Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Court Holds Federal Law Governs FAA Arbitration Dispute Related to Surplus Lines Insurance Contract, Compels Arbitration Under Fifth Circuit Preemption of State Law

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Harbor Homeowner’s Association Inc. sued its insurers in Louisiana state court seeking to recover damages allegedly caused by the insurers’ failure to pay claims related to Hurricane Ida. The insurers removed to federal court, arguing that the action related to an arbitration agreement falling under the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and filed a motion to compel arbitration.

The plaintiff argued in response that arbitration provisions in surplus lines insurance contracts are not enforceable under Louisiana law. The plaintiff also argued that, because the policy included a choice-of-law provision selecting New York law, the court should follow Second Circuit precedent holding that, pursuant to the McCarran-Ferguson Act, the New York Convention did not preempt contrary state law.

The court disagreed, noting that arbitrability under the FAA is a question of federal law, not state law, whereas a choice-of-law clause in an insurance policy provides the substantive insurance law applicable to the contract. As such, the choice-of-law clause did not bear on the arbitrability of the dispute.  Moreover, the court noted that “application of New York state law does not entail application of Second Circuit federal law simply because New York sits within the Second Circuit; a Second Circuit case construing federal law is not New York state law.”

Based on the above, the court found that it was constrained to follow Fifth Circuit precedent holding that the New York Convention preempts contradictory state law, including Louisiana law prohibiting the enforcement of arbitration provisions in insurance contracts, and ordered the parties to arbitrate their dispute.

Harbor Homeowner’s Association, Inc. v. Certain Underwriters at Lloyd’s London, No. 2:23-cv-05043 (E.D. La. Jan. 12, 2024).

Ninth Circuit Reverses Order Denying Motion to Compel Arbitration, Concluding “Delegation Provision” Is Enforceable

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Noting the court was deciding, as a matter of first impression, “what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating this challenge,” the Ninth Circuit Court of Appeals, in Bielski v. Coinbase Inc., reversed a district court order that denied defendant Coinbase’s motion to compel arbitration.

Coinbase is an online cryptocurrency exchange. Plaintiff Abraham Bielski maintained an account, or “digital wallet,” with Coinbase that allowed him to store and transfer cryptocurrency in and out of his account. Before opening his account, Bielski was required to accept Coinbase’s user agreement, which included a three-step process to resolve any disputes: (i) an “informal complaint process,” which involved contacting Coinbase and attempting to resolve the dispute amicably; (ii) a “formal complaint process” involving a written complaint; and (iii) arbitration of the dispute pursuant to an arbitration agreement. The arbitration agreement included a “delegation provision” providing that disputes arising out of the agreement including the “enforceability, revocability, scope, or validity” of the agreement were delegated to the arbitrator.

Shortly after opening his account, a dispute arose involving an unauthorized transfer from Bielski’s digital wallet. Bielski “live chatted” with company representatives, called the company hotline, and wrote two letters requesting help to recover his funds. He then filed a lawsuit under the Electronic Fund Transfer Act and Regulation E alleging Coinbase failed to investigate the unauthorized transfer of funds from his account. Coinbase moved to compel arbitration of the claims under the user agreement. The district court denied the motion to compel concluding the arbitration agreement and the delegation provision were “inseverable” and unconscionable.

On appeal, Bielski argued that the delegation provision and the arbitration agreement were unconscionable and unenforceable. The court first addressed what a party must do to challenge a delegation provision, and what a court may consider in evaluating the challenge. Coinbase argued on appeal that Bielski did not do enough to challenge the delegation provision. The court rejected this argument, concluding that by specifically objecting to the delegation provision in his opposition to the motion to compel, Bielski sufficiently challenged the provision. The court noted its approach was consistent with decisions in the Second, Third, and Fourth Circuits, but contrary to the approach in the Sixth and Eleventh Circuits, which require a party to provide “more substance in their delegation provision challenge.” The court then addressed what a court may consider in evaluating the challenge, concluding that “a court must be able to interpret that provision in the context of the agreement as a whole, which may require examining the underlying arbitration agreement as well.” Finally, the court rejected Bielski’s argument that the delegation provision was unconscionable, held that the district court erred in refusing to enforce the delegation provision, and reversed the order denying Coinbase’s motion to compel arbitration.

Bielski v. Coinbase, Inc., No. 22-15566 (9th Cir. Dec. 5, 2023).

Third Circuit Affirms Order Denying Motion to Compel Arbitration After AAA Declines to Administer Arbitration

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The Third Circuit Court of Appeals has affirmed a district court decision denying defendant MicroBilt Corp.’s motion to compel arbitration, finding the plaintiff had fully complied with all provisions of her arbitration agreement with MicroBilt.

In connection with a loan plaintiff Maria Del Rosario Hernandez applied for in 2020, the lender utilized a product offered by MicroBilt, referred to as an “instant bank verification report,” which allowed the lender to verify Hernandez’s identity and financial information. The verification report included information for other persons with the Hernandez name, including a person who was on a government watch list that caused the lender to deny Hernandez’s loan application.

After Hernandez filed a lawsuit alleging MicroBilt violated the Fair Credit Reporting Act, MicroBilt filed a motion to compel arbitration, relying on an arbitration provision that was part of the loan application process. The arbitration provision included an “exclusive resolution” clause, which required that any disputes or claims be resolved exclusively by binding arbitration. The arbitration provision also stated the arbitration would be conducted by a single arbitrator in accordance with AAA rules, punitive and consequential damages were not recoverable, and each party would be responsible for its own attorneys’ fees. Hernandez dismissed her lawsuit and submitted the claim to the AAA. Treating the matter as a “consumer agreement” under the AAA Consumer Arbitration Rules, the AAA administrator assigned to the matter notified MicroBilt that the damages limitation included in the arbitration provision conflicted with Principle 14 of the consumer due process protocol of the rules, which requires that an arbitrator “should be empowered to grant whatever relief would be available in court under law or equity.” MicroBilt refused to waive the damages limitation and the AAA declined to administer the arbitration under Rule 1(d). Hernandez then reinstated her claims in the district court and MicroBilt moved to compel arbitration. The district court denied the motion to compel, finding Hernandez had fully complied with the arbitration provision.

