Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

COURT RULES ON DIRECT ACTION ISSUES RELATING TO TWO LEVEL REINSURANCE RELATIONSHIPS

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Guarantee Trust Life Insurance Company (“GTL”) sells health insurance to college students, and obtained reinsurance from First Student Programs, LLC (“FSP”). The reinsurance agreement required that FSP obtain reinsurance, and it purportedly reached an agreement to reinsure its risks with American United Life Insurance Company (AUL), which also provided excess reinsurance directly to GTL. When AUL failed to pay claims, GLT sued FSP for breach of the reinsurance requirement of their agreement, and FSP filed a third-party complaint against AUL. AUL moved to dismiss. In an earlier dispute between GTL and AUL, which was arbitrated, an arbitrator found that AUL was not contractually bound to provide excess reinsurance to GTL. AUL contended that this prior adjudication precluded FSP’s claim against it based upon the doctrine of res judicata.

Applying Pennsylvania law, the US District Court for the Northern District of Illinois granted AUL's motion to dismiss in part, and denied it without prejudice in part. The court determined that FSP's breach of contract action should not be dismissed because it was not clear, as a matter of law, that FSP was acting merely as an agent for GTL when it allegedly contracted with AUL so the rule that agents may not sue for contracts entered into on behalf of a principal should not be applied here. The court further held that FSP sufficiently pleaded a claim for promissory estoppel but applied Pennsylvania's “gist of the action” doctrine to dismiss the fraud claim. The court surmised that the fraud claim was inextricably tied to the breach of contract claim so it was barred as a matter of law under the doctrine. The court also dismissed the indemnification and contribution claims as they were expressly conditioned upon a finding that FSP is liable to GTL, and those parties had settled the matter as between them.

Finding that the third party excess reinsurance agreement was not actually intended to benefit FSP, the court dismissed FSP's Third-Party Beneficiary claim. AUL’s res judicata defense remains pending. Guarantee Trust Life Ins. Co. v. First Student Programs, LLC, Case No. 05-1261 (USDC N.D.Ill. Jan. 28, 2009).

This post written by John Black.

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.