Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FOURTH CIRCUIT AFFIRMS CONFIRMATION OF ARBITRATION AWARD OVER OBJECTIONS THAT THE AWARD WAS PROCURED BY “UNDUE MEANS”

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The appeal arises from a contract dispute concerning the construction of a wastewater treatment plant for the City of Greensboro. The parties – Greensboro, the contractor (MCI Constructors), and the contractor’s surety on a performance bond (National Union Fire Insurance Company) – agreed to submit the matter to arbitration. Greensboro was award nearly $15 million in the arbitration. The district court granted Greensboro’s motion to confirm that award. On appeal, MCI and National Union argued that the district court should have vacated the award because the liability award was procured by “undue means” in violation of § 10(a)(1) of the Federal Arbitration Act; that the arbitration panel exceeded the scope of its powers to issue the award; and that the district court should have remanded the award because the award failed to specify whether it includes the contract balance.

The Fourth Circuit affirmed. First, the court stated that an award is procured by “undue means” if there is proof of fraud or corruption, but the most that happened during the arbitration in question was Greensboro’s counsel’s “legally objectionable” tactics. Next, the court determined whether the arbitration panel exceeded the scope of its powers under the contract by not requiring the City to submit the dispute on the contract price to the engineering firm that designed the project. The court found that since the submission of this issue to the engineering firm was not a contract requirement, the panel did not exceed its authority by not requiring such a submission. The court further rejected the contention that because the panel did not specify the basis for its award, the award was ambiguous. It is “well settled” that arbitrators are not required to disclose the basis upon which their awards are made and “courts will not look behind a lump-sum award.” Finally, the court rejected the objection that the panel failed to issue a reasoned written statement of decision; a written statement was not requested by the parties, as contemplated under the applicable arbitration rules (AAA Complex Commercial Arbitration Rules). MCI Constructors v. City of Greensboro, No. 09-1600 (4th Cir. July 1, 2010).

This post written by Brian Perryman.

DISTRICT COURT DENIES ERC’S § 1292(B) REQUEST FOR CERTIFICATION FOR INTERLOCUTORY APPEAL

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In the latest development in the ongoing dispute between Employers Reinsurance and its reinsured Mass Mutual, ERC asks the US District Court for the Western District of Missouri to amend its prior rulings to certify the “follow the settlements” and statutes of limitations issues for immediate interlocutory appeal under 28 U.S.C. § 1292(b). Noting the heavy burden required to certify a question for interlocutory appeal, the District Court incorporated its prior ruling on the “follow the settlements” issue and denied ERC’s request for certification as to that issue, since it had denied certification of that issue previously. The court also refused to certify the statute of limitations issue for interlocutory appeal finding that the issue was not a purely legal question as required by § 1292(b). Employers Reinsurance Corp. v. Massachusetts Mut. Life Ins. Co., Case No. 06-0188 (USDC W.D. Mo. June 16, 2010).

This post written by John Black.

GAO ISSUES REPORT ON NATURAL CATASTROPHE INSURANCE COVERAGE ISSUES

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The U.S. Government Accountability Office recently reported to Rep. Bachus, the ranking majority member of the House Financial Services Committee, of its findings pertaining to various proposals meant to address increasingly difficult insurance coverage issues arising from natural catastrophes. The GAO’s report analyzes various legislative proposals that generally increase federal involvement in insurance coverage for natural catastrophes, through the lens of furthering the public policy goals of (1) charging premium rates that reflect the risk of loss, (2) encouraging broad participation, (3) encouraging the private market to provide natural catastrophe insurance, and (4) limiting costs to U.S. taxpayers. The report identifies the trade-offs that would need to be balanced in legislative assessment of the proposals, such as the trade-off of, on the one hand, increased federal subsidies that would cause premium rates to inadequately reflect the risk of loss, thereby increasing public participation, but, on the other hand, discouraging private marketplace participation and decreasing pre- and post-event mitigation efforts, and encouraging unwise development in high risk areas. The report discusses the roles of and impact on the reinsurance and capital markets in dealing with the risk of natural catastrophe, mentioning that reinsurance issues were also covered in a prior report issued by the GAO in November 2007. It also includes a summary of the GAO’s briefing of the minority staff, and the resultant revisions to the final report.

This post written by John Pitblado.

SPECIAL FOCUS: ALLOCATION OF SETTLEMENT AMOUNT AMONG INSURANCE AND REINSURANCE POLICIES

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In a recent opinion, the United States Court of Appeal for the Third Circuit addressed the applicability of the follow-the-fortunes doctrine to the post-settlement allocation of a settlement amount to a multi-layer insurance program, upon a challenge to the allocation by a reinsurer. Rollie Goss offers an expanded analysis of this case. Travelers Cas. and Surety Co. v. Ins. Co. of North America, Nos. 06-4100 and 08-1032 (3d Cir. June 9, 2010).

This post written by Rollie Goss.

U.S. SUPREME COURT: ARBITRATOR HAS THE AUTHORITY TO DETERMINE WHETHER AN ARBITRATION PROVISION IS VOID DUE TO UNCONSCIONABILITY

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In Rent-A-Center v. Jackson, No. 09-497 (Sup. Ct. June 21, 2010), the U.S. Supreme Court considered whether a provision that delegated to an arbitrator the authority to decide whether any portion of an arbitration agreement was void or voidable is enforceable under section 2 of the Federal Arbitration Act (“FAA”), in a situation in which it was contended that the agreement was unconscionable under Nevada law The Court recognized that it had previously held that parties can agree to arbitrate “gateway” questions of “arbitrability,” such as whether an agreement covers a particular controversy. The Court further recognized that there were two types of challenges to the validity of an agreement under section 2 of the FAA: (1) challenges to an agreement to arbitrate itself; and (2) challenges to the contract containing the arbitration agreement as a whole, “either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” Only the first type of challenge is relevant to a court’s determination whether the arbitration agreement is enforceable. Since an arbitration provision is severable from the remainder of the contract, a challenge must be specifically directed to the arbitration provision in order for the court to intervene. Since the challenge here was to the contract as a whole, rather than specifically directed to the arbitration provision at issue, the arbitration provision was enforceable, and the arbitrator had the authority to determine the issue of unconscionability.

This post written by Michael Wolgin.