In affirming the district court’s denial of the motion to compel, the Third Circuit recognized the arbitration provision covered Hernandez’s claims but noted that under 9 U.S.C. § 4, it “may compel arbitration only where there is a ‘failure, neglect, or refusal … to arbitrate under a written agreement.’” The court found the district court’s denial of MicroBilt’s motion was correct because Hernandez was in full compliance with the relevant arbitration provisions. As a result, the court concluded it lacked authority under section 4 to compel arbitration. The court also rejected MicroBilt’s argument that the AAA administrator’s requirement that MicroBilt waive the damages limitation was an “arbitrability” issue that should have been resolved by the arbitrator. The court found that, under Consumer Rule 14(a), arbitrators have the exclusive power to rule on “the existence, scope, or validity” of an arbitration provision, and the administrator’s decision to dismiss the arbitration did not implicate any of those issues. The court also rejected MicroBilt’s argument that the “exclusive resolution” clause of the arbitration provision conflicts with Hernandez pursuing her claims in court. The court noted that Hernandez has fully complied with the AAA rules, and “[s]everal courts have allowed plaintiffs to return to court after administrative dismissals under Rule 1(d), despite general agreements to arbitrate.” The court affirmed the district court’s decision denying defendant MicroBilt’s motion to compel arbitration.

Hernandez v. MicroBilt Corp., No. 22-3135 (3d Cir. Dec. 5, 2023).

Reinsurer Permitted to Intervene in Affiliate’s Lawsuit Related to Breach of MGA Agreement

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Texas Insurance Co. sued Talisman Specialty Underwriters Inc. for breaching the parties’ managing general agent (MGA) agreement by authorizing the issuance of hundreds of insurance policies by Texas Insurance in sectors (like marine and energy) where Talisman Specialty did not have the authority to do so. Texas Insurance further alleged that Talisman Specialty had withheld $10 million in premiums owed to Texas Insurance and that it had failed to segregate them in a fiduciary account for Texas Insurance’s benefit as required by the MGA agreement.

Talisman Insurance Co., an affiliate of Talisman Specialty, filed a motion to intervene. Talisman Insurance alleged that it had entered into a quota share reinsurance agreement with Texas Insurance, pursuant to which Talisman Insurance agreed to reinsure the insurance sold by Talisman Specialty. In turn, Texas Insurance agreed to pay Talisman Insurance 94% of the insurance premiums it received, pursuant to the reinsurance agreement. Talisman Insurance argued additionally that Texas Insurance agreed that Talisman Specialty would remit these payments directly to Talisman Insurance, bypassing Texas Insurance. Talisman Insurance alleged that Texas Insurance breached the reinsurance agreement by initiating the lawsuit and by claiming that Talisman Specialty must first remit the premiums to Texas Insurance, thereby interfering with Talisman Insurance’s right to payment.

The district court found that Talisman Insurance was entitled to intervene as of right because it timely filed its motion early in the case and because it had a direct and substantial interest in the insurance premiums which interest would not be adequately represented by the existing parties and which could be impaired if it were not permitted to intervene. Talisman Insurance timely sought to intervene as the motion, although filed approximately two months after Talisman Insurance learned of the suit, came before discovery had opened in the matter, and further, Talisman Insurance did not seek to reopen any prior proceedings in the case.

The court found that Talisman Insurance had a direct and substantial property interest in the premiums and the method of payment, as its alleged contractual right to receive its share of the premiums directly from Talisman Specialty allegedly resulted in administrative cost-savings. If Talisman Insurance were not permitted to intervene and instead was required to institute a separate proceeding, its interests in the premiums and method of payment could be impaired by rulings in the instant lawsuit. Finally, the court found that Talisman Insurance’s interests were not adequately represented by its affiliate, Talisman Specialty, even though the two shared the same counsel, as Talisman Specialty was not a party to the reinsurance agreement and the two entities sought to enforce different contractual rights derived from their individual contracts with Texas Insurance.

As such, the court granted the motion to intervene, finding Talisman Insurance satisfied all of the requirements necessary to establish its entitlement to intervention.

Texas Insurance Co. v. Talisman Specialty Underwriters, Inc., No. 2:23-cv-03412 (E.D. La. Dec. 1, 2023).

Second Circuit Affirms Schwab Victory in FINRA Arbitration

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The Second Circuit Court of Appeals recently affirmed a decision confirming an arbitration award in favor of Charles Schwab & Co. over allegations of discovery abuses that purportedly rendered the arbitration proceeding unfair. We previously wrote about the district court decision confirming the arbitration award in a prior post.

The appellant again argued to the Second Circuit that the arbitration panel had “refused to hear evidence pertinent and material to the controversy and thereby rendered the proceedings fundamentally unfair.” But the Second Circuit found the appellant failed to carry its burden to demonstrate the panel’s discovery-related decisions rendered the proceeding unfair. To the contrary, the court noted that the panel considered numerous discovery motions, including hearing oral argument, and further that Schwab produced more than 5,500 documents to the appellant over 14 different document productions.

In concluding, the court stated that “in light of the ‘great deference’ accorded to arbitrators ‘in their evidentiary determinations,” the court found the arbitration proceeding was not fundamentally unfair.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 22-2748 (2d Cir. Nov. 29, 2023).