Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT AFFIRMS REINSURANCE ARBITRATION AWARD IN FAVOR OF FIRST STATE INURANCE COMPANY AND NEW ENGLAND REINSURANCE CORPORATION

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Phased arbitration proceedings involving First State Insurance Company and New England Reinsuance Corporation against Nationwide Mutual Insurance Company addressed claims arising under numerous reinsurance agreements between First State and Nationwide. The arbitration panel entered three orders, one as to each phase, in favor of First State and, as part of its decision, crafted certain remedial measures under the reinsurance agreements between the parties. The arbitration panel’s rulings engendered additional litigation on both procedural and substantive grounds before the federal court. Procedurally, the federal court ruled that First State’s motion to confirm the award as to the first phase was premature when filed because the arbitration panel had not yet ruled on the remaining phases. On reconsideration of its prior order dismissing the motion to confirm as premature, the court ruled that the motion should have been deferred and not dismissed as premature. The court consolidated the motion with First State’s other motions seeking to confirm the awards on the subsequent phases of the arbitration proceedings. Substantively, the court rejected Nationwide’s argument that the panel exceeded its authority in crafting the remedial measures in light of the high level of deference given to arbitral awards by reviewing courts. First State Insurance Co. v. Nationwide Mutual Insurance Co., Case No. 13-cv-11322-IT (USDC D. Mass. Mar. 25, 2015).

This post written by Leonor Lagomasino.

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NATURE OF REINSURANCE RELATIONSHIP PRECLUDES DISMISSAL OF NEGLIGENCE CLAIM BROUGHT BY REINSURER AGAINST CEDENT

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A federal district court has denied a cedent’s motion to dismiss a negligence claim brought against it by its reinsurer, Old Republic National Title Insurance. The dispute between Old Republic and First American Title arose out of a reinsurance agreement where Old Republic agreed to assume a specified share of First American’s contractual liability under certain title insurance policies. First American negotiated a settlement of claims brought under those title policies and then asserted that Old Republic was obligated under the reinsurance agreement to pay its proportionate share of that sum. Old Republic paid the amount under a full reservation of rights, then sued First American for several causes of action, including negligence. The negligence claim alleged that when Old Republic made the offer for the reinsurance agreement, “First American undertook a duty to underwrite the Title Policies in a reasonably prudent manner and created a special relationship” with Old Republic that First American then breached.

First American moved to dismiss the negligence claim, arguing that the “gist of the action” doctrine precludes it. That doctrine states that an action in tort will not arise for breach of contract unless the tort action arises independent of the existence of the contract. First American argued that its liability stems from the parties’ reinsurance agreement and any duty owed by First American to Old Republic arises solely out of that contractual relationship. The court rejected that argument and the doctrine’s application, stating that the nature of the relationship between reinsurers and cedents, including the exercise of utmost good faith between them, supported a duty grounded in social policy, not solely in contract. The court further found that irrespective of the source of the duty owed, the negligence claim would not be dismissed because Old Republic, in the alternative, sought to rescind the reinsurance agreement and if the rescission claim ultimately prevailed, then the “gist of the action” would no longer be contractual. Old Republic National Title Insurance Co. v. First American Title Insurance Co., No. 8:15-cv-126 (USDC M.D. Fla. March 25, 2015).

This post written by Renee Schimkat.

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COURT FINDS IN FAVOR OF HARBINGER ON $50 MILLION CLAIM INVOLVING PURCHASE OF OLD MUTUAL FINANCIAL LIFE INSURANCE COMPANY

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In a lengthy opinion detailing extensive findings of fact and law, a New York federal district court entered its order in favor of Harbinger F&G, LLC and against OM Group (UK) Limited in an action stemming from claims arising from the stock purchase agreement for the purchase of Old Mutual Financial Life Insurance Company by Harbinger from OM Group. Under the Agreement, Harbinger was entitled to a $50 million purchase price reduction if the Maryland insurance regulators did not approve a post-closing transaction between Old Mutual and Front Street Re, a reinsurance company owned indirectly by Harbinger, and if Harbinger fulfilled certain other conditions precedent. Harbinger was required to prepare and file certain approval documentation in the form agreed to by the parties, to use reasonable best efforts to obtain governmental approval for the reinsurance transaction and, if the transaction was not approved, Harbinger was required to engage in certain remedial efforts. When the post-closing transaction was not approved but OM Group failed to make the purchase price reduction payment, Harbinger sued. After holding a bench trial on those issues not disposed of on summary judgment, the trial court entered judgment in favor of Harbinger but found OM Group was entitled to the payment of certain fees from Harbinger. “>Harbinger F&G, LLC v. OM Group (UK) Limited, Case No. 12 Civ. 05315 (CRK) (USDC S.D.N.Y. Mar. 18, 2015).

This post written by Leonor Lagomasino.

