Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Southern District of New York Confirms Arbitration Award Finding Force Majeure Clause Did Not Apply to Excuse Performance Under Charter

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Pioneer Navigation Ltd. entered into a charter contract with Chemical Equipment Labs Inc. to ship road salt from Venezuela to the United States. The charter contained a force majeure clause and an arbitration clause. The vessel bearing the road salt shipment that was the subject of the charter never received authorization to depart from Venezuela. Chemical Equipment Labs communicated to Pioneer that it believed the Venezuelan government’s failure to authorize the salt shipment constituted a force majeure event that excused its performance under the charter. Pioneer disagreed and initiated arbitration.

In a 2-1 decision, the arbitration panel majority found in favor of Pioneer, noting that the “record of events … is replete with on-scene references to the lack of proper export documentation as the reason for the stoppage and offloading of the Vessel’s cargo.” Thus, the majority concluded that the force majeure clause did not apply because Chemical Equipment Labs did not “carr[y] its burden of establishing that an export permit and authorization were in place for this shipment and that the facts and circumstances leading to the Venezuelan Authorities’ intervention were not unforeseeable and not beyond its control.”

Pioneer then petitioned to confirm, and Chemical Equipment Labs moved to vacate, the arbitration award. The magistrate judge issued a report and recommendation recommending that Pioneer’s petition be granted and Chemical Equipment Labs’ motion be denied. Chemical Equipment Labs objected to the report and recommendation and largely recycled arguments that it made before the magistrate judge. Because the magistrate judge’s thorough and well-reasoned report and recommendation did not misstate the law or otherwise contain clear error, the district judge granted Pioneer’s petition to confirm the arbitration award, denied Chemical Equipment Labs’ motion to vacate the arbitration award, and confirmed the final award.

Pioneer Navigation Ltd. v. Chemical Equipment Labs, Inc., No. 1:19-cv-02938 (S.D.N.Y. Mar. 3, 2020).

Court Affirms Ruling Putting End to Arbitration on Issue and Claim Preclusion Grounds

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This case arises from a protracted dispute between Applied Underwriters Captive Risk Assurance Co. and Milan Express Co. over amounts Milan allegedly owed Applied Underwriters under a reinsurance participation agreement. The agreement had an arbitration clause requiring arbitration under American Arbitration Association (AAA) rules. The parties had also executed a separate request to bind coverages and services, which had its own arbitration clause requiring arbitration under JAMS rules and in conformity with the Arbitration Act of the State of Nebraska.

A dispute resulted in Applied Underwriters initiating arbitration before the AAA based on the arbitration clause in the reinsurance participation agreement. That arbitration ended with a final award that the clause was unenforceable due to a Nebraska statute prohibiting arbitration clauses in insurance contracts. Applied Underwriters subsequently initiated a new arbitration, asserting the same claims, only this time before JAMS, based on the binder clause. Meanwhile, Applied Underwriters also commenced this litigation in Nebraska state court, in response to which Milan moved to stop the JAMS arbitration. Citing the AAA award deeming the arbitration clause in the reinsurance participation agreement unenforceable, the lower court granted Milan’s motion to end the arbitration on issue and claim preclusion grounds. Applied Underwriters appealed, relying on certain differences between the two arbitration clauses.

On appeal, the court rejected Applied Underwriters’ contention that the binder clause was enforceable despite the AAA award invalidating the arbitration clause in the reinsurance participation agreement, finding no meaningful distinction between the two clauses as it pertained to their enforceability. Because a panel of AAA arbitrators had already determined the arbitration clause in the reinsurance participation agreement to be invalid and unenforceable under Nebraska law, the appellate court agreed with Milan that the issue of the binder clause’s enforceability was barred from further consideration based on issue and claim preclusion principles. The court therefore affirmed the lower court’s order stopping the JAMS arbitration.

Applied Underwriters Captive Risk Assurance Co. v. Milan Express Co., No. A-18-570 (Neb. Ct. App. Mar. 17, 2020).