Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Third Circuit Reverses Judgment Enjoining Arbitration Proceeding, Remands to District Court for Further Consideration

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In Field Intelligence Inc. v. Xylem Dewatering Solutions Inc., the Third Circuit Court of Appeals agreed with the district court’s determination that the court, not the arbitrator, was required to determine whether the parties’ first agreement, which included an arbitration agreement, was superseded by a second agreement, which did not contain an arbitration provision. However, the court then reversed the district court’s judgment, which determined that the agreement containing the arbitration provision had been superseded, and remanded the matter for further consideration of the defendant’s motion to stay the federal court litigation while arbitration is pending.

Defendant Xylem Dewatering Solutions manufactures and sells large-capacity water pumps. Xylem entered into two agreements with plaintiff Field Intelligence Inc. to develop a solution to allow Xylem customers to better monitor the water pumps. The first agreement, in 2013, was a “non-disclosure agreement” that included an arbitration provision requiring that any “dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof,” be “settled by arbitration in accordance with the Rules of the American Arbitration Association.” The second agreement, in 2017, was a “software subscription service agreement” and did not include an arbitration provision, instead requiring any “action under or concerning” that agreement to be litigated in a state or federal court in New Jersey. A dispute arose between the parties and Field Intelligence filed an action in the district court for breach of the 2017 agreement. After engaging in some early discovery, Xylem then filed an arbitration demand with the AAA seeking various relief, including a determination that it did not breach the 2013 agreement. Xylem moved to stay Field Intelligence’s federal court action pending resolution of the arbitration. Field Intelligence opposed the motion to stay and cross-moved to enjoin the arbitration. The district court held it had the authority, rather than the arbitrator, to decide whether the second contract (without an arbitration provision) superseded the first, and then found the later agreement did in fact supersede the first agreement. The district court enjoined the arbitration that Xylem had filed and denied as moot Xylem’s motion to stay the federal litigation.

The Third Circuit agreed that the district court was authorized to determine whether the second contract superseded the first, holding that “the parties’ supersession dispute is for a court, not an arbitrator, to decide” and “before sending parties to an arbitrator, a court must decide whether they agreed to resolve their dispute in that forum.” However, the Third Circuit found that since there was no indication in the 2017 agreement that the parties intended to replace the 2013 agreement, “the 2013 contract’s arbitration provision is still in effect, and Xylem was entitled to arbitrate claims tied to that agreement.” The court further held that “Xylem did not waive its right to pursue arbitration for claims arising under the 2013 contract merely by engaging in this litigation.” The court then reversed the district court’s judgment enjoining the arbitration proceeding, vacated the judgment denying Xylem’s motion to stay the federal litigation while arbitration is pending, and remanded that issue to the district court “to consider the merits of that motion in light of our opinion.”

Field Intelligence Inc. v. Xylem Dewatering Solutions, Inc., No. 21-2087 (3d Cir. Sept. 13, 2022).

Second Circuit Affirms Decision That Insurer Is Entitled to Reinsurance Coverage for an Allocated Portion of Settlement

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In Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., the Second Circuit Court of Appeals affirmed a district court order granting summary judgment to plaintiff Fireman’s Fund, holding that defendant OneBeacon is obligated under a reinsurance policy’s “follow-the-settlements” clause to provide coverage for a settlement paid by Fireman’s Fund to its insured.

The case involved a reinsurance policy that OneBeacon’s predecessor-in-interest (General Accident) issued to Fireman’s Fund. The policy reinsured one of three excess insurance policies that Fireman’s Fund had issued to its insured, ASARCO, for two policy years in the early 1980s. All three excess policies issued by Fireman’s Fund to ASARCO provided coverage for $20 million in losses “but applied to varying policy years and had different attachment points (that is, points at which excess coverage was triggered)”. Faced with significant potential liability from asbestos-related claims, ASARCO sought coverage for those claims from Fireman’s Fund under all of the excess policies. After 10 years of litigation, Fireman’s Fund agreed to pay ASARCO $35 million in settlement of ASARCO’s claims under the three excess policies. To pursue reinsurance for the settlement it paid to ASARCO, Fireman’s Fund allocated the settlement amount among the three excess policies “in proportion to its calculation of the policies’ likely respective exposures,” which resulted in an allocation of $8.1 million to the OneBeacon policy. Fireman’s Fund then sought reinsurance coverage from OneBeacon for a percentage of that amount. The OneBeacon reinsurance policy included a “follow-the-settlements” clause, which provided “[a]ll claims involving this reinsurance, when settled by [Fireman’s Fund], shall be binding on the Reinsurer, who shall be bound to pay its proportion of such settlements.” However, OneBeacon denied the claim, asserting that the underlying policies were not exhausted and “Fireman’s Fund should have allocated the entire settlement amount to the other two excess policies.” The district court granted summary judgment in favor of Fireman’s Fund, concluding that OneBeacon had no basis for challenging Fireman Fund’s allocation of a portion of the settlement amount to the third policy.

