Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

TEXAS APPEALS COURT AFFIRMS SUMMARY JUDGMENT FOR TEXAS COMPTROLLER IN RISK POOL ROW

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A Texas appeals court affirmed a summary judgment that rejected an attempt by two insurers to recover more than $1.1 million for taxes, penalties, and interest on certain reinsurance agreements. Argonaut Insurance Company and Argonaut Great Central Insurance Company (jointly “Argonaut”) provided insurance to two self-funded government risk pools formed on behalf of Texas counties and school districts. These risk pools provided various insurance products to their membership. As part of a reinsurance arrangement with these risk pools, Argonaut agreed to provide indemnity for losses accumulated under member insurance policies in return for member premium payments. Argonaut considered these premium payments non-taxable “reinsurance income,” but the Texas Comptroller rejected this classification finding that “for premiums to qualify as paid for reinsurance, the transaction must occur between two licensed insurance companies.”

On appeal, all parties agreed that the main issue centered on “whether the premiums received by Argonaut from [the risk pools] are premiums received from another insurer for reinsurance.” Argonaut argued that the agreements with the risk pools have reinsurance characteristics, a factor that outweighs whether or not the risk pools are licensed insurance companies. The court found that while a risk pool “is expressly authorized to purchase reinsurance, it is also expressly declared not to be insurance or an insurer” under Texas insurance and tax codes. For these reasons, the court affirmed the trial court’s grant of summary judgment for the Texas Comptroller. Argonaut Ins. Co. et al. v. Hegar et al., No. 03-13-00619-CV (Tex. Ct. App. June 24, 2015).

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

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FOURTH CIRCUIT APPLIES “LIMITED REVIEW” OF CLASS ARBITRATION AWARD AND FINDS NO MANIFEST DISREGARD OF THE LAW

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The Fourth Circuit considered whether an arbitrator manifestly disregarded the law by failing to find actual damages and failing to award sufficient attorney’s fees against certain non-profit credit repair companies, despite the arbitrator’s finding that the companies had made inadequate disclosures under the Credit Repair Organizations Act (CROA). Regarding damages, the arbitrator had determined that plaintiffs were not entitled to “amount[s] paid” under the CROA as damages, because plaintiffs made “voluntary contributions” to the non-profit credit repair organizations, rather than actual payments contemplated within the meaning of the CROA. The Fourth Circuit held that, given the absence of binding precedent requiring a contrary interpretation of the CROA, the arbitrator’s ruling “did not constitute a refusal to heed a clearly defined legal principle.” The court further noted that it was not for it “to pass judgment on the strength of the arbitrator’s chosen rationale.” Similarly, with respect to the arbitrator’s ruling on attorney’s fees, the Fourth Circuit held that while “it may be debatable whether the arbitrator performed [the] task ‘well,’ the record in this case shows that the arbitrator undertook a careful analysis of the applicable legal principles and reached a decision supported by his interpretation of our precedent.” In reaching its decision, the Fourth Circuit considered certain U.S. Supreme Court rulings in making clear that the “limited review” of an arbitration award is appropriate even when “the arbitrator considered remedies created by statute, rather than rights established by contract.” Jones, et al. v. Dancel, et al., Case No. 14-2160 (4th Cir. July 6, 2015).

This post written by Michael Wolgin.

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SECOND CIRCUIT DENIES JP MORGAN’S ATTEMPT TO FORCE ARBITRATION

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The Second Circuit affirmed a New York district court ruling that found that the FINRA arbitration rules, one of which prohibits arbitration of putative or collective class actions, was incorporated within the subject employment agreement. Former financial advisers of the progeny of J.P. Morgan Chase & Co. sued J.P. Morgan under state and federal law for violations of overtime laws. J.P. Morgan moved to compel arbitration pursuant to a clause within the advisers’ employment contracts. In denying their motion, the district court reasoned “that the arbitration clause requires arbitration of only those claims required to be arbitrated under the FINRA Rules and that, under New Rule 13204, Plaintiffs’ claims cannot be arbitrated.”

