Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Orders Stay of New Arbitration Over Disputed Reinsurance Billings and Compels Parties to Proceed Before a Predecessor Arbitration Panel

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The case involved a “second layer special casualty excess agreement of reinsurance” under which reinsurers General Reinsurance Corp. and SCOR Reinsurance Co. agreed to cover a certain amount in excess of Chicago Insurance Co.’s $1 million per occurrence retention. An arbitration ensued after the reinsurers disputed reinsurance billings from Chicago Insurance arising out of certain asbestos insurance liability. The arbitration panel rejected Chicago Insurance’s attempt to bill its losses on the basis that each site where the insured had operated constituted an “occurrence” under the reinsurance agreement, and issued an award for the reinsurers. The award expressly retained the panel’s jurisdiction to “resolve any dispute arising out of [the] Final Award.”

Subsequent to the award, Chicago Insurance submitted a new billing to the reinsurers, which stated that the “loss allocation was prepared in accordance with the Award’s protocols.” The reinsurers disputed the new billing and alerted the prior arbitration panel. The umpire confirmed that it had retained jurisdiction but noted that Chicago Insurance’s appointed arbitrator disagreed and would not participate in the new dispute. Chicago Insurance then initiated a new separate arbitration, in which the reinsurers refused to participate, and filed a petition to compel the reinsurers’ participation and to stay the original arbitration. The reinsurers responded by filing a cross-petition to stay the new arbitration and for a declaration that the prior panel had jurisdiction to resolve the dispute.

The court denied Chicago Insurance’s petition and granted the reinsurers’ cross-petition to stay the new arbitration. The court rejected Chicago Insurance’s argument that the prior panel was functus officio by fully exercising their authority to adjudicate the issue submitted to them. The court found that the prior panel retained jurisdiction to resolve any dispute arising out of the prior award and that Chicago Insurance had consented to that by failing to dispute the award. The court also found that Chicago Insurance “repeatedly claimed that the new bill that it sent to the Reinsurers was offered pursuant to the ‘protocols’ set forth by” the prior award, and therefore, consistent with what the majority of the original panel determined, the current dispute “clearly” fell within the original arbitration jurisdiction. The court, therefore, ruled that the prior panel retained jurisdiction to adjudicate whether the new bill comported with its prior award.

Chicago Ins. Co. v. Gen. Reinsurance Corp., No. 1:18-cv-10450 (S.D.N.Y. Oct. 22, 2019).

Oklahoma Supreme Court Reverses Course: Finds Arbitration Clause Printed on Shingles’ Wrapping Did Not Bind Homeowner to Arbitrate

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 A third-party contractor installed the defendant’s shingles on the plaintiffs’ roof. Subsequently, the plaintiffs filed suit for damages allegedly caused by the defendant’s faulty shingles and replacement of their roof. The defendant successfully moved to stay the proceeding and compel arbitration pursuant to an arbitration agreement found on the wrapping of each bundle of shingles.

The Oklahoma Supreme Court reversed the decision on appeal, finding that the plaintiffs were not bound to the arbitration agreement; the plaintiffs could not have had actual knowledge of the arbitration agreement and therefore could not consent to arbitration. Further, the contractors lacked the authority to enter into an arbitration agreement on the plaintiffs’ behalf without ratification, and there were no facts suggesting that the plaintiffs knew of the arbitration clause, so the plaintiffs “could not ratify the arbitration provision.”

The Supreme Court was not persuaded by the defendant’s argument that the plaintiffs sought to enforce their rights under the limited warranty provision, which contained the arbitration agreement, and could not now disclaim the arbitration agreement provision of that contract. The Supreme Court stated that the plaintiffs were “not seeking to enforce their rights under the limited warranty contract. Their claims arise in tort law not contract law.” Nor did the Supreme Court find that the plaintiffs could be estopped from challenging the arbitration agreement, lacking actual or constructive knowledge of the arbitration agreement until after they filed an initial warranty claim.

Williams v. TAMKO Bldg. Prods., Inc., No. 117190 (Okla. Oct. 1, 2019).

Court of Federal Claims Finds HHS Offset Invalid Under Colorado’s Insurance Liquidating Priority Scheme

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The U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services (HHS) operates the reinsurance and risk-adjustments program for Colorado, including the application of the “netting rule” — a method by which it would aggregate and offset money owed by or to different insurers under various Affordable Care Act (ACA) payment programs. Colorado Health Insurance Cooperative Inc. ran into financial difficulties and was put into liquidation. According to the liquidator, the HHS would offset $20,255,084 of the amount the HHS owed Colorado Health under the risk-adjustment program against $21,775,432 that Colorado Health owed the HHS under the risk-adjustment program. Ultimately, the liquidator sent the HHS a claims-determination letter, disallowing the HHS’ claims and requesting a return of all unauthorized offsets. The HHS did not timely object under Colorado law and, upon the liquidator’s motion, a Colorado court affirmed the liquidator’s claim determination.

