Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SUPREME COURT DENIES REVIEW OF CASE CHALLENGING PARTY-SELECTED ARBITRATOR

by

The Supreme Court denied certiorari in Trustmark Insurance Co. v. John Hancock Life Insurance Co., a case involving a challenge to a party-selected arbitrator in a tripartite arbitration (where each party selects an arbitrator, and the two arbitrators select an umpire). We reported earlier on both the federal district court’s decision enjoining the arbitration on the basis that John Hancock’s selected arbitrator was not “disinterested” because of his participation in a prior arbitration proceeding between the same parties (Feb. 8, 2011), and the court of appeals’ reversal of the district court’s decision (May 10, 2010). The court of appeals held the district court erred in holding that John Hancock’s arbitrator was not “disinterested” because he had knowledge of the parties’ prior arbitration, and further erred in determining that the arbitration panel lacked the power to construe a confidentiality agreement that the parties had reached during the first arbitration proceeding. Trustmark Insurance Co. v. John Hancock Life Insurance Co., No. 09-3682 (7th Cir. Jan. 6, 2011), cert. denied 79 U.S.L.W. 3594 (U.S. May 16, 2011) (No. 10-1213).

This post written by Ben Seessel.

PREJUDGMENT INTEREST AVAILABLE ONLY FOR COMPENSATORY DAMAGES, BUT NOT FOR PUNITIVE OR TREBLED DAMAGES

by

On March 7, 2011, we posted on an extensive decision of a District Court in a dispute over a reinsurance relationship which had not been documented in a written agreement. The court has now assessed prejudgment interest, attorneys’ fees and costs. The court held that prejudgment interest must be computed on actual damages, and may not be based upon doubled or trebled amounts, and that prejudgment interest may not be awarded for punitive damages. Trenwick America Reinsurance Corp. v. IRC, Inc., Case No. 07-12160 (USDC D. Mass. May 23, 2011).

This post written by Rollie Goss.

ARBITRATION COMPELLED DESPITE CLAIM OF INVALIDITY

by

In response to Plaintiff Gordon Hook’s action to enjoin UBS from enforcing a promissory note it required Hook to execute after he commenced his employment at UBS, the company moved to compel arbitration and for dismissal or stay pending completion of arbitration. Hook, for his part, moved for a preliminary injunction to enjoin UBS from enforcing the arbitration provisions of the promissory note and from proceeding with the pending arbitration before FINRA. The US District Court for the District of Connecticut granted UBS’s motion to compel arbitration and further dismissed the action pending arbitration. The Court found specifically that the arbitration provision was valid and that it required that all challenges to the validity of the promissory note (and the arbitration provision itself) must be determined by arbitrators. This included all of Hook’s claims of fraudulent inducement, conversion, and statutory theft. Hook’s motion for an injunction was denied, as he failed to demonstrate the likelihood of irreparable harm. Accordingly, the Court closed the case. Hook v. UBS Fin. Servs., Case No. 10-950 (USDC D. Conn. May 4, 2011).

This post written by John Black.

ARBITRATION VENUE PROVISION NOT UNCONSCIONABLE

by

Plaintiff Ellison Framing Inc. recently filed a complaint with the California Department of Insurance against Zurich American Insurance claiming that Zurich had overcharged Ellison by almost $200,000 in improper fees pursuant to a workers compensation insurance plan. Zurich subsequently made a demand for arbitration, alleging nearly $570,000 in unpaid deductibles. Ellison responded by filing a suit in California Superior Court seeking declaratory and injunctive relief, contending that the venue provision, which provides that arbitration should occur in Schaumburg, Illinois, Zurich’s principal place of business, was unconscionable. Zurich removed the action to Federal Court and submitted a motion to stay the action and compel arbitration. The US District Court for the Eastern District of California granted Zurich’s motion finding that the American Arbitration Association’s decision as to venue may not be reversed because the AAA met the minimum standards for fair dealing. Further, plaintiff had not met its burden in claiming that the arbitration venue provision was unconscionable. Accordingly, the Court stayed the action, and found that plaintiff’s claim for fraud fell with the scope of arbitration. Zurich was additionally found not to have waived its right to seek relief. Ellison Framing, Inc. v. Zurich Am. Ins. Co., Case No. 11-0122 (USDC E.D. Cal. Apr. 4, 2011).

This post written by John Black.

COURT OF APPEAL HOLDS THAT ARBITRATOR BIAS NOT PROVEN AND THAT PANEL DID NOT MANIFESTLY DISREGARD APPLICABLE LAW

by

Credit Suisse sold STMicroelectronics (“ST”) auction rate securities to manage its cash and cash equivalents, replacing prior investments in money market funds and floating rate notes, which ST had selected for their safety and liquidity. While Credit Suisse promised that it would invest only in safe and liquid instruments, it instead invested in higher risk un-guaranteed collateralized debt obligations and credit-linked notes, sending ST false transaction confirmations. When the auction rate securities market failed, ST was left holding over $400 million of securities which failed at auction. ST demanded arbitration. A three member panel issued an award in favor of ST, pursuant to which ST returned the securities in exchange for a payment of approximately $404.5 million in damages, interest and attorneys’ fees.

Credit Suisse unsuccessfully attempted to have one of the arbitrators thrown off the panel part way through the proceeding, contending that he had failed to make adequate disclosure of a prior expert witness engagement on an issue relevant to the arbitration. Affirming the District Court’s confirmation of the award, the Court of Appeals noted that Credit Suisse never asked the arbitrator for details of his expert engagements, had misstated the evidence, and had not satisfied the very high burden to show arbitrator bias or misconduct. The Court also rejected the contention that the panel had manifestly disregarded the law, finding that even if the doctrine still existed, Credit Suisse’s proof fell well short of establishing manifest disregard. While confirming the award, the Court agreed that the District Court should have credited against the amount of the award $97 million received by ST after the issuance of the award for the sale of the auction rate securities to another institution. STMicroelectronics, N.V. v. Credit Suisse Securities, No. 10-3847 (2d Cir. June 2, 2011).

This post written by Rollie Goss.