Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

U.S. SUPREME COURT TO HEAR APPEAL ON ENFORCEABILITY OF ARBITRATION AGREEMENTS IN CALIFORNIA

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The United States Supreme Court has granted DIRECTV’s petition for Writ of Certiorari and will hear the following question presented: Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

As reported here previously, DIRECTV had moved to dismiss or stay a class action litigation filed against it and to compel individual arbitration pursuant to the arbitration clause contained in DIRECTV’s customer agreements in California, which specifically prohibit class actions. The trial court denied the motion and the California Court of Appeal affirmed. The Court of Appeal focused on the arbitration clause’s non-severability provision and its reference to “state” law to hold that the class-action waiver in the arbitration clause was invalid under California law and the entire arbitration agreement was therefore unenforceable. In its petition, DIRECTV argued that the Court of Appeal did precisely what the Supreme Court’s Concepcion decision prohibits: “It applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver.” DIRECTV further argued that because the decision is in direct conflict with a recent Ninth Circuit decision, creates an acknowledged conflict between state and federal courts on a matter of federal law, and “evinces the very hostility to arbitration that led to the enactment of the FAA in the first place,” the Supreme Court’s review was warranted. Petitioner’s brief on the merits is to be filed with the Court by May 29, 2015, and Respondents’ brief is to be filed by July 17, 2015. The Court is scheduled to hear the case during its October 2015 term. DIRECTV, Inc. v. Imburgia, et al., Case No. 14-462.

This post written by Renee Schimkat.

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SUMMARY JUDGMENT OVERTURNED IN COVERAGE DISPUTE

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In late April, the Indiana Supreme Court held that Continental Casualty Company (“CNA”) must provide insurable relief for Anthem Insurance Companies, Inc. (“Anthem”), reversing a lower court decision. Anthem’s expenditures were covered under their excess reinsurance policy.

Anthem, which later merged with co-defendant WellPoint Inc., was originally subject to multiple lawsuits in Florida and Connecticut for failing to pay claims in a timely manner, breach of state and federal statutes, breach of good faith and fair dealing, unjust enrichment, negligent misrepresentation, and violations of Racketeer Influenced and Corrupt Organizations Act. Anthem later settled, without admitting wrongdoing or liability, a multi-district litigation that consolidated the various state actions. Anthem then sought indemnification from their reinsurers.

Anthem self-insured E&O liability coverage and also purchased additional reinsurance coverage. CNA and other implicated excess reinsurers denied coverage for Anthem’s underlying litigation expenses. The trial court granted summary judgment in favor of CNA. Twin City Fire Insurance Company (“Twin City”) later joined that verdict. A court of appeals affirmed that decision.

CNA argued that (1) Anthem’s alleged conduct was not solely in performance of “Professional Services,” a requirement under their reinsurance agreement; (2) that Anthem’s coverage relief was barred under Indiana public policy; and (3) Anthem’s alleged conduct was barred under the reinsurance agreements “dishonest or fraudulent act or omission” exception. The court found that Anthem’s coverage extended to “loss of the insured resulting from any claim or claims…for any Wrongful Act of the Insured…but only if such Wrongful Act…occurs solely in the rendering of or failure to render Professional services.” The court found that Anthem’s alleged conduct fit under this guidance, as the conduct was a part of Anthems handling of health claims. The court also noted a strong presumption for the enforceability of contracts, especially between CNA and Anthem, both sophisticated parties. For these and other reasons, the court reversed the trial court and granted in large part, summary judgment for Anthem.

WellPoint, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 49S05-1404-PL-244 (Ind. Apr. 22, 2015).

