Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

BAR OF ARBITRATION CLAIMS BY PRIOR CLASS SETTLEMENT CONFIRMED

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In a February 26, 2008 post, we discussed an opinion of the Sixth Circuit Court of Appeals which held that claims asserted in arbitration by members of a settlement class were barred if they related to the settled claims because the claimants had not opted out of the class-wide settlement of the claims. The case was remanded to the arbitration panel to clarify the basis for the award. The panel confirmed that the award was based solely on the matters that were encompassed by the settlement. In a second appellate round, the court confirmed the vacation of the award due to the bar of the settlement, and also affirmed the dismissal of cross-claims by the district court. Rich v. Spartis, No. 06-1723 (6th Cir. Dec. 16, 2008).

This post written by Rollie Goss.

NO INDEPENDENT SUBJECT MATTER JURISDICTION UNDER FEDERAL ARBITRATION ACT

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Defendant, Sandra R. Sanchez, filed a Rule 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction against the plaintiff, Newton & Associates, LLC. Sanchez asserted that, because the Federal Arbitration Act (“FAA”) did not confer federal-court jurisdiction, the case should be dismissed because the parties are not diverse and there was no other basis for federal jurisdiction. The Eastern District of Louisiana granted Sanchez’s motion to dismiss, holding that while the FAA created a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, it did not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise. The District Court noted in particular that section 10 of the FAA allowed federal district courts to vacate arbitration awards but did not confer upon federal courts subject matter jurisdiction. The court did, however, opine that under limited circumstances, the non-statutory ground for vacatur of an arbitration award (if made in manifest disregard of the law) may provide subject matter jurisdiction for the federal courts. As this was not the case here, the court dismissed the action. The case has been remanded to state court. Newton & Assoc., LLC v. Sanchez, Case No. 08-4558 (USDC E.D. La. Dec. 22, 2008).

This post written by John Black.

REINSURER LIABLE UNDER WORKERS’ COMPENSATION POLICY

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PEO Services provided SMJ Environmental with laborers to perform asbestos removal at construction sites. SMJ hired Feliz Amado Jara as one such laborer, retained the right to control and direct his work, and furnished him with the equipment necessary to do his job. When PEO could no longer provide SMJ with workers’ compensation coverage, SMJ obtained a policy from Frontier Insurance, which was reinsured by Clarendon National.

Jara was injured on the job and submitted a claim for workers’ compensation to SMJ. The workers’ compensation law judge determined that SMJ was Jara’s sole employer and that Clarendon National, as the reinsurer of Frontier, was liable for the payment of benefits. On appeal, the court affirmed the finding regarding the employment relationship as having been supported by substantial evidence. The court also rejected the insurers’ argument that the workers’ compensation coverage covered only four employees, since the only specific exclusion was in the policy was for SMJ’s president. Jara v. SMJ Environmental, Inc., Case No. 500512 (N.Y. App. Div. Oct. 30, 2008).

This post written by Brian Perryman.

RELEASE OF CLAIMS HELD TO CONFER EXCLUSIVE JURISDICTION ON ENGLISH COURTS TO DECIDE ACTIONS OF “FRAUD”

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This is the latest chapter in the transatlantic saga involving the Seaton Insurance and Stonewall Insurance companies. We blogged earlier about related lawsuits in the United States (see our December 22, 2008 post), and an English court’s decision denying those insurance companies’ application for a stay for proceedings pending resolution of a motion to dismiss in the United States District Court for the Southern District of New York (see our July 23, 2008 post). This complex case presents interesting issues of the interface between US and UK courts and between US and UK law.

The underlying facts and procedural history of the disputes are tortuously complex. At the risk of understatement, it suffices to say that Seaton and Stonewell became involved in litigation with Cavell USA, owned by British citizen Kenneth Randall, over Cavell’s handling of the run-off of their insurance obligations under an administration agreement. The parties entered into a written settlement of their disputes (the “Term Sheet”), which contained a provision that the settlement “shall be governed by and construed in accordance with English law and the parties submit to the exclusive jurisdiction of the English courts.” The Term Sheet included a “carve-out” provision for “fraud” on the part of former managers, related companies and individuals.

After entering into the settlement with Cavell, Seaton and Stonewell initiated arbitration with their reinsurer in the United States, National Indemnity Company (“NICO”), and served subpoenas on Cavell. Seaton and Stonewell also sued Cavell in the United States District Court for the Southern District of New York, alleging what was said to be “fraud” under New York law. The gist of the fraud claim focused on the delegation by Cavell of claims handling for Seaton and Stonewall to NICO pursuant to a Collaboration Agreement; it was alleged that Cavell and Randall “fraudulently” subordinated the interests of Seaton and Stonewall to those of NICO by entering into, operating and concealing the Collaboration Agreement.

Cavell and Randall then separately sued Seaton and Stonewell in the United Kingdom, seeking a declaration that all of their disputes had been compromised by the Term Sheet, as well as damages resulting from Seaton and Stonewell involving them in the United States arbitration and litigation. Seaton and Stonewell challenged the jurisdiction of the English court, and sought the aforementioned (denied) stay of the English lawsuit pending a decision on a motion to dismiss the United States lawsuit they had filed.