The Second Circuit affirmed the district court’s entry of summary judgment, holding that the third policy’s terms “did not unambiguously require exhaustion of the underlying insurance policies through actual payment of the policy limits by the underlying insurers,” and “the underlying policies could be exhausted by a below-limits settlement and the third policy would cover so long as the policyholder’s total covered losses exceeded the policy’s attachment point.” The court then pointed out because ASARCO’s losses exceeded the third policy’s attachment point, “Fireman’s Fund could reasonably allocate a portion of the settlement to that policy.” Finally, the court rejected OneBeacon’s argument that the reinsurance policy required payment of policy limits in full by the underlying primary and excess insurers before any reinsurance coverage would attach, concluding that “[b]ecause Fireman Fund’s allocation was not contrary to the terms of any of the applicable policies, the reinsurance policy’s follow-the-settlements clause binds OneBeacon to honor the allocation.”

Fireman’s Fund Insurance Co. v. OneBeacon Insurance Co., No. 20-4282 (2d Cir. Sept. 15, 2022).

Denial of Motion to Compel Arbitration Vacated by Second Circuit Due to Insufficient Record Evidence of Presentment of “Scrollwrap Agreement” to Users

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Nicole Zachman brought a putative class action against the Hudson Valley Federal Credit Union (HVCU) for breach of contract and violation of the federal Electronic Fund Transfer Act, among other claims, based on HVCU’s alleged practice of collecting overdraft or insufficient funds fees on accounts that were not actually overdrawn. HVCU moved to compel arbitration based on an arbitration provision included in the modified account agreement Zachman signed in 2019 when she opened her online account with HVCU. Zachman countered that the account agreement she signed in 2012, when she originally opened her account with HVCU, did not contain an arbitration agreement and further that she was not bound by the arbitration provision added in 2019 because she was never provided notice of its addition.

In response, HVCU argued that Zachman was on “inquiry notice” of the arbitration provision’s inclusion in the 2019 modified account agreement. Under New York law, an offeree who does not have actual notice of contract terms is nevertheless bound by those terms if he or she is on inquiry notice of them and assents to them through conduct. “In determining whether an offeree is on inquiry notice of contract terms, New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. This often turns on whether the contract terms were presented to the offeree in a clear and conspicuous way.” When applied to web-based contracts, the courts “look to the design and content of the relevant interface” to determine if the contract terms were presented to the offeree in a way that would put him or her on inquiry notice of the terms.

Here, the Second Circuit determined that the record was insufficiently developed to permit a determination as to whether the presentment of the arbitration provision to users like Zachman was sufficiently “clear and conspicuous” to put her and other users on inquiry notice. The record contained evidence that the modified account agreement containing the arbitration provision was published on the HVCU website. HVCU customers could access the agreement by searching the HVCU website using its built-in search bar or clicking through the website’s “resources” tab to the “account disclosures” webpage. Users could also obtain a hard copy of the agreement by requesting it be mailed to them or by visiting a brick-and-mortar branch. However, HVCU did not post a notice of the added provisions in its quarterly newsletters or in members’ electronic statements, nor did it provide notice in any other fashion, such as by posting a “banner” notification on its webpage.

When HVCU established its new online banking system in 2019, it required users to first register their accounts. To register, users had to click through various “clickwrap” or “scrollwrap” agreements, including an “internet banking agreement.” The internet banking agreement incorporated the modified account agreement and provided links to it. The modified account agreement included the mandatory arbitration provision at issue.

The district court ruled that HVCU failed to demonstrate that Zachman’s registration for online banking put her on inquiry notice of the arbitration provisions. The court found that HVCU “provides no visual aid or description of any layout or design of the webpages that a user sees when registering for online banking services.” HVCU provided a copy of the internet banking agreement “but did not provide screenshots of the webpage(s) presenting the Internet Banking Agreement to online banking registrants.” Reviewing the copy of the internet banking agreement that had been provided, the court found that the relevant hyperlink and language “appear to be buried” in the agreement and, therefore, that HVCU had failed to establish Zachman was on inquiry notice. As a result, it denied the motion to compel.

The Second Circuit, however, vacated and remanded for further proceedings. The appellate court noted that HVCU did not submit any evidence of how the internet banking agreement was presented to users. “As a result, the district court could not resolve whether Zachman was on inquiry notice because, as it noted, it was unable to assess whether the relevant language and hyperlink are clear and conspicuous.” The district court could not properly engage in the required analysis based on the copy of the internet banking agreement in the record; rather, it was necessary to know “the design and content of the webpage and how the terms were presented.” Because no such evidence was presented by either party, the Second Circuit vacated and remanded for further proceedings to develop the record on this issue.

Zachman v. Hudson Valley Federal Credit Union, No. 21-999 (2d Cir. Sept. 14, 2022).

