Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT FINDS THAT ALLEGED LEGAL ERRORS DO NOT JUSTIFY VACATUR OF ARBITRATION AWARD

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The United States Court of Appeals for the Third Circuit recently confirmed an arbitration award in a dispute concerning the ownership of certain music rights, rejecting the argument that alleged legal errors constituted sufficient grounds to vacate the award. The underlying arbitration involved a dispute between The Pullman Group, LLC and its owner, David Pullman (collectively, “Pullman”), and the estates of John Whitehead and Gene McFadden, who were “an integral part of the Philadelphia music scene in the 1970s.” Pullman entered into a contract with Whitehead and McFadden to purchase their song catalogue, but the sale was never finalized. After the musicians passed away, Pullman and the estates agreed to arbitrate their dispute over ownership of the catalogue. An arbitration panel ruled in favor of the estates, and Pullman brought an action in federal court to vacate the award on the grounds that the panel had committed various legal errors.

The district court denied Pullman’s motion to vacate the award, which the Third Circuit affirmed. The court held that mere errors of law are insufficient to warrant vacatur of arbitration award, and that such outcome is only justified where an arbitrator’s legal error is so substantial that a party was deprived of a fair hearing. In this case, that the arbitration panel’s application of New York law and decision to exclude certain testimony was well-founded, and did not arise to the level of misconduct required to vacate the award. The Third Circuit rejected Pullman’s alternative argument that the panel’s ruling amounted to “manifest disregard of the law,” finding that even if this doctrine is still a viable ground to vacate an arbitration award (which the court declined to address), it would not apply because the panel’s decision did not ignore binding legal precedent. Whitehead v. The Pullman Group, LLC, Nos. 15-1627 & 15-1628 (3d Cir. Dec. 10, 2015).

This post written by Rob DiUbaldo.

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COURT UPHOLDS CLASS WAIVER ARBITRATION CLAUSE, FINDING AN UNAWARE PARTY CAN STILL MANIFEST ASSENT TO BE BOUND

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A federal court in Oregon granted a motion to compel arbitration based on a class waiver and arbitration provision in a credit agreement. The primary question of fact was whether the plaintiff had been read or had received the terms of the credit agreement. The credit agreement’s arbitration provision contained a right to opt out of the arbitration provisions upon written notice by the consumer within the first thirty days of their first transaction. The plaintiff never opted out of this agreement, claiming that she never affirmatively consented to the terms of the agreement or physically received the provision. Based on a preponderance of evidence, the court found that the plaintiff manifested assent to the terms of the arbitration agreement. The defendants did not need to show that the plaintiff verbally assented to or signed a credit agreement in order to bind her. Receipt of the agreement and use of the account, “regardless of whether [the plaintiff] read, signed, or understood the Agreement, objectively manifested assent to the arbitration provision contained in the Agreement.” Campos v. Bluestem Brands, Inc., Case No. 3:15-CV-00629-SI (USDC D. Ore. Jan. 22, 2016).

This post written by Joshua S. Wirth, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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LIQUIDATION COURT GRANTS RECEIVER’S APPLICATION FOR AUTHORITY TO ENTER INTO REINSURANCE SETTLEMENTS WITH THREE REINSURERS

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A Texas court presiding over the liquidation of Santa Fe Auto Insurance Company approved an application by the Special Deputy Receiver for the liquidating company (“SDR”) to enter into a reinsurance settlement with three reinsurers. The agreement provides that the reinsurers will pay over $11 million due under certain quota share reinsurance agreements. The order noted that no objections to the application were filed. Texas v. Santa Fe Auto Ins. Co., Case No. D-1-GV-13-000204 (Tex. Dist. Ct. Dec. 7, 2015) (application) and (Tex. Dist. Ct. Dec. 21, 2015) (order).

This post written by Joshua S. Wirth, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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CEDENT IS NOT REQUIRED TO MINIMIZE ITS REINSURANCE RECOVERY IN ORDER FOR THE “FOLLOW THE FORTUNES” DOCTRINE TO APPLY

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On December 9, 2014 and August 20, 2015, we reported on the reinsurance dispute between Utica Mutual Insurance Company and Clearwater Insurance Company. In a recent ruling, the court rejected Clearwater’s argument that the follow the fortunes doctrine did not apply and that Clearwater was relieved of its obligations under the subject reinsurance contract. Clearwater contended that Utica unreasonably and in bad faith shifted all of its liabilities to its umbrella policies to maximize reinsurance recovery. As an alternative basis to avoid liability, Clearwater also argued that Utica billed it for items for which it was not entitled to recover.

In rejecting Clearwater’s arguments, the court explained that while the follow the fortunes doctrine requires the cedent to align its interests with its reinsurer, in order to show bad faith, Clearwater was required to establish an “extraordinary showing of a disingenuous or dishonest failure” and that the cedent acted with gross negligence or recklessness. The court found that Clearwater could not make such a showing. The Court noted that Utica did not have any fiduciary duty to place Clearwater’s interests above its own nor minimize its reinsurance recovery in order to avoid bad faith. And the Court summarily dismissed Clearwater’s argument that some of the billings were not covered by the reinsurance, ruling that if the payment was arguably within the scope of the insurance policy, then it was within the reinsurance. Utica Mutual Insurance Co. v. Clearwater Insurance Co., Case No. 6:13-cv-01178 (USDC N.D.N.Y. Jan. 20, 2016).

This post written by Barry Weissman.

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IRS REVOKES RULING THAT IMPOSED EXCISE TAX ON WHOLLY FOREIGN REINSURANCE TRANSACTIONS

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The Internal Revenue Service recently revoked a 2008 ruling that a 1% excise tax under section 4371(3) of the Internal Revenue Code applied to “reinsurance premiums paid by one foreign insurer or reinsurer to another.” The IRS’s shift came in the wake of the D.C. Circuit’s opinion in Validus Reinsurance, Ltd. v. United States, 786 F.3d 1039 (D.C. Cir. 2015).

In Validus, a foreign reinsurer filed claims for refund of excise taxes imposed on premiums paid to a foreign retrocessionaire. The United States argued that such reinsurance policies were within the excise tax’s scope because the risks ultimately underlying the multiple levels of reinsurance were situated within the United States. The taxpayer countered that the statute’s plain language applied only to reinsurance, not retrocession coverage. After extensive analysis of the statute’s plain language and legislative history, the D.C. Circuit concluded that the statute was ambiguous. To resolve the controversy, the court resorted to the presumption against extraterritorial application of U.S. laws. The court ruled that the excise tax did not apply because the transaction was a “wholly foreign retrocession[].”

Going forward, therefore, a foreign insurer who pays reinsurance premiums to another foreign insurer likely will not have to pay the excise tax under section 4371(3) of the Internal Revenue Code, though the IRS has noted some narrow exceptions. Moreover, any foreign insurers who have paid such taxes within the statute of limitations should consider contacting counsel about the prospect of claims for refund. IRS Rev. Ruling 2016-03.

This post written by Richard Euliss.

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