Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Affirms Ruling That Insured Cannot Recover From Captive Reinsurer or Affiliated Insurance Brokerage

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The plaintiffs sued Public Storage seeking insurance coverage after Public Storage allegedly disposed of personal belongings the plaintiffs had in a rented storage unit. The belongings were insured under a policy produced by PSCC Inc., an insurance brokerage affiliated with Public Storage. The coverage was also reinsured by a captive reinsurer affiliated with Public Storage – PS Insurance Company-Hawaii Ltd. The cedent-insurer was sued as well but was ultimately dismissed, after which Public Storage moved for summary judgment. The lower court granted Public Storage’s motion, finding that it could not be liable to the plaintiffs under the policy as neither it nor its affiliates were parties to the contract. The plaintiffs appealed, but the California appellate court affirmed.

Although PSCC is a Public Storage affiliate, and was identified in the insurance policy, the court agreed that it was only identified as a producer, not a principal, and thus could not be contractually liable to the plaintiffs under the policy. And while PS Insurance Co. is also affiliated with Public Storage, the court held that the reinsurance agreement between the cedent-insurer and PS Insurance had no effect on the contract between the cedent and its insureds – the plaintiffs. The court also rejected the plaintiffs’ “alter ego liability” theory, finding no evidence that Public Storage and/or its affiliates were alter egos of the cedent-insurer. Indeed, the court ruled, it is an “essential feature” of reinsurance that it does not alter the terms or conditions of the insurance contract between the cedent and its insured. As such, the lower court order was affirmed.

Cabral v. Public Storage, No. B294798 (Cal. Ct. App. Apr. 10, 2020).

Illinois Federal Court Finds Futures Traders Are Estopped From Avoiding Operating Agreement’s Arbitration Clause Where They Sought to Directly Benefit From Operating Agreement

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A federal judge in the Northern District of Illinois ruled that Chicago derivatives firm DV Trading LLC can force three futures traders to arbitrate claims that it is withholding $1.6 million to defray a $5 million regulatory fine for alleged market manipulation.

In 2016, the Commodity Futures Trading Commission (CFTC) assessed a $5 million monetary penalty against DV to settle allegations that its predecessors’ traders engaged in prohibited wash trading of eurodollar futures contracts between 2013 and 2015. The plaintiffs, who traded futures for DV until August 2016, brought this suit in their individual capacities seeking damages from DV for allegedly violating the anti-fraud, wash trading, and whistleblower retaliation provisions of the Commodity Exchange Act (CEA), and a judgment declaring that the plaintiffs had no obligation to reimburse DV for any portion of the penalty.

DV moved to stay the suit and compel arbitration in 2017, arguing that the claims “arise out of” DV’s holding company’s operating agreement, which calls for the arbitration of employment disputes. The court denied the request in regard to the whistleblower retaliation claim, saying the whistleblower amendment to the CEA “clearly” invalidates an agreement to arbitrate.

After additional briefing, the court denied the motion on the basis that the arbitration agreements were ambiguous, and the traders did not sign them in their individual capacities. But the court noted that the order was without prejudice and that DV could seek to compel arbitration again after discovery.

After limited discovery closed, DV filed a motion to dismiss the CEA and whistleblower claims for lack of standing or, alternatively, to compel arbitration under the doctrines of estoppel and corporate veil piercing.

Although the court considered the CEA claims for estoppel purposes, the court dismissed them for lack of standing, finding that the traders’ companies, rather than the individuals, incurred losses and that the plaintiffs did not have third-party or statutory standing to bring the CEA claims.

Recognizing that under ordinary contract law principles, an arbitration agreement generally cannot bind a non-signatory, the court looked to the limited exceptions to the signatory rule under Illinois contract law and found that the doctrine of direct benefits estoppel applied. The court noted that direct benefits can flow in two ways. First, a party can benefit directly by seeking to sue on the arbitration clause even if it is not a signatory. Second, under certain circumstances, the party may seek to benefit from the agreement containing the arbitration clause.

While the court determined that the plaintiffs did not benefit directly under the operating agreement, because they held an indirect financial stake in the disputed profits as employees and shareholders of their respective companies, the court found that the traders were nonetheless estopped from avoiding the operating agreement’s arbitration clause because the damages the plaintiffs sought from DV’s alleged violations of the CEA’s wash trading and anti-fraud provisions were profits to which they would have been entitled, if at all, through the operating agreement, and thus the plaintiffs sought to benefit directly from the operating agreement. Accordingly, the court granted DV’s motion to compel arbitration as to the declaratory judgment claim.