In May 2008, the English court ordered a trial of preliminary issues, which included: “(1) whether the parties have agreed to submit all their disputes, including claims in fraud to the exclusive jurisdiction of the English Court; (2)(i) what is meant by fraud; and (ii) whether claims advanced in the New York Court are claims in fraud, within the meaning of the carve-out.” The claimants, Cavell and Randall, submitted that the answer to issue (1) was “yes,” since any proceedings brought other than in the English court system are in breach of the Term Sheet. They also submitted that the answer to issue (2)(i) was that “fraud” meant “deceit,” as in the English tort of deceit, “and no more.” Finally, the claimants argued that the answer to (2)(ii) did not arise but, if so, it was “no.” The English court agreed with the claimants on both issues (1) and (2)(i). It found a determination of issue (2)(ii) to be unnecessary in light of its predicate determinations.

Reaching the first delineated issue, the court observed that resolution turned on a “double actionability” test: any claim brought must constitute “fraud” both within the meaning of the Term Sheet, as construed under English law (there was no dispute that English law governed interpretation of the Term Sheet), and as a matter of the law governing the “antecedent transactions,” that is, the alleged “fraudulent” conduct itself. Thus, the court would – in both sides’ views – be required to determine whether a particular claim is or is not a claim of “fraud” within the meaning of the carve-out. “The critical difference between the parties was that, on the Claimants’ case, this Court would be dealing, in addition, with the substance of any surviving claim; whereas, on the Defendants’ case, determination of the substance of any claims would rest with some other court or tribunal.” The court, as noted, concluded that the parties agreed to submit all disputes to the exclusive jurisdiction of the English courts, principally finding that a provision for all disputes not otherwise resolved to be dealt with in a single jurisdiction was consistent with the Term Sheet’s overall purpose of achieving an orderly termination of the parties’ relationships. The court further observed that the plain language of the jurisdiction clause (“and the parties submit to the exclusive jurisdiction of the English Courts”) “is wide rather than restricted,” and did not exclude claims sounding in fraud.

The court next turned to what was meant by “fraud” in the carve-out, beginning with the natural meaning of “fraud” in an English contract. Fraud has the “ordinary and primary meaning of deceit,” although it was observed that fraud was also capable of a wider meaning, referring generally to “dishonesty” as required by the context. However, the context did not require such a broad meaning in the court’s view, as it would have eviscerated the Term Sheet’s purpose, allowing virtually any claim permitted by clever pleading. “Indeed, once the safe ground of the primary meaning of ‘fraud’ is abandoned, it is not at all clear where to stop.” Thus, the court concluded that “fraud,” as was meant by the carve-out, had only the primary meaning of deceit. Cavell USA Inc. v. Seaton Insurance Co. [2008] EWHC 3043 (Nov. 12, 2008).

This post written by Brian Perryman.

COURT TO PARTIES: START ARBITRATION OVER

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Petitioners, Insurance Co. of North America and INA Reinsurance (collectively “INA”), and Respondent, Public Service Mutual Insurance Co. (“PSMIC”), came before the Southern District of New York on the question of whether an arbitration proceeding halted in medias res upon resignation of one party-appointed panelist may continue or whether under such circumstances the arbitration must commence anew. Under the terms of the parties’ arbitration agreement, each party was to choose their own arbitrator and then together select a third arbitrator to comprise a three person panel. After the arbitration had commenced and the panel had issued a Summary Judgment Order, one of the arbitrators was forced to withdraw for health considerations. PSMIC demanded that INA appoint a replacement arbitrator; INA demanded the arbitration commence anew. This case followed.

As a general rule, under Marine Products v. MT Globe Galaxy, 977 F.2d 66 (2d Cir. 1992) if a member of a three person arbitration panel dies before the rendering of an award, and the arbitration agreement does not anticipate that circumstance, the arbitration must commence anew with a new panel. The arbitration does not have to start over, however, if the panel has issued a “partial final award” and “was without power to revisit that question.” Here, the court determined that the original arbitration panel’s Summary Judgment Order did not “conclusively decide every point” and instead only rule on the applicability and effect of case law on INA’s primary defense. The court noted that the Summary Judgment Order was an interim decision on a matter of law and did not conclusively deal with all aspects of the case, including liability and damages. Further, the court determined that since the arbitration was fairly straightforward and not, as in Zeiler v. Deitsch, 931 F.3d 157 (2d Cir. 2007), “ongoing and complex arbitration.” As a result, the partial final award exception did not apply, and the court ordered arbitration to commence anew, with each party appointing its own arbitrators. The court further denied PSMIC’s motion to confirm the original panel’s Summary Judgment Order because the order did not “finally dispose of a separate, independent claim.” Ins. Co. of North Am. v. Public Service Mutual Ins. Co., Case No. 08-7003 (USDC S.D.N.Y. Dec. 10, 2008).

This post written by John Black.