Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Enforces Arbitration Agreement Despite “Service-of-Suit” Provision

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Pacific West Securities Inc. made a claim for coverage with its insurers, relating to underlying securities claims alleged against it in a FINRA proceeding brought by investors. The insurers contested coverage and initiated arbitration under the contracts. Pacific West brought suit in Washington state court, seeking to stay arbitration and have the matter heard in court based on the service-of-suit provision in the parties’ contracts. The insurers removed the case to federal court and moved to dismiss the petition to stay the arbitration. Citing the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, the court granted the motion, finding that the service-of-suit clause and the arbitration clause were compatible and could be read in a reasonable way to further the strong federal policy embodied in the FAA of enforcing arbitration agreements. Pacific West Securities Inc. v. Illinois Union Insurance Co., No. C12-539RSM (USDC W. D. Wash. Aug. 29, 2012).

This post written by John Pitblado.

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CREDIT FOR REINSURANCE UPDATE

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About a year ago we reported on the NAIC’s adoption of amendments to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). Eleven states now have implemented changes to their credit for reinsurance requirements to allow for a ratings-based methodology to allow for reduced collateral requirements for certified, non-U.S. reinsurers. These states include: Florida, New York, New Jersey, Pennsylvania, California, Connecticut, Delaware, Georgia, Indiana, Louisiana, and Virginia. Certain of these states, most notably Florida and New York, already had moved in this direction before the NAIC adopted its revised Models. A number of states, however, enacted legislation during their recently completed legislative sessions.

Some of the state legislation has included variation from the NAIC Models. For example, California’s law, signed by Governor Brown in early September, authorizes the insurance commissioner to disallow credit for reinsurance under certain circumstances notwithstanding technical compliance with the new requirements. California’s law goes into effect January 1, 2013, but will be deemed automatically repealed on January 1, 2016, unless separate legislation provides otherwise. Thus, it appears that California may be taking the NAIC’s revised Model on a three-year test drive.

At the NAIC, the Reinsurance (E) Task Force continues its work on credit for reinsurance matters. Most notably, its Qualified Jurisdiction Drafting Group, led by Missouri’s Director Huff, is focusing on developing the list of qualified jurisdictions. Under the Models, this list will identify the non-U.S. jurisdictions that will qualify as acceptable domiciliary jurisdictions for non-U.S. reinsurers to be eligible for consideration for certification and, potentially, reduced collateral obligations under the Model framework.

This post written by Anthony Cicchetti.

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COURT DENIES DISMISSAL OF PUTATIVE CLASS ACTION ALLEGING KICKBACKS ACCEPTED BY LENDER VIA ITS CAPTIVE REINSURER

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A breach of contract claim survived dismissal in a potential class action lawsuit by homeowners against a mortgage lender for alleged kickbacks obtained when the lender required the homeowners to pay for force-placed insurance (FPI) on mortgaged properties. The homeowners contended that the lender breached its contractual duty of good faith and fair dealing by funneling back to itself a portion of the premiums paid by the homeowners for the FPI by, among other things, providing reinsurance through its own captive insurance company. While the court held that the contract claim could proceed against the lender, the court dismissed other claims for unfair and deceptive trade practices, and for unjust enrichment. Montanez v. HSBC Mortgage Corp. (USA), Case No. 11-4074 (USDC E.D. Pa. July 18, 2012).

This post written by Michael Wolgin.

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FEE-SHIFTING PROVISION IN ARBITRATION CLAUSE UNENFORCEABLE WHEN CERTAIN FEDERAL STATUTORY RIGHTS ARE AT ISSUE

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In an employment dispute, a Magistrate Judge issued a Report and Recommendation which broadly interpreted the arbitration provision in an employment agreement in favor of arbitration. The judge interpreted the term providing that either party “may submit the matter to arbitration” (emphasis added) to mean that once one party elects to arbitrate, the arbitration becomes mandatory with respect to the other party. The judge also interpreted the term which explains that the arbitration clause applies to “any disputes . . . in connection with [Plaintiff’s] rights and obligations under this agreement” (emphasis added) to cover plaintiff’s sex and pay discrimination claims. The district court adopted the Report and Recommendation, except that it granted an objection to a fee-shifting provision of the arbitration clause, requiring that it be severed, finding it to be unenforceable and not essential to the arbitration clause. The fee-shifting provision required the losing party to pay attorneys’ fees. The court found the provision to be unenforceable because the claimant would not have to pay attorneys’ fees to vindicate her federal statutory rights under Title VII and the Equal Pay Act in court, and requiring the claimant to be exposed to that risk to vindicate her rights in an arbitral formum was not consistent with the statute. The district court specifically declined to follow cases from other circuits, which have held that fee-shifting provisions are generally too speculative to prevent a plaintiff from vindicating his or her federal statutory rights in an arbitral forum. Smith v. AHS Oklahoma Heart, LLC, Case No. 11-00691 (USDC N.D. Okla. Aug. 3, 2012).

This post written by Abigail Kortz.

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DELAWARE COURT OF CHANCERY’S CONFIDENTIAL ARBITRATION PROCEEDING DECLARED UNCONSTITUTIONAL

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In 2009 Delaware adopted a rather unique process for the arbitration of business disputes by a sitting judge of the Court of Chancery, which was intended “to preserve Delaware’s pre-eminence in offering cost-effective options for resolving disputes, particularly those involving commercial, corporate, and technology matters.” Del. H.B. 49, at 4 (2009). A public interest group filed suit challenging the section of the new statute requiring that the proceedings be considered “confidential and not of public record.” 10 Del C. § 349(b). The federal district court in Delaware recently held that since the arbitration process essentially functions like a civil trial the confidentiality provision violates the qualified right of access to criminal and civil trials protected by the First Amendment. The court concluded that the proceedings function like a non-jury trial because: 1) the Chancellor, not the parties, selects the judge; 2) the Chancery Court discovery rules apply instead of the rules for arbitration discovery, and 3) a sitting judge of the Chancery Court, rather than a third party arbitrator, presides. The arbitration process remains in force in all other respects. Delaware Coalition for Open Government v. Strine, Case No. 1:11-01015 (USDC D. Del. Aug. 30, 2012).

This post written by Abigail Kortz.

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