Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT CONFIRMS ARBITRATION AWARD IN REINSURANCE BILLING DISPUTE

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A New York federal district court affirmed an arbitration award in favor of R&Q Reinsurance Company as against its cedent, Utica Mutual, in a reinsurance dispute arising from certificates issued by R&Q reinsuring certain umbrella coverage Utica had written covering asbestos-related exposure of its insured. The parties began arbitrating a billing dispute in 2008 which, as of May, 2013, involved more than $21.7 million in disputed amounts. Utica sought coverage for four categories of loss: indemnity, defense, “orphan shares,” and declaratory judgment expense. The panel heard the case and decided in Utica’s favor only on the first category, and in R&Q’s favor on the other three. The panel did not, however, indicate in its award the precise amount owed to Utica by R&Q for the indemnity losses. Both parties made various post-award motions for clarification, but Utica never sought in any of these motions for the panel to set out the precise amount Utica was owed under the first category of loss which it was awarded. R&Q thereafter brought an action in court to confirm the award. The court found that Utica’s failure to seek clarification of the amount with the panel precluded vacatur of the award and that, “[f]or better or worse, the parties to this arbitration tasked the arbitral panel with resolving their dispute at a conceptual, rather than a mathematical, level.” R&Q Reinsurance Co. v. Utica Mutual Insurance Co., Case No. 13-Civ-8013 (USDC S.D.N.Y. Feb. 14, 2014).

This post written by John Pitblado.

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ARBITRATOR IMPROPRIETIES: A EDUCATIONAL LAUNDRY LIST

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The Ninth Circuit Court of Appeals recently affirmed the U.S. District Court of Nevada’s confirmation of an arbitration award allocating attorneys’ fees and denial of a motion to vacate the award.  After first holding, in a separate opinion, that parties may not waive or eliminate judicial review of arbitration awards under Section 10 of the Federal Arbitration Act, the court next communicated a laundry list of reasons for which a district court may vacate an arbitration award: (1) if the arbitrator’s decision is procured by corruption, fraud, or undue means; (2) if the arbitrator was evidently partial or actually biased; (3) if mediation and related fund transfers are undisclosed; (4) if communications are made ex parte; (5) if the arbitrator exceeds arbitral jurisdiction or issues biased rulings; and (6) if the arbitrator fails to disclose material conflicts of interest.  Finding that the district court correctly concluded that the arbitrator had not engaged in any such misconduct and that no prejudice was shown in any event, the Ninth Circuit affirmed.  In re Wal-Mart Wage and Hour Employment Practices Litigation, No. 2:06-cv-00225-PMP-PAL (9th Cir. Dec. 17, 2013).

This post written by Kyle Whitehead.

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MICROSOFT TAKES HOME THE GOLD IN ARBITRATION AGAINST YAHOO!

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For the past several years, Yahoo! has been merging its search engine and search ads system, Panama, with Microsoft’s Bing search engine. Yahoo! “paused” its efforts to integrate with Microsoft in Taiwan and Hong Kong when Microsoft CEO Steve Ballmer announced that he plans to step down. Microsoft considered this “pause” a breach of their agreement with Yahoo! and initiated an emergency arbitration in which the arbitrator ordered Yahoo! to “use all efforts” to complete the Taiwan and Hong Kong transitions in 2013. Yahoo! moved to vacate the award in the S.D.N.Y. on the basis that the injunctive relief granted to Microsoft was not interim relief as authorized by the arbitration agreement, but was final. The court denied Yahoo!’s petition and confirmed the arbitration award because the arbitrator had a “colorable basis” for concluding that an injunction was necessary to restore the status quo. Yahoo!, Inc. v. Microsoft Corporation, Case No. 13-7237 (S.D.N.Y. Oct. 21, 2013).

This post written by Abigail Kortz.

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NO U.S. EXCISE TAXES ON FOREIGN RETROCESSIONS

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Foreign retrocession insurance transactions are beyond the reach of IRS excise taxes based on the plain language of 26 U.S.C. § 4371(3), which aims to tax insurance transactions involving policies issued by foreign insurers or reinsurers. The District Court for the District of Columbia recently granted summary judgment to a Bermuda reinsurer in its suit against the IRS for a refund of an excise tax extracted from the foreign reinsurer in connection with its ceding of risk to a retrocessionaire. The Government maintained that Congress intended to impose a tax on any and all successive levels of insurance or reinsurance obtained from a foreign insurer, but the court held that the statute had clear internal limitations on its application. Specifically, taxes could be levied on premiums paid on policies of reinsurance covering specific insurance contracts, including casualty insurance, indemnity bonds, life insurance, sickness or accident insurance, or annuity contracts. However, retrocession policies are reinsurance policies covering the risks of reinsurance policies, not one of the types of insurance contracts enumerated by Section 4371(3). Validus Reinsurance, Ltd. v. United States, Case No. 13-0109 (ABJ) (D.D.C. Feb. 5, 2014).

This post written by Kyle Whitehead.

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TENTH CIRCUIT HOLDS FAA PREEMPTS NEW MEXICO UNCONSCIONABILITY LAW

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New Mexico law considers arbitration provisions that apply primarily to the claims that one party to the contract is likely to bring to be unconscionable and unenforceable.  This law, the Tenth Circuit holds, is preempted by the Federal Arbitration Act because it is based on the underlying assumption that arbitration is inferior to litigation in court.  Supreme Court precedent is clear that arbitration provisions cannot be invalidated by generally applicable contract defenses, like unconscionability, “that derive their meaning from the fact that an agreement to arbitrate is at issue.”  Thus, an arbitration provision that permits a nursing home to litigate its most likely claims against its residents, but requires arbitration of the residents’ most likely claims against the nursing home, is enforceable.  THI of New Mexico at Hobbs Center, LLC v. Patton, No. 13-2012 (10th Cir. Jan. 28, 2014).

This post written by Abigail Kortz.

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