District Court Orders Limited Trial to Address Party’s Authority to Sign Arbitration Agreement

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Relying on the Federal Arbitration Act and recognizing that “this case presents one of the rare instances in which a defendant opposing arbitration survives the initial stage of an FAA proceeding,” the U.S. District Court for the Eastern District of Kentucky denied the defendant’s motion to dismiss the plaintiff’s action to compel arbitration and ordered the matter to proceed to trial on the limited issues concerning the validity and enforceability of the arbitration agreement.

In August 2010, Opal Wells executed an unlimited power of attorney providing her son Leonard Wells as her attorney-in-fact and agent. Opal was admitted to the Boyd Nursing and Rehabilitation Center in 2013. In 2019, when new owners took over Boyd, they took steps to obtain signatures on paperwork regarding Opal, which included an arbitration agreement. The arbitration agreement was part of a larger document but had its own signature block, which Leonard signed as his mother’s “responsible party.” Opal passed away in September 2020 and Leonard filed a state court action on behalf of her estate and wrongful death beneficiaries. Boyd then filed an action in the district court to compel arbitration of the state court claims, asserting that the power of attorney “provided Leonard with the authority to sign the Arbitration Agreement on Opal’s behalf.” Leonard filed a motion to dismiss Boyd’s action on several grounds, including lack of subject matter jurisdiction, failure to join an indispensable party, and the Colorado River abstention doctrine. The district court rejected each of those arguments. Leonard also raised arguments regarding the validity and enforceability of the arbitration agreement, asserting that the arbitration agreement was unconscionable because it was “part of a mass-produced, boiler-plate, pre-printed document” and that “an obviously gross disparity of bargaining power” supports a finding of unconscionability. The court rejected those arguments as well, noting that the court has “previously found that nursing home arbitration agreements with similar characteristics fall short of the high bar for procedural unconscionability despite their ‘boilerplate’ language” and that the claim of unequal bargaining power was unsupported.

Finally, Leonard argued that the authority he maintained as Opal’s power of attorney expired when she became incapacitated, rendering him incapable of signing the arbitration agreement on her behalf. With regard to this issue, the court concluded that “the making of the agreement is in issue” such that “this matter must proceed to trial” on limited issues regarding whether “Opal was incapacitated prior to the signing of the Arbitration Agreement” and, if necessary, “whether Leonard lacked actual knowledge of Opal’s incapacitation such that he could in good faith validly bind her and her successors in interest.” The court noted that the “Sixth Circuit has stated that ‘parties may seek targeted discovery on … disputed contract-formation questions’ under the FAA, provided that ‘any discovery must comport with § 4, which calls for a summary trial — not death by discovery.’” The court ordered the matter to proceed to trial on the limited issues addressed in the opinion and permitted limited discovery on the triable issues.

Boyd Nursing & Rehabilitation, LLC v. Wells, No. 0:22-cv-00011 (E.D. Ky. Aug. 30, 2022).

Fourth Circuit Dismisses Petition Brought by NLRB to Enforce Settlement and Order

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Concluding that the action before it “lacks adverseness” and did not present a case or controversy fit for judicial resolution, the Fourth Circuit Court of Appeals held that it did not have jurisdiction over the National Labor Relations Board’s petition to enforce a settlement and order to which the employer had consented, and dismissed the petition.

Respondent Constellium Rolled Products employs members of a local United Steelworkers union. After a labor dispute, the union filed four charges with the NLRB alleging that Constellium committed unfair labor practices. The union requested information from Constellium that it believed would be relevant to collective bargaining. The union alleged that Constellium refused to provide the requested information, and “[b]elieving the allegations had merit,” the NLRB issued an agency complaint against Constellium. Rather than proceed through agency adjudication, the union and Constellium entered into a formal settlement stipulation, which provided that the stipulation was not effective until the NLRB had approved it and that upon entry of an NLRB order, Constellium would immediately comply with the terms of the order. Constellium also agreed in the stipulation that when the NLRB sought a judgment in federal court to enforce the order, “Constellium would waive all defenses and consent to the entry of that judgment.”

The NLRB approved the stipulation, issued an order reflecting the terms, and then petitioned the court under 29 U.S.C. §160(e) to enter a consent judgment against Constellium reflecting the terms of the order. The Fourth Circuit dismissed the petition holding that “[b]ecause this suit lacks adverseness, we lack jurisdiction.” In considering the jurisdictional issue, the Fourth Circuit noted the Supreme Court’s decision in United States v. Windsor, 570 U.S. 744 (2013), which reaffirmed that Article III requires “sufficient adverseness” to confer an adequate basis for jurisdiction. The court further noted that “[a]dverse interests — that minimum adverseness threshold required by Windsor — exist only when judicial action would have ‘real-world consequences’ and ‘real meaning’ for the parties.” The court noted that the NLRB “agrees that Constellium has complied with the order and continues to do so” and found that while there was adverseness between the NLRB and Constellium at some point when the matter was before the board, “that adverseness was extinguished before the case got to federal court” and dismissed the petition.

National Labor Relations Board v. Constellium Rolled Products Ravenswood, LLC, No. 20-2140 (4th Cir. Aug. 5, 2022).