Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FIRST CIRCUIT CONCLUDES PLAINTIFF’S DELAY WAIVED ARBITRATION CLAUSE

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Joca-Roca Real Estate, LLC sued Robert T. Brennan asserting claims of fraud and breach of contract arising out of an agreement between the two parties which contained an arbitration clause. Although Brennan raised the failure to arbitrate as an affirmative defense, it never pursued arbitration. Instead, the parties engaged in significant discovery. On the eve of trial, Joca-Roca moved to stay the proceedings pending arbitration. Both the magistrate judge and the district court denied the motion to stay, finding that Joca-Roca waived its arbitral rights.

On appeal, the First Circuit noted that, while federal law favors agreements to arbitrate, arbitration clauses can be waived expressly or through conduct. In determining whether a conduct-based waiver occurred, a court must ascertain whether there has been undue delay in the assertion of arbitral rights and whether, if arbitration supplanted litigation, the other party would suffer unfair prejudice. The longer the delay and the more extensive the litigation-related activities that have taken place, the stronger the inference of prejudice. Joca-Roca’s attempt to invoke the arbitration was deemed not only untimely, but unsupported by an explanation for the belated request. Moreover, during this time, Brennan was prejudiced because he was forced to engage in discovery which would not have been required in arbitration. The prejudice to Brennan was even greater given the looming trial date. On this basis, the First Circuit affirmed the lower court’s ruling denying Joca-Roca’s motion to stay the proceedings pending arbitration. Joca-Roca Real Estate, LLC v. Brennan, No. 14-1353 (1st Cir. Dec. 1, 2014).

This post written by Leonor Lagomasino.

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DISTRICT OF COLUMBIA APPROVES AMENDMENTS TO CAPTIVE INSURANCE COMPANY ACT OF 2004

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The Council and Mayor of the District of Columbia have approved enacting amendments to the Captive Insurance Company Act of 2004 to, in part, strike references to segregated accounts; clarify certain statutory requirements for protected cell captive insurers and protected cells; confirm the confidentiality of capital insurers’ license application materials and clarify when they may be shared; and permit the Commissioner of the Department of Insurance, Securities and Banking to extend or waive the requirement to conduct a financial examination of captive insurers every 5 years upon the satisfaction of specified criteria. The amendments will take effect following a 30-day period of congressional review and will be cited as the “Captive Insurance Company Amendment Act of 2014.” D.C. Act 20-497 (Dec. 8, 2014).

This post written by Renee Schimkat.

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CALIFORNIA FEDERAL DISTRICT COURT COMPELS ARBITRATION IN REINSURANCE DISPUTE

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Randazzo Enterprises sued its reinsurer, Applied Underwriters Captive Risk Assurance Company, Inc. in California federal court over Applied’s calculation of premiums of the reinsurance agreement entered between them. Invoking the arbitration clause set forth in the reinsurance agreement, Applied filed a demand for arbitration and, in the pending federal case, moved to compel arbitration and to dismiss Randazzo’s complaint. The court determined it must first consider whether a valid arbitration clause exists and, if so, whether the arbitration encompasses the dispute at issue. To do so, the court found it must apply ordinary state law principles governing the formation and construction of contracts. Applying these principles to the facts before it, the court first rejected Randazo’s argument that the arbitration clause was unenforceable under Nebraska law which the parties agreed would govern. Nebraska law only applied to issues of substantive law and not to arbitration. Moreover, even if Nebraska law were to apply, it was preempted by the Federal Arbitration Act.

The court then turned to Randazzo’s argument that the arbitration agreement was unconscionable. Under California law, a contract must be unconscionable both procedurally and substantively in order to be rendered invalid. Here, because Randazzo had no opportunity to negotiate the arbitration provision, the agreement was an adhesion contract and therefore procedurally unconscionable. The Court then analyzed whether two specific provisions were substantively unconscionable. Under California law, a contract is substantively unconscionable when it is so one-sided that “it shocks the conscience.” The provision regarding the choice of arbitrator, requiring the arbitrators to be active or retired disinterested officials of insurance or reinsurance companies, was not substantively unconscionable. However, the provision which allowed only Applied to seek injunctive relief in Court was found substantively unconscionable, since it exceeded the rights afforded parties in an arbitration under California law and was so one-sided that it could not be justified as a legitimate commercial need. However, because California law permits a court to sever an unconscionable provision from an agreement, the parties’ agreement was not invalid because that one clause could easily be stricken without the need to reform the agreement. Finally, the court concluded that Randazzo’s claims related to the execution, delivery, construction or enforceability of the reinsurance contract, such that all of Randazzo’s claims were subject to arbitration. Randazzo Enterprises, Inc. v. Applied Underwriters Captive Risk Assurance Company, Case No. 5:14-CV-02374-EJD (USDC N.D. Cal. Dec. 11, 2014).

This post written by Leonor Lagomasino.

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NAIC APPROVES SEVEN FOREIGN COUNTRIES AS QUALIFIED JURISDICTIONS FOR REINSURANCE COLLATERAL REDUCTION REQUIREMENTS AND ANNOUNCES ACTION ON INSURANCE PRIORITIES

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At its December 11, 2014 meeting, the National Association of Insurance Commissioners (NAIC) approved seven foreign countries as Qualified Jurisdictions so that reinsurers licensed and domiciled in those jurisdictions will be eligible for reinsurance collateral reduction requirements under NAIC’s Credit for Reinsurance Model Law. Four of those jurisdictions – Bermuda, Germany, Switzerland, and the United Kingdom, were previously on NAIC’s list of Conditional Qualified Jurisdictions. Effective January 1, 2015, these four, along with Japan, Ireland and France, will be full Qualified Jurisdictions subject to a 5-year term, after which they will be re-evaluated under the provisions of the Qualified Jurisdiction Process.

NAIC also adopted the Revised Insurance Holding System Regulatory Act and Actuarial Guideline 48. The Act, in part, updates the model to clarify the group-wide supervisor for a defined class of internationally active insurance groups. AG 48 establishes national standards regarding certain captive reinsurance transactions and includes regulation of the types of assets held in a backing insurer’s statutory reserve. AG 48 takes effect in 2015. NAIC issued a news release on its actions, which can be found here.

This post written by Renee Schimkat.

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REINSURANCE ARBITRATION AWARD CONFIRMED, REACHING RESULT CONTRARY TO PREVIOUS AWARD AGAINST DIFFERENT REINSURER

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On March 11, 2014, we reported on the First Circuit’s ruling in a contested arbitration between OneBeacon America Insurance Co. and certain of its reinsurers over reinsured asbestos claims. The reinsurers filed a declaratory relief action, seeking to preclude OneBeacon’s claims based on an adverse ruling that OneBeacon received in a previous arbitration against a different reinsurer. The First Circuit affirmed the order dismissing the action and compelling arbitration, holding that the preclusive effect of a prior arbitration award is an arbitrable issue and not an issue for the court to determine.

The arbitration has concluded and an award in favor of OneBeacon has been reached and confirmed by the court. The award found that the phrase “same causative agency” in the governing multiple line reinsurance treaty permitted OneBeacon to accumulate claims of multiple insureds and cede losses as a single occurrence, notwithstanding a contrary finding of the previous adverse arbitration award. The panel also determined the procedure by which OneBeacon must apply its self-insured retention across multiple treaty years. OneBeacon America Insurance Co. v. National Casualty Co., Case No. 1:14-cv-12570 (USDC D. Mass. Aug. 21, 2014).

This post written by Michael Wolgin.

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