Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Arbitration Awards – Part I

by

There have been a large number of Court of Appeal and District Court opinions recently relating to arbitrations awards. This week, we present a two-part post to present these opinions. Today's post concerns evident partiality and venue, while tomorrow's will address the scope of arbitrators' authority and manifest disregard of law.

  • In a potentially important opinion, the Second Circuit has issued a fairly detailed analysis of a situation in which an arbitrator came to be aware of a business relationship between his company and the parent company of one of the parties to the arbitration. Rather than investigate, he walled himself off with a “Chinese Wall” in an attempt to remain ignorant, and did not disclose his lack of investigation of the potential conflict. The District Court held that this constituted evident partiality, and vacated the arbitration award. The Court of Appeals affirmed. This case contains a good discussion of the legal principles relating to evident partiality. Applied Industrial Materians Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., Case No. 06-3297 (USCA 2d Cir. July 9, 2007).
  • In Toroyan v. Barrett, Case No. 06-4422 (USDC SD N.Y. July 10, 2007), the court confirmed an arbitration award over objections of evident partiality and manifest disregard of law. The evident partiality claim was based on the fact that parties to the arbitration had contributed to maintaining an endowed chair in a different school of the University where the arbitrator was a professor. The court rejected the evident partiality claim for three reasons: (1) there was no indication that the arbitrator knew of the relationship; (2) the relationship was immaterial; and (3) the objector should have known about the issue and raised it prior to losing the arbitration.
  • In The Ridge at Red Hawk, LLC v. Schneider, Case No. 06-4162 (USCA 10th Cir. July 9, 2007), the 10th Circuit affirmed a venue decision by an arbitration panel. This case is intersting in part because it involves parallel proceedings in a Texas state court and a Utah federal court, with Rooker-Feldman Doctrine implications. The courts concluded that a somewhat unique arbitration provision in the contract underlying the dispute allowed an appeal of the venue issue only if the determination was strictly legal in nature, and the arbitration award indicated that the venue determination was a combination of a legal and factual determination. Therefore, the courts dismissed the federal court challenge to the arbitration award.
  • In ReliaStar Life Ins. Co. v. Certain Underwriters at Lloyd's London, Case No. 06-3845 (USDC D Minn. Feb. 1, 2007), the court confirmed an arbitration award by agreement of the parties. The Stipulation filed with the court includes a copy of the award.

Travelers granted judgment on the pleadings in finite reinsurance case

by

In October 2004, New York Attorney General Elliot Spitzer announced the filing of a civil Complaint against Marsh & McLennan Companies, alleging fraud and antitrust violations and implicating major insurance companies. The next day, an analyst reported that the St. Paul Travelers Companies (“Travelers”) could expect to be involved in the investigation and be subject to a subpoena. Travelers' stock price dropped $2.06 per share. About one month later, Travelers disclosed the receipt of a second subpoena, relating to finite reinsuracne issue. A class action securities fraud suit was filed against Travelers. The Complaint did not allege a drop in stock price following the disclosure of the finite reinsurance subpoena. Travelers moved for judgment on the pleadings with respect to claims relating to finite reinsurance issues, contending that the Complaint filed to adequately allege loss causation with respect to those issues. The court agreed, and granted the motion, but provided the Plaintiffs leave to file an amended Complaint. In re St.Paul Travelers Secutieis Litigation II, Case No. 04-4697 (USDC D Minn. June 1, 2007).

Holder of contruction bonds does not have direct right of action against reinsurer of insolvent bond surety

by

Frontier Insurance Company, as surety, issued a performance bond and a payment bond for the construction of a movie theater, and reinsured its obligations with National Indemnity Company. When Frontier was declared insolvent, the holder of the bonds sued National Indemnity. The US District Court dismissed the action, finding that there was no cut through provision in the reinsurance agreement, that the reinsurance agreement explicitly prohibited non-parties from obtaining rights under the reinsurance agreement and that New York law did not provide for a direct cause of action against a reinsurer in the circumstances presented. Jurupa Valley Spectrum, LLC v. National Indemnity Company, Case No. 06-4023 (USDC SD NY June 29, 2007).

Judge dismisses claims against former KPMG personnel

by

In a stern rebuke to federal prosecutors, a US District Judge has dismissed criminal tax-fraud claims against 13 former KPMG executives based upon the government's “intolerable” prosecutorial abuses. The Court had previously found that the government's pressuring KPMG not to pay the executives attorneys' fees violated their constitutional rights. The Court has now decided that dismissal of the charges is the appropriate remedy for such conduct. The government conceded that if the Court's constitutional analysis was correct, that dismissal was appropriate, presumably to clear the way for an appeal of the issue. The case will proceed to trial against other defendants. Prior posts on this case on this blog cover the arbitrability of attorneys' fee issues (post date September 26, 2006) and an appellate brief filed by the US District judge on that issue (post date January 22, 2007). United States v. Stein, Case No. 05-crim-0888 (USDC SD NY July 16, 2007).

District Court Denies U.K. Defendant’s Motion to Dismiss For Lack of Personal Jurisdiction

by

Defendants, employees of the U.K. based Marsh Services Limited, provided services to plaintiff Guy Carpenter & Company (“Guy Carpenter”) in the field of facultative reinsurance. In April 2007, the Defendants resigned from Marsh Services to join Integro, a competitor of plaintiffs. By doing so, Plaintiffs allege that defendants breached a non-solicitation provision of their contract. This contract contained two forum selection clauses.

One of the defendants, Ron Whyte, moved to dismiss on the basis that the court lacked personal jurisdiction over him and on based upon the doctrine of forum non conveniens. Whyte argued that the existence of a second forum selection clause in “Schedule II.D” of the contract created an ambiguity which rendered the forum selection clause in the body of the Agreement unenforceable. The court disagreed, denying the motion to dismiss, and holding that the forum selection clause in Schedule II.D did not apply to the issue, and was, in any event, non-exclusive. Guy Carpenter & Co. v. Julian Samengo-Turner, Ron Whyte, and Marcus Hopkins, Case No. 07 Civ. 3580 (USDC S.D. N.Y. June 29,2007).