Reinsurance Focus

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 First, it argued that the phase II award superseded the phase I award and that the phase I award was therefore not confirmable.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).

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).

The New Jersey Supreme Court issued a combined opinion in two cases arising from arbitration agreements in employment contracts. The plaintiffs in the respective cases claimed they fell within section 1 of the Federal Arbitration Act (FAA), also known as the “exemption clause,” and thus that their disputes were not subject to arbitration. The question in both cases was whether the disputed arbitration clauses would still be enforceable under the New Jersey Arbitration Act (NJAA), even assuming section 1 of the FAA applied. The court answered in the affirmative, thereby reversing the appellate decision in one case and affirming it in the other.

Section 1 of the FAA states that the FAA shall not “apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Citing a 2019 decision by the U.S. Supreme Court, the court held that section 1 applies only to transportation workers engaged in interstate commerce. It was undisputed that the plaintiffs in one of the subject cases were exempt. The court remanded the other case for a determination whether the plaintiffs fell within section 1. Nonetheless, the court explained that, absent preemption, New Jersey arbitration agreements have been automatically subject to the NJAA since 2003. The court held that the NJAA is nearly identical to the FAA and incorporates the same policies strongly favoring arbitration. The court therefore rejected the notion that the arbitration clauses at issue were not (or otherwise could not be) governed by the NJAA merely because they did not expressly invoke the statute. Moreover, having determined that the NJAA is not preempted by the FAA, the court ruled that the NJAA may apply to arbitration agreements even if parties to the agreements are exempt from arbitration under section 1 of the FAA.

Arafa v. Health Express Corp., No. 083174, and Colon v. Strategic Delivery Solutions, LLC, No. 083154 (N.J. July 14, 2020).

In a case involving an arbitration agreement between foreign nationals and U.S. citizens, which is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, chapter II of the FAA, the U.S. District Court for the Western District of Arkansas found that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA, therefore directing the plaintiff’s claims for insurance coverage to arbitration.

Plaintiff J.B. Hunt Transport Inc.’s claims arose out of a dispute concerning two insurance policies issued to it by Certain Underwriters at Lloyd’s and Steadfast Insurance Co., under which the plaintiff sought defense and indemnity coverage for claims presented in a separate lawsuit involving the wrongful death of a woman by an employee of one of the plaintiff’s contracted carriers.

Underwriters moved for arbitration pursuant to the arbitration provision in its policy with the plaintiff directing any disputes to an arbitrator. In its motion to compel, Underwriters argued that the Convention, which provides that the “court of a Contracting State … shall, at the request of one of the parties, refer the parties to arbitration,” is controlling law under the Supremacy Clause, rendering the arbitration provision valid and enforceable. Conversely, the plaintiff argued that Arkansas law, which bars the enforcement of binding arbitration clauses in insurance contracts, should control pursuant to the McCarran-Ferguson Act, which creates a system of “reverse-preemption” for state insurance laws. Underwriters responded that the McCarran-Ferguson Act does not apply to the Convention or chapter II of the FAA and that, as a result, the court should enforce the arbitration provision. The lynchpin of Underwriters’ argument was that the Convention and chapter II of the FAA are not “acts of Congress” subject to the McCarran-Ferguson Act. In support of its argument, Underwriters cited a variety of cases concluding that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA.

Steadfast also opposed Underwriters’ motion for arbitration, arguing that it was not a party to the policy between Underwriters and the plaintiff and therefore was not subject to the arbitration provision. Steadfast asked the court to stay the plaintiff’s claims against it in the event the court granted arbitration.

The district court held that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA. The court noted that the McCarran-Ferguson Act does not nullify international agreements, but rather is limited to domestic affairs. As such, the Convention and chapter II of the FAA are not within the scope of the McCarran-Ferguson Act, and the Convention and chapter II of the FAA are not reverse-preempted by Arkansas law barring the enforcement of arbitration agreements in insurance contracts.

After finding the Convention controls, the district court analyzed four factors to determine whether the Convention applied to the arbitration provision at issue: (1) whether a written arbitration agreement exists between the parties; (2) whether the arbitration provision provides for arbitration in the territory of a signatory of the Convention; (3) whether the relationship between the parties involves a commercial subject matter; and (4) whether the relationship between the parties is not entirely domestic. The district court found that the second and third requirements for applying the Convention were easily met where the arbitration provision stated that the arbitration should occur in New York, which is located within the signatory’s territory, and the parties’ insurer/insured relationship is commercial in nature.

As to the first and fourth requirements, the plaintiff argued that the Convention did not apply because the arbitration provision only applies to disputes between reinsurers and that the relationship between the plaintiff and Underwriters was entirely domestic because it obtained the Underwriters policy through a U.S.-based broker. The district court rejected both arguments, finding that the arbitration provision was part of the policy held by the plaintiff, and referenced the policy to which the plaintiff was a party. The court also noted that while the plaintiff may have gone through a U.S. broker, Underwriters is a foreign-based company, and the broker had to go through the U.K.’s insurance market.

The court also stayed the remaining claims against Steadfast until the conclusion of arbitration.

J.B. Hunt Transport, Inc. v. Steadfast Insurance Co., No. 5:20-cv-05049 (W.D. Ark. July 1, 2020).