Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Special Focus: Supreme Court Holds That Class Arbitration Must Be Consensual

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The United States Supreme Court issued a long anticipated opinion last week addressing the circumstances under which parties may be compelled to arbitrate disputes on a class-wide basis. Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 2010 WL 1655826 (Apr. 27, 2010). Although we posted a brief item about this case earlier this week, this opinion is important enough that we are posting a longer Special Focus piece today describing the Court’s reasoning in more detail. This post also notes that the Court had the opportunity to address the issue of the continued viability of manifest disregard of law as a basis for vacating arbitral awards in this opinion, but declined to do so. More on that issue next week, as the Eleventh Circuit last week joined the debate on that issue.

This post written by Rollie Goss.

Fifth Circuit Reverses – Finds Arbitrator’s Adverse Inference Protected Employee’s Interests

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In a suit arising out of alleged employment discrimination, Dillard’s Inc. appealed the district court’s decision to vacate an arbitration award to the Fifth Circuit Court of Appeals. At the initial arbitration pursuant to Ms. Barahona’s employment contract, despite drawing an adverse inference against Dillard’s for its failure to produce relevant emails, the arbitrator ruled that Ms. Barahona failed to carry her burden of proof on her discrimination and retaliation claims. Upon Ms. Barahona’s motion, the district court at first remanded the dispute to the arbitrator, but after the arbitrator’s refusal to reconsider the case on jurisdictional grounds, the District Court granted Ms. Barahona’s motion to vacate the award based on Dillard’s fraudulent conduct in failing to produce the emails.

The Fifth Circuit reversed and remanded, holding that Dillard’s allegedly fraudulent conduct – failing to produce the emails – was brought to the attention of the arbitrator who addressed it by drawing an adverse inference against Dillard’s. Accordingly, Ms. Barahona could not meet her burden for vacatur under the FAA and the case should be remanded. Trinidad Suyapa Barahona v. Dillard’s Inc., Case No. 09-31142 (5th Cir. 2010).

This post written by John Black.

“Reinsurance Accepted” Clause Interpreted to Define Maximum Exposure, Including Expenses

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A court has found that a reinsurer’s (Global Reinsurance Corporation of America) maximum exposure under a facultative certificate is $1 million dollars, inclusive of expenses. The issue raised in the case by the parties’ cross-motions for judgment on the pleadings was whether expenses are subject to the $1 million limit stated in the certificate’s “Reinsurance Accepted” section. The reinsured (Pacific Employers Insurance Company) alleged the $1 million cap did not apply to the expenses, and requested that the court find that as a matter of law that Global was obligated for up to $1 million of loss and, in addition thereto, a pro rata share of expenses. In turn, Global sought a declaration that the cap is the maximum Pacific Employers could potentially recover. The “Reinsurance Accepted” section stated: “$1,000,000 ANY ONE OCCURRENCE AND IN THE AGGREGATE[.]” Examining the certificate’s plain language, the court found that this section’s “broad and unambiguous language” encompassed expenses because it defined Global’s maximum exposure. The section did not differentiate between reinsurance accepted for “losses” versus reinsurance accepted for “expenses,” but simply provided a total cap on liability for loss payments, expense payments, or any combination thereof. Pacific Employers Insurance Co. v. Global Reinsurance Corp. of America, Case No. 09-6055 (USDC E.D. Pa. Apr. 23, 2010).

This post written by Brian Perryman.

State Legislative Update: Reinsurance and Captives

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Activity in the various State Legislatures highlights our latest updates on legislative developments in the areas of reinsurance and captive insurers.

State Reinsurance: Tennessee SB 2863 (bill text and bill summary), signed by the Governor on April 5, 2010, makes numerous changes and clarifications concerning the authority and responsibility of the Tennessee Life and Health Guaranty Association. The bill, as it relates to reinsurance, amends Section 56-12-207 of the Tennessee Code to authorize the Guaranty Association to elect to succeed to the rights of the insolvent insurer regarding any reinsurance agreement to the extent that such agreement provides coverage for losses occurring after the date of the order of liquidation or rehabilitation. This provision seems to give a preference to the Guaranty Association contrary to the basic concept and structure of the rehabilitation and liquidation process. It became effective on April 12, 2010.

Louisiana HB 1326 proposes, in addition to the policy take-out program authorized by present law, to authorize the Louisiana Citizens Property Insurance Corporation (Corporation) to transfer residential and commercial property insurance policies to domestic insurers licensed to write property insurance in Louisiana via reinsurance of those policies to be taken out of the Corporation. The bill provides that the reinsurance may be facilitated by property insurance companies domiciled in Louisiana and licensed by the Louisiana Department of Insurance (DOI). The proposed legislation is designed to facilitate the transfer of risk from the Corporation to the voluntary insurance market, and that the Corporation and DOI are given broad latitude to effectuate these reinsurance programs with all deliberate speed in order to achieve the intent of the legislation. The bill was introduced on April 19, 2010, and referred the next day to the Committee on Insurance.

Maryland HB 305, signed by the Governor on April 13, 2010, amends the state’s domestic reinsurance law requirements by: (1) specifying an assessment fee payable by specified domestic reinsurers to the Maryland Insurance; (2) exempting domestic reinsurers from a requirement to have an office in the State; (3) requiring domestic reinsurers to keep specified assets in the State; and (4) authorizing domestic reinsurers to keep their general ledger account records outside the State under specified circumstances. The amendments become effective June 1, 2010.

Kansas HB 2500, signed by the Governor on April 12, 2010 amends the Kansas Municipal Group-Funded Pool Act to allow municipal insurance pool applicants to submit a confirmation that reinsurance approved by the Insurance Commission is in effect or will be effective at the time the pool assumes risk. The bill takes effect upon its publication in the Kansas Statute Book.

State Captive Insurers: Delaware enacted HB 314 (mentioned in our February 8, 2010 posting), which amends the state’s captive insurance company laws by adding two new forms of captive insurance companies, “agency captive insurance companies” and “branch captive insurance companies,” to those that can currently be licensed in Delaware. The legislation was passed by the Delaware House in March 2010 and by the Delaware Senate in April 2010, subject to an amendment introduced by the Senate, which requires the Insurance Commissioner to make a finding that a “branch captive” insurer is financially stable in order to exempt the insurer from the minimum capital and surplus requirements and reserve requirements of the State insurance law.

This post written by Karen Benson.

Supreme Court Torpedoes Class Arbitration Where Parties Reached No Agreement on the Issue

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A party may not be compelled under the Federal Arbitration Act to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so, according to a recent decision from the United States Supreme Court. The parties in the case stipulated that the arbitration provision was silent on the issue of whether an arbitration could be brought on a class-wide basis, and they had reached “no agreement” on that issue. On this basis, the Court concluded that the parties could not be compelled to submit their dispute to class arbitration. The decision is based on the long-standing principle that arbitration is a matter of consent, not coercion, that private agreements to arbitrate are enforced according to their terms, and that arbitrators must give effect to the contractual rights and expectations of the parties. The Court noted that class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”

The decision also clarifies the Supreme Court’s decision in Green Tree Financial Corp. v. Bazzle (2003). The Court confirmed that “Bazzle did not yield a majority decision,” and that the parties wrongly believed “the judgment in Bazzle requires an arbitrator, not a court, to decide whether a contract permits class arbitration.” In fact, Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted. Stolt-Nielsen S.A. v. AnimalFeeds International Corp., No. 08-1198 (U.S. Apr. 27, 2010).

This post written by Brian Perryman.