Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

REINSURANCE ARBITRATION AWARD STANDS IN FACE OF CHALLENGES TO RATIONALITY AND IMPARTIALITY OF DECISION

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Yosemite Insurance Co. (“Yosemite”) lost its challenge to an arbitration award that found Nationwide Mutual Insurance Co. (“Nationwide”) was not required to cover a share of Yosemite’s settlement with the State of California regarding pollution losses from the 1950s. After the arbitral board decided in Nationwide’s favor, Yosemite challenged the impartiality and rationality of the award.

In deciding Yosemite’s challenge, the court emphasized that the bases to vacate an arbitration award under the Federal Arbitration Act (“FAA”) are narrow and impose a steep burden on the challenging party. The dispute was based on whether an exclusion for “contamination and pollution” applied to any claims made or only where the party’s “main operations” related to “contamination and pollution.” The court found that while it believed the operative language was ambiguous, the arbitrators’ decision was “anchored” in the text of the agreement. Because the decision did not stray from an interpretation and application of the agreement, or exhibit a manifest disregard for the law, the court lacked authority under the FAA to second-guess the arbitral panel’s award.

Yosemite also challenged the arbitral panel’s impartiality because one of the three members failed to disclose that he had previously represented a client in a case adverse to Yosemite—a representation Yosemite’s counsel himself did not recall. The court applied a four-factor test borrowed from the Fourth Circuit to determine whether the inadvertent failure to disclose the representation would cause a reasonable person to conclude the arbitrator was biased. The court found there was no non-speculative suggestion of a conflict of interest, no suggestion of antipathy against Yosemite, and that the ten-year old adverse representation failed to impugn the impartiality of the arbitrator.

Despite rejecting Yosemite’s challenges, the court declined to award attorneys’ fees and costs to Nationwide because the claims were not objectively unreasonable. The court did however, “encourage” Yosemite’s counsel to review the strict and demanding showings required when seeking to vacate an arbitral award.

Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., Case No. 16-5290 (USDC S.D.N.Y. Nov. 10, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

See our disclaimer.

ARBITRATION CLAUSE IN BODY OF REINSURANCE AGREEMENT GOVERNS OVER PROVISION IN ENDORSEMENT

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In a dispute between First Mutual, a ceding company, and its reinsurer, Infrassure, over which of two competing arbitration clauses in a reinsurance contract governed, the Second Circuit affirmed a lower court decision in favor of the reinsurer and found the arbitration provision contained in the body of the operative agreement controlling over a second provision located in an endorsement.

First Mutual, the insurance arm of New York’s Metropolitan Transit Authority, sought to resolve its claims against Infrassure arising from damage caused by Superstorm Sandy in a London arbitration. The endorsement relied upon by First Mutual contained the second arbitration clause, which was titled “LONDON ARBITRATION AND GOVERNING LAW (UK AND BERMUDA INSURERS ONLY).” Infrassure argued the endorsement was inapplicable because it was not a UK or Bermuda insurer. Another provision in the agreement, the so-called ‘Titles Clause,’ provided that titles in the agreement existed for convenience and were not deemed to limit or affect the provisions they titled. First Mutual argued that the endorsement’s title limiting the provision to UK and Bermuda Insurers could not limit the substance of that provision.

The Second Circuit ruled that the reinsurance agreement was unambiguous in this respect, and that the arbitration clause contained in its body controlled, because the second clause was contained in a section expressly limiting its effect to UK and Bermuda insurers. Furthermore, the court noted that First Mutual’s construction of the Titles Clause would render several critical clauses within the reinsurance agreement meaningless because the titles provided critical context regarding what the language therein governed.

Infrassure, Ltd. v. First Mut. Transp. Assurance Co., No. 16-306 (2nd Cir. Nov. 16, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

See our disclaimer.

