Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

TEXAS APPEALS COURT DENIES PETITION FOR A WRIT OF MANDAMUS THAT TRIAL COURT ERRED IN DENYING MOTION TO VACATE ARBITRATION PANEL’S ORDERS

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A Texas appeals court denied a petition for a writ of mandamus filed by Irving Drobny, on behalf of National Accident Insurance Group (“NAIG”) and National Accident Insurance Underwriters (“NAIU”) (collectively, “NAIU”), challenging a trial court’s denial of NAIU’s motion to vacate an arbitration panel’s pre-hearing security and discovery orders in favor of American National Insurance Corporation (“ANICO”).

The background of this case can be found here. In sum, ANICO and NAIU were parties to an Underwriting Agreement, in which ANICO authorized NAIU to market, underwrite, issue and collect premiums for ANICO insurance policies. A dispute arose between the parties because one of NAIU’s vice presidents allegedly defrauded both NAIU and ANICO of approximately $43 million. The parties participated in an arbitration, in which ANICO filed a motion for pre-hearing security. On October 24, 2014, the arbitration panel granted ANICO’s motion and ordered NAIU to post $20 million in pre-hearing security. On January 12, 2015, the panel issued another order granting a motion to compel discovery responses and depositions, a motion to compel compliance with order requiring pre-hearing security and a motion for continuance. On March 4, 2015, NAIU filed in a Texas trial court a motion for temporary restraining order, temporary injunction and motion to compel arbitration, essentially asking the court to vacate the pre-hearing security order. The Texas court found that it had no authority to grant NAIU’s motion to vacate the panel’s pre-hearing security order because under the Federal Arbitration Act (the “FAA”), NAIU had failed to timely challenge it, and thus, the court denied NAIU’s motion. The court did not expressly rule on any discovery issues. NAIU appealed the trial court’s order, or in the alternative, requested that it be treated as a petition for a writ of mandamus. The Texas appeals court held that it did not have jurisdiction over NAIU’s appeal as it was interlocutory, and thus the appeal was treated as a petition for a writ of mandamus.

In its order, the Texas appeals court found that the trial court did not abuse its discretion in denying NAIU’s motion to vacate the arbitration panel’s pre-hearing security order because it was not timely challenged within the 90-day period under Texas law and the 3-month period under the FAA. With respect to NAIU’s argument that there is no authority for pre-hearing security during arbitration, the court noted while the FAA does not speak to pre-hearing security, Texas law allows for pre-hearing security. The court also noted that the trial court held a hearing on the motion to vacate the pre-hearing security order at which NAIU presented no evidence. Thus, the Texas appeals court held that the trial court did not abuse its discretion in denying the motion to vacate the panel’s award of pre-hearing security. Further, as the trial court did not rule on any discovery issues, the Texas appeals court overruled NAIU’s second issue and denied NAIU’s petition for a writ of mandamus.

In Re Irving Drobny, as Representative of National Accident Insurance Group, et al., No. 01-15-00435-CV (Tex. Ct. App. Aug. 30, 2016).

This post written by Jeanne Kohler.

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SEVENTH CIRCUIT AFFIRMS SERVICE OF SUIT CLAUSE IN REINSURANCE TREATIES AND GRANTS CEDENT ABSOLUTE RIGHT TO SELECT FORUM

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Based on the plain and ordinary meaning of the service of suit clause, the Seventh Circuit Court of Appeals found a reinsurer waived its right of removal. The service of suit clause provided:

It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of any Court of competent jurisdiction within the United States and will comply with all requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.

Cases interpreting this service of suit clause as far back as 1949 have found such a clause forecloses a defendant’s right of removal. Although the reinsurer urged the Court should adopt a heightened “clear and unequivocal” standard when determining whether it waived its right of removal, the Court declined to do so, as litigation-based waivers are distinguishable from contractual waivers, and such a high standard should not be applied to the right of parties to contract where they will litigate a dispute.

The reinsurance treaties required the reinsurer to submit to the jurisdiction of any court chosen by the cedent “whether it be to determine the arbitrable nature of the dispute, to confirm an arbitration award, to compel arbitration, or resolve on the merits, a claim not subject to arbitration,” which included the cedent’s breach of contract claim in this instance. Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., No. 16-1073 (7th Cir. Sept. 1, 2016)

This post written by Nora A. Valenza-Frost.

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ALABAMA AMENDS CAPTIVE INSURERS ACT

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On April 26, 2016, Alabama Governor Robert J. Bentley approved House Bill No. 270, which revised Alabama’s Captive Insurers Act. The revised Captive Insurers Act went into effect on July 1, 2016, and included amendments to several provisions of the act to make it easier to establish captives and provides tax-friendly measures for captives. In particular, we note that the amended act lowers capital requirements, allows captives to be formed as any form of business entity, provides for a 60-day provisional license in certain circumstances, and caps premium taxes. Under Alabama’s 2006 Captive Insurers Act, captives could only be formed as corporations. Norman Chandler, President of the Alabama Captive Association, has stated that “The newly revised Captive Act will significantly help the captive industry grow in Alabama.”

A copy of the revised Chapter 31B is available here, which shows in redline form the changes to the Act. 2016 Alabama Laws Act 2016-191 (H.B. 270).

This post written by Zach Ludens.

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Reliance Liquidation Court Approves Application for Direct Payments from Reliance’s Reinsurers to Certain Insureds

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Recently, there have been several developments in the ongoing liquidation of Reliance Insurance Company. The liquidation court recently approved the application for the assumption by one of Reliance’s reinsurers, EFH Vermont Insurance Company, of a direct coverage obligation to Reliance’s insured, LSGT Gas Company LLC, and approved the direct payment to LSGT from EFH. The liquidation court also approved the application for the assumption by another of Reliance’s reinsurers, NAFCO Insurance Company, Ltd., of a direct coverage obligation to Reliance’s insured, Carlson Holdings, Inc., and approved the direct payment to Carlson from NAFCO.

SECOND CIRCUIT COURT OF APPEALS ALLOWS FEDERAL COURTS TO “LOOK THROUGH” § 10 FAA PETITION TO DETERMINE FEDERAL JURISDICTION

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The United States Court of Appeals for the Second Circuit has reversed its own precedent to allow federal courts examining petitions under § 10 of the FAA to “look through” the petition to examine if there is federal jurisdiction. In the case, which arose out of a dispute involving registered FINRA members and their former employees, the district court dismissed the case for want of jurisdiction, finding that it did not state a “substantial federal question on its face.” On appeal, the petitioner argued that the Second Circuit’s precedent in Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000), which led the district court to its determination, had been displaced by Vaden v. Discovery Bank, 556 U.S. 49 (2009). The Second Circuit panel held that Vaden “rendered Greenberg’s result fundamentally inconsistent with the Act’s statutory context and judicial interpretations.” Thus, the Second Circuit returned the case to the district court with instructions that it could “look through” the § 10 petition, “applying the ordinary principles of federal-question jurisdiction to the underlying dispute as defined by Vaden.” Doscher v. Sea Port Group Securities, LLC, No. 15-2814 (2d Cir. Aug. 11, 2016).

This post written by Zach Ludens.

See our disclaimer.