Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NEW YORK FEDERAL BANKRUPTCY COURT FINDS INSURANCE INSOLVENCY PROCEEDING DOES NOT “REVERSE – PREEMPT” BANKRUPTCY COURT JURISDICTION

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In a recent adversary proceeding in the chapter 11 case involving Ames Department Stores, Inc. (“Ames”), Lumbermens Mutual Casualty Company (“Lumbermen’s”) argued that under the McCarran-Ferguson Act, the issues in dispute between it and Ames should be decided in Illinois state court as part of Lumbermens’ insolvency proceedings.

The procedural history and the issues in the case between Ames and Lumbermens can be found here. In short, Ames filed a Chapter 11 bankruptcy in New York in 2001. In 2006, a dispute between Lumbermens and Ames commenced, which centered around the ownership of an approximate $8 million trust account. By 2012, Lumbermens entered state rehabilitation proceedings in Illinois. Lumbermens’ rehabilitator challenged the bankruptcy court’s jurisdiction over the adversary proceeding in New York federal court, arguing for the issues to be addressed in Illinois state court as part of Lumbermens’ ongoing insolvency proceeding. The court granted the rehabilitator’s motion to withdraw reference, and requested a report and recommendation on Lumbermens’ jurisdictional motion from a New York federal bankruptcy court.

The New York bankruptcy court first found that it had authority to hear all the claims at issue. Next, it determined whether the McCarran-Ferguson Act applied to “reverse – preempt” federal law. The court utilized a three part analysis to determine whether the McCarran-Ferguson Act applies and whether a federal statute can be reverse preempted by a state law. First, the court considered whether the Bankruptcy Code, the federal law at issue, specifically relates to the business of insurance, and concluded that it does not. Next, the court considered whether the state law at issue relates to the business of insurance, finding that the Illinois statute, relegating jurisdiction to the Illinois state court, was to ensure orderly and predictable liquidations of insurance companies. Thus, the court found that the state law at issue was enacted for the purpose of regulating the business of insurance. Finally, with respect to the third prong, whether allowing the case to proceed in federal bankruptcy court would “impair, invalidate, or supersede” Illinois state law, the court found that the bankruptcy court’s jurisdiction would not contravene Illinois law in any meaningful way, because any bankruptcy court judgment would remain subject to the priority scheme of the Illinois insurance insolvency proceeding. Therefore, the court held that hearing the adversary proceeding in federal bankruptcy court would not impair, invalidate or supersede Illinois insurance law, and thus, found that the Bankruptcy Code was not reverse – preempted by McCarran-Ferguson.

In re Ames Department Stores Inc., et al., No. 01-42217 (REG) (Bankr. S.D.N.Y. Dec. 7, 2015).

This post written by Jeanne Kohler.

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GEORGIA APPELLATE COURT HOLDS MALPRACTICE COVERAGE SUIT MUST BE ARBITRATED

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The Court of Appeals of Georgia recently affirmed a trial court’s ruling compelling arbitration in a malpractice coverage dispute. McLarens Young International Inc. (McLarens) and American Safety Casualty Insurance Company (ASCIC) shared a claims handling agreement (CHA) that required McLarens to provide the insurer with claims management and adjustment services for ASCIC policies issued under a Lawyers Professional Liability Program. Under one of those policies, ASCIC was required to pay the $2 million policy limits to satisfy a malpractice settlement. ASCIC then sought reimbursement from its reinsurer, Excalibur Reinsurance Corp. (Excalibur), and the reinsurer paid.

Both McLarens and Excalibur filed a demand for arbitration against McLarens for a claim of negligent oversight of the underlying claim. McLarens countered in the trial court that the arbitration demand was outside the scope of the CHA’s arbitration provision. Both the trial court and the appellate court disagreed, holding that “the dispute pertains solely to whether McLarens is required to indemnify ASCIC under the terms of the CHA, and there is no greater or lesser right to indemnification because Excalibur has been inserted into the proceedings.” Because of the Reinsurance Agreement with ASCIC, Excalibur is merely subrogated to any right to indemnification that ASCIC may have against McLarens under the CHA due to the negligent handling of the claim. The appellate court held that the scope of the suit remains the same as if it were only between McLarens and ASCIC and, thus, is within the scope of the arbitration clause.

McLarens Young International, Inc. v. American Safety Casualty Insurance Co., et al., No. A15A0932 (Ga. App., 4th Div. Nov. 20, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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DELAWARE FEDERAL COURT CONFIRMS ARBITRATION AWARD IN COMMERCIAL DISPUTE, FINDING THAT THE FAA STANDARD, AND NOT THE DELAWARE UNIFORM ARBITRATION ACT, GOVERNED THE PARTY’S CHALLENGE

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Roquette Freres, S.A. and Solazyme, Inc. entered into a Joint Venture Operating Agreement (the “JVOA”), which was established for the purpose of “the research and development, manufacture, distribution, sales, marketing and support” of certain products. The JVOA contained an arbitration provision that required disputes arising out of or connected with the agreement to be resolved under the “Arbitration Rules of the Center for Public Resources in New York”.  The JVOA further provided that the arbitration be conducted “according to the laws of the State of Delaware” and that the agreement was “governed and construed in accordance with” Delaware law.