In addition, because the claim for whistleblower retaliation is nonarbitrable, the court stayed the litigation of this claim pending the outcome of arbitration. The court noted that “the facts alleged in plaintiffs’ whistleblower retaliation claim run a substantial risk of overlapping with facts and issues likely to arise in the arbitration of plaintiffs’ declaratory judgment claim” and that without a stay, the facts surrounding the CFTC’s investigation of DV as well as the interactions between the plaintiffs and DV’s principals will almost certainly be at issue both in this court and in arbitration proceedings.

Elsasser v. DV Trading, LLC, No. 1:17-cv-04825 (N.D. Ill. Mar. 16, 2020).

Court Compels FMLA Employment Dispute to Arbitration, Finding That Arbitration Agreement Delegated Arbitrability to Arbitrator and Agreement Appeared Not to Be Void or Unconscionable

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A former executive and in-house lawyer for the Miami Heat basketball franchise sued the team for allegedly violating her rights under the Family and Medical Leave Act when she was terminated from her employment. The Heat filed a motion to compel arbitration, which the plaintiff opposed. First, the plaintiff contended that the arbitrability of the dispute was for the court, not the arbitrator. The court disagreed, holding that, while the agreement did not contain an express delegation clause, the agreement’s incorporation of the American Arbitration Association rules served to delegate the issues regarding the validity of the arbitration agreement to the arbitrator.

The plaintiff also argued that the agreement was void as against public policy, contending that the agreement’s provisions for the arbitrator to award reasonable fees to the prevailing party and for each party to be responsible for one-half of any administrative costs imposed by the AAA precluded her from vindicating her complete rights under the FMLA. Although the court did not need to decide this issue – having already found that arbitrability was delegated to the arbitrator – the court found that even if the fees and costs provision was unenforceable due to a failure to provide the plaintiff with remedies fully consistent with the FMLA, the provision was not the essence of the parties’ agreement and was therefore severable.

The plaintiff also contended that the agreement was unconscionable because the Heat allegedly did not permit her time to review the agreement, seek legal counsel, or negotiate the terms. The court rejected this argument finding that the plaintiff failed to provide any evidence to “explain any specific reason she felt rushed to sign the agreement, had no ability to negotiate it, or lacked employment alternatives.” The court further rejected the plaintiff’s argument that the agreement was substantively unconscionable because it required her to arbitrate all her claims, “while only requiring the Defendant to arbitrate counterclaims that it ‘is or should be aware [of] at the time a demand for arbitration is made.'” The court explained that the plaintiff overlooked the provision in the agreement that required “that any claims ‘arising in the workplace environment’ be subject to arbitration.” “Certainly,” the court concluded, the agreement was not “outrageously unfair” and did not “otherwise shock the judicial conscience.” The court compelled arbitration and dismissed the case.

Yakovee v. Miami Heat L.P., No. 1:20-cv-20540 (S.D. Fla. Apr. 30, 2020).

District Court Orders Insurer in Receivership to Arbitrate With Reinsurers, Rejecting Argument That Jurisdiction Rests With Receivership Court and That McCarran-Ferguson Act Preempts FAA

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The District Court of Puerto Rico upheld a prior judgment ordering Integrand Assurance Co. to arbitrate its claims against its various reinsurers, rather than remand the case to the court overseeing Integrand’s receivership, the Superior Court of the Commonwealth of Puerto Rico.

Integrand commenced proceedings against the reinsurers in order to recover assets that the reinsurers purportedly owed Integrand. In support of its argument that the proceedings should be remanded, Integrand argued that, under the Puerto Rico insurance code, the Superior Court of Puerto Rico had “exclusive jurisdiction to attend” to any action by or against Integrand and its estate subsequent to the commencement of receivership proceedings. Integrand further argued that the McCarran-Ferguson Act preempted the application of the Federal Arbitration Act to the parties’ dispute.

The court disagreed with Integrand, finding that, under the U.S. Supreme Court’s test in Humana v. Forsyth, the FAA was not preempted because the application of the FAA to the parties’ dispute would not “invalidate, impair, or supersede the state statute regulating insurance.” The court found that the provisions relied upon by Integrand related clearly and exclusively to the commencement of receivership proceedings. The instant dispute, however, was over entitlement to certain assets, not the commencement of receivership proceedings. The exclusive jurisdiction provisions, therefore, did not apply.

