Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FACTUAL DISPUTES PRECLUDE SUMMARY JUDGMENT IN FAVOR OF REINSURER ASSERTING NONCOMPLIANCE WITH PROMPT NOTICE PROVISION

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A federal district court adopted in part, and vacated in part the report and recommendation of a magistrate judge on defendant TIG Insurance Company’s motion for partial summary judgment, which sought rulings that: (1) Illinois law governed a reinsurance coverage dispute and that, therefore, TIG could deny coverage without showing prejudice from untimely notice; (2) AIU Insurance Company breached the reinsurance contracts by providing late notice of its 2001 claim; and (3) TIG did not provide reinsurance coverage for the period from October 1, 1981 through October 1, 1982. AIU issued four umbrella insurance policies covering the period from October 1, 1978 to October 1, 1982. AIU subsequently reinsured its exposure under three of the umbrella insurance policies, covering the period from October 1, 1978 to October 1, 1981, with TIG’s predecessor company under nine reinsurance certificates. AIU later sought reimbursement for certain settlement payments pursuant to the reinsurance certificates by submitting a reinsurance claim to a TIG affiliate, which responded by citing the certificates’ prompt notice provision, and reserving its rights. On this denial, AIU brought an action alleging breach of contract and seeking declaratory relief based on TIG’s failure to pay amounts due.

The magistrate judge assigned found that Illinois law governed the dispute and that, under Illinois law, a reinsurer need not demonstrate prejudice to deny coverage to a reinsured which has failed to comply with a policy provision requiring prompt notice of claims. The magistrate judge further found that TIG did not provide reinsurance coverage for the period from October 1, 1981 through October 1, 1982 because AIU conceded that after filing its complaint it became aware that TIG had not, in fact, reinsured AIU for this period. The magistrate judge, however, further recommended that TIG’s motion be denied without prejudice to the extent it sought a ruling that AIU breached the reinsurance certificates by failing to provide prompt notice of a 2001 claim. On that point, questions clouded the issue of AIU’s knowledge of potential claims. AIU Insurance Co. v. TIG Insurance Co., Case No. 07-7052 (USDC S.D.N.Y. Feb. 11, 2010) (report and recommendation of magistrate judge).

The district judge declined to adopt the report and recommendation, except to the extent the parties did not dispute that coverage did not exist between October 1, 1981 and October 1, 1982. Because discovery was still being conducted on all the issues, summary judgment was premature. AIU Insurance Co. v. TIG Insurance Co., Case No. 07-7052 (USDC S.D.N.Y. Mar. 9, 2010) (order of district judge).

This post written by Brian Perryman.

DISTRICT COURT DENIES MOTION FOR RECONSIDERATION BROUGHT BY ASSIGNEE OF REINSURANCE CLAIMS

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This is our third installment covering the action brought by B.D. Cooke & Partners Ltd. (“Cooke”) to recover money from certain underwriters at Lloyd’s, London as the assignee of rights under certain reinsurance contracts. In an April 24, 2009 post, we detailed the federal district court concluding, among other things, that the liquidator’s right not to be compelled to arbitrate was not assigned to Cooke and compelling arbitration between Cooke and the defendants. In a January 27, 2010 post, we covered the federal district court denying the defendants’ motion to stay arbitration pending the result of Cooke’s motion for reconsideration. The federal district court has now denied Cooke’s motion for reconsideration, finding that Cooke essentially asserted the same arguments regarding the enforceability of the arbitration clause and the defendants’ waiver of the right to remove the action and rejecting Cooke’s argument concerning the scope of the arbitration clause because the dispute concerned matters of performance under the contracts. B.D. Cooke & Partners Ltd. v. Certain Underwriters at Lloyd’s, London, Case No. 08-3435 (USDC S.D.N.Y. Mar. 9, 2010).

This post written by Dan Crisp.

