Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Texas Department of Insurance Adopts New Reinsurance Regulations for Reciprocal Insurers

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In November 2021, the Texas Department of Insurance adopted new administrative reinsurance regulations relating to reciprocal reinsurers. The rules took effect on January 1, 2022.

Section 7.615 (28 Tex. Admin. Code § 7.615) largely mirrors NAIC Model Regulation #786, and adds a new way for ceding insurers to receive credit for reinsurance ceded to non-U.S. assuming reinsurers domiciled in a “reciprocal jurisdiction,” as defined by Texas Annotated Insurance Code section 493.108, which also became effective on January 1, 2022. The ceding reinsurer is eligible to receive the credit if it meets certain requirements and conditions, including satisfying minimum capital, surplus, and solvency requirements; agreeing to submit to jurisdiction in the state of Texas; and various other rules set forth in section 493.108 and section 7.615(c).

Section 7.616 (28 Tex. Admin. Code § 7.616) is substantially similar to NAIC Model Regulation #787, the purpose of which is to establish standards governing reserve financing arrangements for certain life insurance policies. Certain types of reinsurance treaties are exempt from the new rule, as set forth in section 7.616(c).

SDNY Recognizes Strong Deference Owed to Arbitrators, Confirms Arbitration Award

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International Engineering and Construction (IEC) commenced arbitration against Baker Hughes (formerly GE Oil and Gas) over construction delays in the building of a liquefied natural gas power plant in Nigeria. The three-arbitrator panel issued an award finding that both GE and IEC breached the construction contracts. While the panel awarded IEC more than $7 million plus interest from GE, it also ordered IEC to pay GE $11 million plus interest, as well as 95% of the arbitration costs and GE’s costs. The net result was that IEC was ordered to pay more than $8 million plus interest.

GE moved to confirm the arbitration award and IEC cross-moved to vacate the award on the grounds that the arbitrators manifestly disregarded the law and the plain language of the parties’ contracts. Although the district court noted that IEC’s arguments “might have traction” if the court were writing on a blank slate, based upon the strong deference owed to arbitrators, the court found that IEC’s vacatur arguments “fell short,” and confirmed the award in favor of GE.

Baker Hughes Energy Services, LLC v. International Engineering & Construction S.A., No. 1:21-cv-01961 (S.D.N.Y. Nov. 16, 2021)

Ninth Circuit Affirms Denial of Motion to Compel Arbitration Against Non-Signatory Spouse of Contracting Party

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In a case brought under the Telephone Consumer Protection Act (TCPA), the Ninth Circuit Court of Appeals affirmed an order denying the defendant corporation’s motion to compel arbitration, which the company filed pursuant to a truck purchase agreement signed by the plaintiff’s husband, but not by her. The company contended that the plaintiff was bound by the arbitration clause because she was designated as her husband’s agent and authorized third party on the subject account, made payments on the account, made substantive changes to the account, called the company regarding the account, and filed a TCPA claim that arose out of the contract containing the arbitration agreement. The Ninth Circuit, however, held that the district court correctly ruled that under Florida law, which governed the contract, the plaintiff was not bound to her spouse’s agreement to arbitrate. The court further held that the plaintiff was not equitably estopped from avoiding the arbitration agreement, observing that, generally, Florida courts do not apply equitable estoppel to estop non-signatories. The court concluded that the plaintiff had not derived sufficient benefit under the contract to warrant application of estoppel.

Canady v. Bridgecrest Acceptance Corp., No. 20-15997 (9th Cir. Nov. 8, 2021).

Fourth Circuit Refuses to Create a Less Deferential Standard of Review for Arbitral Decisions That Implicate Res Judicata or Collateral Estoppel

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In a dispute between Constellium Rolled Products Ravenswood LLC and a labor union, Constellium argued that an arbitrator’s award against Constellium was contrary to a prior court decision involving the same parties and therefore violated the doctrine of res judicata. Despite the existence of an arbitration agreement between the parties, Constellium sued in district court seeking a declaratory judgment that it should prevail in the dispute. The district court denied Constellium’s petition and the parties proceeded to arbitration, which resulted in an award in favor of the union. Constellium appealed to the Fourth Circuit Court of Appeals, arguing that the district court should have determined the preclusive effect of the prior decision in the first instance or, in the alternative, that the appellate court should apply a less deferential standard for reviewing res judicata and collateral estoppel errors than applies to other alleged legal errors in an arbitration.

The Fourth Circuit disagreed, noting that the Supreme Court has identified two categories of threshold questions — procedural questions for the arbitrator, and questions of arbitrability for the court. Questions of arbitrability are “quite limited” and include disputes about the existence and scope of a valid and binding arbitration agreement. “Procedural questions,” on the other hand, grow out of the dispute and bear on its final disposition, and include issues such as the application of statutes of limitations, notice requirements, laches, and estoppel. Such procedural questions do not present any legal challenge to the arbitrator’s underlying power and are the types of questions that the parties would likely expect the arbitrator to determine.

