Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Oklahoma Supreme Court Finds Arbitrator, Not Court, to Determine Fraudulent Inducement Attack on Contract Containing Arbitration Clause

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The plaintiff-appellant filed suit in Oklahoma state court seeking to rescind a contract it entered into with the defendants, claiming the contract was procured by fraud. Citing an arbitration clause in the contract, the defendants moved to dismiss the suit and to compel arbitration. The question thus became whether the court or an arbitrator should determine a challenge of fraudulent inducement to the entirety of a contract containing an otherwise valid arbitration clause. The Supreme Court of Oklahoma held that state and federal law were aligned on the issue and required that the question be decided by the arbitrator. Specifically, the court concluded that Oklahoma law and the Federal Arbitration Act both adhere to the “separability doctrine.” The doctrine states that when parties agree to arbitrate, attacks on the validity of the contract – as distinct from the validity of the arbitration clause itself – are to be resolved by the arbitrator in the first instance. Because the allegations of fraud here were directed to the contract as a whole, not specifically to the arbitration clause, the court agreed with the lower court that the fraud issue must be referred to arbitration. As such, the court vacated an appellate court order and affirmed the lower court order granting the defendants’ motions to dismiss and to compel.

Signature Leasing LLC v. Buyer’s Group LLC, No. 115100 (Okla. June 9, 2020).

Texas District Court Finds Arbitration Required in Hurricane Harvey Dispute and That Independent Adjusting Firm May Join in Arbitration

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This action involves plaintiff Living Steward Properties’ insurance claim for property damage caused by Hurricane Harvey. The insurer defendants moved to compel arbitration of the plaintiff’s claims that the insurer defendants underpaid the company for Hurricane Harvey damage.

The insurer defendants argued that this case presented the same arbitration language and the same issues that the U.S. District Court for the Southern District of Texas adjudicated in Corpus Christi Island Apartment Villas Management Group, LLC v. Underwriters at Lloyd’s London, No. 2:19-cv-00188, 2019 WL 8273959 (S.D. Tex. Oct. 18, 2019), in which the court found there existed a written agreement to arbitrate and an unchallenged delegation clause, which required all additional questions be resolved by the arbitrators. Because the plaintiff made no effort to distinguish its case from Corpus Christi Island, the court ordered that the plaintiff’s claims against the insurer defendants be submitted to arbitration.

The plaintiff also sued CJW, the public adjusting firm assigned to its claim, for unfair settlement practices under the Texas Insurance Code and breach of the common law duty of good faith and fair dealing. CJW argued that these claims and their underlying facts were inextricably intertwined with the claims against the insurer defendants such that they all belonged, together, before the arbitrators. CJW sought to compel arbitration of the claims made against it by joining with the insurer defendants to enforce the policy’s arbitration agreement and to extend that agreement to include the extra-contractual claims made against CJW. The court found that equitable estoppel prevented the plaintiff from avoiding the contractual arbitration agreement for claims against CJW, a nonparty to the insurance policy, because the plaintiff relied on the policy in making its claims against CJW, and the claims against both the insurer defendants and CJW were inextricably intertwined.

Because the plaintiff failed to brief any argument against the application of equitable estoppel, the court granted CJW’s joinder and ordered that the plaintiff’s claims against both the insurer defendants and CJW be submitted to arbitration.

Living Steward Properties, Ltd. v. Certain Underwriters at Lloyd’s London, No. 2:20-cv-00001 (S.D. Tex. May 18, 2020).

Eleventh Circuit Affirms Denial of Imax Corp.’s Petition to Vacate Arbitration Tribunal Rulings That Included Awards of Nearly $1 Million in Arbitration Costs and Attorney’s Fees

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The arbitration awards involved several agreements for the sale, lease, and maintenance of Imax theater systems in South and Central America and the Caribbean. The arbitral tribunal issued a partial final award, and then several months later the tribunal issued its final award that resolved requests for relief on which it had deferred ruling. The tribunal ordered Imax to pay the opposing party $971,525.38 in arbitration costs, representing $800,000 in attorneys’ fees, and 70% of the administrative fees and expenses of the International Dispute Resolution Procedures of the American Arbitration Association, as well as 70% of the compensation and expenses of the arbitrators, which totaled $171,525.38. Imax challenged the awards, but the district court denied vacatur. The Eleventh Circuit then affirmed the denial, finding that the district court properly denied vacatur because Imax “failed to carry its burden to establish” (1) a defense under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or (2) that the arbitral tribunal exceeded its powers under the Federal Arbitration Act.

