Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

INSURER’S ACTION TO ARBITRATE STAYED IN LIEU OF EARLIER-FILED STATE COURT COVERAGE ACTION

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An Illinois federal court recently stayed an insurer’s petition to compel arbitration of a dispute with its policyholder, finding that abstention in favor of an earlier-filed suit involving the parties was appropriate under the so-called Colorado River doctrine. A.O. Smith Corporation entered into a settlement/coverage-in-place agreement (the “Agreement”) with Allstate Insurance Company to resolve disputes between them concerning the coverage afforded by various policies for underlying asbestos claims. In exchange for certain payments, the Agreement released Allstate from all claims and liabilities under the subject policies, provided that A.O. would be responsible for a share of defense and indemnity costs, and required A.O. to cooperate in the defense of such claims. The Agreement also contained a provision mandating that A.O. and Allstate resolve disputes by arbitration.

The complex factual history regarding this case can be found here. In short, years after the Agreement was entered into, Continental Casualty Company brought suit in Wisconsin against Allstate, A.O., and other insurers seeking contribution and indemnification for amounts paid by Continental to resolve certain asbestos claims. Allstate moved to stay the action and petitioned an Illinois federal court to compel arbitration under the Agreement on the basis that certain issues involved in the Wisconsin action concerning the Agreement’s scope and A.O.’s duty to cooperate were arbitrable. The Illinois court held that it had subject matter jurisdiction over the action, rejecting A.O.’s motion to dismiss for lack thereof, on the grounds that the Wisconsin suit plainly involved matters that fell within the ambit of the Agreement’s arbitration provision, making it ripe under Section 4 of the Federal Arbitration Act. However, the court granted A.O.’s request to stay the lawsuit pursuant to the Colorado River doctrine, finding that the Wisconsin action would dispose of all the claims presented by Allstate, and that other factors, such as the desire to avoid piecemeal litigation with the other insurer-defendants, that the Wisconsin suit was filed first, the Agreement’s incorporation of Wisconsin law, and the risk of inconsistent rulings weighed in favor of abstention. Allstate Insurance Co. v. A.O. Smith Corp., No. 1:15-cv-06574 (USDC N.D. Ill. Oct. 23, 2015).

This post written by Rob DiUbaldo.

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TEXAS COURT AFFIRMS ARBITRATION AWARD IN LAW FIRM FEE ROW

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A Texas district court denied Curtis International, Ltd.’s (“Curtis”) counter-motion to vacate an arbitration award in a row over attorney and expert witness fees and expenses. Curtis, a manufacturer and distributor of electronic and home appliances, retained McKool Smith as counsel to handle several patent infringement lawsuits. Upon settlement of these underlying actions, McKool Smith sought over $1.4 million dollars in unpaid legal fees and expert witness expenses. An arbitrator awarded McKool Smith fees and expenses with interest, after the dispute stalled at mediation. Curtis sought to vacate the award based on public policy, arbitrator authority, and manifest disregard of the law concerns.

Curtis argued that the arbitrator award conflicted with the Texas Disciplinary Rules of Professional Conduct in contravene to Texas public policy. The court quickly dismissed this argument finding that “[t]he Fifth Circuit has foreclosed the use of non-statutory grounds for vacatur, including public policy grounds.” The court again invoked the Fifth Circuit regarding manifest disregard of the law, finding the ground invalid when applying for vacatur. The court finally addressed Curtis’ concerns that the arbitrator exceeded his authority. The court noted that the engagement agreement between the parties explicitly stipulated that Curtis would be responsible for the expenses incurred by the use of expert witnesses. The court also found that contrary to Curtis’ assertions, McKool Smith did discuss the use and retention of expert witnesses. For these and other reasons, the court denied Curtis’ motion and confirmed the arbitration award. McKool Smith, P.C. v. Curtis Int’l, Ltd., No. 3:15-cv-01685-M (N.D. Tex. Oct. 14, 2015)

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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COURT COMPELS ARBITRATION BUT REFUSES TO STAY PARALLEL STATE ACTION

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The district court of South Carolina granted National Home Insurance Company’s (“National”) motion to compel arbitration in a dispute over new home defects. Home Buyers Warranty Corporation (“HBW”) manages a program for home warranties. National provides warranties to home builders associated with this program. Respondent, Ruth Bridges (“Bridges”), obtained a home warranty through HBW. Prior to the expiration of the warranty, Bridges contacted National over alleged structural defects in her home. National originally denied the claim and Bridges subsequently sued. National sought arbitration under the agreement which mandated arbitration for “any claim, dispute, or controversy . . . .”

