Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

D.C. COURT DISMISSES DISPUTE OVER REINSURANCE OF FEDERAL CROP INSURANCE PROGRAM

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On September 20, a federal district court in the District of Columbia dismissed a lawsuit brought by reinsurers of the federal crop insurance program. The plaintiffs-reinsurers alleged that the Federal Crop Insurance Corporation (“FCIC”) improperly modified the actuarial methodology that set the premiums owed for several crops, including corn and soybeans, resulting in plaintiffs purportedly paying more than what was allegedly conveyed to them at the time of contracting. Indeed, the plaintiffs had entered into five-year standard agreements which they claimed included representations that the methodology used to determine the premiums charged would not change, but it later did. The plaintiffs first challenged the methodology with the Deputy Director of Insurance Services, and later to the Civil Board of Contract Appeals (the “Board”), both of which granted summary relief to the FCIC.

Thereafter, the plaintiffs filed suit in federal court alleging counts of breach of contract, promissory estoppel, unjust enrichment, violation of a statute limiting renegotiation of standard contracts to once every five years, violation of a statute in that the FCIC did not consider the reinsurer’s financial condition, reformation and rescission, and for a declaratory judgment. The FCIC filed a motion for judgment on the pleadings under FRCP 12(c), which the court granted. In so doing, the court found that many claims were barred by res judicata as they had been decided by the Board and were not appealed under the Administrative Procedures Act. The court also found that the promissory estoppel and unjust enrichment counts were not actionable because the parties’ agreement was governed by existing contracts. As to the new counts not raised before the Board, the court found that the claims should be dismissed for failure to exhaust administrative remedies. Thus, the court dismissed the suit brought by the reinsurers.

Ace American Ins. Co. v. Federal Crop Ins. Corp., Case No. 1:14-cv-01992-RCL (D.D.C. Sept. 20, 2016).

This post written by Zach Ludens.

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NORTH CAROLINA FEDERAL COURT HOLDS THAT ARBITRATION CLAUSE REQUIRING PANEL TO RENDER A DECISION WITHIN 30 DAYS IS NOT UNCONSCIONABLE

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In July, a federal court in North Carolina held that an arbitration provision which required the arbitration panel to reach a decision within thirty days of their selection was not unconscionable. Arising out of a dispute regarding a construction contract, the court said that the defendant’s argument failed to consider the thirty day limitation in the full context of the arbitration provision. While acknowledging that “allowing an arbitration panel only 30 days to sort out the liability for the post-construction, partial collapse of two parking garages would be a Herculean feat, if not utterly impossible,” the court noted that “during any significant construction project, billing claims and disputes often arise which require immediate attention and resolution lest the project grind to a halt.” Thus, the court pointed to the panel’s power to extend the date for final disposition under the Commercial Arbitration Rules of the AAA, to find that the thirty day limitation was not unconscionable.

In late September, the same court compelled a second lawsuit between the parties to arbitration, over the objection of a defendant that the thirty day limitation was absolute and jurisdictional, depriving the panel of continued jurisdiction over the first lawsuit. The court held that such a challenge would constitute an argument that the panel “exceeded its powers,” which was not ripe nor before the court at the time.

Tribal Casino Gaming Enter. v. W.G. Yates & Sons Const. Co., Case No. 1:16-cv-00030-MR (W.D.N.C. July 1, 2016) and Case No. 1:16-cv-00132-MR (W.D.N.C. Sept. 26, 2016).

This post written by Zach Ludens.

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THIRD CIRCUIT REJECTS CONTRACTOR’S CHALLENGE TO ARBITRAL JURISDICTION BASED ON FAILURE TO COMPLY WITH AGREEMENT’S PROCEDURAL REQUIREMENTS

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The Third Circuit affirmed a lower court’s ruling against a contractor challenging an arbitrator’s authority in ordering payment of delinquent contributions to employee benefit funds. Plaintiff (“Nolt”) signed a Project Labor Agreement (“PLA”) for a construction project that required it to hire union employees, but permitted it to hire non-union employees in certain circumstances.  The PLA also required Nolt to contribute to employee benefit funds “on behalf of all employees covered by” it.  The PLA contained a provision with an exclusive grievance and arbitration procedure for disputes between the parties, which included certain pre-arbitration “meet and confer” requirements and time limits, the failure to comply with which rendered any grievances null and void.

In a dispute over whether Nolt was required to contribute to union employee benefit funds on behalf of its non-union employees, who would not benefit from the funds, an arbitrator interpreted the plain language of the PLA to require contributions for “all employees covered” by the PLA and ordered payment of $492,000 in delinquent contributions. Nolt moved to vacate the arbitration award on the grounds that the arbitrator lacked jurisdiction and that the award violated public policy and other relevant wage laws.

