Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

SDNY Severs Arbitration Award to Confirm in Part and Vacate in Part

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Following clarification by the arbitrator of his arbitration award, the parties sought confirmation, vacature, and/or modification of the award. The court found the award lacked finality: the issue of warrants was before the arbitrator, but even upon the request to clarify the economic value of the warrants, the arbitrator “expressly stated that he did not reach any conclusion as to that issue.” Thus, if the court were to confirm the award as it stood, “it would undoubtedly result in further litigation to determine the economic value of the warrants.” The court therefore requested that the arbitrator limit his decision to the dollar amount to which the petitioner was entitled and confirmed the remainder of the award.

Three Brothers Trading, LLC v. Generex Biotechnology Corp., No. 1:18-cv-11585 (S.D.N.Y. Apr. 24, 2020).

Utah Court Stays Claims in Litigation Pending Completion of Arbitration

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After the plaintiffs filed a fourth amended complaint, certain defendants sought to compel arbitration and stay further federal court proceedings. The plaintiffs did not oppose the motions, which argued that the subject agreements contained broad arbitration clauses, which required arbitration based on the plaintiffs’ claims in the lawsuit. The court concurred, granting all three motions to compel and staying the claims against the defendant-movants pending the completion of arbitration.

J. White, L.C. v. Wiseman, No. 2:16-cv-01179 (D. Utah Apr. 9, 2020).

Fireman’s Fund Obtains Second Circuit Reversal in Long-Running Reinsurance Dispute Involving Asbestos Claims and Policies Without Aggregate Limits

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The Second Circuit has reversed a $64 million judgment against Fireman’s Fund Insurance Co. in the latest ruling in a long-running dispute related to primary and excess policies that Utica Mutual Insurance Co. issued to a company later embroiled in asbestos claims.

We’ve been closely following this dispute at the district court level. For a full recap, see our posts noting that the district court refused to seal summary judgment exhibits, allowed “follow-the-fortunes” (also known as “follow-the-settlements”) evidence, and refused to change a credibility determination. We’ve also covered a companion case on several occasions.

To recap, Utica Mutual Insurance Co. issued primary and excess policies to Goulds Pump Inc. Utica reinsured a portion of the excess policies with Fireman’s Fund Insurance Co. Goulds subsequently faced thousands of asbestos claims related to its products. Utica defended and indemnified those claims pursuant to its policies.

A dispute arose between Utica and Goulds because Utica’s policies allegedly did not contain aggregate limits. To avoid potentially catastrophic losses as a result of that purported omission, Utica settled its dispute with Goulds. The parties agreed, among other things, that the primary policies contained aggregate limits and that Goulds’ umbrella policies would cover losses that exceeded the primary policies’ aggregate limits. They also stipulated the settlement was fair, just, and reasonable and resolved within the terms of the policies.

Utica subsequently sought reimbursement from Fireman’s Fund pursuant to the reinsurance contracts. In short, the district court denied cross-motions for summary judgment, and a jury subsequently returned a $64 million verdict in favor of Utica following a 12-day trial.

Fireman’s Fund appealed to the Second Circuit. It argued that it did not owe anything to Utica because the reinsurance certificates contained a “follow form” clause that provided that Fireman’s Fund’s liability “shall follow that of [Utica] and … shall be subject in all respects to all the terms and conditions of [the umbrella policies]” and the umbrella policies provided they only applied in excess of the limits stated in the schedules accompanying the umbrella policies, which Fireman’s Fund claimed did not contain any aggregate limits for bodily injury claims.

Applying New York law, the Second Circuit agreed. It explained that the plain language of the excess policies provided that they only applied “in excess of … the amounts of the applicable limits of liability of the underlying insurance as stated in the Schedule of Underlying Insurance Policies,” and “the limits of liability listed in [those] Schedules for bodily injury d[id] not include aggregate limits.” The court rejected Utica’s argument that the language in the excess policies only required occurrence limits, not aggregate limits, to be listed as inconsistent with the plain language of the excess policies and New York’s principles of contract interpretation.

Utica argued, however, that Fireman’s Fund was obligated to reimburse it pursuant to the reinsurance contracts because those contracts contained a “follow-the-settlements” clause that provided that all “claims involving this reinsurance, when settled by [Utica], shall be binding on [Fireman’s Fund].” The Second Circuit explained that follow-the-settlements clauses may “not alter the terms or override the language of reinsurance policies.” Adopting Utica’s argument would “render the follow form clause in the reinsurance contract and the umbrella policy language defining Utica’s loss meaningless” and would contradict the parties’ expressed agreement.

The Second Circuit therefore reversed the judgment against Fireman’s Fund.

Utica Mutual Insurance Co. v. Fireman’s Fund Insurance Co., No. 18-828 (2d Cir. Apr. 28, 2020).