Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

IMPORTANT DECISIONS ADDRESSING ARBITRATION AWARDS

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During January 2008, five of the US Courts of Appeal addressed issues relating to the vacation of arbitration awards in six different cases, with a district court also entering this arena. This is an unusual concentration of appellate activity in this area, and the cases addressed different bases for vacating arbitration awards:

  • In Long John Silver's v. Cole, No. 06-1259 (USCA 4th Cir. Jan. 28, 2008) the court affirmed a district court decision confirming an arbitration award over objections that the arbitrator had manifestly disregarded controlling legal principles and exceeded his scope of authority. The arbitrator had followed the American Arbitration Associations class action rules to certify an opt-out arbitration class of labor claims, rather than certifying an opt-in class pursuant to the Fair Labor Standards Act.

  • In Howard Univ. v. Metropolitan Campus Police Officer's Union, No. 07-7055 (USCA D.C. Cir. Jan. 18, 2008) the court affirmed a district court decision confirming an award over objections that the arbitrator did not have jurisdiction to resolve the dispute and engaged in misconduct by excluding certain evidence. The court found the jurisdictional objection was waived when it was not raised during the arbitration, and that the evidentiary decision did not prejudice the right of the parties to a fundamentally fair hearing.

  • In Uhl v. Pacific Employer's Ins. Co., No. 07-1044 (USCA 6th Cir. Jan. 9, 2008) the court affirmed the decision of the district court (reported in a January 4, 2007 post to this blog) confirming an award over the objection that the undisclosed fact that one of the arbitrators had served as co-counsel in another matter with counsel for one of the parties in the arbitration, since the objecting party had failed to establish specific facts that indicated improper motives on the part of the arbitrator.

  • In Sherrock Bros., Inc. v. DaimlerChrysler Motors Co., No. 06-4767 (USCA 3d Cir. Jan. 7, 2008), the court affirmed the decision of the district court (reported in a October 31, 2006 post to this blog) confirming an award over two objections: (1) that the arbitration panel's rulings on res judicata, collateral estoppel and waiver were in manifest disregard of the law; and (2) that the use of a summary judgment procedure to dispose of the claims was error.

  • In Truck Drivers Local v. Allied Waste Systems, Inc., No. 06-1572 (USCA 6th Cir. Jan. 4, 2008) the court reversed the decision of a district court (reported in a October 31, 2006 post to this blog) which vacated an award, finding that one of its own recent decisions “refined” the scope of review of labor arbitration awards, such that the arbitrator did not exceed his authority by making an interpretive error, and since the arbitration agreement did not clearly and consistently limit the arbitrator's authority in the manner contended for by the party seeking to vacate the award.

  • In Hall v. American General Financial Service, Inc., No. 06-1768 (USCA 8th Cir. Jan. 29, 2008), in a very perfunctory opinion, the court affirmed a decision confirming an award, stating the the party objecting to the award had not demonstrated that the award was completely irrational or in manifest disregard of the law.

  • In Nationwide Mut. Inc. Co. v. Randall & Quilter Reinsur. Co., Case No. 07-120 (USDC S.D. Ohio Jan. 24, 2008), the court confirmed an award, which had already been paid. The issue was whether the award should be confidential, when there was no written confidentiality agreement, only a discussion of confidentiality at one of the arbitration hearings. The court found that since the parties had not consented to the confirmation of oral awards, the court was not authorized under section 9 of the Federal Arbitration Act to confirm a purported oral confidentiality order. See a September 5, 2007 post to this blog for an earlier ruling in this case.

This post written by Rollie Goss.

KFC EMPLOYEES WAIVED RIGHT TO ARBITRATE

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Nearly 1,000 KFC employees filed suit against KFC alleging that it violated the Fair Labor Standards Act by failing to pay overtime to assistant managers at its restaurants. Later, a portion of the employees demanded arbitration. KFC argued that the employees had waived their right to arbitrate by opting in to the collective lawsuit. KFC claimed it would suffer prejudice from the delayed request for arbitration because during the lawsuit the American Arbitration Association had raised the applicable filing fee by forty-four percent. In response, the employees argued that arbitration would be far less expensive for KFC then pursuing the additional discovery in the lawsuit. A Minnesota federal court ruled that the employees had waived their right to arbitrate and would have to pursue their claims in court. Christian Parler v. KFC Corp., Case No. 05-cv-2198 (USDC D. Minn. Jan. 3, 2008).