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COURT DENIES SUMMARY JUDGMENT MOTIONS DESPITE AN EXPRESS AGREEMENT TO ARBITRATE

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A New York federal district judge denied Plaintiffs McKenna Long & Aldridge, LLP (“McKenna”) and Vincent W. Sedmak (“Sedmak”) motions for summary judgment which sought to stop an arbitration action from Ironshore Specialty Insurance Company (“Ironshore”).

Five years ago, Eidos, LLC (“Eidos”), with McKenna serving as counsel, obtained a $20 million loan from Stairway Capital Management II LP (“Stairway”) to finance an enforcement litigation program. As a precondition for the issuance of the loan, Ironshore provided a loss reimbursement policy in case the original loan was not paid back. The arbitration provision in that policy provided the framework for this litigation. Ironshore refused to pay Eidos pursuant to the loss reimbursement policy due to the alleged misuse of loan funds from Sedmak. Ironshore sued to compel arbitration under the policy and McKenna and Sedmak simultaneously moved for summary judgment. As both McKenna and Sedmak did not sign the loss reimbursement policy agreement, the court noted that the arbitration provision therein would only be enforced under the following theories–1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.

The court found “no triable issue as to whether plaintiffs have directly benefited from the Policy, or as to whether McKenna was an intended third-party beneficiary of the Policy and knowingly accepted benefits stemming from the Policy.” The court noted that McKenna was estopped from denying arbitration as they were the direct recipient of over $11 million in legal fees. Furthermore, as part of the loan was used to pay Sedmak’s salary and certain loan proceeds were transferred to a corporation owned by Sedmak, Sedmak was a third party beneficiary and therefore could not contest Ironshore’s right to arbitration. McKenna Long & Aldridge, LLP v. Ironshore Specialty Ins. Co., No. 14-CV-6633 KBF, 2015 WL 144190, at *1 (S.D.N.Y. Jan. 12, 2015).

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

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ARBITRATION ROUNDUP

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Award Authorizing Class Action Litigation

Emilio v. Sprint Spectrum L.P., Case No. 14-732-cv (2d Cir. Nov. 12, 2014) (affirming denial of motion to vacate award; district court did not err by finding that arbitrator did not exceed powers nor manifestly disregard law when it ruled that Sprint could not be compelled to proceed with class arbitration and plaintiff could not be compelled to proceed with bilateral arbitration under state law, which the arbitration agreement stated would govern);

Emilio v. Sprint Spectrum L.P., Case No. 1:11-cv-03041 (USDC S.D.N.Y. Dec. 23, 2014) (denying motion to dismiss class action or strike class allegations; defendant collaterally estopped from relitigating basis for prior arbitration rulings authorizing class action litigation)

Manifest Disregard

NDV Investment Co. v. Apex Clearing Corp., Case No. 1:14-cv-00923 (USDC S.D.N.Y. Jan. 8, 2015) (denying motion to vacate FINRA award; granting cross-motion to confirm award; no manifest disregard of the law for misapplying FINRA rule or for the panel’s failure to permit a full hearing; no arbitrator “misconduct” for refusing to hear evidence);

Power Partners Mastec, LLC v. Premier Power Renewable Energy, Inc., Case No. 1:14-cv-08420 (USDC S.D.N.Y. Feb. 20, 2015) (granting petition to confirm nearly $3 million award; no manifest disregard of law; arbitrator’s findings were supported by the record);

Sotheby’s International Realty, Inc. v. Relocation Group, LLC, Case No. 14-253-cv (2d Cir. Jan. 6, 2015) (reversing district court’s order that vacated award as manifest disregard of law; court failed to apply test, which includes finding that relevant law was “clear,” determining that no “barely colorable justification” for the panel’s decision existed, and addressing alternate readings of the relevant law that might have supported the arbitrators’ decision)

Exceeding Authority

Seagate Technology, LLC v. Western Digital Corp., Case No. A12-1944 (Minn. Oct. 8, 2014) (affirming appellate court’s order reinstating $500 million arbitration award; defendants did not waive their rights to challenge the award, but a review of the merits of the award showed that arbitrator did not exceed authority by issuing punitive sanctions for defendants’ fabrication of evidence, which included excluding defendants’ evidence and defenses);

BNSF Railway Co. v. Alstom Transportation, Inc., Case No. 13-11274 (5th Cir. Feb. 6, 2015) (reversing order vacating arbitration award; court improperly reviewed merits of arbitrators’ interpretation of contract instead of limiting review to “whether the arbitrators even arguably interpreted the Agreement in reaching their award”)

Scope of FAA

Wiand v. Schneiderman, Case No. 14-11203 (11th Cir. Feb. 10, 2015) (affirming district court’s order compelling arbitration and denying motion to vacate award; court-appointed receiver’s “clawback” action against estate of investor in Ponzi scheme is not exempt from FAA; court did not err in referring validity of contract to arbitration; court did not err in holding arbitrator did not exceed powers; court would not review arbitrator’s evidence-based rulings)

This post written by Michael Wolgin.
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