Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL COURT REFUSES TO DISMISS PLAINTIFFS’ PUTATIVE CLASS ACTION IN CAPTIVE REINSURANCE CASE

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On their third attempt to state a claim for mortgage services fraud pursuant to the Real Estate Services Settlement and Procedures Act (“RESPA”), Plaintiffs in a putative class action overcame defendants’ motion to dismiss on the grounds that plaintiffs claims were untimely because they were brought outside of RESPA’s one-year statute of limitation. Linda Menichino, on behalf of herself and others similarly situated (“Plaintiffs”), sued various primary mortgage insurers (“PMI’s”) for mortgage fraud arising from alleged unlawful fee-splitting and kickback arrangements in connection with their mortgages. Specifically, Plaintiffs alleged that the portions of their monthly mortgage premiums that were supposed to pay for reinsurance services were actually disguised kickbacks remitted by the captive PMI’s to the mortgagees in exchange for the mortgagees’ continual flow of business back to the PMI’s. In an earlier opinion the court dismissed the case, holding that Plaintiff had not adequately alleged the basis for tolling the running of the limitation period, but permitted Plaintiff to amend to attempt to cure that deficiency. Conceding that the suit fell outside RESPA’s one year statute of limitation, Plaintiffs argued their factual allegations sufficiently alleged grounds for equitable tolling by showing how Plaintiffs were prevented from learning of the existence of their claims as a result of the PMI’s fraudulent concealment of the true purpose of their arrangement with the mortgagees. This decision follows a line of other decisions earlier reported in Reinsurance Focus on the recent developments in the cases involving RESPA violations and its one-year statute of limitations.

The Menichino Court agreed, further finding that Plaintiffs had now sufficiently alleged (1) they were not on inquiry notice of the possible existence of the claim during the limitations period; and (2) their ignorance of the true facts was not due to lack of reasonable due diligence. The Court also refused to dismiss Plaintiffs’ substantive claims of illegal kickbacks under RESPA as well as Plaintiffs’ claims for unjust enrichment under the laws of the six states where the Plaintiffs reside. Linda Menichino v. Citibank, N.A., et. al., Civil Action No. 2:12-cv-00058 (USDC W.D. Pa. Feb. 5, 2014).

This post written by Leonor Lagomasino.

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COURT AFFIRMS PARTIES’ WAIVER OF RIGHT TO COMPEL ARBITRATION

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A federal court of appeals has affirmed a district court’s decision that parties to a pending lawsuit waived their right to compel arbitration by waiting 11 months after that lawsuit was filed to invoke their right. Instead of exercising their right to compel arbitration according to the agreement at issue, defendants actively litigated the case in federal court, conducting discovery and litigating motions. The court found that plaintiffs, in opposing defendants’ belated motion to compel arbitration, had shown that (1) defendants had knowledge of their right, (2) defendants’ actions in litigating the dispute in court were inconsistent with that right, and (3) plaintiffs would be prejudiced by arbitration at such a late date. Prejudice was founded upon the waste of time and money already spent in federal court, the additional expense the parties would incur if they now needed to educate arbitrators, and the threat of forcing plaintiffs to relitigate matters already decided by the district court judge. James V. Kelly, et al. v. Public Utility District No. 2 of Grant County, et al., No. 12-35639 (9th Cir. Jan. 13, 2014).

This post written by Renee Schimkat.

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SERVICE OF SUIT ENDORSEMENT DEEMED TO WAIVE INSURER’S RIGHT TO REMOVE ACTION TO FEDERAL COURT

