Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

INTERESTING DECISIONS ON ARBITRATION AWARDS

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Four recent opinions address interesting issues in the confirmation of arbitration awards:

  • In Extendicare Health Services, Inc. c. District 1199P Service Employees International Union, No. 06-4768 (3d Cir. Oct. 26, 2007), the court affirmed a district court decision finding that the reinstatement of an employee by an arbitrator in a labor arbitration was not contrary to public policy. This opinion contains a rather extended discussion of the public policy issue analysis.

  • In Lagstein v. Certain Underwriters at Lloyds of London, Case No. 03-1075 (USDC D. Nev., Aug. 15, 2007), an insurance bad faith case, the arbitration panel awarded $900,000 in compensatory damages, $1.5 million in bad faith compensatory/emotional distress damages, $4 million in punitive damages and $350,000 in attorneys’ fees. The district court found that this award “shocks the Court’s conscience, is biased, and cannot stand.” The court further found that the damages were unsupported by the record and in manifest disregard of law, that the punitive damage award exceeded the jurisdiction of the arbitration since it awarded damages for a time period that the parties had expressly agreed was beyond the scope of the arbitration, and that the size of the punitive damage award was excessive.

  • In Hendrik Delivery Service, Inc. v. St. Louis Post-Dispatch LLC, Case No. 07-1516 (USDC E.D. Mo. Oct. 19, 2007), the court confirmed an arbitration award of $892,000 in compensatory and $750,000 of punitive damages in a business dispute. The losing party sought to vacate the award, essentially arguing that the arbitrator made the wrong decision. The court found no manifest disregard of law, and refused to vacate the award.

  • In Van Pelt v. UBS Financial Services, Inc., Case No. 05-477 (USDC W.D. N.C. Oct. 12, 2007), the court denied a motion to vacate an arbitration award of $2.4 million for wrongful termination of a financial advisor. The employer contended that the award should be vacated because: (1) the award was not drawn from the essence of a contract; (2) the panel manifestly disregarded the law; (3) the panel exceeded its power in making the award; and (4) the award violated public policy. The court denied the request to vacate the award. The critical point in this opinion is that since the award was not a reasoned award, and hence the panel did not explain the bases for its decision, there was an insufficient record upon which to vacate the award.

COURT DISMISSES REINSURER’S BAD FAITH CLAIMS AGAINST CEDENT’S PARENT COMPANIES

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A Pennsylvania district court dismissed bad faith and fiduciary duty claims brought by a reinsurer against a cedent’s corporate parents. Plaintiff, Gaffer Insurance Company, reinsured policies issued by Discover Re, a subsidiary of U.S. Fidelity and Guaranty Co., which is in turn a subsidiary of St. Paul Travelers Cos. Inc. Pursuant to the agreement, Gaffer posted $4 million dollars to secure its obligations. When the agreement terminated and Gaffer asked Discover to release up to 3.8 million of those funds, Discover never responded. Gaffer filed suit and the defendants moved to dismiss for failure to state a claim, or alternatively, to compel arbitration.

The court ordered arbitration between Gaffer and Discover Re pursuant to the agreement’s arbitration provision. With respect to Gaffer’s claims against Discover Re’s parent companies, the court concluded that Gaffer failed to state a claim against those defendants. Specifically, the court concluded that Pennsylvania’s bad faith statute does not apply to reinsurance agreements, and added that the statute was intended to protect consumers from insurers, not to protect “two sophisticated, bargaining parties from one another.” The court also dismissed the good faith and fair dealing claim against the parent companies. Finally, the court dismissed the breach of fiduciary duty and negligence claims against the parent companies finding that as a reinsurer, Gaffer is not covered by the fiduciary duties owed by an insurer to an insured. Gaffer v. Discover Reinsurance Co., Case No. 3:07-CV-00580 (M.D. Pa., Oct. 10, 2007).

COURT RULES ON VALIDITY OF AMENDMENTS TO FEDERAL CROP REINSURANCE PROGRAM

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The D.C. district court recently addressed whether the Federal Crop Insurance Corporation (“FCIC”) had authority to promulgate two federal regulations relating to the administration of its reinsurance agreements, and if so, whether they also had authority to promulgate an amendment to those regulations. Plaintiffs, agricultural insurance providers, alleged the FCIC’s unilateral amendments to their reinsurance agreements constituted a breach of contract.

Following a lengthy procedural path, the plaintiffs filed their claim with the Department of Agriculture Board of Contract Appeals. The Board concluded that plaintiffs’ claims were time barred pursuant to a federal regulation that mandated a 45-day period for bringing administrative claims. Plaintiffs subsequently filed a complaint in the D.C. district court requesting the court conclude that the agency lacked jurisdiction to hear the plaintiffs’ claims and to overturn the agency’s interpretations of the contract and relevant statutes and regulations. Plaintiffs also sought a determination that the agency’s procedures and final decision violated the Constitution. Both parties filed motions for summary judgment.

Applying the “Chevron deference” analysis, the court concluded that the FCIC had authority to promulgate both regulations. With respect to the amendment, the court concluded that it qualified as an “interpretive rule,” and therefore was not required to comply with the notice and comment requirements under the APA. As such, the rule was valid, and the court granted the defendant’s motion for summary judgment as to several of plaintiff’s claims. The court remanded some of plaintiffs’ claims to the Board to address what action triggered the limitations period and whether the 45-day limitations period was controlling in light of a conflicting 6-year statutory limitation period.

Finally, the court dismissed plaintiffs’ constitutional claims stating that they were “without merit” and dismissed plaintiffs’ contract and unjust enrichment claims for failure to exhaust administrative remedies. Ace Property and Casualty Ins. Co. v. Federal Crop Ins. Corp., Case No. 06-1430 (RMU) (D.D.C., Sept. 28, 2007).

IRS PROPOSES ELIMINATION OF LONG-STANDING TAX BENEFIT FOR CAPTIVES

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The IRS has proposed a regulation (full text here) which would postpone the tax deduction for an incurred loss arising from related party business until the loss is paid, instead of permitting an earlier deduction for certain loss reserves. This proposal has surprised the industry, as it was issued without any notice. The proposal would affect a single parent captive filing a consolidated tax return with its parent. There is concern among the US captive regulators that this would eliminate an important tax incentive for US domiciled captives, resulting in captives moving offshore. The Captive Insurance Companies Association has posted a frequently asked question document relating to this proposal. There is a comment period open on this proposal until December 27, 2007.

COURT CONFIRMS ARBITRATION AWARD BASED UPON A FAILURE TO CARRY A BURDEN OF PROOF

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An arbitration proceeding ensued as a result of a motor vehicle accident. The arbitrator could not decide which party was at fault, and therefore held in favor of the respondent, finding that the Claimant had failed to carry her burden of proof on her affirmative claims. The losing party sought to vacate the award, contending that the arbitrator had improperly presumed her to have been at fault, in manifest disregard of law. The court disagreed, finding that an award based upon a simple failure to sustain one’s burden of proof was appropriate. Beverly v. Collier, Case No. 06-1414 (USDC E.D. Ark. Oct. 12, 2007).