Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

ANOTHER ASBESTOS REINSURANCE SETTLEMENT

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A settlement in principle was reached in Century Indemnity Company v. Global Reinsurance Corporation of America, a breach of contract case involving the nonpayment by Global Reinsurance of its portion of an asbestos exposure-related loss incurred by Century under two umbrella liability policies. Global had an uphill battle because the facultative reinsurance agreements contained a follow-the-fortunes provision, obligating Global to follow all loss settlements made by Century, provided that such settlements are within the terms and conditions of both the original policies and the reinsurance certificates. Century Indemnity Co. v. Global Reinsurance Corp. of Am., Case No. 13-CV-797 (KBF) (S.D.N.Y. Aug. 26, 2013).

This post written by Kyle Whitehead.

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SECOND CIRCUIT FINDS ARBITRATION WAIVER DUE TO PROTRACTED LITIGATION

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Although federal policy strongly favors arbitration and waiver of a right to arbitrate is not lightly inferred, the Second Circuit recently affirmed the Southern District of New York’s finding of waiver in a case involving “protracted litigation that prejudice[d] the opposing party.” While bright-line rules do not exist for determining when a party has waived its right to arbitration, there are certain factors that courts consider: (1) the time elapsed from commencement of litigation to the request for arbitration, (2) the extent of litigation (including any substantive motions and discovery), and (3) proof of prejudice. The Second Circuit found waiver because the defendant, with knowledge of the arbitration provision, had waited fifteen months after the complaint was filed to raise its contractual rights and had already argued two substantive motions to dismiss, engaged in extensive written discovery requests, and deposed a key plaintiff witness. Additionally, the court defused the defendant’s argument that Second Circuit arbitration jurisprudence conflicted with the Federal Arbitration Act, ultimately holding that its waiver case law “derives from the uncontroversial premise that affirmative defenses like arbitrability ‘are subject to forfeiture if not raised in a timely fashion.’” Technology in Partnership, Inc. v. Rudin, No. 12-3699-cv (2d Cir. Sept. 17, 2013).

This post written by Kyle Whitehead.

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REINSURERS BEWARE: ATTEND YOUR INSURERS’ REHABILITATION PROCEEDINGS

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A Wisconsin Court of Appeals recently affirmed an order enjoining a reinsurer from withholding or failing to make payments to an insurer’s segregated account, which the insurer had established for troubled parts of its insurance business, including mortgage-backed securities, credit default swaps, and municipal bonds. Under an approved rehabilitation plan for the troubled segregated account, policyholders were to receive 25% of their claim amounts in cash and the remaining 75% in surplus notes. Although the reinsurer acknowledged an obligation to pay proportionately for the cash portion of any settlement agreements reached, it refused to reimburse the segregated account for the value of any surplus notes provided to policyholders unless and until the segregated account made cash payment on those notes and sought to compel arbitration. The rehabilitation court disagreed, and the Court of Appeals affirmed, finding: (1) that the rehabilitation court in Wisconsin had personal jurisdiction over the nonresident reinsurer based on minimum contacts and the reinsurer’s notice of the pending rehabilitation plan; (2) that the rehabilitation court had exclusive jurisdiction to determine any matter relating to a delinquent insurer that would otherwise be subject to an arbitration proceeding; and (3) that the reinsurer’s payment obligations stemmed not only from the contracts themselves, but also from the policies underlying the reinsurance contract. In re Rehabilitation of: Segregated Account of Ambac Assurance Corp., Case No. 2010CV1576 (Wis. Ct. App. Oct. 24, 2013).

This post written by Kyle Whitehead.

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CALIFORNIA SUPREME COURT ATTEMPTS TO THREAD THE UNCONSCIONABILITY NEEDLE

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California’s appellate courts have had a strained relationship with the U.S. Supreme Court when it comes to enforcement of the FAA in the last few years. Illustrative of this tension is a recent decision captioned Sonic-Calabasas A, Inc. v. Moreno, No. S174475 (Cal. Oct. 17, 2013) (“Sonic II”). The Court in Sonic II was instructed by the U.S. Supreme Court to reconsider its ruling in Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (“Sonic I”), which invalidated an arbitration agreement.

The dispute arose from an employment wage dispute. The heart of the case was whether California’s statutory employment dispute mandatory ‘pre-screening’ process (referred to as a “Berman hearing”) could be waived by an arbitration agreement, such as the one in the employment contract at issue. In Sonic I, the Court held that an arbitration agreement that waives a Berman hearing is unconscionable and unenforceable. Shortly after Sonic I was released, the U.S. Supreme Court released its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ [131 S.Ct. 1740] (2011) (“Concepcion”). The defendant thereafter sought review of Sonic I by the U.S. Supreme Court, which granted certiorari and reversed, citing Concepcion and the FAA’s strong presumption in favor of arbitration.

On remand, in Sonic II, the Court held that, consistent with Concepcion, “the FAA preempts our state-law rule categorically prohibiting waiver of a Berman hearing.” However, it left the trial court some wiggle room to nevertheless find the agreement unconscionable on remand, holding (and citing Concepcion) that “state courts may continue to enforce unconscionability rules that do not interfere with fundamental attributes of arbitration.”

Based on its finding that evidence relevant to such an unconscionability claim was not developed, it remanded to the trial court to determine in the first instance whether the present arbitration agreement is unconscionable.

This post written by John Pitblado.

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COURT REFUSES TO COMPEL ARBITRATION AGAINST NONSIGNATORY ASSOCIATION CAPTIVE INSURER

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The case involved motions to compel arbitration by multiple defendants, all of which were parties to contracts with the plaintiff, an association captive insurer, but only some of which had signed contracts containing arbitration provisions. The court compelled the plaintiff to arbitrate breach of contract and related claims with the arbitration-signatories, finding that the claims fell under the arbitration provisions’ scope, which covered all disputes “arising out of” the underlying contracts. The court rejected, however, a non-arbitration-signatory’s attempt to compel the plaintiff to arbitrate under an estoppel theory, finding that the nonsignatory was “really arguing” that the court should read the arbitration clause into its non-arbitration agreements. Notwithstanding the court’s decision to only partly compel arbitration, it did stay the entire litigation, finding that some of the issues or claims might eliminate certain issues against the non-arbitration-signatory, and that the arbitration would likely proceed expeditiously. J.M. Woodworth Risk Retention Group, Inc. v. Uni-Ter Underwriting Management Corp., Case No. 2:13-cv-00911 (USDC D. Nev. Sept. 11, 2013).

This post written by Michael Wolgin.

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