Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT ALLOWS STATE LAW UNCONSCIONABILITY LAW TO VOID CLASS ARBITRATION WAIVER PROVISION

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The Third Circuit Court of Appeals has held that the Federal Arbitration Act does not preclude a court from applying state law unconscionability principles to void a class arbitration waiver. At the district court, American Express argued that plaintiff should be required to arbitrate his claims on an individual basis because Utah law governed the class arbitration waiver clause, and expressly allowed class arbitration waivers in consumer credit agreements. In opposition, plaintiff argued that, as a New Jersey resident, New Jersey law applied and that application of Utah law would violate New Jersey’s public policy against class arbitration waivers, so New Jersey choice of law principles dictated that the choice of Utah law was invalid. The district court agreed with American Express and dismissed the complaint.

In the ensuing appeal, the Third Circuit passed on its prior opinion in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007), where the court applied the parties’ contractual choice of Virginia law in concluding that the waiver was valid, rejecting Pennsylvania cases on the unconscionability issue as being preempted by the FAA. According to the court, this issue in Gay appeared to be dicta. But “[w]hether dicta or not,” the defense New Jersey law provides to class arbitration waivers is “a general contract defense” that applies to all waivers of classwide actions, not simply those that also compel arbitration. Thus, following the Ninth Circuit’s lead in Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008), the court held that the application to an arbitration provision of a general ban on class action waivers was not preempted by the FAA because the ban applies equally to a contract that permits only individual, not class, litigation. Having so concluded, the court next turned to the question of whether New Jersey courts would enforce Utah law allowing class arbitration waivers. After reviewing the salient New Jersey Supreme Court decisions, the court decided that class arbitration waivers violate fundamental New Jersey public policy “as applied to small-sum cases.” The court next determined that New Jersey’s policy against such waivers conflicted with Utah law and that, although both states had significant contacts with the litigation, it seemed likely that the New Jersey Supreme Court would determine that New Jersey had a materially greater interest than Utah in the enforceability of a class arbitration waiver that could operate to preclude a New Jersey resident from relief under New Jersey law. Accordingly, New Jersey law applied and the waiver was held to be unconscionable. Homa v. American Express Co., Case No. 07-2921 (3d Cir. Feb. 24, 2009).

This post written by Brian Perryman.

COURT APPROVES COMMUTATION AND SETTLEMENT BETWEEN RELIANCE INSURANCE COMPANY (IN LIQUIDATION) AND REINSURER

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In an opinion illustrating the principles for the approval of commutations in liquidation proceedings, a Pennsylvania state court approved a commutation and settlement agreement by and between Reliance Insurance Company (“Reliance”) and General Security National Insurance Company, formerly known as Sorema North America Reinsurance Company (“GSN”). Under the terms of the agreement, GSN agreed to pay Reliance $13,000,000 in exchange for a release of all past, present, and future liabilities which have arisen or may arise under certain reinsurance contracts issued by GSN to certain enumerated Reliance subsidiaries (though generally excluding certain foreign subsidiaries). The court found that the agreement constituted a fair and reasonable settlement of GSN’s past and potential future obligations to Reliance under the reinsurance agreements recited. Ario v. Reliance Ins. Co., Docket No. 269 M.D. 2001 (Pa. Commw. Ct. Dec. 30, 2008).

This post written by John Pitblado.

ACTION TO CONFIRM ARBITRATION AWARD DISMISSED FOR LACK OF SUBJECT MATTER JURISDICTION

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On December 2, 2008, we reported on an order by the U.S. District Court for the Eastern District of Michigan granting the Respondent’s motion to seal in part, permitting the Respondent to “temporarily file” its motion to dismiss and the award under seal, pending a determination of the motion to dismiss for lack of subject matter jurisdiction in the Petitioners’ action to confirm the arbitration award. After the order, the Respondent filed its motion to dismiss and the Petitioners moved for sanctions. The district court noted that the arbitration award included declaratory provisions but no monetary award. Petitioners argued that the court retained jurisdiction from an earlier action to appoint an umpire and that the amount sought in the arbitration, rather than the award, provided diversity jurisdiction. In granting the motion to dismiss, the district court first stated that jurisdiction was not retained because the earlier action was dismissed without the court issuing an order to compel arbitration, which would have retained jurisdiction on a subsequent motion to confirm. The district court next stated that the amount in controversy is the amount of the arbitration award sought to be confirmed. Since no monetary damages were awarded and the Petitioners did not show that the declaratory provisions had any real value, the court concluded the amount in controversy did not meet the threshold required to exercise diversity jurisdiction, which will force the Petitioners to file a similar motion to confirm in state court. Petitioners sought sanctions against Respondent’s local counsel for costs incurred to defend against the motion to dismiss and to address the motion to seal and related motion papers. The court ultimately denied the motion for sanctions because the Respondent’s position in the motion to dismiss was correct and the arbitration premised on the parties’ own agreement necessitated the motion to seal. American Bankers Insurance Co. of Florida v. National Casualty Co., Case No. 08- 13522 (USDC E.D. Mich. Feb. 3, 2009).