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A Missouri federal district court remanded a coverage action brought against Illinois Union Insurance Company (“Illinois Union”) by its insured, holding that the Policy’s Service of Suit Endorsement (“Endorsement”) waived Illinois Union’s right to remove the action to federal court notwithstanding the Policy’s Jurisdiction and Venue clause which stated that the Insurer did not waive its right of removal. The Endorsement provided that, at the insured’s request, Illinois Mutual will submit to the jurisdiction of any court of competent jurisdiction. The Endorsement also included the conspicuous statement “This Endorsement Changes the Policy, Please Read it Carefully.” Characterizing it as “meritless”, the Court rejected Illinois Union’s argument that the Endorsement did not waive Illinois Union’s right of removal because the Endorsement did not explicitly state that it substituted the Jurisdiction and Venue clause. Instead, citing principles of contract interpretation, the Court found that if the terms of the endorsement and the general provisions of the policy conflict, the terms of the endorsement prevail. The Endorsement in this case supplanted the Jurisdiction and Venue clause found in the general provisions of the policy and, therefore, waived Illinois Union’s right to remove the case to federal court. Both of these clauses are commonly found in reinsurance agreements, and this opinion illustrates that careful drafting is necessary to achieve the desired business result. Hazelwood Logistics Center, Inc. v. Illinois Union Insurance Company, No. 4:13-CV-2572 CAS (USDC E.D. Mo. Feb. 28, 2014).

This post written by Leonor Lagomasino.

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SUPREME COURT HOLDS THAT ARBITRATORS, NOT COURTS, ARE TO INTERPRET A TREATY’S ARBITRATION PREREQUISITE

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The United States Supreme Court has held that arbitrators, not courts, bear the primary responsibility for interpreting and applying a local litigation requirement of an investment treaty between the United Kingdom and Argentina that operated as a condition precedent to arbitration. BG Group plc, a British firm that had invested in an Argentine entity, sought arbitration for a dispute arising out of that treaty. Argentina claimed that the arbitrators lacked jurisdiction over the dispute because BG Group had not complied with the treaty’s requirement that the dispute first be submitted to an Argentinean court for consideration. The arbitrators concluded that they had jurisdiction finding, in part, that Argentina’s conduct in enacting new laws that hindered recourse to its judiciary had excused BG Group’s failure to comply with the treaty’s local litigation requirement. The arbitrators then found in favor of BG Group and awarded it $185 million in damages.

After decisions by the federal district and appellate courts, both of which were reported here previously, the Supreme Court held that the treaty’s local litigation requirement was a procedural condition precedent to arbitration and that, absent a contrary intent reflected in the treaty itself, the interpretation and application of that procedural provision should be decided by the arbitrators and that decision should be reviewed with considerable deference. The fact that the document at issue was a treaty rather than an ordinary contract did not change the Court’s analysis, a position on which the dissent strongly disagreed. The Court concluded that the arbitrators’ jurisdictional determination was lawful and the judgment of the Court of Appeals to the contrary was therefore reversed. BG Group PLC v. Republic of Argentina, No. 12-138 (U.S. March 5, 2014).

This post written by Renee Schimkat.

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REINSURER’S PETITION TO COMPEL ARBITRATION STAYED WHERE CEDENT CLAIMS ISSUE IS ALREADY PENDING IN STATE COURT

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A federal district court has stayed a case where Nationwide Mutual Insurance Company petitioned to compel arbitration of a dispute that its cedent Liberty Mutual Insurance Company claims was already adjudicated by an arbitration panel and confirmed by a state court judgment. Nationwide sought to compel arbitration on the issue of whether Liberty Mutual breached its obligations under an access to records provision of the parties’ reinsurance treaties. In support, Nationwide cited the breadth of the treaties’ arbitration clauses and the strong federal policy favoring arbitration. Liberty Mutual countered that the very issue Nationwide sought to arbitrate was already decided as part of a panel’s decision regarding Nationwide’s payment obligations under the treaties and that Liberty Mutual had already moved to enforce a state court judgment confirming that very arbitration award. The court presumably agreed with Liberty Mutual that the identical claims were at issue before the state court, a fact which Nationwide disputed, and that the federal action should therefore be stayed in deference to the state court’s pending decision to enforce its own judgment under the Colorado River abstention doctrine, or in the interests of comity and sound judicial administration. Nationwide Mutual Insurance Co. v. Liberty Mutual Insurance Co., Case No. 1:13-CV-12910 (USDC D. Mass. Feb. 21, 2014).

This post written by Renee Schimkat.

See our disclaimer.