right to arbitrate. Linglong then appealed to the Sixth Circuit, arguing that the arbitration clause survived the expiration of the Agreement.

The Sixth Circuit, in reviewing the Ohio district court’s refusal to compel arbitration de novo, noted that an arbitration clause survives the expiration of a contract only when the dispute at issue “arises under the contract,” which occurs in two circumstances relevant to the current dispute. First, the Court stated that a dispute arises under the contract when a “majority of the material facts and occurrences” giving rise to the dispute occurred prior to the expiration of the contract at issue. In this case, the Court noted that the vast majority of events at issue occurred after the expiration of the Agreement. Second, a dispute arises under the contract when the contractual right at issue survives the expiration of the contract itself. Although the Sixth Circuit noted that one might interpret Horizon’s claims for permanent right of exclusive distributorship to arise out the Agreement, the Court also noted that Horizon itself had stated that “to the extent that Horizon had a claim based on a continuing obligation created by the Collaboration Agreement, Horizon has unequivocally and irrevocably waived it.” The Sixth Circuit then found that the Agreement’s arbitration clause does not apply to Horizon’s claims and that Horizon is estopped from making any claim based upon the Agreement. Thus, the Court affirmed the Ohio district court’s order denying Linglong’s motion.

Linglong Americas Inc. et al. v. Horizon Tire Inc., No.16-3520 (6th Cir. Dec. 1, 2016).

This post written by Jeanne Kohler.

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PARTY CANNOT APPEAL DECISION THAT DISTRICT COURT DID NOT MAKE REGARDING MOTION TO VACATE ARBITRATION AWARD

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The Sixth Circuit has declined to rule on a motion to vacate an arbitration award, which was brought at the same time as a successful motion to dismiss the action for forum non conveniens, when the district court had not decided that motion. The Court found that no exceptional circumstances existed that would justify ruling on an issue not addressed by the district court and that, given its other ruling, the district court was correct not to address the motion.

The case was initially brought in federal court in Tennessee by Milan Express, which alleged various claims against Applied Underwriters relating to an agreement to provide workers’ compensation coverage. The parties later agreed to submit the matter to arbitration, but the arbitration panel determined that the arbitration clause in the parties’ agreement was unenforceable. Returning to federal court, Applied Underwriters filed two motions: a motion to dismiss for forum non conveniens and a motion to vacate the arbitration award. The district court granted the motion to dismiss but did not rule on the motion to vacate. Applied Underwriters appealed, claiming that the court’s non-ruling on the motion to vacate was “in effect a denial of the motion.” Applied Underwriters further contended that the arbitrators, in finding the arbitration clause unenforceable, “exceeded their powers and acted with manifest disregard for the law,” and that both parties agreed that this presented a pure question of law that the Sixth Circuit could decide. The Court disagreed, however, finding that the district court’s silence could not be construed as confirming the validity of the arbitration award, an issue the district court was constrained not to decide once it decided that the Nebraska courts had exclusive jurisdiction over the case. Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance Co., Inc., No. 16-5270 (6th Cir. Dec. 2, 2016)

This post written by Jason Brost.

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ARBITRATION AWARD IN INTERNATIONAL COAL SHIPPING DISPUTE UPHELD AS WITHIN TRIBUNAL’S AUTHORITY

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An arbitration tribunal awarded damages to Sino East after Kailuan International wrongfully terminated a coal shipping contract after the delivery was delayed. The two Hong Kong-based companies’ agreement for Sino East to ship coal from Virginia to China was thrown into conflict when Sino East was delayed in loading and shipping the coal. Sino East petitioned for arbitration under the agreement when discrepancies in shipping documents and an ultimately late delivery of coal to China prompted Kailuan to terminate the contract and refuse payment for the shipment. The arbitration tribunal considered whether Kailuan wrongfully terminated the contract and whether Sino East failed to timely present the required shipping documents, and awarded damages to the latter. Kailuan then moved to vacate the arbitration award in New York federal court.

Under the limited review of arbitral decisions afforded to courts under the Federal Arbitration Act (“FAA”), the court analyzed whether the arbitrator’s consideration of Kailuan’s untimely exercise of its termination rights under the contract overstepped the panel’s authority to consider the issues submitted to it. The court concluded that the tribunal acted squarely within its authority in determining the issue of whether Kailuan adequately preserved its termination rights was critical to the determination of the wrongfulness of the ultimate termination—one of two issues submitted to the panel. Because the arbitrators acted within the scope of their authority, and did not exhibit manifest disregard for the law or the agreement, the court denied Kailuan’s motion to vacate.

Kailuan (Hong Long) Int’l Co., Ltd. v. Sino East Minerals, Ltd., Case No. 16-2160 (USDC S.D.N.Y. Dec. 9, 2016).

This post written by Thaddeus Ewald .

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FOURTH CIRCUIT REFUSES TO VACATE FINRA ARBITRATION AWARD, DESPITE PARTY’S CLAIM THAT IT HAD NO OPPORTUNITY TO PARTICIPATE IN SELECTION OF ARBITRATORS AND CHALLENGES TO DAMAGES CALCULATION

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UBS Financial Services’ motion to vacate a FINRA arbitration award was denied, despite its claims that the panel was improperly chosen and that the panels damages award was flawed in that it did not impose an offset.

UBS brought the arbitration against Padussis seeking repayment of a loan, and Padussis counterclaimed. FINRA mailed a list of potential arbitrators to the parties, which then had twenty days to rank and strike the arbitrators. Padussis did so, but UBS did not. After the deadline passed, UBS moved to extend its time to rank and strike, claiming it never received the list. FINRA denied this motion and selected a panel of three arbitrators based on Padussis’ preferences. The panel ultimately awarded over $1.6 million to UBS and over $900,000 to Padussis, but did not provide that these amounts would offset. Padussis then claimed that he could not pay the $1.6 million award “due to a statutory lien and the prospect of bankruptcy,” such that UBS would receive nothing yet need to pay Padussis more than $900,000.

UBS claimed the award should be vacated because the panel was not selected in accordance with the parties’ agreement. The Court disagreed, finding that FINRA had followed its own rules by mailing the list to the parties and selecting arbitrators based on the responses it received. Further, the Court held that whether to grant UBS an extension to respond to the list was a procedural question that was completely within FINRA’s discretion.

UBS also asked the Court to impose an offset, but the Court declined to do so, noting that the “arbitration award expressly denied ‘[a]ny and all relief not specifically addressed’ by the award, and the award did not mention an offset.” Imposing an offset would thus be a modification of the award and “would not effectuate the intent of the arbitrators,” whose intent could not be assumed. Such a presumption of an offset was made part of FINRA’s rules for awards issued after October 24, 2016, but this change came too late to assist UBS. UBS Financial Services, Inc. v. Padussis, No. 15-2145 (4th Cir. Nov. 22, 2016)

This post written by Jason Brost.

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