THIRD CIRCUIT SIDE-STEPS SPLIT ON MANIFEST DISREGARD OF LAW

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The Third Circuit Court of Appeals heard the appeal of Bapu Corporation from a district court’s denial of its motion to vacate an arbitration award. The dispute centered on Choice Hotels International Inc.’s decision to terminate a Quality Inn license agreement with Bapu on the basis that Bapu had failed to make required renovations to the hotel. Bapu asserted that Choice’s claim for damages was barred by the applicable three year statute of limitations, and raised that issue and others in the parties’ arbitration. Ultimately, both the district court and the Third Circuit Court agreed that the arbitrator’s decision against Bapu, based partly on the fact that Bapu had waived its statute of limitations claim by failing to pursue it after initially raising it, did not provide a basis for vacatur. The Court side-stepped the question, however, of whether manifest disregard of law constituted an independent basis for vacatur of arbitration awards, after the Supreme Court’s ruling in Hall Street Associates, L.L.C. v. Mattel Inc., but noted a split of authority in the sister circuits on that question. The Court also rejected Bapu’s claim of arbitrator bias or corruption. Bapu Corp. v. Choice Hotels Int’l, Inc., No. 09-1011 (3d Cir. March 16, 2010).

This post written by John Pitblado.

COLORADO RIVER ABSTENTION WHACK-A-MOLE

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A federal court in Iowa heard a motion to dismiss or stay brought by The Samuels Group, Inc., a design/build company who undertook a construction project in Wisconsin. Samuels had entered into a contract with the property owner, Alta Vista Properties, LC, to build a facility on one of its properties. Samuels subcontracted to Hatch Grading & Contracting, Inc. During the course of construction, a tornado destroyed the partially finished project. Hatch asserted a mechanic’s lien against the property to recover payment for the work it had done, and brought an action in state court to enforce the lien. It initially brought in both Alta Vista and Samuels, but ultimately, after various machinations by the parties, agreed to withdraw the petition as against Samuels, as Samuels and Hatch agreed to arbitrate corollary disputes that impacted the mechanic lien issue, and the state court proceedings were stayed. Samuels and Hatch arbitrated, with an award in favor of Hatch. Hatch thereafter sought to bring Samuels back into the state court action to confirm the arbitration award. Samuels filed a petition in federal court to vacate the award on various grounds. Hatch argued that Colorado River abstention applied, and that the action should be dismissed or stayed pending resolution of the state court action. Samuels argued Colorado River did not apply, in part because the FAA created a federal law basis requiring the federal court to maintain jurisdiction, and in part because the parties were not identical in the state court proceeding. The court generally rejected these arguments, noting that the parties were not identical in Colorado River itself, and that Samuels effectively had been part of the state court proceedings at various points. The court nonetheless agreed to maintain jurisdiction, but granted Hatch’s motion to stay the federal action pending the outcome of the state court proceeding. The Samuels Group, Inc. v. Hatch Grading and Contracting, Inc., No. 09-2058 (USDC N.D. Iowa March 23, 2010).

This post written by John Pitblado.

FIRST CIRCUIT CLARIFIES STANDARD OF REVIEW, CONCLUDES THAT AGREEMENT MANDATES ARBITRATION

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In this dispute between two parties to a joint venture agreement, one party filed a lawsuit and the other submitted an arbitraiton demand. Motions were filed to stay the lawsuit pending arbitration and to stay the arbitration. The motions were assigned to a magistrate judge. The magistrate judge concluded that arbitration was optional under the agreement and granted the plaintiff’s motion to stay the arbitration. The defendant contested this decision, but the district court stated that this decision was not “clearly erroneous or contrary to law.” In a case of first impression to the federal courts of appeal, the First Circuit held that the correct standard of review for a district judge’s review of a magistrate judge’s ruling on a motion to stay pending arbitration was whether the ruling was contrary to law. The First Circuit further stated that, for questions of law, no practical difference exists between review under the “contrary to law” and de novo standards. Next, in interpreting the arbitration provision at issue, the First Circuit concluded that a statement that the parties had the right to seek legal and equitable relief merely granted the authority to award such relief to the arbitrator, and did not make a provision that the parties “shall” arbitrate disputes permissive. The First Circuit thus reversed the decision and remanded to the district court for the entry of an order staying the litigation. PowerShare, Inc. v. Syntel, Inc., No. 09-1625 (1st Cir. Mar. 1, 2010).

This post written by Dan Crisp.