Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UK COURT REFUSES TO HOLD DIRECTOR LIABLE ON JUDGMENT AGAINST INSURER

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As we previously posted in July, 2007, a UK court assessed costs against insurance broker Horace Holman & Co. (“Horace”) in an action Horace brought against Equitas Ltd. (“Equitas”) which the Court found to be “largely fruitless.” The matter was recently brought back before the Court by Equitas, which sought post-judgment enforcement of the order, insofar as Horace has not made ordered payments. Horace responded that it was in liquidation proceedings, and Equitas responded by asserting that Horace’s liability is recoverable from Mr. Arwyn Powell, who was added as a party to the proceeding. Mr. Powell was Holman’s sole shareholder and managing director, and also shareholder and director of related companies, including Camomile Management Consulting Ltd. (“Camomile”), which was a creditor of Horace in the liquidation proceedings.

The Court rejected the enforcement orders sought by Equitas. First, the Court rejected the allegation that Horace’s liquidation was a previously devised plan to avoid any judgment in the event one was obtained against it, and that Equitas thus had no further rights against Horace than as creditor in the liquidation proceedings. The court rejected claims directly against Mr. Powell as sole shareholder of Horace, finding no ground for “piercing the corporate veil.” The Court also rejected the claim that Powell, as Camomile’s shareholder, stood to benefit from liquidation, and Camomile’s position as creditor in that proceeding. Finally, the Court found it dispositive that Equitas failed to warn Powell that it would seek to recover directly against him, prior to making its application for such recovery. Equitas Ltd. v. Horace Holman & Co., Ltd. [2008] EWHC 2287 (Comm) (Oct. 3, 2008).

This post written by John Pitblado.

ENGLISH REINSURANCE ASSETS TO BE REMITTED TO AUSTRALIAN LIQUIDATORS, BUT FOR WHAT REASON?

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In a July 12, 2007 post, we reported on issues relating to HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. The House of Lords disagreed, allowing an appeal and ruling that the English assets of the insolvent insurer should be remitted to the Australian liquidator. There were sharp differences of opinion as to why exactly that should be the case.

The HIH group presented winding up petitions to the Supreme Court of New South Wales in 2001. Some of the assets, which consisted mostly of reinsurance claims on London policies, were situated in England, so English provisional liquidators were appointed. The Australian judge subsequently issued winding up orders and sent a letter to the High Court in London asking that the provisional liquidators remit the assets to the Australian liquidators for distribution in accordance with Australian law. The question on appeal was whether the English court could and should accede to the request. The alternative was a separate liquidation and distribution of the English assets under the English Insolvency Act of 1986. The manner of distribution mattered because Australian law generally gave priority to insurance creditors at the expense of other creditors, while the same result would not obtain under English law.

The decision was resolved primarily by analyzing the tension between section 426(4) of the Insolvency Act, which allows an English court with insolvency jurisdiction to assist designated foreign courts (including Australian courts), and section 426(5) of the same Act, which allows a court discretion to provide assistance in accordance with the rules of private international law, including the common law principle of “modified universalism.” That principle requires United Kingdom courts to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution. While the court stated that a refusal to remit the assets might be appropriate if it causes a manifest injustice to a creditor, it ultimately found that the Australian distribution was not unacceptably discriminatory or contrary to public policy.

The dispute was focused on whether the basis of jurisdiction ought to be grounded in the common law considerations allowed by section 426(5) or the discrete statutory authority of section 426(4). Lord Hoffmann would have allowed the remission solely through the exercise of common law principles. He argued that under the common law doctrine of ancillary winding up, English courts may “disapply” parts of the statutory scheme by authorizing the English liquidator to allow actions he is obliged by statute to perform in accordance with English law to be performed by the foreign liquidator in accordance with foreign law. Others, including Lord Phillips, rejected this view: “I do not propose to stray from the firm area of common ground [of allowing the appeal under section 426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.” Lord Neuberger, too, opposed Lord Hoffman’s view, stating that he took “the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act.” McGrath v. Riddell [2008] 1 WLR 852, [2008] UKHL 21 (Apr. 9, 2008).

This post written by Brian Perryman.

AIU v. TIG DISCOVERY DISPUTE: THE SAGA CONTINUES

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The bell has rung on the latest round of discovery litigation brought between AIU Insurance Company (“AIU”) and TIG Insurance Company (“TIG”) in litigation in federal District Court. As we wrote in our previous post of October 2, 2008, AIU brought the litigation to recover reinsurance payments allegedly owed to it from TIG on the basis of certain excess liabilities arising from underlying asbestos litigation exposure. In our October post, we noted that the Court ordered TIG to produce documents relating to its anticipated late notice defense from its claim file, despite its objections based on claims of attorney-client privilege and protection under the work product doctrine.

