Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

INSURER DENIED REQUEST TO ENJOIN SPEEDY ARBITRATION PROCEEDING

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Policyholder Nero filed a putative class action lawsuit against American Family Insurance Company, alleging common law and statutory claims. American Family moved to dismiss, asserting that the claims were subject to mandatory arbitration, among other grounds. Shortly thereafter, on March 1, Nero notified American Family that an arbitration hearing would be commencing on March 5 in a different state and in front of a single arbitrator. American Family sought a temporary restraining order from the court enjoining the arbitration. American Family argued that it did not have sufficient time to prepare and, furthermore, that the location and designation of a single arbitrator was contrary to the terms of the arbitration provision in Nero’s insurance policy. It further argued that it would be irreparably harmed by having to “oppose confirmation of an unjust arbitration award” in a different jurisdiction. The court denied American Family’s request. The court stated that American Family’s contention that the arbitrator would not follow the proper procedure for selecting arbitrators was only speculative, and, furthermore, that FAA section 10(a)(3) permits vacatur where an arbitrator wrongfully refuses to postpone an arbitration hearing. Nero v. American Family Mut. Ins. Co., Case No. 11-02717 (USDC D. Colo. Mar. 2, 2012).

This post written by Ben Seessel.

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APPELLATE COURT REMANDS TO COMPEL ARBITRATION UNDER “DELEGATION PROVISION”

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Plaintiff sued her bank in Florida federal court for the manner in which she was charged overdraft fees. The bank moved to compel arbitration, but the district court found the agreement to arbitrate unconscionable and unenforceable. The bank appealed. After the Supreme Court decided AT&T Mobility LLC v. Concepcion, __ U.S. __, 131 S.Ct. 1740 (2011), the Eleventh Circuit reversed and remanded for consideration in light thereof. The district court again refused to compel arbitration, avoiding an unconscionability finding, but nevertheless finding that the dispute did not come within the scope of the arbitration agreement. The bank again appealed and the Eleventh Circuit again reversed, finding the threshold issue of whether the dispute is arbitrable to be explicitly reserved for the arbitrator under the so-called “delegation provision” in the parties’ contract, which states that “[a]ny issue regarding whether a particular dispute or controversy is . . . subject to arbitration will be decided by the arbitrator.” In re Checking Account Overdraft Litigation, No. 11-14282 (11th Cir. March 21, 2012).

This post written by John Pitblado.

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FLORIDA AND OREGON ENACT CAPTIVES LEGISLATION

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On March 27th and April 24th, respectively, Oregon and Florida became the latest states to enact legislation providing for the formation of captive insurers, including captive reinsurers, for various types of insurance. Among other things, the new legislation sets out standards for captive formation, capitalization requirements, permissible types of coverage, and reporting. The two laws vary, however, in several respects.

Oregon’s new law (SB 1547) requires minimum policyholder surplus of between $250,000 and $750,000, depending on whether the captive is formed as a “pure” captive, “association” captive, or captive reinsurer, all of which (among others) are defined in the law. Florida’s law (HB 1101), in contrast, requires minimum surplus of between $250,000 and $500,000, depending on whether the captive is formed as a “pure” captive, or an “industrial insured” captive, as defined therein.

The new laws also differ with respect to fees and taxes. Oregon requires $5,000 for the initial application fee and $5,000 for each annual renewal, whereas Florida requires $1,500 as an application fee and $1,000 for annual renewal. With respect to premium taxes, Oregon’s law contains none, as opposed to Florida’s law which sets a premium tax rate of 1.75% on gross premium receipts. Both laws provide various financial requirements relating to the maintenance of reserves and liquidity.

Captives licensed in Oregon or Florida are required to have at least one board meeting each year in their respective states. Both states also require captives to maintain their respective principal places of business in-state (with one exception in Oregon’s law for “branch” captives). Approximately 31 jurisdictions have now enacted captive insurance laws over the past decade. Both the Oregon and Florida laws will take effect July 1, 2012.

This post written by Michael Wolgin.

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FEDERAL COURT JURISDICTION FOUND FOR STATE LAW CLAIMS BASED ON DISPUTED WITHDRAWALS UNDER FEDERAL REINSURANCE PROGRAM

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School districts brought a case in state court against their insurers, alleging that the insurers’ withdrawal of funds from the federal Early Retiree Reinsurance Program (ERRP) on the school district’s behalf was improper under the ERRP’s scheme. Despite the plaintiffs’ assertion of only state common law claims for conversion, civil theft, unjust enrichment, and breach of fiduciary duty, the defendants removed the case to federal court as implicating a federal question. On plaintiffs’ motion to remand back to state court, the court analyzed plaintiffs’ allegations and determined that, notwithstanding that the legal claims were alleged under state law, meeting the elements of those claims required the court to interpret the ERRP and related federal regulations to determine whether the defendants’ withdrawals were proper. The court then determined that, because the case would entail a “substantial and disputed federal issue,” and because federal jurisdiction over the case would not create “a potentially enormous shift of traditionally state cases into federal court,” federal jurisdiction was proper. In reaching this conclusion, the court found that the lack of a right to a private right of action under the ERRP was a relevant factor, but did not require remand. Hartland Lakeside Joint No. 3 School District v. WEA Insurance Corp., Case No. 2:12-cv-00154 (USDC E.D. Wisc. Apr. 24, 2012).

This post written by Michael Wolgin.

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COURT COMPELS PRODUCTION OF UNDERWRITING MANUALS; FINDS REINSURANCE DOCUMENTS GENERALLY IRRELEVANT

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A dispute arose between the city of Warren, Michigan and several insurance companies regarding their duties to defend and indemnify with respect to a state court class action suit against the city. The city sought to compel discovery of underwriting manuals, documents reflecting the company’s interpretation of key policy terms, and documents reflecting discussions with reinsurers and the setting of reserves from United States Fire Insurance Company as well as a series of other insurers who had provided coverage at various points between the 1960s and 2001. The district court granted the city’s motion to compel as to the claims manuals, underwriting manuals, and related documents, and denied all other requests. Specifically, the court found that (1) the other claims-related material was covered by attorney-client privilege or the work-product doctrine; (2) materials evidencing interpretation of policy terms were not relevant; and (3) while reinsurance policies themselves are discoverable, all other documents relating to reinsurance are irrelevant and not discoverable. United States Fire Insurance Co. v. The City of Warren, No. 10-13128 (E.D. Mich. Apr. 26, 2012).

This post written by John Black.

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