COURT UPHOLDS PRIOR RULING THAT UNFILED RATES CHARGED UNDER REINSURANCE AGREEMENT WERE NOT VOID

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On July 21, 2016, we reported on a putative class action filed in a California U.S. district court by Shasta Linen Company against Applied Underwriters, Inc. and its affiliate entities, alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated California insurance law and regulations. Shasta asserted that the defendants unlawfully used a Reinsurance Participation Agreement (RPA) to control workers’ compensation rates (and thus, charge higher rates) without first having the RPA filed and approved by the department of insurance as required by law. The court dismissed Shasta Linen’s claims to the extent that they sought to invalidate the RPA’s rates on the theory that the RPA was an unfiled plan pursuant to section 11735 of the California Insurance Code. The court reasoned that the use of a rate that has not been filed is not an unlawful rate unless and until the commissioner conducts a hearing and disapproves the rate.

Subsequent to the court’s ruling, the California Commissioner issued an order in an administrative proceeding, finding that the RPA was void because it had not been filed and approved by the department. Shasta Linen then sought reconsideration of the court’s prior dismissal, arguing that the Commissioner’s Order was a “change in controlling authority meriting reconsideration” by the court. On October 17, 2016, the court held that the Commissioner’s order misinterpreted the law, and was not “controlling.” The court denied reconsideration, but it did so “without prejudice as to attempts by plaintiff to invalidate the [RPA] on grounds other than the theory that defendants violated” section 11735. Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-00158 (USDC E.D. Cal. Oct. 17, 2016).

This post written by Michael Wolgin.

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COURT GRANTS DEFAULT JUDGMENT CONFIRMING ARBITRATION AWARD, WITH A LESSON ON JURISDICTION

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Choice Hotels filed an application to confirm an arbitration award of over $247,000 for the alleged breach of a franchise agreement by two defendants, which failed to timely commence construction of a hotel. The defendants had not participated in or submitted any written materials for arbitration. However, the court denied Choice Hotels’ first motion for a default judgment because it failed to adequately establish subject matter jurisdiction and jurisdiction under the FAA. The Court explained that the FAA is not an independent source of jurisdiction, and further held that Choice Hotels’ failed to plead the requirements of diversity jurisdiction. Additionally, because there was no record in the application or the arbitration award itself that the arbitration occurred in Maryland, which was required by the arbitration agreement, the court could not determine that jurisdiction existed under the FAA. Choice Hotels filed a second motion for default judgment, which successfully alleged diversity jurisdiction and established that the case was within the scope of the FAA. The Court then granted the motion for default judgment and confirmed the award. Choice Hotels Int’l, Inc. v. HSL Inv., Inc., Case No. TDC-15-2386 (USDC D. Md. Oct. 20, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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THIRD CIRCUIT REVERSES ORDER DENYING ARBITRATION, RULING THAT STATE LAW PROHIBITING ARBITRATION OF INSURANCE MATTERS CHALLENGED REINSURANCE CONTRACT AS A WHOLE

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Applied Underwriters Captive Risk Assurance Company appealed from the denial of its motion to compel arbitration in a dispute related to a reinsurance participation contract with South Jersey Sanitation Company. The trial court denied the motion because it held that Nebraska law: (1) governed the dispute, (2) prohibits arbitration provisions that relate to insurance policies, as the relevant provision here purportedly does (according to South Jersey), and (3) preempted the FAA under the McCarran-Ferguson Act. The Third Circuit reversed, holding that it was for the arbitrator to determine the precise nature of the reinsurance participation contract, and whether it fell under an exception to the Nebraska law. Similarly, the Third Circuit held that South Jersey’s contention that the contract was procured based on fraud, implicated the contract “as a whole,” rather than specifically the arbitration provisions. “Therefore,” the court ruled, “the question of whether the [contract’s] arbitration provision is enforceable under Nebraska law is a question for the arbitrator,” and not the court. The court vacated the judgment and remanded to the trial court. Because the default location set forth in the contract was not within the district in which the petition to compel arbitration was filed, as is required by the FAA, the trial court was directed to determine the proper forum for arbitration, and “how to proceed” if the trial court is not able “to compel arbitration in the default location provided for in the contract.” South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co., Case No. 14-4010 (3d Cir. Oct. 25, 2016).

This post written by Michael Wolgin.

See our disclaimer.