In the latest round of discovery litigation, TIG moved to compel AIU to produce certain documents despite AIU’s claims of privilege. In another split decision, the court ordered some, but not all of the relief sought by the moving party. Despite TIG’s arguments that certain privileged documents were nonetheless discoverable because AIU’s advice of counsel defense put them at issue, the Court held that the advice of coverage counsel is not necessarily at issue in evaluating the reasonableness of an underlying settlement. The Court did order the production of documents pertaining to similar, but unrelated claims, noting that they could lead to the discovery of admissible evidence pertaining to the manner in which the insurer interprets its own obligations under the notice provision of its contracts. The Court also ordered that AIU search the electronic files of certain persons named by TIG, finding that their electronic materials were discoverable. AIU Insurance Company v. TIG Insurance Company, 07-CV-7052 (SHS) (HBP) (USDC SDNY Nov. 25, 2008).

This post written by John Pitblado.

COURT TO PARTIES: YOU ARE ARBITRATING

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On behalf of an aggrieved union member, the International Brotherhood of Electrical Workers brought a grievance against Verizon for declaring the employee medically unfit to drive a company van. A collective bargaining agreement provided for mandatory arbitration for all disputes under the agreement. Verizon alleged in arbitration that the dispute fell under the Federal Motor Carrier Safety Act (“FMCSA”) rather than the Collective Bargaining Agreement. The arbitrator issued an Interim Award ordering the parties to submit to FMCSA dispute procedures before continuing arbitration. The American Arbitration Association cancelled an arbitration hearing and has since administratively closed the parties file. The FMCSA review process remains ongoing.

IBEW subsequently filed suit in the US District Court, alleging that Verizon’s failure to reschedule an arbitration hearing was in breach of the Collective Bargaining Agreement’s arbitration clause. IBEW moved for summary judgment on whether the underlying issue was arbitrable and whether Verizon was in violation of the arbitration agreement. The Court held that the crux of the matter was whether Verizon acted capriciously or arbitrarily when it found the employee medically unqualified to operate the motor vehicle, which would be a violation of the Collective Bargaining Agreement. Disputes under the Agreement are subject to arbitration. The Court also stated that because the arbitrator ordered the parties to submit to FMCSA procedures, arbitration was in fact still ongoing. The Court noted that arbitrators naturally were empowered to consider federal law in making their rulings so the arbitrators’ order to submit to FMCSA procedures was not in error. Int’l Brotherhood of Electrical Workers v. Verizon North, Inc., Case No. 07-3194 (USDC C.D. Ill. Dec. 3, 2008).

This post written by John Black.

COURT REFUSES SUBJCT MATTER JURISDICTION TO REVIEW ARBITRATION AWARD, SINCE THE VALUE OF THE AWARD WAS LESS THAN THE COURT’S JURISDICTIONAL AMOUNT

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A dispute arose between Hansen Beverage Company and DSD Distributors over a distribution agreement. The agreement included an arbitration clause providing that all disputes were to be arbitrated in California. The parties submitted to arbitration in San Diego where the arbitrator found that defendant had not breached the contract and Hansen did not constructively terminate the contract. Thus, no monetary damages or attorneys’ fees were awarded to either party.

On the day the arbitration award was handed down, DSD filed a motion in Wisconsin state court (the company’s state of domicile) to vacate or modify the award. That court declined jurisdiction holding that the arbitration should be finalized in California Federal Court. On the same day, Hansen filed a motion in the Southern Dist. of California to confirm the arbitration award, while DSD moved to stay or dismiss the award.

DSD contends that the action must be dismissed for lack of subject matter jurisdiction because the arbitration award fell below the $75,000 minimum for diversity jurisdiction. The court, noting a circuit split on this issue, held that where a petition seeks confirmation or vacatur of an award, without seeking remand for further arbitration proceedings, the amount in controversy is the value of the arbitration award itself. The court additionally stated that although the arbitrator’s judgment was essentially equivalent to a declaratory judgment, that aspect of the arbitration award was merely a collateral consequence of the arbitrator’s decision. Thus, the Motion to Dismiss or Stay was granted. The court did note specifically, however, that its decision may have been different if DSD was seeking to reopen arbitration in the California court rather than Wisconsin. Hansen Beverage Co. v. DSD Distributors, Inc., Case No. 08-0619 (USDC S.D. Cal. Dec. 12, 2008).

This post written by John Black.