Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NEW YORK FEDERAL DISTRICT COURT DISMISSES THIRD PARTY CLAIM AGAINST INSURANCE BROKERAGE SERVICE

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In what the court termed a “risk-free reinsurance scheme [that] proved anything but,” a New York federal court dismissed a third-party claim against the insurance brokerage service that put the two parties to the insurance arrangement in contact and counterclaims against the reinsurer that acquired business through the customers of its insured. The case involves a dispute between AmTrust North America, Inc. and SafeBuilt Insurance Services, Inc., as well as a third-party insurance consulting service, Preferred Reinsurance Intermediaries. AmTrust had retained PreferredRe to help AmTrust find prospective business opportunities, and PreferredRe succeeded in introducing AmTrust to SafeBuilt. As a result, AmTrust and SafeBuilt entered into an agreement in which AmTrust provided reinsurance to SafeBuilt, which SafeBuilt then provided a retrocession through a Montana subsidiary. The idea was that AmTrust was “to provide reinsurance but was not actually to have anything at risk.” Because of undercapitalization in the primary insurer and the retrocessionaire, however, AmTrust ended up shouldering close to $10 million of liability. When faced with the lawsuit, SafeBuilt filed a third-party complaint against PreferredRe, alleging, among other things, that PreferredRe was negligent because it “knew or should have known that . . . the parties were not well-suited for one another.” Having indemnified PreferredRe, AmTrust filed a motion to dismiss the third-party claims against it, which the court granted. In addition, AmTrust faced a counterclaim for breach of fiduciary duty and tortious interference with business relationships that the court dismissed.

Dispatching the claims against PreferredRe, the court found, among other things, that “there [was] no allegation of any agreement between PreferredRe and [SafeBuilt] at all.” Even if SafeBuilt was an intended beneficiary of a contract between AmTrust and PreferredRe, this did not include a duty to conduct due diligence of a relationship between AmTrust and SafeBuilt. The counterclaims against AmTrust centered on allegations that AmTrust used information from auditing the insurance arrangement to provide to a subsidiary, which was able to acquire business from SafeBuilt’s former customers. The fiduciary duty claim centered on allegations that AmTrust was the principal and SafeBuilt was its agent—however, absent specific contractual language, “a principal does not necessarily owe its agent a fiduciary duty.” As to tortious interference, the court ruled that absent a contractual duty to keep information confidential, AmTrust’s did “nothing more than engage in sharp practice” which “may be repugnant, but is not a wrongful means.” AmTrust North America, Inc. v. SafeBuilt Insurance Services, Inc., No. 14-cv-09494-CM-JLC (USDC S.D.N.Y. Dec. 1, 2015).

This post written by Zach Ludens.

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SOUTH CAROLINA FEDERAL COURT GRANTS IN PART, DENIES IN PART, TRUSTEE’S MOTION TO DISMISS CLAIMS BROUGHT BY FRONTING INSURER IN DISPUTE INVOLVING REINSURANCE TRUST AGREEMENTS

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Plaintiff Companion Property and Casualty Insurance Company (“Companion”) brought suit against U.S. Bank National Association (“US Bank”) arising from its role as trustee under various reinsurance collateral trusts that secured certain reinsurers’ obligations to Companion for its participation in a fronted insurance program. Companion asserted the following claims against US Bank: breach of contract (the trust agreements); breach of fiduciary duty; negligence/gross negligence; negligent misrepresentation; equitable estoppel; and violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”). US Bank moved to dismiss each cause of action for failure to state a claim.

The U.S. District Court for the District of South Carolina granted in part, and denied in part, US Bank’s motion. First, the Court found that Companion adequately pled a cognizable claim for breach of the trust agreements, rejecting US Bank’s argument that this claim (as pled) was premised on duties not expressed in those agreements. Next, Companion’s breach of fiduciary duty and negligence claims were ruled actionable, even though they involved US Bank’s purported breach of its contractual duties, because Companion sufficiently alleged the existence of an independent duty of good faith and care owed to it as beneficiary of the trusts. Finally, while Companion adequately pled sufficient facts to establish that US Bank is liable for negligent misrepresentation, the claims for equitable estoppel and for violating SCUTPA failed as a matter of law, because the former cannot be brought affirmatively in a complaint under South Carolina law, and the latter failed to allege facts demonstrating that US Bank’s conduct was the result of “standard procedures or business practices that have an adverse impact on public interest”, as required by SCUTPA. Companion Property & Casualty Insurance Co. (n/k/a Sussex Ins. Co.) v. U.S. Bank NA, No. 3:15-cv-01300 (USDC D.S.C. Nov. 24, 2015).