The court found that the preclusive effect of a prior judgment is a “procedural question” for the arbitrator. Similar to laches and estoppel, preclusion is an affirmative defense to the underlying dispute and does not implicate the arbitrator’s power, unlike questions related to the existence or scope of an arbitration agreement. Constellium “highlight[ed] older decisions” holding that courts “have the power to defend their judgments as res judicata, including the power to enjoin or stay subsequent arbitrations,” and argued that the court should exercise “plenary review” of an arbitrator’s preclusion decision rather than applying the typical highly deferential standards for review of an arbitration decision. But the Fourth Circuit found no legal basis for such a distinction in the Federal Arbitration Act or case law. Lacking any legal basis for treating such issues differently, the court declined Constellium’s invitation to expand its review of legal errors in arbitration awards beyond that authorized by the FAA, and affirmed the award against Constellium.

Constellium Rolled Products Ravenswood, LLC v. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union AFL-CIO/CLC, No. 20-1759 (4th Cir. Nov. 29, 2021).

Second Circuit Rejects Arbitration-Ordered Procedure for Determining Religious Exemptions to Vaccines in Favor of Title VII Standards

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The Second Circuit Court of Appeals recently invalidated an arbitrator’s procedure for determining whether New York City Department of Education employees would receive religious accommodations to a vaccine mandate after finding that the arbitrator’s procedure failed to pass constitutional muster.

In August 2021, New York City’s commissioner of health and mental hygiene adopted a vaccine mandate for most New York City employees who work in New York City’s public schools.

The United Federation of Teachers objected to the mandate on the ground that it did not provide for medical or religious accommodations. That objection led to arbitration, where an arbitrator issued an award providing a process for employees to seek religious accommodations.

The arbitrator’s procedure required covered employees to submit a request that was “documented in writing by a religious official (e.g., clergy).” The procedure then provided that requests would be “denied where the leader of the religious organization has spoken publicly in favor of the vaccine, where the documentation [(apparently, documentation from the religious organization supporting the vaccine)] is readily available (e.g., from online sources), or where the objection is personal, political, or philosophical in nature.” The city’s department of education made an initial determination regarding an accommodation. That decision was subject to appeal to a panel of arbitrators. Employees who were granted an accommodation would remain on the payroll but would not be allowed to enter school buildings. The arbitration award also provided a series of deadlines and allowed the city to place unvaccinated employees who were denied an accommodation on unpaid leave by a certain date and allowed employees on unpaid leave to voluntarily resign from their positions, provided they waived their right to challenge their resignation. Employees who resigned would maintain health insurance but would not be paid.

A group of teachers and administrators challenged the vaccine mandate and the arbitrator’s procedures. They claimed the mandate was unconstitutional on its face and as applied to them through the arbitrator’s procedures. The district court denied the plaintiffs’ request for a preliminary injunction and the plaintiffs appealed to the Second Circuit. A motions panel at the Second Circuit heard oral argument on a request by the plaintiffs for interim relief. At that oral argument, the city conceded that the arbitrator’s process was “constitutionally suspect.” The motions panel subsequently granted the plaintiffs partial interim relief, which among other things and in accordance with a proposal from the city, allowed the plaintiffs to receive renewed consideration of their accommodation requests by a citywide panel that applied Title VII’s standards for religious accommodations. The motions panel also stayed the deadlines for resignation and provided that plaintiffs whose requests were granted would receive back pay.

The Second Circuit then addressed the merits of the plaintiffs’ claims, albeit in the context of the plaintiffs’ request for a preliminary injunction. The court first found that the plaintiffs were not likely to succeed on their claim that the vaccine mandate was facially unconstitutional. On its face, the mandate was neutral and generally applicable and therefore subject to rational basis review. The mandate satisfied that standard and the plaintiffs’ facial claim failed.

The court then turned to the arbitrator’s procedure, however, which it noted the city’s defense of was “half-hearted at best.” The court found that, unlike the mandate on its face, that process was neither neutral nor generally applicable. The procedure impermissibly determined an employee’s entitlement to a religious accommodation by reference to another person’s (e.g., a clergy person’s) beliefs. The plaintiffs also submitted evidence that the arbitrators who reviewed decisions under the process had substantial discretion that seemed to result in varying standards and seemingly inconsistent results. The court therefore applied strict scrutiny, which the process failed because “whether an applicant can produce a letter from a religious official … is not narrowly tailored to serve the government’s interest in preventing the spread of COVID-19.”

As a result of its decision, the Second Circuit vacated the district court’s ruling and remanded for further proceedings while leaving the relief ordered by its motion panel in place and refusing to order additional injunctive relief requested by the plaintiffs.

Kane De Blasio, No. 21-2711 (2d Cir. Nov. 28, 2021).