After the arbitration panel ruled in Solazyme’s favor, Roquette moved to vacate the award under Delaware law. Solazyme counterclaimed for confirmation of the award, arguing that the standard set forth in the Federal Arbitration Act (“FAA”) governed Roquette’s challenge.  As a threshold matter, the court found that because the JVOA did not specifically reference the Delaware Arbitration Act, and Roquette did not file its action in the Delaware Court of Chancery (as contemplated by the statute), the FAA controlled.  Applying the standard set forth by the FAA, the court confirmed the panel’s award and denied Roquette’s motion to vacate because:  (1) the panel’s interpretation of the time period in which to render an award, which Roquette argued had not been strictly adhered to, was a procedural issue that required broad deference under the statute and was rationally derived from the JVOA and CPR rules; (2) the panel’s consideration of extrinsic evidence was necessary to resolve the issues in dispute, and thus permissible; (3) alleged “public policy” considerations did not provide the court with a basis to vacate the panel’s ruling as a matter of law; and (4) the relief crafted by the panel, though broad in scope, was based upon the language of the JVOA, and thus within the panel’s authority.  Roquette Freres, S.A. v. Solazyme, Inc., No. 1:14-cv-01442 (USDC D.Del. Dec. 21, 2015).

This post written by Rob DiUbaldo.
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NEW JERSEY APPELLATE COURT AFFIRMS RULING THAT SOLVENT INSURERS NOT RESPONSIBLE FOR PORTIONS OF INSOLVENT INSURERS

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Earlier this month, a New Jersey appellate court affirmed a lower court’s ruling that the insured, not solvent insurers, was responsible for the liability apportioned to policies not covered by New Jersey’s Property Liability Insurance Guaranty Association (PLIGA). The insured, Ward Sand and Materials Company (Ward), was sued by the New Jersey Department of Environmental Protection related to cleanup of municipal waste accepted at a sand mining facility from 1970 to 1991.

Prior to litigation, three of Ward’s insurers—Mission National Insurance Company, Integrity Insurance Company, and Western Employers Insurance Company—had been declared insolvent. During the litigation, two of Ward’s insurers, Reliance Insurance Company and Home Insurance Company, were declared insolvent.  Following a multi-million dollar settlement in the environmental litigation, Ward brought suit against its primary and excess insurance carriers, as well as PLIGA, seeking an order allocating insurance coverage for the settlement.  PLIGA settled with Ward on behalf of the insolvent insurers, but the trial court issued a decision requiring Ward to assume any sums allocated to its insolvent insurers in excess of the payments by PLIGA.

Ward filed a motion for reconsideration, which the trial court denied, and then appealed the decision. After all of the relevant insurers had become insolvent but before the litigation in this case, the New Jersey legislature amended the statute regarding PLIGA to clarify that exhaustion of underlying policies had only occurred once all available insurance limits had been met.  The New Jersey Supreme Court held that this meant that “for the years in which PLIGA is standing in the palce of an insolvent carrier in a long-tail environmental contamination case, the insured—not the solvent insurer—is compelled to make payments before accessing statutory benefits under the PLIGA Act.”  Thus, the appellate court affirmed the trial court’s determination that Ward was responsible for the shares allocated to its insolvent insurers. Ward Sand and Materials Co. v. The TransAmerica Insurance Company, No. A-1479-13T1 (N.J. Super. Ct. App. Div. Jan. 12, 2016).

This post written by Zach Ludens.
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THIRD CIRCUIT REAFFIRMS HIGH BURDEN TO ESTABLISH DELEGATION OF CLASS ARBITRABILITY DETERMINATION

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Earlier this month, the Third Circuit Court of Appeals reaffirmed its holding that the availability of class arbitration constitutes a question of arbitrability to be decided by courts unless the arbitration agreement “clearly and unmistakably” provides otherwise and expanded this holding to encompass situations in which the alleged delegation occurs through incorporation of American Arbitration Association (AAA) rules. The case arose out of a dispute regarding leases over oil and gas with landowners in Pennsylvania.

The lease agreements contained an arbitration provision that said that “all such disputes shall be determined by arbitration in accordance with the rules of the” AAA. The AAA rules included various subparts which, among other things, allow an arbitrator to determine if an arbitration should go forward on a class basis.  A lessee filed an arbitration demand with the AAA on behalf of itself and other similarly situated, and the lessor countered by filing a declaratory judgment action seeking a declaration that a court must determine class arbitrability and that the leases at issue did not allow for this.

The trial court granted summary judgment to the lessor and vacated the arbitrators’ decision regarding class arbitrability. The Third Circuit has set out a two part test to determine whether an arbitrator may determine class arbitrability: 1) does the agreement provide that class-wide arbitration is a question of arbitrability; and, if so 2) does the agreement clearly and unmistakably provide for the arbitrator to make this determination.  The Third Circuit has set this standard as an “onerous” one that simply could not be done in a case such as this where the agreement of the parties purported to incorporate rules which have various subparts, some of which allowed for an arbitrator to make this determination.  For this reason, the Third Circuit affirmed the lower court’s determination. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275 (3d Cir. Jan. 5, 2016).

This post written by Zach Ludens.
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