Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Southern District of New York Rejects Reinsurer’s Claim that Exhaustion Provision Was Not Met; Concludes Indemnification Was Required Under Follow-the-Settlement Clause

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The United States District Court for the Southern District of New York rejected a reinsurer’s denial of a claim. The court disagreed with the reinsurer’s position than exhaustion language had not been satisfied, and found the exhaustion language ambiguous and concluded that payment was required under a “follow-the-settlement” clause in the reinsurance certificate.

Fireman’s Fund Insurance Company issued three excess liability policies to Asarco. The third policy (“Policy 3”) provided “coverage of $20 million for losses in excess of $75 million in excess of a $3 million self-insured retention for the period March 15, 1983 to March 15, 1984.”

General Accident Insurance Company reinsured Policy 3 under a facultative reinsurance contract in which it assumed “15% . . . of the risk assumed in Policy 3.”  OneBeacon Insurance Company subsequently became the successor-in-interest to General Accident.

Asarco filed an action against Fireman’s seeking coverage for asbestos exposure. Fireman’s estimated its exposure at $50.3 million. It settled with Asarco for $35 million and allocated a portion of that settlement to Policy 3 in accordance with its exposure analysis.

Fireman’s then billed OneBeacon pursuant to the reinsurance agreement. OneBeacon denied Fireman’s claim, asserting that the policies underlying Policy 3 had not been exhausted.

The court granted summary judgment to Fireman’s. In short, the court explained that the reinsurance certificate contained a “follow-the-settlements” provision that required OneBeacon to make payments in accordance with Fireman’s good-faith settlement, which was reasonable. That clause was not trumped by any exhaustion clause in Fireman’s policies because the term exhaustion was ambiguous within the meaning of Fireman’s policies.

Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., No. 14-civ-4718 (PGG) (Oct. 19, 2020).

Ninth Circuit: Website Visit Four Years After Assent To a Contract Containing a Change-of-Terms Provision Does Not Bind Parties To New Contract Terms Addressing Arbitration

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The Ninth Circuit affirmed the district court’s order compelling arbitration in a case brought under the Fair Credit Reporting Act (FCRA) and state law, based on the plaintiff’s purchase of Experian’s Credit Score subscription service in 2014. The plaintiff agreed in 2014 to Experian’s terms of use, which included an arbitration provision and a “change-of-terms” provision, specifying that she would be bound to future versions of the contract by continuing to access Experian’s website. In 2018, on the day before the plaintiff filed her lawsuit, the plaintiff accessed Experian’s website, and subsequently argued that she became subject to new contract terms exempting FCRA claims from arbitration.

The Ninth Circuit held that the plaintiff’s claims were arbitrable under the 2014 terms of the contract, and that the 2018 terms did not apply. In order to bind parties to new terms pursuant to a change-of-terms provision, both parties must have notice that the terms have changed and an opportunity to review the changes. The plaintiff did not allege facts sufficient to conclude that this occurred. The court observed that “the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms.”

The Ninth Circuit also held that there was no concern that the 2014 contract required parties to waive their rights to seek public injunctive relief, which would have rendered the agreement unenforceable under California law (the “McGill rule”). Because the 2014 arbitration agreement subjected to arbitration “all disputes to the fullest extent allowed by law,” the court found that the arbitration agreement did not prohibit a plaintiff seeking public injunctive relief in court. The court also found that the McGill rule was inapplicable because the plaintiff failed to allege Article III standing to bring public injunctive relief.

Stover v. Experian Holdings, Inc., Case No. 19-55204 (9th Cir. Oct. 21, 2020).

Parsing the Sometimes Fine Distinction Between a Broad and a Narrow Arbitration Clause

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In an employment dispute, the District Court of Connecticut dissected an arbitration clause to determine whether its scope was “broad,” resulting in a presumption of arbitrability of collateral issues, or “narrow,” in which case collateral issues would generally not be subject to arbitration.  The court ultimately found the clause at issue to be “broad,” but the question was close, as demonstrated by the court’s recognition that “reasonably similar” clauses had been deemed “narrow” by other courts within the Second Circuit.

The clause at issue provided for arbitration of “any controversy or claim arising under federal, state and local statutory or common or contract law … involving the construction or application of any of the terms, provisions or conditions of the Agreement….” The fact that the agreement provided for arbitration of controversies “arising under” essentially any law, as opposed to controversies “arising under” solely the agreement itself, weighed in favor of characterizing the agreement as broad.

