Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Uber Price Fixing Class Action Award Still Fares Despite Arbitrator’s Unfunny Joke

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The petitioner unsuccessfully sought to vacate an arbitration award permitting Uber’s use of a “surge” pricing algorithm to set fares, arguing that comments made by the arbitrator reflected his “evident partiality” toward Uber in violation of 9 U.S.C. § 10(a)(2). Specifically, on the third day of the arbitration hearing, the arbitrator offered concluding remarks on the record including the statement: “I must say I act out of fear. My fear is if I ruled Uber illegal, I would need security. I wouldn’t be able to walk the streets at night. People would be after me.” The petitioner also argued the arbitrator was “starstruck” by the presence of Kalanick, Uber’s co-founder and then CEO, taking his picture on the first day of the hearing.

Uber first argued that the petitioner waived his right to seek vacatur by waiting until after the arbitrator ruled against him. The court agreed, as attacks on the qualifications of arbitrators on grounds previously known but not raised until after an award has been rendered are precluded. The petitioner’s claim that vacatur of an “openly partial award” is not waivable was “belied by Second Circuit precedent.” The court also agreed with Uber’s second argument, that the arbitrator’s conduct did not justify vacatur, finding the arbitrators remarks “were simply an attempt at humor – one of many made by the arbitrator throughout the hearing.”

Meyer v. Kalanick & Uber Technologies, Inc., No. 1:15-cv-09796 (S.D.N.Y. Aug. 3, 2020).

Tenth Circuit Refuses to Vacate FINRA Arbitration Dismissal

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The Tenth Circuit Court of Appeals recently rejected a claimant’s effort to vacate the dismissal of his FINRA claim following his repeated failure to comply with various deadlines.

Zane Piston initiated a FINRA arbitration against his former employer, Transamerica Capital Inc., claiming that Transamerica Capital incorrectly described the reason for his termination.

The arbitration panel issued a scheduling order. Piston’s attorney failed to make various filings in accordance with the scheduling order and timely respond to motions filed by Transamerica Capital.

Transamerica Capital eventually moved to have Piston’s claim dismissed with prejudice due to these failures. The arbitration panel held a hearing at which it required Piston to show good cause as to why his claim should not be dismissed. Piston’s counsel indicated that he had undergone surgery, been traveling in Europe, and that his wife had been hospitalized and that he had therefore been unable to make timely filings. The panel concluded that Piston’s counsel had not shown good cause for his various failings and dismissed Piston’s claim with prejudice as a sanction.

Piston moved to vacate that decision. The district court denied Piston’s motion, and Piston appealed to the Tenth Circuit. The Tenth Circuit affirmed the district court’s denial of Piston’s motion to vacate the dismissal of his claim. Piston primarily claimed that the arbitration panel exceeded its powers, disregarded the law, committed misconduct, and denied him a fair hearing because it allegedly dismissed his claim without a warning. The court rejected that claim. It concluded that the panel arguably interpreted and applied FINRA Rule 13212(c), which allows FINRA panels to dismiss a claim with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions proved ineffective. Whether the panel properly interpreted Rule 13212(c) was beyond the scope of the court’s review. The Tenth Circuit also rejected Piston’s claim that the panel misapplied the good cause standard, noting that Piston had to do more than show that the panel committed an error.

Piston v. Transamerica Capital, Inc., No. 19-1123 (10th Cir. July 21, 2020).

SDNY Finds Cedent Entitled to Indemnification for $20 Million Settlement Payment Under English Law

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The question before the Southern District of New York was whether, under English law, certain facultative reinsurance policies obligated a reinsurer to indemnify its cedent for a $20 million settlement. The finding was notwithstanding the three-year stated policy period of each of the reinsurance policies, as the insured was held liable on an “all sums” basis for a continuous injury occurring outside the relevant policy period.

Similar to the laws in the United States, “[u]nder English law, settlements paid under the reinsured policy are presumed to be covered as a matter of law by the reinsurance policy if the reinsured can prove: (1) that the reinsured has actually paid the settlement sums; and (2) that the claim arguably falls within the insurance/reinsurance policy under which the payment was made as a matter of law.” Further, English law has a strong presumption that liability under a proportional facultative reinsurance policy is “co-extensive” with the underlying insurance policy.

Accordingly, the court found both the cedent and the reinsurer assumed the risk that the cedent could be held liable on an “all sums” basis for continuous injury occurring outside the insured’s policy period. Thus, the reinsurer would have to indemnify the cedent for any settlement the cedent was required to pay its insured as a result of the injury under the follow-the-settlements provision in the reinsurance policies.

