Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT DENIES DISCOVERY OF RESERVE INFORMATION

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On Plaintiffs’ motion to compel discovery in a bad faith action against first-party property insurer Liberty Mutual Fire Insurance Company (“Liberty Mutual”), an Alabama federal court limited, but allowed, discovery related to: past bad faith lawsuits against the insurer; commercial property claims files of the adjuster handling the Plaintiffs’ claim; performance goals and evaluations of the claims department; and, quality assurance manuals. The Court fully denied Plaintiffs’ overbroad and irrelevant requests for information relating to claims files and claims where bad faith was alleged as well as reserves information and personnel records.

The court declined to compel discovery of Liberty Mutual’s reserves, frequently a target of discovery in reinsurance matters, as reserve information “is not relevant as to what an insurer thought of the merits of a claim.” Graham & Company, LLC v. Liberty Mut. Fire Ins. Co., Case No. 14-2148 (USDC N.D. Ala. April 5, 2016).

This post written by Nora A. Valenza-Frost.
See our disclaimer.

CALIFORNIA SUPREME COURT ENFORCES ARBITRATION AGREEMENT, FINDING IT IS NOT UNCONSCIONABLE

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In this case, a former employee of a retail store appealed to the California Supreme Court seeking reversal of an appellate court decision which found that an arbitration agreement in her employment application was not unconscionable.

An employee originally filed a suit against Forever 21 and individual defendants for harassment, race and sex discrimination and retaliation.  The defendants moved to compel arbitration based on the arbitration agreement in the employment application which was executed by the employee.  The California trial court denied the motion, finding that the agreement was unconscionable.  A California Court of Appeal reversed, finding that there was no substantive unconscionability in the agreement.  The California Supreme Court granted the employee’s petition to review, and affirmed the Court of Appeal’s judgment.

In its decision, the California Supreme Court found that an arbitration agreement, which authorized the parties to seek provisional relief in a judicial action while still compelling the remainder of the dispute to arbitration, was enforceable, noting that the clause “does no more than restate existing law . . . [and] does not render the agreement unconscionable.”  The court also held that an arbitration agreement remains enforceable when the claims it specifically lists that are subject to arbitration are claims that would likely be brought by an employee because the employer’s claims, even though not listed, would also be subject to arbitration.  It also found that a provision in the arbitration agreement that required both parties to agree that during arbitration “all necessary steps will be taken” to protect from disclosure the company’s trade secrets and proprietary and confidential information, was not unduly one-sided.  Lastly, the court held that the fact that the arbitration agreement stated that the arbitration would be conducted under the model rules of the American Arbitration Association, and the employee was not provided with a copy of the AAA rules, did not make the agreement procedurally unconscionable.

Thus, the California Supreme Court concluded that the arbitration agreement was not unconscionable and was enforceable.  Baltazar v. Forever 21, Inc. et al., No. S208345 (Cal. Mar. 28, 2016).

This post written by Jeanne Kohler.
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FOURTH CIRCUIT COURT OF APPEALS DECIDES ISSUE OF CLASS ARBITRABILITY IS A QUESTION FOR THE COURT, NOT ARBITRATOR

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A South Carolina federal court dismissed a petition to compel class arbitration, reasoning “that whether the arbitration clause permits class arbitration is a simple contractual interpretation issue, and because the question ‘concerns the procedural arbitration mechanisms available to the [respondent]’, the threshold inquiry is a question for the arbitrator rather than for the court.” The Fourth Circuit Court of Appeals reversed the decision, and found the question of whether a sales agreement authorized class arbitration should be determined by the court.  Other circuit courts have similarly held.

Relying on Supreme Court precedent, the Court identified two categories of threshold questions: (1) procedural questions to be decided by the arbitrator and; (2) questions of arbitrability for the court. As to the latter category, whether or not the underlying controversy will proceed to arbitration on the merits is a question of arbitrability for the court to decide.  Moreover, it cautioned that, “courts should not assume that the parties agreed to arbitrate arbitrability absent “clear and unmistakable evidence”.

