Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT OF APPEAL AFFIRMS VACATION OF ARBITRATION AWARD ON GROUNDS OF ARBITRATOR’S EVIDENT PARTIALITY

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Thomas Kinkade Company’s suit against Nancy and David White was submitted to an arbitration proceeding in which, as the Sixth Circuit noted, “the coincidences all break one way.” During the five-year arbitration, the arbitrator, Mark Kowalsky, defied his role as neutral intermediary in various ways. For example, Kowalsky provided the Whites multiple opportunities to bolster the proofs of their claims. Kowalsky allowed the Whites to submit as evidence 8,800 documents they had deliberately withheld from Kinkade for four years. On a straightforward breach-of-contract claim that went virtually uncontested throughout arbitration, he denied Kinkade any relief. When Kinkade raised objections to Kowalsky’s decisions as an arbitrator, Kowalsky gave no response. Kowalsky additionally awarded the Whites attorney’s fees of nearly $500,000 after the arbitration panel unequivocally denied those fees in the Interim Award. Finally, during arbitration, the Whites and their appointed arbitrator both retained Kowalsky’s law firm in unrelated matters, and Kowalsky made no effort to avoid receiving compensation for such matters. Kinkaid sought to disqualify Kowalsky to no avail. Both the AAA and Kowalsky denied disqualification requests. The arbitration panel entered a Final Award in favor of the Whites in an amount in excess of $1.4 million. The district court granted Kinkade’s motion to vacate due to the arbitrator’s partiality, and the Sixth Circuit affirmed. Thomas Kinkade Company v. White, No. 10-1634 (6th Cir. April 2, 2013).

This post written by Rollie Goss.

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COURT DISMISSES ALL CLAIMS IN PRIVATE MORTGAGE REINSURANCE “KICKBACK” SCHEME RESPA SUIT

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As we reported yesterday , a number of suits in recent years have been filed challenging lender and insurer practices regarding private mortgage insurance. This practice has come under attack in suits alleging that privage mortgage insurers and lenders (and/or their captive reinsurers) have unlawfully entered into reinsurance arrangements between the primary insurers that issue the insurance, and captive reinsurers of the lender, that amount to “kickbacks” to the lenders violating the Real Estate Settlement Procedures Act (“RESPA”), among other causes of action.

A California federal court has granted motions to dismiss filed by each of the defendants, including the lender, primary insurers, and reinsurer. The court found that the plaintiff acquiesced in the dismissal of the bank defendants. The court also found the plaintiff had no standing to sue one of the primary insurers, which had not insured the named plaintiff’s mortgage, but had allegedly insured some putative class members’ mortgages. Finally, the court dismissed all the claims under RESPA’s statute of limitations, finding that the “discovery rule” did not apply, and the plaintiffs were not otherwise entitled to equitable tolling. Samp v. J.P. Morgan Chase Bank, N.A., Case No. 11-civ-1950 (USDC C.D. Cal. May 7, 2013).

This post written by John Pitblado.

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CLASS CERTIFICATION RECOMMENDED IN ALLEGED PRIVATE MORTGAGE REINSURANCE “KICKBACK” SCHEME

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When prospective home buyers cannot make a down payment at a certain level (usually twenty percent of the purchase price), lenders often require them to purchase private mortgage insurance, to cover the risk of default. Typically, the lender places the insurance on behalf of the borrower. The premium is charged to the borrower along with other escrow items, such as property tax and homeowners insurance premiums. This practice has come under attack in suits in recent years – often class action suits – alleging that private mortgage insurers and lenders (and/or their captive reinsurers) have unlawfully entered into reinsurance arrangements between the primary insurers that issue the insurance, and captive reinsurers of the lender, that amount to “kickbacks” to the lenders violating the Real Estate Settlement Procedures Act, among other causes of action.

In the long-running Munoz v. PHH Corp. case pending in the Eastern District of California, a federal magistrate recommended a partial grant of class certification, which would certify a class of “all persons who obtained residential mortgage loans originated and/or acquired by PHH and/or its affiliates on or after June 2, 2007, and, in connection therewith, purchased private mortgage insurance and whose loans were included with PHH’s captive mortgage reinsurance arrangements.” Munoz v. PHH Corp., Case No. 08-cv-0759 (USDC E.D.Cal. May 15, 2013).

This post written by John Pitblado.

See our disclaimer.

REINSURER CAN DENY COVERAGE BASED ON INSURER’S LATE NOTICE

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AIU brought an action against TIG asserting breach of contract and seeking a declaratory judgment as to coverage under nine certificates of facultative reinsurance issued by TIG’s predecessor in interest in the late 1970s and early 1980s. The parties’ dispute arose in 2007 after AIU sought coverage from TIG regarding a multimillion dollar settlement AIU had reached with its insured Foster Wheeler relating to Foster Wheeler’s exposure to numerous asbestos-related lawsuits. TIG contested coverage under the certificates, arguing that AIU had failed to provide prompt notice of Foster Wheeler’s demand for payment which AIU had received in 2003 but did not report to TIG until early 2007.

AIU contended that New York law applied, under which a reinsurer must demonstrate prejudice due to late notice in order to avoid coverage. TIG argued that prejudice to TIG need not be shown in order for it to deny coverage based on late notice under applicable Illinois law. The court determined that Illinois law applied because the certificates were issued in Illinois and AIU was required to perform under the certificates in Illinois by submitting claims to TIG’s Chicago-based intermediary. The court granted TIG’s motion for summary judgment. AIU Insurance Co. v. TIG Insurance Co., Case No. 07-civ-7052 (USDC S.D.N.Y. Mar. 25, 2013).

This post written by Ben Seessel.

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INVALID ATTORNEYS FEE PROVISION SEVERED AND ARBITRATION COMPELLED

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An arbitration provision in an employment agreement provided that the “costs and expenses of the arbitration, including the arbitrator’s fees, shall be borne equally by the parties.” The court held the provision invalid because it would have prevented the plaintiff, if successful, from recovering attorneys fees as provided for in Title VII. However, the court severed the invalid provision and compelled arbitration. Adams v. Republic Parking System, Inc., Case No. 12-1310 (USDC W.D. Okla. April 9, 2013).

This post written by Rollie Goss.

See our disclaimer.