Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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.

See our disclaimer.

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.

See our disclaimer.

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.

Ninth Circuit Holds That Class Action Waiver in Employment Agreement Is Unenforceable, Adding to the Circuit Split on the Issue

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As a condition of employment, Ernst & Young’s employees were required to sign agreements that contained a “concerted action” waiver requiring employees to pursue legal claims against E&Y exclusively through arbitration, and arbitrate only as individuals in “separate proceedings”. An employee brought a class action against E&Y in the United States District Court for the Northern District of California alleging violations of the Fair Labor Standards Act. E&Y moved to compel arbitration and was granted such relief by the District Court, which dismissed the class action. On appeal, a divided U.S. Court of Appeals for the Ninth Circuit reversed, holding that the concerted action waiver in E&Y’s employment agreements violated Sections 7 and 8 of the National Labor Relations Act – specifically, the National Labor Relations Board’s interpretation that such waivers violate that Act. Moreover, because the Ninth Circuit concluded that an employee’s right to act collectively was substantive, rather than procedural, the court further held that the Board’s ban on class action waivers did not conflict with the Federal Arbitration Act, finding that when an arbitration provision effectively waives a substantive federal right, the so-called “savings clause” of the Federal Arbitration precludes enforcement of that waiver.

Our prior blog posts discussed the developing split among federal circuit courts on this issue. For example, in Cellular Sales of Missouri, LLC v. National Labor Relations Board, No. 15-1620 (8th Cir. June 2, 2016), the Eighth Circuit held that arbitration provisions in employment agreements waiving class actions are enforceable. (See also Fifth Circuit, enforcing such provisions; (same). By contrast, in Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016), the Seventh Circuit reached a similar result as the Ninth Circuit. This emerging split, coupled with the use of these types of provisions in employment agreements, may result in the United States Supreme Court ultimately deciding to address the issue. Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016).