Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Trial Court Denies Post-Trial Motions in Asbestos Reinsurance Saga Involving Claims That Reinsurer Failed to “Follow the Fortunes” and Adopt Cedent’s Allocations of Losses

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We previously posted about the yearslong reinsurance dispute between Utica Mutual Insurance Co. (the cedent) and Century Indemnity Co. (the reinsurer), involving Utica’s claims that Century breached two reinsurance certificates covering the years 1973 and 1975 in connection with asbestos liability exposure, and Century’s counterclaim that Utica had, in bad faith, maintained a separate record-keeping system for reinsurance allocation purposes to allegedly over-bill Century for its losses. Last fall, after a trial, the jury agreed that Utica’s allocation decisions were reasonable and made in good faith. The court entered judgment in favor of Utica in the amount of $6,257,889.02.

The court has now denied Century’s motion to reduce the prejudgment interest awarded to Utica and has denied Century’s motions for judgment as a matter of law or for a new trial. Regarding the award of prejudgment interest, Century argued that the court erroneously calculated interest from the date Utica sent its first billing to Century, instead of calculating interest incrementally from each ensuing date that Utica submitted billings to Century. The court equivocated on the merits of Century’s argument, but ultimately rejected Century’s argument because it was never made to the jury, and because the jury had made the contrary finding that the two reinsurance claims at issue accrued on the initial dates that Utica submitted the claims to Century.

Regarding the motions for judgment as a matter of law or for a new trial, Century argued that Utica’s allocation of losses pre- and post-settlement with its underlying insured were inconsistent and therefore objectively unreasonable as a matter of law. The court, however, rejected that argument, ruling that evidence supported the jury’s finding that Utica’s allocations were consistent pre- and post-settlement with the underlying insured, and that even if they were not, the law does not deem inconsistent allocations per se unreasonable as a matter of law. Century also argued that evidence did not support the jury’s award of damages for Utica’s recovery of reinsurance claims that included defense costs. Century contended that there was never a formal endorsement of the reinsurance agreement permitting that recovery. The court was not persuaded, however, finding that evidence supported the jury’s finding on this issue, including testimony that showed that “certain reinsurance principles … including the follow-the-fortunes provision, made formal modification [of the agreement] unnecessary under [the] circumstances.”

Utica Mutual Insurance Co. v. Century Indemnity Co., No. 6:13-cv-00995 (N.D.N.Y. Dec. 3, 2020).

Eighth Circuit Reinstates Arbitration Award Stemming From Federal Crop Insurance Policy

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The Eighth Circuit reversed a district court decision vacating an arbitration award relating to a federal crop insurance policy issued through a standard reinsurance agreement with the Federal Crop Insurance Corp. (FCIC). The district court had ruled that the arbitrator exceeded his powers under the arbitration agreement by interpreting the crop insurance policy. Pursuant to FCIC regulations, the policy included a provision prohibiting the arbitrator from interpreting either the policy or FCIC procedures, and instead requiring the parties to obtain such an interpretation from the FCIC itself.

The Eighth Circuit found that the question whether the arbitrator was required to interpret the policy was not raised by either party until after the award had already been issued. Emphasizing that the courts are to “accord an extraordinary level of deference” to the arbitrator’s decision, the Eighth Circuit stated that an “arbitrator has not exceeded his powers where neither party suggested that a term of the policy was subject to interpretation, but the interpretation dispute instead arose after the arbitration proceedings.” The Eighth Circuit reversed and remanded, directing the district court to enter an order confirming the arbitration award.

Balvin v. Rain & Hail, LLC, No. 18-3018 (8th Cir. Dec. 2, 2019).

Maryland District Court Finds Damages Award, Not Liability Award Was “Final” Decision Triggering Time to Challenge Award Under FAA

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The plaintiff moved to vacate an arbitration award and the defendant moved to dismiss and confirm. The defendant’s dismissal motion challenged confirmation of an arbitration award, arguing that the matter was filed in violation of the arbitration agreement’s confidentiality clause, was prohibited by the defense of arbitration and award, failed to comply with the Federal Arbitration Act, was untimely, and failed to include any legal authority.

The court dispensed with the defendant’s first argument, as the arbitration agreement expressly preserved the parties’ statutory right to judicial review of arbitration proceedings. As to the second argument – that confirmation is prohibited by the defense of arbitration and award – the court noted that the plaintiff was not attempting to re-litigate the claims that were resolved by the arbitration but rather “exercise its statutory right to request that a district court vacate the arbitration award.”

As to the third argument, timeliness, the FAA requires that a party challenging an arbitration award serve notice on the adverse part “within three months after the award is filed or delivered,” which period begins to run once the arbitrator issues its final award. Here, the liability award was issued on July 9, 2018, and the damages award on January 3, 2019. Thus, the plaintiff’s complaint, filed on January 25, 2019, was within the three-month period. Additionally, “[a]lthough the FAA provides that the sole method for challenging an arbitration award is by serving a motion to vacate within three months of the final award and does not expressly permit a party to initiate a challenge to an arbitration award by filing a complaint, a court may construe a complaint challenging an arbitration decision as a motion to vacate when doing so would not prejudice the opposing party.” Finding no prejudice, the court rejected the defendant’s third argument.

