Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

District Court Grants Motions to Dismiss Claims Brought by Reinsurer

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The U.S. District Court for the Northern District of Texas recently dismissed certain claims brought by a reinsurer related to its efforts to audit an insurer’s broker.

Antares Reinsurance Co. reinsured United Specialty Insurance Co. United Specialty contracted with National Transportation Associates (NTA) to sell United Specialty policies on commission. Antares sought to audit NTA because it suspected it of fraud. A disagreement concerning the terms of the audit ensued, and Antares filed suit against several defendants seeking specific performance of a contractual provision allowing Antares to inspect NTA’s books, asserting various claims, including breach of contract and fraud/fraudulent misrepresentation, and requesting declaratory relief articulating Antares’ rights regarding inspecting NTA’s books.

The district court dismissed Antares’ claims. It found the specific performance claim moot because the defendants “permitted inspection of the relevant books and records” and that “additional” demands for inspection that the defendants had refused were “non-contractual.” The court held that the fraud claims were barred by the economic loss rule, which provides that “malfeasance doesn’t give rise to a fraud claim unless it resulted in damages beyond those recoverable for the contractual breach itself.” The fraud claims, the court held, “resulted in harms indistinguishable from breach of the underlying contract.” Finally, the court held that the request for declaratory relief was duplicative of the breach of contract claims. The defendants did not move to dismiss the breach of contract claim, however, and that claim therefore survived.

Antares Reinsurance Co. v. National Transportation Associates, Inc., No. 4:23-cv-00928 (N.D. Tex. Mar. 20, 2024).

Tenth Circuit Remands Case for Arbitrability Determination, Concludes That State Court Decision Relied on by District Court No Longer Had Preclusive Effect

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In Nu Skin Enterprises Inc. v. Raab, the Tenth Circuit Court of Appeals considered the preclusive effect of a state trial court decision as it related to the arbitrability of the parties’ dispute under the Federal Arbitration Act.

As the trial court relayed, the underlying dispute involved beauty products marketer Nu Skin Enterprises and several of its distributors. The distributors filed an action against Nu Skin in Washington state court alleging, among other things, violations of Washington’s consumer protection act. Nu Skin then filed a separate action in federal court in the District of Utah, seeking to compel arbitration of the parties’ dispute in Utah pursuant to identical arbitration provisions in two of the parties’ agreements.

Before the Utah district court had a chance to rule on the question of arbitrability, the Washington state court denied Nu Skin’s motion to dismiss, holding that the dispute was not subject to arbitration under the parties’ agreements. Thereafter, the district court denied Nu Skin’s motion to compel arbitration, holding that the district court was bound by the Washington state court’s earlier conclusion under the doctrine of issue preclusion. Nu Skin appealed this ruling to the Tenth Circuit.

In a procedural twist, a Washington appellate court reversed the state trial court’s decision, holding that the claims in the litigation were disputes subject to the arbitration agreements and remanding to the trial court for further proceedings, including a determination of whether the arbitration clause was unconscionable. In the related appeal that was then pending in the Tenth Circuit, both parties acknowledged that as a result of the Washington appellate court’s decision, the state trial court’s decision on arbitrability no longer had preclusive effect.

Effectively agreeing with both parties, the Tenth Circuit reversed the district court’s decision, holding that the state trial court decision on which the district court relied no longer had preclusive effect. The court then remanded the case to the district court to consider the issue of arbitrability anew, noting: “We express no view on any other issue in this case, including the possible preclusive effect of any other proceedings or decisions in the Washington courts.”

Nu Skin Enterprises Inc. v. Raab, No. 22-4068 (10th Cir. Mar. 19, 2024).

Tax Court Upholds IRS Decision That Premiums Paid to Microcaptive Insurance Companies Did Not Qualify for Tax Deductions

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The U.S. Tax Court recently upheld a determination by the IRS that premium payments to certain microcaptives could not be deducted for tax purposes because the premium payments were not actually for “insurance.”

Dr. Sunil S. Patel, who operated an eye surgery center and two research centers, supplemented his businesses’ commercial insurance by purchasing policies from two purported microcaptive insurance companies. Dr. Patel and his wife, Dr. McAnally-Patel, claimed tax deductions for the premiums paid to those microcaptives. The IRS concluded that the premiums could not be deducted and assessed deficiencies and penalties against the Patels.

The Patels challenged the IRS’ determination, but the Tax Court upheld it. The court noted that the Tax Code “does not prohibit deductions for microcaptive insurance premiums,” but “the deductibility of insurance premiums depends on whether the premiums were truly payments for insurance.” To analyze that question, the court examined “four criteria,” whether:

(1) the insurer distributes the risk among its policy holders; (2) the arrangement is insurance in the commonly accepted sense; (3) the arrangement shifts the risk of loss to the insurer; and (4) the arrangement involves insurable risks.

The court found that the microcaptives “fail[ed] to demonstrate risk distribution.” It found a “circular flow of funds,” “no evidence of any arm’s-length negotiations in determining the premiums paid,” and no evidence that the premium “was actuarially determined.”