IMAX Corp. v. Giencourt Investments, S.A., No. 20-10491 (11th Cir. May 28, 2020).

Court Denies Vimeo’s Motion to Compel Arbitration of Purported Class Action Claims Under Illinois Biometric Information Privacy Act

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Vimeo Inc. sought to compel arbitration of putative class claims brought by Bradley Acaley relating to the use of Magisto, a video creation app. Acaley claimed that the app’s use of face-geometry scan technology violated the Illinois Biometric Information Privacy Act (BIPA). The app’s terms of service included a clause providing for binding arbitration of “all disputes, controversies and claims.” However, the terms also provided an “exceptions to arbitration” clause, which excepted claims “related to, or arising from, allegations of … invasion of privacy.”

Acaley first argued that no valid agreement to arbitrate existed because he never “assented to the terms of service.” “Illinois contract law requires that a website provide a user reasonable notice that his use of the site or click on a button constitutes assent to an agreement.” To determine whether a user has received reasonable notice, courts ask “whether the web pages presented to the user adequately communicated all the terms and conditions of the agreement, and whether the circumstances support the assumption that the user received reasonable notice of those terms.” Although the notice was in smaller font and partially obscured at times by pop-up windows, the court found that Acaley received sufficient reasonable notice from the app’s welcome page, which stated, “By continuing I agree to the terms,” where the word “terms” provided a hyperlink to the terms of service. In addition, a second webpage displayed in “smaller but still conspicuous font” the statement, “By starting you agree to our terms and privacy policy.” As such, the parties had formed a valid arbitration agreement.

The court found, however, that Acaley’s claims for invasion of privacy were clearly excepted from the agreement to arbitrate. The court determined that violations of BIPA constitute an “invasion of privacy” as that term was used in the arbitration agreement and that the exception applied to such claims brought by either party, not just Vimeo. Therefore, the court concluded “with positive assurance” that the arbitration agreement did not apply to Acaley’s BIPA claim and refused to compel arbitration.

Acaley v. Vimeo, Inc., No. 1:19-cv-07164 (N.D. Ill. June 1, 2020).

Court Compels Arbitration With Respect to Insurers, Not Brokers

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The U.S. District Court for the Southern District of Texas recently compelled arbitration against insurers but not brokers related to a commercial insurance dispute.

After Hurricane Harvey decimated Houston, an insured sought coverage under its commercial insurance policy. The insurers, several of whom were foreign, denied coverage. The insured filed suit against the insurers based on the denial and an alleged failure to investigate. It also sued the brokers who developed the policy on the theory that the brokers had failed to disclose that the policy contained an allegedly “unique and extremely onerous” arbitration clause.

The insurers and brokers sought to compel arbitration under that clause. The district court granted the insurers’ motion but denied the brokers’ motion and stayed the action.

The court concluded that the requirements of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards were met with respect to the insurers and rejected the insured’s argument that the Convention’s exception where the arbitration agreement is “null and void” applied. The insured contended that the arbitration agreement was “unconscionable” under Texas law because it required arbitration to occur in and be subject to the law of New York, set strict limitations on damages, and required the tribunal to comprise senior underwriters or claims handlers. The court explained that the “null and void” exception “is limited to standard breach-of-contract defenses capable of being applied neutrally on an international scale – such as fraud, mistake, duress, waiver, and the like.” There was no evidence of that here.

With respect to the broker defendants, the court noted that they were not signatories to the insurance agreement and its arbitration clause and that non-signatories could compel arbitration in limited circumstances. The court rejected the contention that “intertwined-claims estoppel” applied, explaining that the insured’s complaint did not establish a sufficiently close relationship between the insurers and the brokers for that doctrine to apply. The court also rejected “direct-benefits estoppel,” explaining that the doctrine was not applicable because the insured’s claims against the brokers related to alleged misrepresentations and omissions in the insurance contract’s development and did not assert breaches of the insurance policy. “[N]o interpretation of the insurance policy [was] necessary to adjudicate the misrepresentation claims” against the brokers.

The court nevertheless stayed court proceedings pending completion of the arbitration.

5556 Gasmer Management LLC v. Underwriters at Lloyd’s, London, No. 4:19-cv-00974 (S.D. Tex. May 29, 2020).