Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL CIRCUIT ENFORCES ARBITRATION AWARD, REJECTS FOREIGN SOVEREIGN’S IMMUNITY CHALLENGE

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In 1973, Chevron and Ecuador signed an agreement allowing Chevron to develop oil fields in Ecuador. Years later, litigation ensued and eventually Chevron commenced an arbitration action before a tribunal in the Hague. Ecuador objected to the arbitral tribunal’s jurisdiction. The tribunal rejected the jurisdictional challenge and ultimately awarded Chevron $96 million. After appeals in the Dutch courts, Chevron sought to confirm the award in a federal district court under the New York Convention. Ecuador challenged the court’s jurisdiction under the Foreign Sovereign Immunities Act (“FSIA”), lost and appealed.

The main issue before the Federal Circuit Court was whether the district court had subject-matter jurisdiction under the FSIA. Resolution of that issue turned, in great part, the arbitration provision contained in the U.S.-Ecuador Bilateral Investment Treaty (“BIT”) pursuant to which Chevron initiated the arbitration. The appellate court rejected Ecuador’s argument that Ecuador’s offer in the BIT to arbitrate certain types of disputes was not an agreement to arbitrate the Chevron dispute. The court found that BIT included a “standing offer to all potential U.S. investors to arbitrate investment disputes” and that Chevron properly accepted that offer. Thus, the court concluded, the FSIA allowed the district court to exercise jurisdiction over Ecuador to consider an action to confirm or enforce the arbitral award.

The appellate court noted that the FSIA required Chevron to make a prima facie showing that there was an agreement to arbitrate. Once Chevron met that burden, the burden shifted to Ecuador to demonstrate that the notice to arbitrate in the BIT did not constitute a valid arbitration agreement. Resolution of this question was critical, the appellate court noted, to the district court’s jurisdictional analysis: “The statute requires the District Court to satisfy itself that the party challenging immunity has presented prima facie evidence of an agreement between the parties and that the sovereign asserting immunity has failed to sufficiently rebut that evidence.” The district court had failed to make that determination, which might have been reversible error. However, the appellate court found that because the district court had separately determined that there was a valid agreement to arbitrate, there was no need to remand. Chevron Corp. v. Republic of Ecuador, No. 13-7103 (D.C. Cir. Aug. 4, 2015).

This post written by John A. Camp.

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RHODE ISLAND ENACTS AMENDMENTS TO CREDIT FOR REINSURANCE ACT

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Rhode Island recently amended its Credit for Reinsurance Act to include two provisions regarding credits for reinsurance relating to the insolvency of the ceding insurer. Specifically, the first provision states that no credit is allowed “unless the reinsurance is payable by the assuming company on the basis of liability of the ceding company under the contractor contracts reinsured without diminution because of the insolvency of the ceding company.” Additionally, the second provision states that no credit is allowed “unless the reinsurance agreement provides that payments by the assuming company shall be made directly to the ceding company or to its liquidator, receiver, or statutory successor” or directly to the insured. Finally, the amendments state that no assuming company “may pay or settle, or agree to pay or settle, any policy claim, or portion of a claim, directly to or with a policyholder of any ceding company if an order of rehabilitation or liquidation has been entered against the ceding company.” These changes appear to be to bring Rhode Island’s statute closer to the model act promulgated by the National Association of Insurance Commissioners.

R.I. HB 6179 (enacted June 17, 2015) and R.I. SB 939.

This post written by Zach Ludens.

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ACTION TO VACATE ARBITRAL AWARD DISMISSED FOR LACK OF SUBJECT-MATTER JURISDICTION