It also concluded that, “aside from [some] organizational formalities,” the microcaptives “were not operated as insurance companies” in the commonly accepted sense. They “had no employees of their own that performed services” and a separate entity “orchestrated [their] activities so that they appeared to be engaged in the business of issuing insurance contracts.”

The court therefore declined even to consider “whether [the microcaptives’] transactions involved insurance risk or risk shifting.” The Tax Court sustained the IRS’ conclusion that the Patels could not deduct the premiums paid to the microcaptives.

Patel v. Commissioner of Internal Revenue, Nos. 24344-17, 11352-18, 25268-18 (U.S.T.C. Mar. 26, 2024).

Third Circuit Reverses Order Denying Motion to Compel Arbitration, Holds Arbitration Clause in Consumer Financing Agreement Is Enforceable

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In Mancuso v. MDG USA Inc., the Third Circuit Court of Appeals considered defendant MDG’s appeal of an order denying its motion to compel arbitration of the plaintiff’s lawsuit alleging violations of state and federal fair credit laws. The plaintiff purchased a laptop computer from MDG and signed a financing agreement requiring monthly payments on his account. A dispute arose regarding the remaining balance on the account, and after the plaintiff directed his bank to stop payment on the monthly charges to the account, MDG reported the plaintiff to credit agencies.

The plaintiff then filed a state court action in Pennsylvania alleging violations of state and federal fair credit laws. MDG removed the case to federal court and filed a motion to compel arbitration pursuant to the arbitration clause included in the financing agreement, which covered “any past, present, or future claim, dispute, or controversy … relating to or arising out of” the agreement. The plaintiff admitted he signed the financing agreement and his claims arose from the agreement, but argued that the agreement was “unenforceable because of fraud and unconscionability.” The district court denied MDG’s motion to compel without prejudice. The court concluded that it was not apparent from the face of the complaint whether the plaintiff’s claims were subject to arbitration and ordered limited discovery related to that issue.

In reversing the district court’s decision, the Third Circuit first noted that because the plaintiff did not dispute he had a valid contract with MDG, the court’s review was limited to “whether the arbitration clause itself — not the rest of the contract — is enforceable.” The court then rejected the arguments raised by the plaintiff in challenging the enforceability of the arbitration clause. The court concluded that the arbitration clause was not “hidden and minimized” and further noted that the plaintiff did not contend he was unaware of the clause when he signed the financing agreement. Further, the court rejected the plaintiff’s contention that the arbitration clause was confusing because of a numbering error, noting that the error was in the arbitration clause itself, which means that for the plaintiff to have even noticed the error, he would have to have read the arbitration clause. The court also rejected the plaintiff’s argument that the financing agreement was unconscionable because he could not alter its terms, noting that the arbitration provision was not procedurally unconscionable because it allowed the plaintiff to send MDG an “arbitration opt out notice.” The court then held that the plaintiff did not raise “a colorable legal issue of fraud, unconscionability, or unenforceability of the arbitration clause” and his claims were subject to the arbitration provision. The court reversed the district court’s denial of MDG’s motion to compel arbitration and directed the court to enter an order compelling arbitration of the plaintiff’s claims.

Mancuso v. MDG USA, Inc., No. 23-1963 (3d Cir. Feb. 7, 2024).

Pennsylvania’s “One-Document Rule” Invalidates Carvana’s Arbitration Agreement

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Dana Jennings and Joseph Furlong each bought a car from Carvana, a nationwide online used car dealer. On the day of their purchases, each signed three separate documents: a “retail purchasing agreement,” a “retail installment sales contract,” and an arbitration agreement.

The purchasers filed a class action lawsuit against Carvana alleging that Carvana breached a contractual promise to properly license, title, and register their vehicles with Pennsylvania. Carvana moved to compel arbitration, but the district court denied the motion, finding that the arbitration agreements were not enforceable under Pennsylvania’s Motor Vehicle Sales Finance Act because they were not expressly incorporated into the retail installment sales contracts signed by the purchasers.

On appeal, the Third Circuit affirmed. Under Pennsylvania’s Motor Vehicle Sales Finance Act, a contract governing an installment sale of a vehicle must: (1) be in writing; (2) contain all agreements between the buyer and the installment seller relating to the installment sale of the motor vehicle; and (3) be signed by the buyer and seller. The second requirement creates a so-called one-document rule, which provides that no other agreement is enforceable as part of the sale unless it is included within the installment sales contract, in this case, the retail installment sales contract.

But here, the arbitration agreements were separate from the retail installment sales contracts. In addition, the retail installment sales contract included an integration clause, which expressly stated that the contracts constituted the complete and exclusive agreements between the parties. Because of the integration clause, the parol evidence rule applied and precluded consideration of other written agreements entered into by the parties.

Carvana argued that because all the agreements were executed on the same day and as part of the same transaction, they should collectively be deemed one contract, which would render the arbitration agreements enforceable. The Third Circuit disagreed, pointing out that although the “same transaction concept” exists in Pennsylvania, the contracts relating to the same transaction are enforceable only if they reference or incorporate one another, which the agreements here did not do.

As a result, the Third Circuit affirmed the district court’s ruling that the arbitration agreements were unenforceable and remanded for further proceedings.

Jennings v. Carvana, LLC, No. 22-2948 (3d Cir. Mar. 21, 2024).