This post written by Rob DiUbaldo.

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NINTH CIRCUIT ALLOWS RACKETEERING CLAIM TO PROCEED FOLLOWING ARBITRATION

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Earlier this month, the U.S. Court of Appeals for the Ninth Circuit reversed summary judgment in favor of defendants who faced a RICO suit following resolution of arbitration with the plaintiffs. The case involved a dispute over whether the defendants tried to overtake a foreign subsidiary of the plaintiffs. A relevant agreement between the parties required the plaintiffs to submit to arbitration under Singapore law. The plaintiff brought suit in the Northern District of California, but that case was dismissed on forum non conveniens grounds. As part of that suit, the plaintiff included a RICO claim and sought treble damages. The Singapore arbitration took about two decades to reach completion, following which time the defendants paid the arbitral award to the plaintiff. Then, the defendants found that the plaintiff had re-initiated suit in California, continuing to seek treble damages under RICO.

The court balanced the treble damages provision of RICO with the “one satisfaction rule,” the principle that a plaintiff should not recover more than their actual losses. The “full measure” of the plaintiff’s claims were not satisfied by the arbitration’s award of actual losses, and, thereby, the RICO trebling claim was not extinguished. The court remanded the case for further proceedings, albeit with a limitation that the previous arbitral award would be offset against any liability on the RICO claim. Uthe Technology Corp. v. Aetrium, Inc., No. 3:L95-cv-02377 (9th Cir. Dec. 11, 2015).

This post written by Zach Ludens.

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STATE STATUTE OF LIMITATIONS FOR RECOGNITION OF FOREIGN JUDGMENTS HELD NOT PREEMPTED BY FAA

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National Aluminum Co., Ltd. (“NALCO”) prevailed in arbitration held in India against Peak Chemical Corp. in 2005. Ultimately, the award was affirmed on appeal by an Indian court in February 2012. When earlier this year, NALCO attempted to enforce the Indian judgment in a federal district court in Illinois, Peak contended that the judgment was barred by the FAA’s three-year statute of limitations for the recognition of international arbitration awards. The court, however, agreed with NALCO, which distinguished the recognition of the award itself from the recognition of the Indian judgment affirming the award; while the former may be time barred, the latter was still enforceable under Illinois’ 15-year statute of limitations for the enforcement of foreign judgments. The court observed that there was “little case law on the issue,” but that case law from other courts, as well as policy considerations, supported its determination that the FAA does not preempt a state’s power to recognize a former judgment. The court then rejected Peak’s alternative arguments attempting to preclude the recognition of the foreign judgment under Illinois law. National Aluminum Co., Ltd. v. Peak Chemical Corp., Inc., Case No. 1:14-cv-01314 (USDC N.D. Ill. Sept. 23, 2015).

This post written by Michael Wolgin.

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COURT DENIES COUNSEL’S ATTEMPT TO USE CONFIDENTIAL DOCUMENTS OBTAINED IN REINSURANCE ARBITRATION IN SEPARATE LITIGATION

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A reinsurer that was engaged in a London arbitration against a captive insurer of a defense contractor for the U.S. Navy had obtained documents from the Navy subject to a an agreed confidentiality protective order limiting use of the documents to the arbitration. While counsel was negotiating the terms of the protective order, counsel brought his own $2.5 billion qui tam action based on the confidential documents, against the defense contractor in a separate proceeding in Mississippi. Ultimately, the Mississippi court excoriated counsel and dismissed the qui tam case because counsel utilized the confidential documents in violation of the protective order. While counsel’s appeal of the Mississippi case was pending, counsel attempted to reopen the protective order proceedings and modify the order, contending that his violation of the order was due to “inadvertent noncompliance.” The court denied counsel’s request, ruling that the counsel was not a party to the protective order proceedings (his client was), and therefore had no standing to reopen the case to modify the order without first moving to intervene in the case. The court further held that counsel did not satisfy “good cause” to modify the protective order because (i) counsel previously advocated in favor of entry of the protective order, (ii) counsel obtained the documents from the Navy with ulterior selfish motives, and (iii) counsel disingenuously argued to the court that his violation of the order was an inadvertent mistake. Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft In München, v. Northrop Grumman Risk Management, Inc., Case No. 1:10-cv-00551 (USDC D.D.C. Dec. 9, 2015).

This post written by Barry Weissman.

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