Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT QUASHES SUBPOENA SEEKING UNISSUED ARBITRATION AWARD

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After striking the affirmative defense of failure to mitigate, a court quashed a subpoena issued to an arbitrator seeking an unissued arbitration award in a dispute between certain defendants and their reinsurer. The case involved a lawsuit by a state-appointed receiver, Jo Ann Howard & Associates, against numerous defendants stemming from a scheme to defraud consumers in connection with pre-need funeral services contracts issued by Lincoln Memorial. After Howard was appointed, the receivership court stayed the arbitration proceedings between Lincoln Memorial and its reinsurer, Hannover Life Reassurance Company of America. One of the issues pending in the arbitration at the time was Lincoln Memorial’s claim for damages against Hannover arising from Lincoln Memorial’s allegations that Hannover’s arbitration-related conduct had brought Lincoln Memorial to the brink of insolvency.

Two of the other defendants, both banks, raised as affirmative defenses Howard’s failure to mitigate damages. The banks alleged Howard’s decision not to pursue Lincoln Memorial’s claims against Hannover caused Howard’s damages. The banks subpoenaed the arbitrator in the Lincoln/Hannover arbitration to obtain a copy of the unissued arbitration award. The court granted Howard’s motion to strike the banks’ failure to mitigate defense, finding the defense legally insufficient. The defense was not causally related to Howard’s damages claim because Howard’s claims against Lincoln Memorial arose from Lincoln Memorial’s handling of pre-need trust accounts, and not from Lincoln Memorial’s insolvency. Further, a receiver’s ability to recover assets or damages for wrongdoing is important to the public, and allowing such an affirmative defense would encumber a receiver’s ability to perform these functions. Jo Ann Howard & Associates, P.C. v. J. Douglas Cassity, Case No. 4:09CV01252 ERW (USDC E.D. Mo. May 9, 2014).

This post written by Leonor Lagomasino.

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CLAUSE WHERE PARTY DEMANDING ARBITRATION IS NOT A PARTY TO ALLEGEDLY TERMINATED REINSURANCE AGREEMENT

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A federal district court has taken under advisement plaintiff’s motion for injunction and defendant’s cross-motion to compel arbitration after conducting a hearing on the matter. The issue to be decided is whether CX can compel Trenwick to participate in an arbitration based upon a reinsurance agreement as to which CX was not a party and which, according to Trenwick, was terminated. At the core of this dispute is a reinsurance agreement under which Trenwick reinsured Commercial Casualty Insurance Company. CX argued the reinsurance agreement included a “cut-through” provision which gave CX the right to collect directly against Trenwick even though CX was not a party to the reinsurance agreement. Trenwick denied liability under this cut-through provision and further denied that the cut-through provision gave its beneficiaries, including CX, any rights under the agreement’s arbitration clause. Additionally, Trenwick argued that the reinsurance agreement was terminated further to a commutation agreement between Trenwick and CCIC’s Liquidator and, as a result, terminated any rights CX may have had under the cut-through provision and any requirement to arbitrate CX’s claims. CX responded that it was not a party to the commutation agreement, which could therefore not extinguish CX’s right to arbitrate. CX also argued that Trenwick’s termination defense must be arbitrated. Trenwick America Reinsurance Corp. v. CX Reinurance Company Limited, Case No. 3:13-cv-01264 (JBA) (USDC D. Conn. Apr. 28, 2014).

This post written by Leonor Lagomasino.

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CLAIMS AGAINST LOAN SERVICER AND FORCE-PLACED INSURER ALLEGING COMMISSION AND REINSURANCE KICKBACK SCHEME SURVIVE DISMISSAL

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A putative class action involving force-placed home insurance and an alleged scheme for mortgage lenders to obtain kickbacks in the form of commissions, reinsurance premium, and other fees, has survived a motion to dismiss. The complaint alleged that the mortgage lender, loan servicer, and insurer participated in a scheme of entering into exclusive agreements to force place insurance at grossly excessive rates in return for the kickbacks. The loan servicer and insurer moved to dismiss two Florida law claims: unjust enrichment and tortious interference with a business relationship. Regarding the claim for unjust enrichment, the court held that the complaint sufficiently alleged that the named plaintiffs conferred a “direct benefit” on the servicer and insurer (force-placed premiums), that the servicer and insurer retained the benefit, and that the benefit would be inequitable for them to retain. With respect to tortious interference, the court held that the complaint sufficiently alleged that the servicer and insurer intentionally interfered with the lender’s and plaintiffs’ business relationship in bad faith, which resulted in damages to the plaintiffs. The court held that the complaint adequately alleged the causes of action. Hamilton v. SunTrust Mortgage, Inc., Case No. 13-60749-CIV (USDC S.D. Fla. March 28, 2014).

This post written by Michael Wolgin.

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TENNESSEE WITHDRAWS FROM SLIMPACT

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Tennessee’s governor signed into law a repeal of that state’s previously-passed enabling legislation, which allowed it to join the Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”). SLIMPACT was one of the two models proposed by various states in response to the invitation and recommendation to do so set forth in the Non-Admitted and Reinsurance Reform Act (“NRRA”) as part of the omnibus Dodd-Frank financial regulation overhaul passed by Congress in 2010. SLIMPACT is an interstate compact created for the purpose of allowing states to take advantage of shared administration of data, record-keeping, and premium tax allocation. Tennessee was the last state to join, which it did in June, 2011, becoming the ninth state. By its terms, SLIMPACT was slated to become effective once ten states joined. However, its future is now in doubt as it moved farther away from its ten-state goal, after stalling at nine states for the last three years. The repeal bill, Tennessee Senate Bill 356, was signed into law on April 4, 2014, and repeals Section 56-14-201 of the Tennessee Code. The bill becomes effective July 1, 2014.

This post written by John Pitblado.

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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 Tenth Circuit has pointedly 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’ oral agreement remained. The case was brought as a class action against a propane gas company for overcharging customers. Despite multiple rounds of lengthy discovery, factual questions remained regarding the content of conversations between the parties, and when the “last act” of contract formation occurred for purposes of determining choice of state contract law. The Tenth Circuit concluded: “Summary-judgment-like motions practice may be a permissible and expedient way to resolve arbitrability questions when it’s clear no material disputes of fact exist and only legal questions remain. But when factual disputes may determine whether the parties agreed to arbitrate, the way to resolve them isn’t by round after round of discovery and motions practice. It is by proceeding summarily to trial. That is the procedure the [FAA] requires and the parties should have undertaken a long time ago – and it is the procedure they must follow now.” Howard v. Ferrellgas Partners, L.P., Case No. 13-3061 (10th Cir. April 8, 2014).

This post written by Michael Wolgin.

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