Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

CASE UPDATE: TRIAL REQUIRED TO DETERMINE ISSUES OF BAD FAITH OR EX GRATIA PAYMENTS

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On November 3, 2006 we reported on a decision of a New York state court that followed the follow-the-fortunes provision of a reinsurance agreement, granting summary judgment as to the majority of the reinsurance claims. A New York appellate court recently reversed that decision, revisiting the scope of the follow-the-fortunes doctrine and ex gratia exceptions under New York reinsurance law. The court found that the general “follow-the-fortunes” obligation comes with exceptions for claim payments that are “fraudulent, collusive or otherwise made in bad faith” or are “ex gratia.” Ex gratia payments are payments made by a cedent insurer “that recognizes no legal obligation to pay, but makes payment to avoid greater expense, as in the case of a settlement by an insurance company to avoid the cost of a suit.”

The reinsurer in this case contended that, years after making settlements in thousands of pesticide poisoning cases, the cedent’s parent company reallocated some of its settlement payments from sister companies to the cedent/plaintiff just to obtain the benefit of the reinsurance coverage. The reinsurer charged that the cedent insurance company's conduct constituted bad faith or at least an ex gratia payment that should relieve the reinsurer of any obligation as a matter of law on summary judgment. The New York appellate court disagreed, finding that issues as to the intent and circumstances of the underlying settlements remained unresolved, requiring a trial. Granite State Ins. Co. v. ACE American Reinsurance Co., 2007 NY Slip Op. 10464 (NY App. Div., Dec. 27, 2007).

This post written by Lynn Hawkins.

LEGISLATIVE UPDATE: STATES IMPLEMENT TRIA EXTENSION

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On December 21, 2007, we reported on the enactment and signing of the Terrorism Risk Insurance Program Reauthorization Extension Act of 2007, which extended TRIA. That Act made some changes to the TRIA program. A number of state insurance departments have issued Bulletins implementing the changes adopted in the extension. While it is not our intention to provide an exhaustive listing of the state actions in this area, we are providing in this post access to the Bulletins issued by the first group of insurance departments to address this matter, so that our readers can see the types of implementation activity that is occurring. You should check for Bulletins in states of interest to you if this topic is of concern to you. Alabama; Arizona; Illinois; Louisiana; Maine; New Hampshire; New Jersey; South Dakota; West Virginia.

This post written by Rollie Goss.

CASE UPDATE: FOURTH CIRCUIT FINDS LOWER COURT’S INTERPRETATION OF ARBITRATION AWARD INSUFFICIENT

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On June 20, 2006 we reported on a decision of a US District Court decision declaring the relationship between two arbitration awards. The Fourth Circuit has reversed that decision. The district court was asked to determine whether an arbitration panel’s second award was intended to supplement or incorporate the first award. After receiving yes/no responses from two of the three arbitrators, the district court concluded that the first award had been factored into and setoff by the second.

The Fourth Circuit reversed and remanded, concluding that while the district court correctly concluded that the second arbitration award was ambiguous and correctly sought clarification from the arbitrators, the procedure employed by the district court to clarify the ambiguity was unsuccessful. The court was “unable to discern, without further discovery into the arbitrators’ intent, how the one-word response from two of the arbitrators resolved the ambiguity.” The Burlington Insurance Company v. Trygg-Hansa Ins. Co., No. 06-2082 (USCA 4th Cir., Jan. 17, 2008).

This post written by Lynn Hawkins.

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.