The next phrase in the arbitration agreement (“and involving the construction or application of any of the terms, provision, or conditions of the agreement”), “somewhat” limited the disputes subject to arbitration, but the court found it to be very similar to “a classically broad arbitration clause.” The court analogized the clause to another that addressed “claims arising out of or relating to” the construction or application of terms, as opposed to this clause, which pertained to claims “arising under law and involving” the construction or application of terms. Since the arbitration clause at issue was broad, the court applied a presumption in favor of arbitration. The plaintiff failed to rebut this presumption, and therefore the court referred the parties to arbitration.

Tahirou v. New Horizon Enterprises, LLC, Case No. 3:20-cv-00281 (USDC D. Conn. Oct. 29, 2020).

Sixth Circuit Holds Company Did Not Waive Its Right To Arbitration Through Pre-Trial “Posturing” Correspondence

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The Sixth Circuit recently reversed a decision from an Ohio federal court that denied an apartment owner’s motion to compel arbitration on the basis that the apartment owner waived its right to arbitration through its pre-trial “posturing” correspondence.

Oro Karric North LLC and its sister entities (collectively “Oro”) contracted with Borror Property Management LLC for Borror to manage Oro’s residential apartments. Each management contract included the following arbitration provision: “If either party shall notify the other that any matter is to be determined by arbitration,” the parties would proceed to arbitration unless they first resolved the dispute amongst themselves.

A dispute arose which resulted in Borror’s ceasing to manage Oro’s properties. Oro responded by letter asserting that Borror was in breach of the parties’ contracts, and advised that Oro planned “to proceed directly to litigation in either state or federal court,” as the contracts “do not limit litigation exclusively to arbitration.” Oro asked Borror to notify it within six days if Borror preferred arbitration; otherwise, Oro would assume that Borror wanted to proceed with litigation.

Instead, Borror filed a complaint in federal court asserting its own breach of contract claims. Oro moved to compel arbitration. The District Court for the Southern District of Ohio denied Oro’s motion to compel arbitration, holding that Oro had waived its contractual right to arbitration through its pre-litigation conduct. Oro timely appealed.

On appeal, the Sixth Circuit reversed, finding that Oro did not waive its right to arbitration because its pre-complaint, litigation-threatening letter did not amount to conduct “completely inconsistent” with Oro’s arbitration rights. The panel recognized that pre-litigation letters exchanged between parties serve a variety of purposes, and are more often a “rhetorical art than legal science.” The panel cautioned that a finding that one could waive its right to arbitration through pre-filing communications “would leave parties with little room to maneuver as they seek to work out their differences short of litigation” and inevitably “make pre-filing settlement elusive, an unfortunate development not only for parties, which often settle disputes to avoid litigation risk, but also for the courts, which historically have counted on the resolution of disputes to conserve limited judicial resources.”

The panel further noted that, even if Oro’s letter was inconsistent with a right to arbitration, Borror was not materially prejudiced by Oro’s actions, and thus no implied waiver occurred. The panel similarly found the letter was not an express waiver of right to arbitration, where nothing in the letter disavowed Oro’s right to arbitration.

The case was remanded for further proceedings.

Borror Prop. Mgmt., LLC v. Oro Karric N., LLC, No. 20-3146 (6th Cir. Oct. 29, 2020).

Arkansas District Court Compels Arbitration of Post-Termination Wage Dispute

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Audra Patterson filed a putative class action against her former employer, American Income Life Insurance Company (AILIC), for alleged wage violations. AILIC moved to compel arbitration of her individual claims pursuant to an arbitration clause in her agency agreement. The agreement provided that all disputes shall be submitted to binding arbitration, specifically including those alleging violations of wage and hour laws. Patterson claimed the arbitration clause was nonetheless inapplicable, arguing the agency agreement was silent as to whether the arbitration clause survived termination of the agreement. The district court disagreed, finding the argument insufficient to overcome the strong presumption in favor of arbitration. Absent clear indication to the contrary, the court noted that federal arbitration law generally presumes an arbitration provision in a contract remains valid and enforceable even after the contract expires or is otherwise terminated. The court also rejected Patterson’s reliance on specific “survival” language in other contract provisions. Patterson claimed it was implicit from the language in those other provisions that the arbitration clause was not to survive upon termination of the contract. The court again disagreed, emphasizing that the U.S. Supreme Court and the Eighth Circuit have interpreted similar arbitration clauses as covering post-termination employment disputes. The court granted AILIC’s motion to compel accordingly.

Audra Patterson v. American Income Life Insurance Co. et al., Case No. 19-cv-00918 (E.D. Ark. Oct. 30, 2020).