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A disappointed claimant in a FINRA arbitration filed suit under section 10 of the Federal Arbitration Act (“FAA”) in United States District Court to vacate the arbitral award.  The court dismissed the case for lack of subject-matter jurisdiction.  The court noted the well established principle that the FAA is not itself a source of subject-matter jurisdiction.  Stating that the parties were not diverse, the court proceeded to evaluate whether it could exercise subject-matter jurisdiction based upon the existence of a federal question.  The plaintiff proposed two bases for federal question jurisdiction: (1) the failure of its opponent to produce certain documents, which it argued constituted a violation of FINRA rules, or a disregard by the panel of FINRA rules; and (2) the fact that the claims pursued in the arbitration included claims under federal securities laws and SEC regulations.  The court rejected both  contentions, finding with respect to the first issue that many courts have held that “manifest disregard” of FINRA or NASD rules do not constitute manifest disregard of federal law for purposes of the FAA.  With respect to the second contention, the court followed a Second Circuit opinion which held that a court may not “look through” the petition to the claims in the underlying arbitration for a basis for subject-matter jurisdiction.  The court rejected the argument that jurisdiction was supported by Vaden v. Discover Bank, 556 U.S. 49 (2009), which held that, with respect to petitions to compel arbitration under section 4 of the FAA, courts may look through the petition to determine whether it is predicated on an action that “arises under” federal law. Citing textual differences between sections 4 and 10 of the FAA, the court held that Vaden did not provide support for looking through the petition for purposes of evaluating whether the court had subject-matter jurisdiction over an action predicted on section 10 of the FAA. Doscher v. Sea Port Group Securities, LLC, Case No. 15-cv-384 (USDC S.D.N.Y. August 5, 2015).

This post written by Rollie Goss.

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IN REINSURANCE-RELATED COMMISSION DISPUTE, COURT GRANTS DEFENDANT LEAVE TO AMEND ANSWER RATHER THAN GRANT PLAINTIFF SUMMARY JUDGMENT

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A lawsuit filed in the United States Court for the District of Connecticut between Odyssey Reinsurance Company and Cal-Regent Insurance Services Corporation involves a dispute over commission payments in a reinsurance scheme with State National Insurance Company, Inc. According to Odyssey, Cal-Regent has not made the appropriate commission payments for 2003 to 2007. According to Cal-Regent, however, Odyssey failed to perform the contracts and Cal-Regent is entitled to a set-off. In its complaint, Odyssey alleged that it “has performed all of its obligations under the Reinsurance Agreement” and had performed all conditions precedent to bringing suit. Odyssey moved for summary judgment, and Cal-Regent argued that Odyssey was not entitled to summary judgment, among other reasons, because of the dispute over whether the Odyssey had first breached the reinsurance contracts. However, in its answer to Odyssey’s complaint, Cal-Regent had the burden “to deny Odyssey’s performance with particularity, which Cal-Regent failed to do.” Rather than granting summary judgment to Odyssey on this issue, the court issued a decision allowing Cal-Regent to amend its answer and affirmative defenses, including granting leave to add an affirmative defense of material breach.

In another decision issued on the same day, however, the court dismissed Cal-Regent’s counterclaim for a setoff, finding that it had been brought under Connecticut law, rather than Texas law, when the parties had agreed to Texas law in the reinsurance agreement. Odyssey Reinsurance Co. v. Cal-Regent Insurance Services Corp., No. 3:14-cv-00458-VAB (USDC D. Conn. Aug. 20, 2015).

This post written by Zach Ludens.

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SENATE BILL 900 AMENDS OPERATIONS OF TEXAS STATE BACKED INSURER

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On September 1, 2015, Texas Senate Bill 900 went into effect after passing both the Texas House and Senate this past summer. The bill amends the operation of the Texas Windstorm Insurance Association (“TWIA”), a state backed insurer of last resort. The TWIA was created in 1971 to fill in coverage gaps for windstorm and hail protection when private insurance became too expensive or when private insurance simply failed to provide coverage. The goal of the TWIA is to make coverage affordable for residential and commercial properties in areas prone to claims, most notably in certain coastal counties.

Senate Bill 900 makes a few important changes to the association. The insurer’s board of directors will now encompass three members from the insurance industry, three members from coastal Texas counties, and three members from inland Texas. It requires that the insurer maintain “available loss funding” to cover a once in a 100 year storm disaster. It also clarifies the purchasing requirements of reinsurance and alternative risk financing, both used in order to limit payout risk. Finally, Senate Bill 900 allows for the appointment of an administrator to run the insurer.

Texas Senate Bill 900 (2015)

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

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