Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

AGREEMENTS REACHED REDUCING LITIGATION IN A PAIR OF LAWSUITS BROUGHT BY A REINSURER

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A group of litigants involved in two reinsurance-related lawsuits agreed to de-escalate the disputes by voluntarily withdrawing certain motions and claims in each case.

In the first lawsuit (National Indemnity Co. v. Stonewall Insurance Co., Case No. 08 Civ. 3718 (USDC S.D.N.Y.)), National Indemnity sued Stonewall Insurance and Seaton Insurance for allegedly violating confirmed arbitration awards and judgments by, among other things, demanding rearbitration of a claim for rescission of a reinsurance agreement. National Indemnity sought declaratory and injunctive relief precluding Stonewall and Seaton from further violating the awards and judgments and from rearbitrating the matter. In response, Stonewall and Seaton filed a motion to stay and to compel arbitration. The motion argued that “NICO’s complaint should be seen for what it is: an attempt to preempt arbitration by masquerading as arbitrable defense as an affirmative claim for relief.”

In the second lawsuit (National Indemnity Co. v. Greenwich Street Investments II, LLC, Case No. 08 Civ. 4067 (USDC S.D.N.Y.)), National Indemnity claimed that a group holding companies (collectively, the “Dukes Place” companies) operating under the domination of Greenwich Street Investments – a group of private equity/hedge fund investors – purchased Seaton during Seaton’s run-off, and agreed to purchase Stonewall if National Indemnity agreed to provide retroactive reinsurance agreements similar to that issued to Seaton. Although National Indemnity assumed Seaton’s and Stonewall’s liabilities, according to National Indemnity, Dukes Place and Enstar Group hatched a scheme to coerce National Indemnity into relinquishing its contractual right to be claims servicer of Seaton and Stonewall in the event of a change of control of Seaton or Stonewall, notwithstanding Duke Place’s and Enstar’s alleged fiduciary duties to National Indemnity.

In the second lawsuit,National Indemnity asserted claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, interference with a contract, and inducing a breach of contract. The defendants Dukes Place and Enstar subsequently filed a motion to dismiss the fiduciary duty claims.

As noted, however, agreements were reached to reduce the litigation. In the first lawsuit, the parties stipulated that any reply papers filed in support of the motion to stay and to compel arbitration would be adjourned until February 1, 2009, or fourteen days after a decision by the court on any motion to dismiss the counterclaims that would be filed in the second lawsuit. In the second lawsuit, National Indemnity agreed to withdraw its claim for inducing a breach of contract, and Dukes Place and Enstar withdrew their motion to dismiss the breach of fiduciary duty claims without prejudice.

This post written by Brian Perryman.

MOTION TO COMPEL ARBITRATION GRANTED BASED UPON ARBITRATION PROVISION INCORPORATED INTO CONTRACT BY REFERENCE

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Before a Federal Magistrate Judge, subcontractor Ratliff, Inc. (defendant and counter claimant) moved to compel arbitration under a provision of the prime contract that was incorporated by reference into the subcontract between plaintiff and defendant. Plaintiff, Dobson Brothers Construction, argued that the motion must be denied because neither the subcontract nor the prime contract contained an express agreement to arbitrate disputes.

The Magistrate held that, although the subcontract made no mention of arbitration or alternative dispute resolution, a clause in the prime contract which had been incorporated into the subcontract was binding and enforceable by Ratliff as a party to the subcontract. The court noted that Ratliff was not asserting claims as a third party, but rather as a party to the subcontract that was naturally anticipated by the prime contract.

Interpreting the language of the provision at issue, the Magistrate held that “based on the generally accepted description and definition of ‘arbitration,’” an agreement to submit disputes to a neutral forum for “hearing and decision” by “arbitration” refers to a binding arbitration process. Thus, the Magistrate recommended that the Motion to Compel Arbitration be granted. Dobson Brother Constr. v. Ratliff, Inc., Case No. 08-3103 (USDC D. Neb. Nov. 6, 2008).

This post written by John Black.

