Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

UNDERLYING INSURED LACKS STANDING TO SUE REINSURER

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An underlying insured lacks standing to maintain an action against a reinsurer under a contract to which it is not a party, according to a Louisiana district court. Plaintiff, LaSalle Parish School Board, was the insured on a policy of insurance issued by Property Casualty Alliance of Louisiana (“PCAL”). PCAL in turn entered into a contract of reinsurance with Allianz Global Risks. LaSalle Parish School Board filed a complaint against Allianz (and Eagle Adjustment Services) after Allianz failed to pay LaSalle more than $800,000 for tornado damage to LaSalle High School. The complaint alleged claims for breach of contract, detrimental reliance, and negligent misrepresentation. Allianz and Eagle moved to dismiss all claims.

The court granted Allianz's motion to dismiss the breach of contract claim, finding that “LaSalle has no standing to sue Allianz under the reinsurance contract, absent an intent to stipulate an advantage for LaSalle.” The Court also concluded that none of the state statutory exceptions allowing an insured to proceed directly against a reinsurer of its own insurer applied. The court denied the defendants’ motion to dismiss the detrimental reliance and negligent misrepresentation claims due to Allianz’s direct involvement in working with the insurance adjuster who dealt directly with the school system in adjusting the claim. LaSalle Parish School Board v. Allianz Global Risks U.S. Ins. Co., Case No. 1:07-cv-00399 (USDC W.D. La. April 24, 2008).

This post written by Lynn Hawkins.

COURTS ADDRESS ARBITRATION AWARDS

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There have been a number of decisions recently addressing different issues with respect to the confirmation or vacation of arbitration awards:

  • Modifying a final award: There have been two decisions under the functus officio doctrine, which addresses whether an arbitrator exceeds his/her powers by making substantive changes to the merits of an award. In Transtech Industries, Inc,. v. A & Z Septic Clean, No. 05-5246, the Third Circuit held that modifications to an award were permissible since they “clarified” ambiguity resulting from the initial award stating “relatively little” with respect to an issue. In Eastern Seaboard Concrete Constr. Co. v. Gray Constr. Inc., Case No. 08-37 (USDC D. Me. Apr. 18, 2008), a magistrate judge held that an arbitrator exceeded his authority when he modified the substantive portion of an earlier award to address an “additional” issue. The line between clarifying an award that does not address an issue and changing an award to initially address an issue may be a fine line.

  • Scope of arbitration issues: The Third Circuit held in Greenwich Services, Inc. v. District 1199C, No. 06-4951 (3d Cir. Apr. 11, 2008) that an arbitrator has the authority to interpret and determine the scope of the issues in the arbitration, based upon the submissions of the parties and the applicable contract. Finding that the arbitrator's determination drew its essence from the contract, the court affirmed the confirmation of the award.

  • Timing of seeking vacation of award: In Employers Ins. Co. of Wausau v. Paladin Reinsurance Corp., Case No. 08-42 (USDC S.D.N.Y. Feb. 21, 2008), the court confirmed an arbitration award finding that the claims asserted with respect to 19 facultative reinsurance certificates were time barred, when the party seeking to vacate did not make the request within the time allowed by the Federal Arbitration Act. The Petition to Confirm the award sets forth pertinent background facts.

  • Merits of awards: In Delgado v. A. Korenegay Senior House HDFC, Case No. 07-7761 (USDC S.D.N.Y. Mar. 21, 2008), the court affirmed an award over a number of complaints relating to procedure and evidence, finding that the arbitrator had found that the party seeking to vacate the award was not a credible witness, which is not a basis for vacating an award.

This post written by Rollie Goss.

DOCUMENTS RELATING TO RESERVE AND REINSURANCE INFORMATION ORDERED TO BE PRODUCED

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The defendant municipality requested an order compelling further responses to requests for production of documents relating to reserves set by the plaintiff insurer on the defendant’s claims, and documents relating to reinsurance of the plaintiff’s policies. The court granted the request, finding that while setting reserves does not constitute an admission of liability, it may be relevant as to plaintiff’s state of mind for the potential for coverage and, therefore, duty to defend. Similarly, non-privileged communications with reinsurers may be relevant for the same reason. The court denied as irrelevant, however, a request for an order compelling further responses to requests for admission concerning hourly rates paid to a law firm in connection with matters not related to the litigation. Insurance Co. of the State of Pennsylvania v. City of San Diego, Case No. 02-CV-693 (USDC S.D. Cal. Apr. 4, 2008).

This post written by Brian Perryman.

FEDERAL DISTRICT COURT ISSUES ORDER COMPELLING ARBITRATION AGAINST A NON-SIGNATORY TO AN ARBITRATION AGREEMENT

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The plaintiff, Birmingham, along with a group of investors, entered into a funding agreement with defendant’s subsidiary, ALVE, which served as a holding company for intellectual property of the defendant, Abbott. The funding agreement related to the development of a stent product and contemplated successor stent product, and contained a broad arbitration provision. Pursuant to the funding agreement, ALVE and Abbott were to use commercially reasonable efforts to obtain regulatory approval of these products. Concurrent with the funding agreement, Abbott entered into a “keep well” agreement with ALVE obligating Abbott to guarantee ALVE’s performance under the funding agreement. The keep well agreement identifies Birmingham and the investors as its intended beneficiaries, and incorporated by reference provisions of the funding agreement. The keep well agreement did not contain an arbitration provision. Subsequently, Abbott decided not to pursue development of the stent product. Birmingham believed that the termination of the development was improper, and that the stent had significant commercial potential. It filed a lawsuit alleging that Abbott abandoned the stent because it wished to focus on a different stent, thereby breaching the keep well agreement. Abbott moved to compel arbitration pursuant to the funding agreement’s arbitration provision.

The court granted the motion to compel arbitration, citing the strong federal policy favoring arbitration and the estoppel doctrine, under which a non-signatory may compel arbitration where: (1) there is a close relationship between the parties and controversies and (2) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration provision. The court initially found that there was a close relationship between Abbott and ALVE and the controversy at issue because of those parties’ parent-subsidiary relationship. The second prong was also satisfied because the dispute between Birmingham and Abbott in the lawsuit was directly related to the terms of the funding agreement. Birmingham Associates Ltd. v. Abbott Laboratories, Case No. 07 Civ. 11332 (USDC S.D.N.Y. Apr. 14, 2008).

This post written by Brian Perryman.

SPECIAL FOCUS: THE MANIFEST DISREGARD OF LAW DOCTRINE: WHAT DOES THE FUTURE HOLD?

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With this post we are expanding the content of Reinsurance Focus to include an occasional article of greater length containing a more detailed analysis of a reinsurance or arbitration-related topic of interest. These posts will be placed in the Special Focus category of our blog, and will consist of a short executive summary of the article linked to the article. We hope that this somewhat more detailed exploration of selected topics adds to our readers’ enjoyment of our blog. Our current intention is to have one such Special Focus post about every other month. Following is the executive summary of our first such article.

The manifest disregard of law doctrine has been referred to as a “judicially created” basis for vacating arbitration awards, which arguably is not expressly provided for in the Federal Arbitration Act (“FAA”). In the recent Hall Street Associates opinion (see the March 28, 2008 post), the United States Supreme Court stated that the grounds for vacating arbitration awards set forth in the FAA are the exclusive grounds for vacating an arbitration award, which may imply that what some courts have described as judicially created bases for vacation, such as the manifest disregard of law doctrine, are not viable. In the accompanying article, we briefly explore the current status of the manifest disregard of law doctrine and whether it has a future after Hall Street Associates. Read the article.

This post written by Rollie Goss.