Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SANCTIONS AWARDED AGAINST PARTY ISSUING SUBPOENA FOR ARBITRATION

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When plaintiff, in a case submitted to arbitration, issued a third party subpoena using the court’s caption and case number, without advising the opposing party, the arbitrator, or the court, the court granted defendant's motion for sanctions, awarding him attorney's fees associated with filing the motion. The court found that the subpoena issued by plaintiff's counsel to a third party was blatantly improper because: (1) the court had fully stayed the case pending arbitration and placed the case on the suspense calendar; (2) only arbitrators, and not parties, have authority to issue subpoenas; (3) plaintiff failed to give proper notice as required by Rule 45(b)(1); and (4) the subpoena sought documents that the arbitrator had already ruled were not discoverable. The court declined to enjoin plaintiff from issuing additional subpoenas. Kenney, Becker LLP v. Kenney, Case No. 06-2975 (USDC S.D. N.Y. Mar. 6, 2008).

This post written by John Black.

SIXTH CIRCUIT VACATES ARBITRATION AWARD BASED UPON MANIFEST DISREGARD OF LAW

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This procedurally complicated dispute arises out of a franchise agreement for a Coffee Beanery cafe. As a result of disputes about the negotiation of the agreements for the café and its operation, the franchisee demanded arbitration, later withdrew the demand and filed suit in federal court, followed by the franchisor demanding arbitration and the Maryland Securities Commissioner issueing an Order to Show Cause, contending that the franchisor had violated the disclosure and anti-fraud provisions of the Maryland franchise act. An arbitration proceeded to a final award in favor of the franchisor. A request to vacate the award was denied, and an appeal followed.

The Sixth Circuit issued two opinions in this appeal. Both opinions held that because an officer of the Coffee Beanery failed to disclose a prior felony conviction for grand larceny, the agreement was in violation of the Maryland Franchise and Registration Act. As such, the court found that the arbitration award should be vacated because the arbitrator showed “a manifest disregard of the law.” The first opinion did not discuss Hall Street Associates LLC v. Mattel Inc., 28 S.Ct 1396 (2008). The amended opinion discusses Hall Street, finding that it did not clearly eliminate the manifest disregard of law doctrine. The opinion states that “[i]n light of the Supreme Court’s hesitation to reject the manifest disregard doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle.” The court found that since the franchisee was deprived of a statutorily required notification of prior felony convictions, it was fraudulently induced and not bound by the arbitration provision, and could pursue a claim to rescind the franchise agreement in its federal court lawsuit. Coffee Beanery, LTD v. WW LLC, No. 07-1830 (6th Cir. November 14, 2008).

This post written by John Black.

UPDATE: COURT SHOOTS DOWN ERC TWICE MORE

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On September 2, 2008, we reported that the District Court for the Western District of Missouri granted summary judgment against Employers Reinsurance Corporation, finding that their contract with Mass Mutual did, in fact, contain a clear “follow the fortunes” clause. ERC subsequently moved for the court to reconsider its ruling, or in the alternative, to certify the “follow the fortunes” issue for immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

The court ruled that ERC’s motion for reconsideration amounted to little more than a reassertion of its arguments on summary judgment. The court interpreted ERC’s motion as arguing that the court committed a manifest error of law simply because the court disagreed with ERC’s arguments. Noting that Fed. R. Civ. P. 60(b) did not list “manifest error of law” as a reason sufficient for reconsideration, the court denied ERC’s motion.

The court additionally denied ERC’s motion to certify the “follow the fortunes” issue for immediate interlocutory appeal, finding that it was an issue of interpretation of the contract, and not a pure question of law, which was required for an interlocutory appeal certification. Employers Reinsurance Corporation v. Massachusetts Mutual Life Insurance Co., Case No. 06-0188 (USDC W.D. Mo. Oct 23, 2008).

This post written by John Black.

UPDATE: COURT ENTERS DEFAULT JUDGMENT AWARDING COMPENSATORY DAMAGES PLUS INTEREST

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On December 20, 2007, we reported that claims arising out of allegedly purposeful undercapitalization of a captive reinsurer survived a motion to dismiss. Since that time, the plaintiff (rehabilitator for Frontier Insurance Co.) moved for entry of a declaratory judgment and an award of compensatory damages plus prejudgment interest by default.

The Southern District of California concluded that plaintiff met the standards for entry of a default judgment, adequately alleged both an enforceable contract and a breach of contract by ASIL (the captive reinsurer), and that the default was not due to excusable neglect. ASIL indicated to Frontier that it would “allow judgment to be entered by default and pay all the available funds to Frontier.” The court granted the motion for entry of default and entered a judgment finding ASIL liable to plaintiff for $577,966.33 in compensatory damages and $91,511.33 in prejudgment interest (calculated at 10% per annum). Mills v. Ramona Tire, Inc., Case No. 07-0052 (USDC S.D. Cal., Sept. 23, 2008).

This post written by John Black.

INSURANCE UNDERWRITER LACKED THIRD-PARTY BENEFICIARY STATUS UNDER REINSURANCE AGREEMENT; COUNTERCLAIMS DISMISSED

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TIG Insurance entered into an agreement with Titan Underwriting for Titan to act as managing general underwriter, soliciting and procuring stop-loss health and life insurance insureds for policies to be issued by TIG. Titan was also obligated to obtain reinsurance to cover the stop-loss policies issued by TIG. Chubb Re reinsured TIG, and TIG received a percentage of the ceding commission of the gross premiums ceded to the reinsurer, a portion of which Titan received as compensation. Subsequently, TIG terminated the stop-loss program and sued Titan for, among other things, breach of contract and fraud. TIG also sent a letter to state insurance commissioners requesting information that Titan refused to produce to TIG. In response, Titan counterclaimed for breach of the Chubb reinsurance agreement, tortious interference with a contract, tortious interference with its business relationships with policyholders, defamation and negligence. The trial court dismissed each of the counterclaims and the court of appeals affirmed the dismissal.

The appellate court found that Titan, which was not a party to the reinsurance agreement, could not sue in the capacity of a third-party beneficiary. Although Titan was entitled to receive a percentage of the ceding commission, the contract contained a provision disclaiming any intent to create a third-party beneficiary. The tortious interference with a contract claim failed because it was legally impossible for TIG to interfere with its own contract (the reinsurance agreement). The tortious interference with business relationships claim failed because Titan failed to establish that it had existing relationships with the policyholders, whose relationships were insurance policies with TIG. The defamation claim, which was based on TIG’s letter to the insurance commissioners, also failed since the letter was not alleged to contain statements that could be “reasonably construed to disgrace or injure Titan’s reputation in the community or subject Titan to public ridicule and contempt.” Finally, the negligence claim failed since Titan failed to establish, as it was required to do, that TIG owed Titan a duty of care. TIG Insurance Co. v. Titan Underwriting Managers, LLC, No. M2007-01977-COA-R3-CV (Tenn. Ct. App. Nov. 7, 2008).

This post written by Brian Perryman.