Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

ADMINISTRATIVE SERVICES AGREEMENT PROVIDES FOR PERMISSIVE ARBITRATION; PLAINTIFF PERMITTED TO AMEND COMPLAINT

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PCH Mutual Insurance Company (“PCH”), a risk retention group providing insurance to assisted living facilities, entered into an Administrative Services Agreement with Casualty & Surety, Inc. (“CSI”), a wholesale insurance broker and program manager. The Agreement’s arbitration provision stated that: “Any disputes . . . may be submitted to binding arbitration. The prevailing party shall be entitled to recover all costs incurred, including reasonable attorneys fees.” After PCH filed suit (alleging breach of contract, breach of fiduciary duty, and unjust enrichment), CSI moved to compel arbitration. The court denied the motion to compel arbitration, holding the arbitration provision was ambiguous and could be read to contemplate permissive arbitration. The court focused on the use of the term “may,” which indicated that arbitration was not required, particularly when juxtaposed with the term “shall,” which signaled that payment of costs to the prevailing party was compulsory. The court also cited the lack of specifics regarding arbitration procedure in the Agreement, further indicating ambiguity to the court. For example, the Agreement did not identify an arbitrator or provide a method for choosing one.

In a separate order issued the same day, the court granted PCH’s motion to amend the complaint to add a claim that CSI had improperly issued occurrence based endorsements, in contravention of underwriting guidelines that limited PCH’s coverage to claims made policies. The court rejected CSI’s argument that PCH’s motion to amend should be denied because of CSI’s “contractual expectancy for arbitration,” finding that it was “dubious” whether a pending motion to compel arbitration could constitute grounds for rejecting a motion to amend the complaint, and, furthermore, CSI had failed to establish that the parties had agreed to mandatory arbitration. The court also held that the proposed amendment would not be futile, and was not offered in bad faith or untimely. PCH Mutual Insurance Co., v. Casualty & Surety, Inc., Case No. 08-00282 (USDC D.D.C. Nov. 11, 2010).

This post written by Ben Seessel.

NAIC ADOPTS REINSURANCE AND SURPLUS LINES PROPOSALS; NCOIL ALTERNATIVE GAINS SUPPORT

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On December 16, 2010, the NAIC adopted the proposed Reinsurance Collateral Reduction & Accreditation Recommendations and the Nonadmitted Insurance Multistate Agreement (“NIMA”), which were profiled in our December 6, 2010 post. The broader surplus lines proposal adopted by the National Conference of Insurance Legislators, profiled in the same post, now has the support of both the Council of State Governments and the National Conference of State Legislatures. The open question is how the states will react to these non-binding proposals.

This post written by Rollie Goss.

APPEALS COURT DERAILS ATTEMPT TO VACATE ARBITRATION AWARD

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Burlington Northern and Santa Fe Railway Company (BNSF) and the Public Service Company of Oklahoma (PSO) entered into a long-term agreement in 1985 pertaining to the transport of coal. A dispute about rates arose and the matter was submitted to arbitration, as per the parties’ agreement. The arbitration provision was limited to rate disputes. The panel awarded PSO the rate decrease it sought, and BNSF thereafter moved to vacate the award in federal district court, arguing the panel (1) exceeded its authority by deciding matters outside the scope of the submission; and (2) incorrectly interpreted the contract in manifest disregard of the law. The district court ultimately confirmed the award, and BNSF revived its arguments on appeal to the Tenth Circuit Court of Appeals. The Tenth Circuit affirmed, finding that BNSF was merely seeking to alter its burden by disguising the issue as one of arbitrability, when really it was seeking review of the decision on the merits. Applying the correct standard of “extreme deference” to the panel’s decision on the merits, the court affirmed the district court’s ruling confirming the panel’s award. Burlington Northern and Santa Fe Railway Co. v. Public Service Company of Oklahoma, No. 09-5133 (10th Cir. Dec. 10, 2010).

This post written by John Pitblado.

SPECIAL FOCUS: REGULATING “COLLATERAL DAMAGE”: NEW YORK FINALIZES COLLATERAL REDUCTION REGULATION

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New York recently joined Florida in adopting a regulation approving reduced collateral for certain reinsurance agreements based largely upon the financial strength of the reinsurer. In this Special Focus article, Carlton Fields partner Anthony Cicchetti provides an analysis of the New York regulation, which takes effect January 1, 2011.

CALIFORNIA APPELLATE COURT AFFIRMS DENIAL OF ADR WHERE THERE WAS A POSSIBILITY OF CONFLICTING RULINGS WITH CONCURRENT LITIGATION

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In a suit by residents of a mobile home park, of whom only some had signed leases that permitted arbitration or other ADR, against the owners of the facility, a California Appellate Court recently affirmed the lower court’s denial of the owners’ motion to compel arbitration. Under California law, the trial court has discretion to deny arbitration where there is a possibility of conflicting rulings on a common issue of law or fact. The lower court found, and the appellate court agreed, that all the plaintiffs had alleged that the mobile home park was inadequately maintained, and to permit arbitration for only some of the residents, while the others continued to litigate in court, would create the possibility of conflicting rulings on issues of law or fact. The appellate court further held that while an evidentiary showing is required under California law to show the existence of an agreement to arbitrate, no such showing is required for the court to find the “possibility” of conflicting rulings. Abaya v. Spanish Ranch I, L.P., No. A125298 (Cal. Ct. App. Nov. 11, 2010).

This post written by Michael Wolgin.