Procedurally, the court first found that it had subject matter jurisdiction over the dispute as the parties were diverse—National is based in Colorado and Bridges is from South Carolina. The threshold question became whether the Federal Arbitration Act (“FAA”) governed the arbitration provision. This question hinged on whether the HBW warranty involved interstate commerce. The court found that because the HBW warranty was located in South Carolina, that HBW completed the warranty application in Georgia, and because National insured the warranty in Colorado, the FAA applied. Because the FAA applied, National’s motion to compel was granted. However, the court did deny National’s petition to stay the proceedings in South Carolina state court pending arbitration. The court found that “[National] has alleged no facts indicating that the state court would fail to act in accordance with its obligations under the FAA . . .” Additionally, the court’s decision did not preclude National from seeking a similar stay order in the South Carolina state court. National Home Ins. Co., v. Bridges et al., No. 6:15-00112-MGL (D.S.C. Oct. 30, 2015)

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.
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COURT LAYS OUT VARIOUS GUIDELINES FOR ASSERTING PRIVILEGE IN INSURANCE AND REINSURANCE RELATED DISCOVERY

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The court considered the various privilege assertions of both the insurers (plaintiffs) and the insureds (defendants) in a multi-insurer insurance litigation. In analyzing varying categories of documents, including subsets of documents produced to the court in camera, the court ordered the production of certain documents but not others. Included in the court’s reasoning were the following principles based on New York law: (1) regarding attorney client privilege, discussions between the insurer and its attorney in advance of the denial of coverage are not privileged unless they are “primarily or predominantly a communication of a legal character,” as distinct from routine insurance business activities such as claim investigation; (2) regarding work product, the party seeking to withhold a document “must demonstrate that the document it seeks to withhold was created because of the anticipation of litigation” and in the context of insurers, that presumptively occurs when the insurance claim is denied; (3) documents related to reserves and reinsurance is discoverable unless they are “covered by another relevant privilege”; and (4) documents generated by the insureds that “speak more to the requirements for making a case to the insurers, not a case against the insurers in the courts,” namely, documents generated before the submission of proof of loss, is presumptively not privileged and is discoverable. Great American Insurance Co. of N.Y. v. Castleton Commodities International LLC, Case No. 1:15-cv-03976 (USDC S.D.N.Y. Oct. 15, 2015).

This post written by Michael Wolgin.

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SIXTH CIRCUIT CLARIFIES PRIOR REVERSAL OF AN ORDER THAT HAD VACATED ARBITRATION AWARD AS A MANIFEST DISREGARD OF THE LAW

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After an arbitrator ruled that indemnification agreements between an acquiring company and certain former directors and trustees of employee stock ownership plans, were void under ERISA, the district court vacated the arbitrator’s ruling as a manifest disregard of the law. On the initial appeal of that ruling, the directors argued that district court properly found a manifest disregard of the law based on ERISA, and also because the arbitrator ignored the directors’ alternative arguments based on fraud and estoppel. The Sixth Circuit reversed the vacatur ruling under ERISA, but in passing appeared to reject the remaining arguments asserted by the directors. Accordingly, on remand, the district court precluded the directors from asserting their alternative fraud and estoppel arguments, as the “law of the case.” The directors appealed, and, in a candid opinion, the Sixth Circuit reversed, noting “[w]e regret the extent to which [the Court’s] language was misleading.” The directors’ fraud and estoppel theories were not rejected, and on remand, “the district court should address that argument in the first instance.” Schafer v. Multiband Corp., Case No. 14-2518 (6th Cir. Oct. 20, 2015).

This post written by Michael Wolgin.

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