The liquidator then sued the HHS, alleging that (1) the HHS failed to make obligatory payments under the reinsurance program; and (2) the HHS’ offset of payments it owed to Colorado Health violated Colorado law and was therefore invalid.

As a threshold matter, the court held that the ACA does not prohibit offset otherwise allowed under federal common law or state law, and dismissed the first cause of action as it did not provide an independent basis for relief. As to the second cause of action, the court held that the HHS’ offset was invalid under Colorado’s insurance liquidation priority scheme. “Because neither the ACA nor another statute authorizes the Netting Rule’s application in the insurance liquidation context, HHS must have taken its offset in its capacity as a creditor. Although federal law governs HHS’s rights as a creditor in implementing the nationwide reinsurance and risk-adjustment programs, its interest in uniformity is insufficient to warrant this Court creating a federal common law rule to displace Colorado’s insurance liquidating priority scheme.”

Conway v. United States, No. 18-1623 (Fed. Cl. Oct. 3, 2019).

North Carolina Court Rules Reimbursement for Extracontractual Losses Discretionary

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The Court of Appeals of North Carolina has concluded that the state’s Reinsurance Facility has discretion to approve or deny petitions from members for reimbursement for extracontractual losses and that members have no right to reimbursement for such losses under the governing statutory scheme. The decision relates to a significant bad faith case against Allstate.

Allstate issued an auto insurance policy to an insured and ceded the policy to the North Carolina Reinsurance Facility, a nonprofit entity that insures drivers whom insurers determine they do not want to insure individually. The insured subsequently struck a minor riding a bicycle, causing serious injury. The insured reported the accident to the Allstate agent who sold him the policy. She told him to call an Allstate phone number to report the accident, but he never did. Allstate received notice of the accident when it heard from counsel for the injured minor. It investigated and offered to tender the policy limit of $50,000, but the injury party rejected that offer. The insured stipulated to a $13.8 million judgment against him and assigned his claims against Allstate to the injured party. That party then sued Allstate for breaching its duty of good faith and ultimately received $11 million in a settlement after an adverse jury verdict.

Allstate sought reimbursement for the bad faith loss from the Reinsurance Facility. The Reinsurance Facility denied Allstate’s request, and Allstate appealed to the North Carolina Commissioner of Insurance. The Commissioner ordered the Reinsurance Facility to reconsider its denial. The Reinsurance Facility petitioned for judicial review, and the trial court affirmed the Commissioner’s decision.

The Reinsurance Facility then appealed to the Court of Appeals of North Carolina. The court reversed and remanded the trial court’s decision. Analyzing the plain language of the statute governing the Reinsurance Facility, the court concluded that the Reinsurance Facility was required to consider a petition for reimbursement and gave member insurers the right to receive reimbursement for contractual losses, but concluded that members had no right to reimbursement for extracontractual losses and that the Reinsurance Facility had discretion to approve or deny such petitions. Thus, the Reinsurance Facility was well within its statutory rights to deny Allstate’s petition for reimbursement.

The Supreme Court of North Carolina then denied Allstate’s petition for further review.

N.C. Reinsurance Facility v. Causey, 830 S.E.2d 850 (N.C. Ct. App. 2019), review denied, 832 S.E.2d 731 (N.C. 2019).

Court Finds Medical Bill Reimbursement Claim Subject to “Biblically-Based Mediation and Arbitration”

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A Mississippi federal court granted a motion to compel arbitration of a claim for reimbursement of medical expenses from the defendant, a company that provides health care sharing plan alternatives to those of Christian faith. The plaintiff had signed a membership agreement stating that he would abide by the defendant’s guidelines, under which members, such as the plaintiff, were required to exhaust an “appeals” process for challenging bill-sharing decisions before resorting to any sort of legal procedures against the defendant. If the appeals process did not resolve the dispute, a “biblically-based mediation and arbitration” clause in the guidelines stated that any and all disputes arising out of the membership agreement shall be settled by “biblically-based mediation.” If that mediation fails, the member may submit the dispute to an independent and objective arbitrator for binding arbitration but otherwise waives his or her right to file a lawsuit.

Addressing the defendant’s motion, the court first held that the provision above constituted a valid arbitration agreement and that the subject dispute fell within the scope thereof. The court noted that the plaintiff had indeed agreed that he “will bring no suit, legal claim or demand of any sort … in the civil court system, with the sole exception of enforcing any favorable arbitration award or mediated agreement.” As such, the court explained that arbitration was required unless a federal statute or policy rendered the plaintiff’s claim non-arbitrable. Because the plaintiff failed to identify any such statute or policy, the court granted the defendant’s motion to compel arbitration.

Pettey v. Medi Share, No. 2:19-cv-00059 (S.D. Miss. Oct. 1, 2019).