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

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INCORPORATION OF AAA RULES “CLEARLY AND UNMISTAKABLY” DELEGATES QUESTIONS OF ARBITRABILITY TO ARBITRATOR

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In a putative class action for denial of employment benefits brought by security contractors against their hiring firm, Blackwater Security Consulting, the court found that the governing agreements delegated the issue of arbitrability to an arbitrator and compelled arbitration. The contractors contended that the agreements contained no such delegation, but the court disagreed, finding that that the agreements’ incorporation of the AAA rules was sufficient to “clearly and unmistakably” submit arbitrability to an arbitrator. The court also found that the contractors’ challenge to the validity of the AAA clause based on fraud and duress failed “because it does not specifically address the delegation agreement itself as required by” the Supreme Court’s 2010 Rent-A-Center decision. The court further found that the contractors’ challenge based on mistake and unconsionability, “fails on the merits as a matter of law.” The contractors contended that they mistakenly believed that the agreements they signed did not contain arbitration provisions. This type of mistake, however, “about the nature of the contract and its contents—is not a mistake about an ‘existing or past fact’ that could satisfy” the law. As to unconscionability, the contractors argued that the shifting of attorneys’ fees and expenses from the firm to them was unfair, but the court rejected this argument as defective under Concepcion and other precedent. Mercadante v. XE Services, LLC, Case No. 1:11-cv-01044 (USDC D.D.C. Jan. 15, 2015).

This post written by Michael Wolgin.

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IRS PROPOSES REGULATIONS DIRECTED TO “PASSIVE” HEDGE FUND FOREIGN INSURANCE ENTITIES

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On April 24, 2015, the Internal Revenue Service proposed regulations directed to “situations in which a hedge fund establishes a purported foreign reinsurance company in order to defer and reduce the tax that otherwise would be due with respect to investment income.” The IRS proposed regulations designed to clarify its applicable tax rules, by attempting to define exceptions to “passive income” from foreign insurance companies. Such income (earned from investments) is taxed at higher rates than income from insurance business, which is taxed only when it is realized, and at lower capital gains rates. The proposed regulations seek to clarify when investment income earned by a foreign insurance company is derived in the “active conduct” of an “insurance business,” and thus whether it qualifies for the passive income exception.

The proposal provides that “insurance business” means “the business activity of issuing insurance and annuity contracts and the reinsuring of risks underwritten by insurance companies, together with those investment activities and administrative services that are required to support or are substantially related to insurance and annuity contracts issued or reinsured by the foreign insurance company.” The proposed regulations “do not set forth a method to determine the portion of assets held to meet obligations under insurance and annuity contracts.” The IRS requests comments by July 23, 2015, “on appropriate methodologies for determining the extent to which assets are held to meet obligations under insurance and annuity contracts.”

This post written by Michael Wolgin.

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VOLUNTARY-INVOLUNTARY RULE IMPLICATED IN REMOVAL PROCEEDING

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In late April, a district court in New York granted plaintiff Utica Mutual Insurance Company’s (“Utica”) motion to remand, implicating the voluntary-involuntary removal rule. Utica originally filed a breach of contract lawsuit against defendant American Re-Insurance Company (“American”). The lawsuit also named as co-defendant, Transatlantic Reinsurance Company (“Transatlantic”), a corporation domiciled and with a principal place of business in New York. American was initially unable to remove the case to federal court due to lack of diversity among the co-defendants.

A New York state court severed the claims against American and Transatlantic, thereby eliminating the diversity impediment for removal. Utica argued that “removability can only be created by Utica’s voluntary conduct,” and not by the court’s involuntary severance order. American argued that the voluntary-involuntary rule’s fraudulent misjoinder exception applied, as Transatlantic was improperly joined. The court found—citing second circuit precedent—that an action was not removable when non-diverse parties were made diverse by a court’s involuntary severance order. The voluntary-involuntary rule was designed to “protect against the possibility that a party might secure a reversal on appeal in state court of the non-diverse party’s dismissal, producing renewed lack of complete diversity in the state court action….in order to be removable, be one which could have been brought in federal court in the first instance.” The case turned on whether the order was final, and not simply voluntary.

As Utica’s severance order appeal was not yet final, a requirement under the voluntary-involuntary rule, the district court remanded the case back to the New York State Supreme Court. The court noted that American’s fraudulent misjoinder claim was “time barred” as defendants failed to file within thirty days after receipt. The court also noted that American understood “Utica’s motivation for joining Transatlantic and [American] as defendants in the same action,” an admission that went against their claim for fraudulent misjoinder.

Utica Mutual Ins. Co. v. American Re-Ins. Co., No. 6:14-CV-1558 (USDC N.D.N.Y. Apr. 27, 2015).

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

See our disclaimer.