As to the fourth argument – that the plaintiff failed to include any legal authority to support vacating the arbitration award – the court noted that, in considering a Rule 12(b)(6) motion, its “role is not to determine whether a party has proven its case” but rather “to determine whether a party has stated a claim for which relief can be granted.” Finding that the complaint met this requirement, the court rejected the defendant’s argument.

The parties cross-moved for summary judgment. The court rejected the plaintiff’s argument that the arbitrator exceeded her legal authority and manifestly disregarded the law, and confirmed the award.

Benchmark Elecs., Inc. v. Myers, No. 8:19-cv-00242 (D. Md. Dec. 3, 2019).

Court Holds Former Director in Contempt Following Wild Reinsurance Dispute

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Recovering returns from reinsurance commissions can be a costly and time-consuming endeavor, at least when a former director of the agency that received the provisional commissions allegedly engages in a slew of activity to transfer and comingle the funds from the commissions.

Odyssey Reinsurance Co. knows that lesson all too well: Recovering funds from the director of an underwriter has been quite the odyssey for Odyssey Reinsurance Co.

Diana Dostalik and her husband were the officers, directors, managers, and shareholders of Cal-Regent Insurance Services Corp. Cal-Regent underwrote certain risks on behalf of State National Insurance Co. Odyssey Reinsurance Co. reinsured State National. Pursuant to the reinsurance agreements between Odyssey and State National, Cal-Regent received a provisional commission paid in part by Odyssey for the policies it underwrote for State National. The provisional commissions were subsequently adjusted depending on the profitability of the business Cal-Regent underwrote. Thus, Cal-Regent was sometimes required to return portions of the provisional commissions.

In 2013, Ms. Dostalik and her husband allegedly realized that they would be obligated to return a significant portion of the commissions they had received from, among others, Odyssey, due to a settlement in a lawsuit against State National. As a result, Ms. Dostalik and her husband allegedly “embarked on a plan to strip Cal-Regent of assets” by forming Pacific Brokers Insurance Services” and transferring substantially all of Cal-Regents assets to Pacific Brokers.

Odyssey sued in the District of Connecticut. While that suit was pending, Ms. Dostalik and her husband allegedly sold substantially all the assets of Pacific Brokers to AmTrust North America Inc. Ms. Dostalik and her husband then agreed that Ms. Dostalik would receive $2,500,000 from AmTrust’s initial payment to Pacific Brokers as part of the couple’s divorce.

After obtaining a $3,200,000 judgment in the District of Connecticut against Cal-Regent, Odyssey brought suit in the Southern District of California against Pacific Brokers, Cal-Regent, Ms. Dostalik and her former husband, and others in a continued effort to recover the returns it was owed from the provisional commissions it paid to Cal-Regent. The court issued temporary restraining orders and injunctions that, in short, prohibited Ms. Dostalik from transferring, assigning, disposing of, or comingling any of the funds she received from the sale of Pacific Brokers’ assets to AmTrust and ordering Ms. Dostalik to deposit into the court’s registry all the funds she had received from AmTrust.

Ms. Dostalik apparently not only failed to deposit funds into the court’s registry despite having several accounts that consisted of more than 99% funds from AmTrust totaling hundreds of thousands of dollars, but also then comingled AmTrust funds with proceeds from the sale of real estate and continued to engage in efforts to shield the AmTrust funds from the court.

The court, however, had had enough. It held Ms. Dostalik in contempt of several of its temporary restraining orders and gave her 14 days to, among other things, deposit nearly $700,000 in the court registry or ordered that she would “be committed to the custody of the U.S. Marshal.” The court also awarded Odyssey its attorneys’ fees and entered additional injunctions.

Odyssey Reinsurance Co. v. Nagby, No. 3:16-cv-03038 (S.D. Cal. 2019).

Without Jurisdiction or Authority to Review, California Appellate Court Dismisses Appeal of Trial Court’s Statement of Decision

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Finding that a California trial court’s statement of decision was not a judgment or appealable order, the California Court of Appeal dismissed the appeal, having no jurisdiction or authority to review it.

The appellant argued that the statement of decision was a final judgment within the meaning of California Code of Civil Procedure section 904.1(a)(1). The court disagreed, as a judgment is final “when it terminates the litigation between the parties on the merits of the case and leaves nothing to be done but to enforce by execution what has been determined.” Thus, a statement of decision will be appealable only when it is “signed and filed and does, in fact, constitute the court’s final decision on the merits.” The court found that the statement of decision was a limited ruling on a discrete issue that did “not finally resolve the dispute alleged in the operative pleadings.”

The appellant argued, in the alternative, that its opening brief should be treated as a petition for a writ of mandate. The court noted, “Although we have the power to treat the purported appeal as a petition for writ of mandate, we should not exercise that power expect under unusual circumstances.” Seeing no justification for such relief, the court held that “[u]nder the circumstances presented here, treating the instant appeal as a writ application would … encourage parties to knowingly appeal from nonappealable orders, safe in the knowledge that their appeal will be saved by the appellate courts. We cannot condone or encourage such practice.”

Warwick Cal. Corp. v. Applied Underwriters, Inc., No. A155523 (Cal. Ct. Ap. Jan. 7, 2020).