The Third Circuit, noting the limited role of courts in reviewing arbitration awards, affirmed the award based on a finding of arbitral jurisdiction and lack of sufficient conflict with a cognizable public policy. The court found that Nolt’s argument claiming the union failed to comply with the PLA’s procedural requirements was a question of “procedural arbitrability” that was appropriately left to the arbitrator, rather than one of “substantive arbitrability” that would be appropriate for judicial resolution.  The court also rejected Nolt’s claim that the award conflicted with public policy by forcing it to essentially pay twice, first to the union employee benefit fund and second via its obligations under applicable wage laws.  Nolt failed to identify any “explicit conflict with other ‘laws and legal precedents’,” and, instead, relied on a non-cognizable “general interest in fairness and equal treatment” between union and non-union employers.  The court deferred to the arbitrator’s interpretation of the PLA as contract interpretation within his authority and affirmed despite recognizing Nolt’s persuasive arguments that the award forced Nolt to pay an unfair price for its non-union employees.

D.A. Nolt, Inc. v. Local Union No. 30 United Union of Roofers, Waterproofers & Allied Workers, No. 15-3697 (3d Cir. Sept. 23, 2016).

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

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SECOND CIRCUIT UPHOLDS REFUSAL TO COMPEL ARBITRATION DUE TO UNAVAILABLE FORUM, RECOGNIZING SPLIT IN FEDERAL CIRCUITS

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A borrower had previously entered into three payday loan agreements that contained arbitration provisions mandating that all claims be arbitrated in the National Arbitration Forum (NAF), and under the Code of Procedure of the NAF. As of 2009, however, NAF did not accept consumer arbitrations. When the borrower filed a class action lawsuit against certain banking institutions involved with her loans, the banks initially compelled arbitration. When the NAF was unable to serve as the forum for the arbitration, the borrower successfully returned the proceedings back to court. The banks appealed this result to the Second Circuit, contending that section 5 of the FAA, which authorizes the court to substitute an arbitrator if there is a “lapse in the naming of an arbitrator,” permitted the court to substitute arbitrators here. But the Second Circuit disagreed with the banks, ruling that the arbitration in this case contained “numerous indicators that the parties contemplated one thing: arbitration before NAF.” “Further,” the court explained, “the agreement makes no provision for the appointment of a substitute arbitrator should NAF become unavailable.” As to the FAA, the court followed Second Circuit precedent and held that an unavailable forum does not constitute a “lapse” within the meaning of section 5 of the FAA. The court noted that the position of its circuit is aligned with the Eleventh and Fifth Circuits, but at odds with the Seventh and Third Circuits. The court affirmed, ruling that the banks could not enforce the arbitration agreements, and that the borrower’s lawsuit should proceed in court. Moss v. First Premier Bank, et al., Case No. 15-2513-cv (2d Cir. Aug. 29, 2016).

This post written by Michael Wolgin.

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DISTRICT COURT REFUSES TO BIND SURETY TO SUBCONTRACT ARBITRATION CLAUSE

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An engineering company was hired to perform work in connection with construction and renovation of the South African Embassy, and subcontracted for sheet metal work with a third party. The subcontract contained an arbitration provision covering “any controversy or claim of Contractor against Subcontractor or Subcontractor against Contractor.” The third party then negotiated with a surety company for a surety bond, which incorporated the subcontract by reference. After a dispute between the engineering company and its subcontractor arose, the engineering company terminated the subcontract, notified the surety company that it intended to make a claim under the surety bond, and filed a request to join the surety company as a party in arbitration proceedings with its subcontractor. The surety company refused to consent to joinder and both parties moved for summary judgment on the issue of whether they must arbitrate the dispute over the bond. The engineering company argued that because the surety bond incorporated the subcontract by reference, the engineering company had agreed to arbitrate not only claims on the bond but also any issues of arbitrability. Relying on the disjunctive “or” in the language of the arbitration clause, the engineering company argued the subcontract required that “any controversy” involving any parties must be arbitrated, as well as any “claim of Contractor against Subcontractor” or vice versa. The court disagreed, applying a heightened standard of “clear and unmistakable evidence” that the surety company agreed to arbitrate. The court reasoned that although the surety company was bound by the subcontract as a whole, the surety company was not bound by the arbitration clause because the language clearly limited it to claims between the engineering company and its subcontractor. Western Surety Co. v. U.S. Engineering Co., No. 15-cv-327 (USDC D.D.C. Sept. 30, 2016).

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

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