The court also distinguished this case from prior cases holding that, in the context of a liquidation proceeding, the FAA was preempted. Significantly, in those prior cases, the action was brought by other entities against the assets of a delinquent insurance company, unlike in this case, in which the action was brought by and for the delinquent insurance company in an attempt to recover assets supposedly owed to it. Finding that the FAA applied, the court upheld the order that the parties proceed with the arbitration of their dispute.

Integrand Assurance Co. v. Everest Reinsurance Co., No. 3:19-cv-01111 (D.P.R. May 1, 2020).

Court Compels Arbitration Based on Merger Clause Incorporating Separate Agreement Into Contract Containing Arbitration Clause and Rejects Argument That Delay Precluded Arbitration

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The U.S. District Court for the Middle District of North Carolina has compelled arbitration over a party’s objection that the dispute at issue was not within the scope of the arbitration clause and that arbitration was precluded by the opposing party’s failure to seek it sooner. The court concluded that a merger clause in the contract amendment containing the arbitration clause and the broad language of the arbitration clause rendered the dispute about a separate agreement incorporated into the amendment and subject to the arbitration clause and ruled that there was no actual prejudice to preclude the invocation of the arbitration clause.

In concluding that delay did not preclude arbitration, the court found significant the fact that the party opposing arbitration had agreed in a Rule 26(f) report to allow the opposing party to file a motion to compel, which greatly undermined the party’s prejudice argument.

North Carolina Mutual Life Insurance Co. entered into a coinsurance agreement with Max Re Ltd. pursuant to which Max Re and later a successor agreed to reinsure certain liabilities in North Carolina Mutual policies. North Carolina Mutual and Max Re’s successor subsequently entered into a novation agreement with Port Royal Reassurance Company SPC Ltd. pursuant to which Port Royal replaced Max Re’s successor as reinsurer. The parties also entered into an amendment to the coinsurance agreement that contained an arbitration clause and a merger clause related to the coinsurance agreement. The amendment also incorporated a trust agreement related to the reinsurance obligations of the various parties to the amendment.

In September 2016, North Carolina Mutual filed suit claiming mismanagement and misappropriation of trust assets in violation of the trust agreement. The parties engaged in settlement negotiations, and several parties reached an agreement in March 2017. The court then stayed the remaining portion of the action until September 2018. The settlement agreement, however, fell apart and the court lifted its stay in April 2018. North Carolina Mutual subsequently filed an amended complaint, which Port Royal answered, that invoked the arbitration clause as an affirmative defense. More than a year later, the parties filed their Rule 26(f) report. The parties agreed in that report that Port Royal could file a motion to compel arbitration by a certain date. Port Royal thereafter filed its motion to compel.

North Carolina Mutual opposed Port Royal’s motion, arguing that (1) its claims against Port Royal were not within the scope of the arbitration clause and (2) Port Royal was in “statutory default” and could not invoke the arbitration clause because years had elapsed since the action was filed.

The Middle District of North Carolina rejected both arguments.

First, the court concluded that North Carolina Mutual’s claims, which related to the trust agreement, were within the scope of the amendment’s arbitration clause. That clause was broad and encompassed “any dispute or claim arising out of or relating to” the parties agreement, which included the trust agreement because of the amendment’s merger clause, which evidenced an “intent … to ‘roll up’ several separate agreements [including the trust agreement] into one integrated contract.”

Second, the court explained that in order to preclude arbitration based on “statutory default,” the party objecting to arbitration had to establish “actual prejudice.” The court analyzed two factors to determine whether such prejudice existed: (1) the degree of Port Royal’s delay in seeking arbitration; and (2) the nature and extent of Port Royal’s litigation activities. Although the court recognized that this action had been pending for years, it noted that the case’s history included a settlement agreement and a stay. The court also emphasized that North Carolina Mutual agreed in the Rule 26(f) report that Port Royal could file a motion to compel arbitration, which “greatly undermine[d] [North Carolina Mutual’s] claim of prejudicial delay.” Port Royal’s litigation activity, meanwhile, was limited to filing answers, participating in a pretrial conference, and moving to compel.

The court also rejected North Carolina Mutual’s argument that the court should deny arbitration because North Carolina Mutual would have to prosecute litigation and arbitration simultaneously if the court compelled arbitration. The court noted that North Carolina Mutual “took on that risk when it brought its claims in federal court while being party to a contractual agreement with a mandatory arbitration provision.”

North Carolina Mutual Life Insurance Co. v. Stamford Brook Capital, LLC, No. 1:16-cv-01174 (M.D.N.C. Apr. 10, 2020).