NORTH KOREA INSURANCE CLAIM DISPUTE FINALLY COMES TO A CONCLUSION

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The saga of Korea National Insurance Corporation’s claim to its reinsurers (profiled several times in posts on this blog), arising out of a helicopter crash, apparently has finally come to an end. The insurers’ action to enforce a judgment obtained in a North Korean court went to trial last month. During the trial, the court struck certain of the reinsurers’ fraud-related defenses as being non-justiciable. Korea National Ins. Co. v. Allianz Global Corporate & Specialty AG [2008] EWHC 2829 (Comm. Nov. 18, 2008). The Court declined to stay the trial pending an appeal, and the trial continued while the reinsurers appealed the decision. The Court of Appeals allowed the appeal, reversing the decision. The parties then settled the case, with the reinsurers paying the equivalent of 95% of the amount claimed. Korea National Ins. Co. v. Allianz Global Corporate & Specialty AG [2008] EWCA 1355 (Ct.App. Dec. 2, 2008).

This post written by Rollie Goss.

COURT DETERMINES THAT INTERPRETATION OF COURT SELECTION PROVISIONS OF ARBITRATION AGREEMENT IS FOR ARBITRATORS TO RESOLVE

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Founders Ins. Co. entered a Reinsurance Agreement with primary insurer Lyndon Property Ins. Co. which required Founders and Lyndon to arbitrate any insurance-related disputes. A dispute regarding coverage arose, and the parties submitted to arbitration in Boston. The arbitration panel issued a ruling requiring Founders to post a sum in prejudgment security. Lyndon subsequently filed suit in the District of Massachusetts asserting that Founders had failed to comply with the panel’s order and had evidenced no intent to do so. The parties disputed the choice of the District of Massachusetts as an appropriate forum under seemingly conflicting provisions of the Reinsurance Agreement. The arbitration provision provided for the enforcement of arbitration awards in any court of competent jurisdiction, while a choice-of-law and submission-to-jurisdiction provision named Missouri law as controlling and courts in Missouri as being appropriate.

The court held that while “gate keeping” decisions relating to arbitration may be made by courts, disputes regarding the procedure to be followed in the arbitration were to be decided by the arbitrators. Because the issue here was a procedural one – the proper interpretation of the Agreement’s choice of forum clauses – the interpretation was left to the arbitrators. The court determined that the holding in Richard C. Young & Co., Ltd. v. Leventhal, 389 F.3d 1 (1st Cir. 2004), was dispositive in the instant case as it proclaimed that a dispute between the parties over the location of the arbitration raised not a question of arbitrability but a procedural question and was appropriate for the arbitrator and not the court. The case was dismissed so that the arbitrators could decide the dispute. Lyndon Property Ins. Co. v. Founders Ins. Co., Ltd., Case No. 08-11359 (USDC D.Mass. Nov. 20, 2008).

This post written by John Black.

JURY AWARDS $23.87 MILLION VERDICT IN DAMAGES RESULTING FROM PARTIAL RESCISSION OF REINSURANCE OBLIGATIONS

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A court entered an Order on a jury verdict of $23.87 million in favor of several of the United National group of insurance companies and against Aon Limited and certain of its predecessors. The verdict was composed of $16.87 million in damages and $7 million in attorneys’ fees.

United National brought the action seeking indemnification from Aon for damages it sustained as a result of an arbitration award that partially rescinded the reinsurance obligations of an Italian reinsurer, Riunione Adriatica di Sicurta, to United National. The partial rescission was made in connection with a program providing insurance coverage to United States contractors and allied trades for risks arising out of residential and commercial construction projects. The arbitration award stemmed out of Aon’s improper conduct in soliciting RAS’s participation in this program without disclosing to RAS material information relating to, among other things, the program’s loss reserve methodology, premium discounts, and the frequency of claims. In the arbitration, RAS alleged that the program – which was placed and managed by Aon as the agent for United National – had been misrepresented by Aon to RAS as a successful program with low loss ratios. RAS also alleged that Aon failed to disclose until after the negotiations over RAS’s participation in the program were complete that RAS’s underwriter had solicited a $250,000 kickback from Aon. Due to the partial rescission, United National was obligated to pay RAS’s damages. United National then brought the indemnity suit against Aon to recover not only those damages United National paid to RAS, but also its attorneys’ fees and costs paid in defending the arbitration initiated by RAS. United National Insurance Co. v. Aon Limited, Case No. 04-CV-539 (USDC E.D. Pa. Dec. 4, 2008).

This post written by Brian Perryman.