Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

AMBIGUITIES IN REINSURANCE BROKER AGREEMENT PRECLUDE SUMMARY JUDGMENT

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A federal district court in Arkansas recently examined provisions of a Broker Authorization Agreement between a reinsurance broker (Global Risk) and a ceding insurer (Aetna). In denying cross-motions for summary judgment on the broker’s breach of contract claim, the court concluded that the agreement contained arguably contradictory provisions regarding who was responsible for paying the broker. One provision expressly placed the responsibility for payment of the broker’s services with the reinsurer (not a party to the Broker Authorization Agreement), while a separate provision addressed Global Risk’s entitlement to be compensated in the event that the agreement was terminated or the reinsurance portfolio was transferred. The court concluded that the agreement was ambiguous because “[i]f [the ceding insurer] had no responsibility to compensate [the reinsurance broker], then these latter provisions would be meaningless. That they are included in the contract between [the reinsurance broker] and [the ceding insurer] suggests that [the ceding insurer] has an obligation to compensate [the reinsurance broker].” Global Risk Intermediary, LLC v. Aetna Global Benefits Ltd., Case No. 4:13-CV-0133 (USDC W.D. Ark. Mar. 12, 2014).

This post written by Catherine Acree.

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DISTRICT COURT DECLINES TO CONSOLIDATE DISPUTES ARISING OUT OF TWO REINSURANCE CONTRACTS

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Plaintiff Georgia Casualty & Surety Company entered into two reinsurance contracts with Defendant Excalibur Reinsurance Corporation, formerly known as PMA Capital Insurance Company. Both reinsurance contracts contained arbitration clauses. The First Excess Reinsurance Contract contained a choice of law provision but no forum selection clause, and the Second Excess Reinsurance Contract contained a forum selection clause but no choice of law provision. In 2006, Douglas Asphalt Company sued Applied Technical Services, Inc., a Georgia Casualty insured. Applied was found liable. While that judgment was on appeal, a high-low agreement was entered, which guaranteed that Georgia Casualty would pay Applied no less than $3 million and no more than $12 million. Thereafter, the Eleventh Circuit vacated the judgment against Applied. Georgia Casualty claimed that it was owed $1,418,708 under the two reinsurance contracts. In response, Excalibur argued that Georgia Casualty promised to seek malpractice damages against defense counsel for Applied and that this lawsuit would be a prerequisite to determining Excalibur’s liability. Additionally, Excalibur claimed that it did not consent to the high-low agreement. Georgia Casualty demanded arbitration of Excalibur’s alleged breach of the reinsurance contracts. Excalibur demanded arbitration on a counterclaim for unpaid premiums. Excalibur refused to consolidate the arbitration of all claims under both reinsurance contracts and requested that the arbitrators stay the arbitration pending the resolution of the malpractice claims. Georgia Casualty claimed this was a delay tactic and sued Excalibur.

The court found that if the Federal Arbitration Act or a state arbitration act lacking a statutory consolidation provision applied, then a court may consolidate arbitration only if the contracts expressly permit. Alternatively, if a state arbitration act that allows courts to impose consolidation regardless of the contracts’ terms governs the contracts, then a court may order consolidation where the statutory requirements are satisfied. Because the Second Excess Reinsurance Contract lacked a choice of law provision, it was governed by the FAA. Thus, the court could not order consolidation. Because the court could not order consolidation, it also could not designate a forum for that consolidated arbitration. With respect to a potential stay, the court believed it had to tread carefully to not violate the principle that, in determining whether a dispute is arbitrable, a court should not rule on the merits of the underlying claims. The court could not order the arbitrators not to stay the arbitration pending any potential malpractice recovery. The court also could not delve into the contract to determine if the contract required Excalibur to post security (in response to Georgia Casualty’s claim that Excalibur was delaying the proceedings). Georgia Casualty & Surety Co. v. Excalibur Reinsurance Corp., Case No. 1:13-CV-00456-JEC (USDC N.D. Ga. Mar. 13, 2014).

COURT ORDERS PRE-PLEADING SECURITY POSTED IN REINSURANCE DISPUTES

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Excalibur Reinsurance provided reinsurance to Travelers Indemnity.  Disputes arose and Travelers filed two lawsuits against Excalibur in United States District Court in Connecticut.  Travelers moved to require Excalibur to post pre-pleading security pursuant to Conn. Gen. Stat. section 38a-27(a).  The statute requires that unauthorized insurers post security.  Excalibur contended that the statute did not apply for three separate reasons: (1) it was authorized in Connecticut when the reinsurance agreements were entered into, although it later cancelled that authorization; (2) the reinsurance agreement was not issued and delivered in Connecticut; and (3) the reinsurance agreements contain a New York choice of law provision.  The courts disagreed, and granted the motions for security.  The statute provides a remedy with respect to insurers which are not authorized at the time that they make a filing in Connecticut courts, rather than when the insurance agreement was entered into.  The courts found that while the statutes provided an exemption for non-Connecticut direct insurance, the statutory exemption did not apply to reinsurance.  Finally, the courts found that the pre-pleading security statute was procedural, not substantive, under the Erie doctrine, resulting in the choice-of-law clause not applying.  Excalibur therefore was required to post security in one case in the amount of $824,591 and in an amount yet to be determined in the other case.  Travelers Indemnity Co. v. Excalibur Reinsurance Corp., Case Nos. 11-1209 and 12-1793 (USDC D. Conn. Mar.11 and 17, 2014).

This post written by Rollie Goss.

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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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