The court also rejected the reinsurer’s argument that the cedent breached its notice obligations by providing notice of the claims nearly six years after the cedent first became aware of an occurrence likely to result in a claim under the policies. The court found the reinsurer failed to meet its burden establishing its cedent acted with “extreme dishonesty” such that the reinsurer was “seriously prejudiced” under English law, or that its cedent acted in “bad faith” under New York law. The cedent’s motion for summary judgment was granted.

Insurance Company of Pennsylvania v. Equitas Insurance Ltd., No. 1:17-cv-06850 (S.D.N.Y. July 16, 2020).

Seventh Circuit Rejects Third-Party Administrator’s Attempt to Avoid Multimillion-Dollar Arbitration Award

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Standard Security Life Insurance Company of New York and Madison National Life Insurance Co. entered into an administrative services agreement with FCE Benefit Administrators Inc. under which FCE administered insurance policies underwritten by the insurers. After several years, the insurers terminated the agreement and invoked its arbitration clause. Phase I of the arbitration ended with the panel issuing a partial final award to the insurers of more than $5 million. The panel denied all the parties’ remaining claims at the conclusion of phase II. A federal district court in Illinois later confirmed both awards.

On appeal, FCE claimed the phase I award should not have been confirmed for three reasons, each of which was rejected. First, it argued that the phase II award superseded the phase I award and that the phase I award was therefore not confirmable. The Seventh Circuit disagreed, explaining that the panel deliberately bifurcated the arbitration to decide discrete claims in each phase, thus plainly intending the phase I award to be final and confirmable as to all phase I claims. Second, FCE argued that the panel exceeded its authority by deciding the insurers’ indemnification claims, which FCE claimed were expressly carved out of the arbitration process. While the court disagreed with FCE’s reading of the relevant contract provisions, it also held that FCE waived the objection in any event, having only asserted it after the panel issued the phase I award. Finally, the court rejected the contention that the panel exceeded its authority by awarding amounts labeled on the phase I award as “embezzlement.” “Despite the dramatic label,” the court ruled, the claim itself was no more than a “garden-variety assertion that FCE took excessive and unearned administrative fees from the Insurers.” Because FCE had notice of and attempted to defend against the assertion during phase I of the arbitration, the court found the argument to be meritless. As such, the district court order confirming the phase I and II awards was affirmed.

Standard Security Life Insurance Company of New York v. FCE Benefit Administrators, Inc., No. 19-2336 (7th Cir. July 28, 2020).

Eleventh Circuit Vacates Compound Interest Award and Directs Trial Court to Recalculate Simple Interest Under Georgia Law

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In this action, Caradigm USA, a computer software company, brought a breach of contract action against health care provider PruittHealth Inc. in the U.S. District Court for the Northern District of Georgia, alleging that Pruitt breached a contract with Caradigm to consolidate and organize patient medical and billing records. Pruitt argued that it was dissatisfied with Caradigm’s progress and that it had a right to abandon the contract. After discovery, the parties filed dueling summary judgment motions. The district court decided that Pruitt had anticipatorily repudiated the contract before Caradigm’s performance was required and that Pruitt was therefore liable for breach. However, because the value of the contract was unclear, the district court left the issue of damages for trial.

After a four-day trial, the jury awarded Caradigm $11 million, comprising $5.1 million in contract damages, $3.6 million in compound interest, and $2.3 million in attorneys’ fees and expenses under a Georgia statute that provides for fee awards against “stubbornly litigious” parties.

Pruitt appealed, arguing that the district court erred in several ways in the run-up to and during the damages trial, which led to the overstated contract damages award and erroneous awards of interest and attorneys’ fees. Specifically, Pruitt claimed that the district court was wrong in its construction of the parties’ contractual obligations, that the court held Caradigm to a lower burden of proof than it should have, and that it was wrong to exclude evidence that Caradigm’s future revenues might have decreased.

A three-judge panel of the Eleventh Circuit concluded that, in the main, the district court did not reversibly err, therefore affirming the awards of contract damages and fees, as well as the determination that Caradigm was entitled to recover interest on the damages award. However, the Eleventh Circuit concluded that it was error to compound the interest, and thus vacated that award and remanded so that the district court can calculate simple interest.

Although the Eleventh Circuit agreed that Pruitt failed to raise the compound interest order before trial, the court stated that Pruitt had not waived its compound interest argument. The court stated that Georgia law is clear that parties must explicitly agree to compound interest in their contract. Because the language in the contract between Pruitt and Caradigm did not establish that the parties agreed to compound interest, the Eleventh Circuit vacated the compound interest award and remanded for the district court to calculate simple interest.

Caradigm USA LLC v. PruittHealth, Inc., No. 19-11648 (11th Cir. July 10, 2020).