Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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).

Court Enforces ICSIC Award

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The International Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID) is a treaty aimed at encouraging and facilitating private foreign investments in developing countries, to which the United States is a signatory. The ICSID has an internal framework for adjudicating and enforcing investor-state disputes. Under the ICSID, any contracting state can request an arbitration tribunal. The parties can challenge an arbitration tribunal award by seeking an annulment of the award on specific grounds, including that the tribunal manifestly exceeded is powers, that there was corruption on the part of a member of the tribunal, that the proceeding seriously departed from a fundamental rule of procedure, or that the award failed to state the reasons on which it was based. At this point, a three-person ad hoc committee convenes to review the request for an annulment.

The ICSID is not empowered to enforce awards; the prevailing party must seek enforcement of its award with a court of a member state. The court of a member state plays only a limited role, and member states are not permitted to review an award on its merits. ICSID awards are beyond the scope of the Federal Arbitration Act. However, the court’s role is more than just a rubber stamp. The courts must apply the same standard to ICSID awards that a federal court applies when it gives full faith and credit to a final judgment of a state court. This means that a federal court must “‘give preclusive effect to state-court judgments whenever the courts of the State from which the judgments emerged would do so’, and, by extension, means that federal courts must accord ICSID awards the same binding effect required under the Convention.” With respect to fraud, a federal court should decline to give full faith and credit to a state court judgment only if the state court would itself decline to enforce the judgment on grounds of fraud. This same standard applies to declining an ICSID award based on fraud.

This case involves a dispute between TECO, an energy company incorporated in the United States, and the Republic of Guatemala, over electricity rates. The dispute was subject to the ICSID. The ICSID arbitration tribunal issued an award in favor of TECO. TECO requested an annulment of part of the award, and Guatemala requested an annulment of the entire award. The committee issued its decision on annulment, which was in favor of TECO. TECO commenced this action to enforce the award. The court enforced the award based on the above standards, as it was clear that the ICSID committee would itself enforce this award.

TECO Guatemala Holdings, LLC v. Republic of Guatemala, No. 1:17-cv-00102, 2019 WL 4860819 (D.D.C. Oct. 1, 2019).

New York Court Compels Arbitration of Commercial Marijuana Dispute

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The defendants moved to compel arbitration of a complex dispute concerning the parties’ investment in medical marijuana companies. The plaintiff claimed that the defendants breached a non-compete agreement and fiduciary obligations by taking virtually all the business belonging to the parties’ mutual holding company and transferring it to a competing company in which the plaintiff held a substantially smaller interest. The holding company’s operating agreement contained a broad arbitration clause requiring that all disputes, claims, rights, and obligations between the parties arising out of the agreement be resolved by final and binding arbitration. The plaintiff brought suit in New York state court seeking to compensate the holding company for its loss of business. The defendants argued that the plaintiff’s claims were barred by the statute of limitations and laches, and moved to dismiss and/or compel arbitration under the operating agreement.

While agreeing that the defendants had potentially strong affirmative defenses, including a statute of limitations and laches, the court held that the merits of these claims and defenses must be decided by an arbitrator. Although New York law allows courts to rule on “gateway” issues, such as a statute of limitations and laches defenses, the court held that the Federal Arbitration Act (FAA) applied here because the matter involved interstate commerce. Under the FAA, the court explained, threshold questions of these kinds are presumptively reserved for the arbitrator. The arbitration clause in this case also expressly incorporated the American Arbitration Association rules. New York courts generally defer arbitrability questions to the arbitrators in such cases. The court also held that the defendants did not waive their right to move to compel arbitration. Because the defendants insisted throughout the case that it belonged in arbitration, the court held that the plaintiff could not now claim to be prejudiced by the defendants’ request for that relief.

Broumand v. Abbot, No. 655954/2018 (N.Y. Sup. Ct. N.Y. Cty. Oct. 4, 2019).