Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

PENNSYLVANIA COURT AFFIRMS LIQUIDATOR’S DECISION THAT A CLAIM ARISING FROM A REINSURANCE POLICY IS ENTITLED TO A LOWER PAYMENT PRIORITY

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A Pennsylvania appellate court has affirmed the liquidator’s determination that a group excess insurance policy issued by Reliance is a reinsurance policy and thereby entitled to a low level of priority of payment from the now insolvent Reliance estate. At issue was a claim by the Alabama Insurance Guaranty Association for reimbursement from the estate for a claim it had paid to a general contractors fund. The Association argued that the Reliance policy was a direct insurance policy, thereby entitled to a high priority for re-payment, and that the liquidator was obligated to follow an Alabama Supreme Court ruling that the claim arose under a policy of direct insurance.

The Pennsylvania court rejected all of the Association’s claims that the liquidator was bound by the Alabama Supreme Court ruling, including the application of the Full Faith and Credit doctrine and principles of collateral estoppel. The court also rejected any choice of law analysis favoring Alabama over Pennsylvania and concluded that the policy at issue was one of reinsurance under Pennsylvania’s governing law. The material characteristics the court looked to in order to determine that the policy was one of reinsurance included the language of the policy itself referring to a “reinsurance premium” and the obligations of Reliance to “reinsure” the Alabama Reinsurance Trust. The opinion generated a strong and lengthy dissent that criticized the majority for rejecting the Alabama Supreme Court’s holding and for otherwise finding that the policy was a contract of reinsurance and not a group insurance policy that covered catastrophic workers’ compensation claims of the self-insurers that were members of the group. Alabama Insurance Guaranty Association v. Reliance Insurance Co. in Liquidation, No. 6 REL 2012 (Pa. Commw. Ct. Sept. 12, 2014).

This post written by Renee Schimkat.

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DENIAL OF ARBITRATION REVERSED WHERE TRIAL COURT FAILED TO HOLD TRIAL TO RESOLVE DISPUTED QUESTIONS OF FACT

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The Eighth Circuit reversed a trial court’s decision to deny arbitration, based on the fact that the lower court failed to hold a trial (as required by the FAA) when disputed questions of fact surrounding the parties’ agreement remained. The case surrounded a disagreement over whether a seller of equipment agreed to indemnify a manufacturer of heavy machinery, in connection with litigation against the manufacturer by a third-party. Disputed facts surrounded whether the agreement between the manufacturer and the seller included a form containing indemnification terms and arbitration provisions. The district court denied arbitration because it concluded that the only undisputed contract terms were the terms of the purchase, sale, and payment; the court left undecided the issue of whether arbitration provisions were included in the agreement, as not subject to a “definitive answer.” Citing a recent Tenth Circuit decision, on which we reported on May 20, 2014, the Eighth Circuit reversed, holding that “if the motions record reveals a material issue of fact, the FAA maintains that the court move summarily to trial. And, when that trial is not demanded by the party opposing arbitration [as was the case here], ‘the court shall hear and determine such issue.’” The court explained that here, “the district court never resolved the factual issues concerning the making of the contract but merely recognized their existence.” The Eighth Circuit vacated the order and remanded “for the district court to hold a non-jury trial, make findings of fact, and apply the appropriate U.C.C. provisions in light of those facts.” Nebraska Machinery Co. v. Cargotec Solutions, LLC, Case No. 13-2753 (8th Cir. Aug. 7, 2014).

This post written by Michael Wolgin.

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TENTH CIRCUIT REVERSES TRIAL COURT DENIAL OF MOTION TO COMPEL ARBITRATION OF WAGE DISPUTE

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The Tenth Circuit Court of Appeals reversed a trial court order denying an employer’s motion to compel arbitration of a wage dispute under the arbitration clause contained in the plaintiffs’ Confidentiality/Non-Compete Agreement. The plaintiff employees brought suit against their employer, an oil-rig servicer, under the Fair Labor Standards Act and Oklahoma Protection of Labor Act. The employer moved to compel arbitration under a provision in the parties’ non-compete agreements. The plaintiffs argued – successfully to the trial court – that the wage disputes did not come within the purview of the arbitration provision, which, although in an agreement that related mostly to non-compete and confidentiality issues, nevertheless contained a broad clause mandating arbitration of “any dispute.” The Tenth Circuit noted that, while the scope of the parties’ contract was narrow, the scope of the arbitration provision was broad, and that, under the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, and the broad federal policy favoring arbitration embodied in the FAA, it was constrained to enforce the agreement. It remanded with instructions to compel arbitration. Sanchez v. Nitro-Lift Technologies, LLC, Nos. 12-7046 and 12-7057 (10th Cir. Aug. 8, 2014).

This post written by John Pitblado.

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HAWAII ENACTS NAIC-RECOMMENDED REVISIONS TO CREDIT FOR REINSURANCE LAW

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Hawaii’s House/Senate conference committee cleared the way for passage by the full houses of NAIC’s Model Act on Credit for Reinsurance, to address NAIC’s recommended updates pursuant to its Solvency Modernization Initiative.  The bill was adopted and became law July 8, 2014.  The Committee amended prior drafts of HI SB 2821 “A Bill for an Act Relating to Insurance,” and recommended final passage of the amended version to the respective Houses. According to the Conference Committee Report, the purpose of the bill is to (1) adopt revisions to NAIC’s model laws on Credit for Reinsurance, Standard Valuation, Standard Non-Forfeiture Law for Life Insurance, and Insurance Company Holding System Act; and (2) maintain accreditation with NAIC. The Committee’s amendments included:

  • Adding a definition for “domestic insurance holding company system;”
  • Deleting a definition for “domestic single-state insurer;”
  • Clarifications regarding the filing of financial statements;
  • Specifying exemptions regarding the annual enterprise risk report;
  • Permitting certain Insurance Commissioner examinations;
  • Specifying obligations regarding subpoenas; and
  • Creating effective dates for various parts of the measure.

This post written by John Pitblado.
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ARBITRATION DENIED IN CLASS ACTION WHERE PLAINTIFF’S TRUST WAS A PARTY TO ARBITRATION AGREEMENT, BUT PLAINTIFF WAS NOT

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In a life settlement transaction, in which a life insurance policy is sold by its owner to another for more than its cash-surrender value but less than the net death benefit, the seller contended that the broker and purchaser conspired to rig the bidding process, resulting in undisclosed kickbacks to the broker. The seller filed a putative class action against the broker, purchaser, and related entities alleging fraud and other similar claims. The defendants moved to compel arbitration (among other things), relying on an arbitration clause in the purchase agreement. The seller, however, had formed a trust to acquire the policy and never personally participated in the purchase agreement. The trial court thus denied arbitration, finding that the seller was a non-signatory against whom arbitration could not be compelled. The defendants appealed, and the Third Circuit affirmed, holding that the seller of the policy could not be equitably estopped from avoiding the reach of the purchase agreement. The court explained that the “alleged fraud was related to the purchase agreement—it set the purchase price and, allegedly, the inflated, undisclosed broker’s commission. But that alone is not sufficient to compel arbitration under the equitable estoppel doctrine: the claims must be based directly on the agreement.” Here, the allegedly fraudulent kickback agreement “took place prior to and apart from the execution of the purchase agreement.” Griswold v. Coventry First LLC, Case No. 13-1879 (3d Cir. Aug. 11, 2014).

This post written by Michael Wolgin.

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