On appeal, J.P. Morgan argued against the trial court’s interpretation of the phrase “required to be arbitrated by the FINRA Rules” as well as the court’s use of the amended version of Rule 13204, which was not in effect when the parties originally entered into their contract. The court used a grammatical and definitional analysis to determine that the phrase applies to all claims and controversies. They also found that when JP Morgan agreed to arbitrate according to the FINRA rules, they also took on the risk that these rules may change. Regardless of that risk, the court noted that under either the original version of Rule 13204 or the amended version, FINRA prohibits the arbitration of collective class actions claims. Lloyd et al. v. JP Morgan Chase & Co. et al., No. 13-3963-cv (2d Cir. June 29, 2015).

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

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REINSURER’S MOTION FOR RECONSIDERATION OVER LIABILITY CAPS DENIED

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In a case on which we previously reported, a federal court in New York recently denied plaintiff insurer’s motion to reconsider the court’s order granting defendant reinsurer’s motion for partial summary judgment. In that order, the court granted defendant Clearwater Insurance Company’s (Clearwater) motion for partial summary judgment because it found that the Liability Clauses in the facultative reinsurance certificates that Clearwater issued to plaintiff Utica Mutual Insurance Company (Utica) established limits on Clearwater’s liability. Specifically, these clauses capped Clearwater’s overall liability for losses (amounts an insurer pays to indemnify its policyholder) and expenses (amounts an insurer pays to defend its policyholder). Applying New York law, the court concluded that the contract was unambiguous and that the caps should be honored.

In its motion for reconsideration, Utica asked the court to deny Clearwater’s motion for partial summary judgment, arguing that a recent Second Circuit order represented an intervening change in controlling law. The court, however, denied Utica’s motion for three reasons: (1) because it was untimely; (2) because the order cited in Utica’s motion did not constitute an intervening change in controlling law; and (3) because even if the order were such an intervening change, it was distinguishable from the case at bar. Utica Mutual Ins. Co. v. Clearwater Ins. Co., No. 6:13-cv-01178 (USDC N.D.N.Y. July 23, 2015).

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

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PENNSYLVANIA DISTRICT COURT REJECTS REINSURER’S “FIRST-FILED” COMPLAINT AS IMPROPERLY ANTICIPATORY AND FILED IN BAD FAITH

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A reinsurer filed a complaint in the Eastern District of Pennsylvania seeking declaratory relief regarding its obligations under a reinsurance contract on May 7, 2015. The defendants filed an action concerning the same parties, facts, and issues in the District of Connecticut on May 12, 2015. Despite the fact that the Pennsylvania action was filed first, the court declined to exercise jurisdiction under the Declaratory Judgment Act.

On May 1, 2015, the defendants requested payment by May 15th from the reinsurer under the parties’ reinsurance contract and indicated that they would file suit in the District of Connecticut if payment was not timely received. Instead of either paying or responding, the reinsurer filed its complaint for declaratory judgment, preemptively, in the Eastern District of Pennsylvania. The defendants moved to dismiss. Noting that the timing of these events suggested an improper first filing, the Pennsylvania court dismissed the reinsurer’s complaint. Fatal to the reinsurer’s action were the court’s finding that the Pennsylvania filing “was filed in bad faith, as it was improperly anticipatory and solely for declaratory relief.” Additionally, the court found that the reinsurer’s first filed action was merely an “attempt to secure better procedural law by rushing to the [Pennsylvania] courthouse ahead of [the defendants].” Finally, because the defendants were able to establish a nexus between Connecticut and the dispute, and because the plaintiff had improperly “fired the first shot” while the defendants’ pre-litigation demand was pending, the court held that the reinsurer was not entitled to the benefits of the equitable “first-filed” rule. Excalibur Reinsurance Corp v. Select Ins. Co., et al., Case No. 15-2522 (USDC E.D. Pa. July 7, 2015)

This post written by John A. Camp.

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