This post written by Lynn Hawkins.

DISTRICT COURT DISMISSES TORITOUS INTERFERENCE AND UNFAIR COMPETITION CLAIMS ALLEGED AGAINST REPLACEMENT REINSURANCE BROKER

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Benfield provided reinsurance brokerage services, but its services were terminated, and it was replaced by Aon. Benfield sued Aon, contending that Aon had wrongfully collected and retained commissions that should have been paid to it. Benfield alleged five claims: tortious interference with contract; tortious interference with prospective business relations; unjust enrichment; conversion; and unfair competition. On a motion to dismiss, the court dismissed all of the claims except those for unjust enrichment and conversion. Benfield, Inc. v. Aon Re, Inc., Case No. 07-2218 (USDC D. Minn. Jan. 8, 2008).

This post written by Rollie Goss.

COURT GRANTS SUMMARY JUDGMENT ON CLAIMS AMOUNTING TO ABUSE OF ARBITRATION PROCESS

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Myles had a credit card from Juniper Bank and failed to pay amounts due under the credit card. Wolpoff & Abramson LLP filed an arbitration claim against Miles on behalf of Juniper Bank. Myles contended that he never agreed to arbitrate, and no arbitration agreement signed by Myles was ever produced. The arbitrator retained the matter but dismissed the claim with prejudice. Myles then sued Wolpoff under the Fair Debt Collection Practices Act (“FDCPA”), the Michigan Collection Practices Act and the Michigan Occupational Code. The claims essentially alleged that Wolpoff had abused the arbitration process by filing a baseless arbitration claim. The district court found that the FDCPA claims failed as a matter of law because they amounted to a collateral attack on the arbitration award, which should have been challenged under the Federal Arbitration Act. The state law claims were then dismissed without prejudice pursuant to 28 U.S.C. § 1367. Myles v. Wolpoff & Abramson, LLP, Case No. 07-12247 (USDC E.D. Mich. Jan. 14, 2008).

This post written by Rollie Goss.

SEVENTH CIRCUIT AFFIRMS GRANT OF SUMMARY JUDGMENT AGAINST REINSURANCE SERVICE COMPANY

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Reinsurance Results is a service company that reviews an insurance company’s claims against its reinsurers to make sure the insurance company receives the benefits to which its reinsurance contracts entitle it. Reinsurance Results entered into a service contract with Indiana Lumbermens Mutual Insurance Company. The fee for the service was 33% of the funds collected from the insurance company’s reinsurers as a result of the review. Reinsurance Results claimed that it obtained $2.2 million and thus was owed 33% of that amount. Indiana Lumbermens disagreed, contending that the $2.2 million was a disputed benefit arising out of a change in its accounting treatment for certain transactions, which affected the amount that Indiana Lumbermens could bill its reinsurers, and that a change in accounting practices did not allow Reinsurance Results to compensation under its contract. An Indiana district court granted summary judgment against Reinsurance Results and Reinsurance Results appealed.

The Seventh Circuit, in an opinion by Judge Posner, affirmed the lower court’s decision. The Seventh Circuit noted that the contract stated that Reinsurance Results was entitled to compensation based upon its reporting of any loss or premium overpayment claims “that have not been processed in accordance with the reinsurance contract terms and conditions” (emphasis in court's opinion). The claims that the insurance company submitted were correctly processed. Even if Reinsurance Results did confer a benefit on Indiana Lumbermens by encouraging them to alter their accounting methodology, “it was not a benefit for which the insurance company was contractually obligated to compensate the service company.” Indiana Lumbermens Mutual Ins. Co. v. Reinsurance Results, Inc., No. 07-1823 (7th Cir. Jan. 16, 2008).

This post written by Lynn Hawkins.