This post written by Dan Crisp.

PLAN’S ADVISORY BOARD MEMBERS ARE NOT SUBJECT TO ARBITRATION CLAUSE

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Dooley disputed the calculation of certain benefits under an incentive plan incorporated into her employment agreement with her former employer. The incentive plan contained an arbitration clause requiring mediation to settle a dispute and, if unsuccessful, then binding arbitration. In accordance with the arbitration clause, Dooley filed a request for mediation naming only her former employer as the responding party. When the mediation failed, Dooley demanded arbitration against her former employer and three of the plan’s Advisory Board members asserting claims against them personally and individually for breach of fiduciary duty in relation to their administration of the plan. Two of the board members moved to stay arbitration in the Supreme Court of the State of New York. Dooley then removed to US District Court and moved to compel arbitration.

The district court first considered whether the court or an arbitrator decides the issue of arbitrability and concluded that courts decide in instances where the dispute concerns whether a certain party is subject to an arbitration clause. The court next considered whether the claims against the board members were arbitrable. Despite a factual dispute existing as to whether the Advisory Board members were parties to the plan, the court found as a matter of law the board members were not bound by the plan’s arbitration clause because neither Dooley nor the board members could have reasonably expected that the board members would be subject to arbitration for claims against them personally and individually for their administration of the plan. The court thus granted the board members’ motion to stay and denied Dooley’s motion to compel arbitration. Di Martino v. Dooley, Case No. 08-4606 (USDC S.D.N.Y. Jan. 6, 2009).

This post written by Dan Crisp.

UK COURT OF APPEALS DELIVERS SPLIT DECISION ON REINSURANCE AVOIDANCE

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The UK Court of Appeals has entered a decision dealing with reinsurance avoidance issues which may be of interest to US practitioners due to the similarity of avoidance standards in the UK and the US. On October 31, 2007 we reported on a decision of the UK Commercial Court, Queen’s Bench Division, avoiding two facultative reinsurance agreements due to misrepresentations by the placing broker as to the amount of deductibles required for ceded risks. The UK Court of Appeals has agreed that the initial reinsurance agreement (covering risks from July 1, 1996 through June 30, 1997, extended by endorsement through January 31, 1998) should be avoided, but has decided that the second reinsurance agreement (covering risks from February 1, 1998 through January 31, 1999) should not be avoided. The representation at issue was made prior to the placement of the first reinsurance agreement, and stated that “[a]s a matter of principle they [the cedents] maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.”

The Commercial Court characterized this statement as a statement of “current policy,” which continued to be effective through the placement of the second reinsurance agreement. There was testimony that this was the policy and practice of the cedents up to the placement of the first reinsurance agreement, but that due to market conditions it was not possible to continue this practice after July 1996. The Court of Appeals stated that the claim of avoidance was based upon an alleged misrepresentation, not upon an asserted failure to disclose, and that to be actionable: (1) a statement must be a representation of existing fact, not of future fact or opinion; and (2) that a representation as to expectation or belief is not actionable if it is made in good faith. The first point is similar to the elements of fraud claims in many US jurisdictions.

The Court of Appeal held that the alleged representation was a statement of intention that was a representation of existing fact prior to July 1996, and that it was a material misrepresentation. The Court found that since the extension of the first reinsurance agreement for an additional seven months was an amendment to an existing contract, rather than a new contract, the reinsurance was avoided through January 31, 1998. The Court stated that the representation was not continuing in nature 19 months after it had been made, rather that it “relates to the time when it is made ….” The Court therefore held that the alleged misrepresentation was not a basis to avoid the second reinsurance agreement. Although not stated, the fact that there was testimony that the market conditions made it impossible for the cedents to maintain a policy or practice of maintaining deductibles at the levels represented after July 1996 supports this conclusion. The Court of Appeals was careful to state that it had not been contended that the cedents were under an obligation to disclose the level of deductibles intended to be written with respect to the second reinsurance agreement, leaving open the question of whether avoidance could be based upon a failure to disclose as opposed to an affirmative misrepresentation. Limit No. 2 Limited v. Axa Versicherung AG [2008] EWCA 1231 (Ct.App. Nov. 12, 2008).

This post written by Rollie Goss.