The Court concluded by noting in class arbitrations, as compared to bilateral arbitrations, there are higher risks for defendants as the result of the limited scope of judicial review. While this is a cost defendants may be willing to accept in bilateral arbitration – since any errors impact only the limited size of the individual dispute – “betting the company” without such review “is a cost of class arbitration that defendants would not lightly accept.”  Lastly, class arbitrations require more procedural formality, and thwart the benefits of arbitration by increasing cost and decreasing the speed of proceedings.  Dell Webb Communities, Inc. v. Roger F. Carlson, No. 15-1385 (4th Cir. Mar. 28, 2016).

This post written by Nora A. Valenza-Frost.
See our disclaimer.

THIRD CIRCUIT AFFIRMS SUMMARY JUDGMENT OF CAPTIVE REINSURANCE DISPUTE AS BEING TIME-BARRED

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In early January, the Third Circuit Court of Appeals affirmed summary judgment of a putative class action dispute regarding private mortgage insurance and captive reinsurance of the same by M&T. We previously blogged about this case on November 20, 2013, February 4, 2014, and March 17, 2015. The putative class action alleged violations of the Real Estate Settlement Procedures Act – specifically, that M&T violated RESPA’s anti-kickback and fee-splitting provisions. However, the district court entered summary judgment on the grounds that the claims were time-barred, and the Third Circuit affirmed this finding.

Under RESPA, claims are subject to a one-year limitations period. The Third Circuit has previously held that the statute of limitations in RESPA is not jurisdictional and is subject to equitable tolling. The putative class plaintiffs argued for the application of equitable tolling on the grounds of fraudulent concealment. After discovery, the district court found that the putative class plaintiffs failed to show reasonable diligence. The Third Circuit affirmed, finding that where the mortgage documentation included a disclosure and allowed borrowers to opt out of captive reinsurance, the putative class was given notice that this could have happened and should reasonably have begun investigating at that time. During depositions, the putative class plaintiffs confirmed that they were aware of the possibility of captive reinsurance, but none of them investigated it until they were contacted by a law firm years later. Cunningham v. M&T Bank Corp., Case No. 15-1412 (3d Cir. Jan. 12, 2016).

This post written by Zach Ludens.

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ARBITRATOR, NOT COURT, MUST DETERMINE ARBITRABILITY OF DISPUTE UNDER REINSURANCE PARTICIPATION AGREEMENT

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Adopting in part a magistrate judge’s recommendation, a federal court in Maine recently held that the enforceability of an arbitration clause in a reinsurance agreement must be determined by an arbitrator, as opposed to a federal judge. Mountain Valley Property, Inc. and Applied Risk Services, Inc. entered into a reinsurance participation agreement that contained an arbitration clause which provided, among other things, that all disputes between the parties relating “in any way to the execution and delivery, construction, or enforceability” of the agreement be decided by binding arbitration. Applied Risk sought to arbitrate a dispute that arose between the parties. Mountain Valley opposed arbitration on the grounds that the subject clause was invalid under Nebraska law, and argued that the court (and not an arbitrator) should determine the validity of the clause.

Agreeing with the Magistrate Judge’s recommendation, the court found that “[b]y including the ‘enforceability’ of the agreement within the scope of arbitration, the parties clearly and unmistakably agreed to arbitrate the issue of arbitrability.” Therefore, the court held that the parties’ dispute, including the issue concerning the validity of the arbitration clause, must be referred to arbitration, and ordered a stay of the lawsuit. For reasons of judicial economy, the court also ordered a stay of the suit as between Mountain Valley and two other defendants that were not signatories to the operative agreement, pending the outcome of the arbitration between Mountain Valley and Applied Risk. Mountain Valley Property, Inc. v. Applied Risk Services, Inc., No. 15-cv-00187 (USDC D. Me. Feb. 25, 2016).

This post written by Rob DiUbaldo.

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