Reinsurance Focus

The plaintiff entered into a retail installment contract with New Century Auto Sales for the purchase of a used car. The contract included an arbitration provision that stated that either the plaintiff or the defendants may elect to resolve any claim by neutral, binding arbitration and not by a court action. The court explained that the Federal Arbitration Act requires courts to “rigorously enforce” arbitration agreements, but arbitration clauses are still subject to the same defenses and bars as other contract provisions. The court further explained that a party cannot be required to arbitrate if the party has not agreed to it, and the burden is on the party resisting arbitration to prove this. Here, the plaintiff acknowledged that the defendant invoked the arbitration provision and therefore the case could properly be submitted to arbitration. In view of the plaintiff’s acknowledgement, the court directed the parties to proceed to arbitration.

Chisholm v. New Century Auto Sales, Inc., No. 1:19-cv-01395 (N.D. Ohio Aug. 23, 2019).

The First Circuit recently denied an appeal from the District of Puerto Rico’s refusal to vacate an arbitration award. The dispute centered on a management services agreement containing an arbitration agreement that required binding arbitration of any disputes under the rules of the American Health Lawyers Association (AHLA). The court disagreed with each of the appellant’s asserted bases for vacatur, which included “two main baskets” of arguments that the court divided as: (1) the Puerto Rico Arbitration Act (PRAA) should have governed the arbitration, rather than the FAA alone; and (2) the arbitrator engaged in misconduct, exceeded his powers, and manifestly disregarded the law.

Regarding the PRAA, the appellant argued that the agreement’s choice-of-law provision selecting Puerto Rican substantive law constituted an explicit agreement to proceed under the PRAA. The First Circuit disagreed, citing precedent holding that “a generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting parties intended to opt out of the FAA’s default regime for vacatur of arbitral awards.”

Regarding the purported errors by the arbitrator, the court quoted cases describing arbitration awards as “nearly impervious to judicial oversight.” The court determined that the alleged misconduct by the arbitrator consisted of his treatment of certain evidence. The court held that the appellant not only failed to make the required showing that the arbitrator’s alleged refusal to hear the evidence resulted in the deprivation of a fair hearing, but it was “clear from the arbitrator’s extensive and detailed findings of fact” that much of the evidence was heard and considered by the arbitrator. The court concluded that the appellant simply did not agree with the weight the arbitrator gave to the evidence, which does not justify vacatur.

The court also rejected the appellant’s contention that the arbitrator exceeded his powers by awarding attorneys’ fees and prejudgment interest in violation of Puerto Rican law. The court explained that it would harmonize the parties’ arbitration agreement and the choice-of-law provision by finding that the choice-of-law provision governed the parties’ substantive rights and duties, but did not limit the arbitrator’s authority under the arbitration rules of the AHLA, which authorized the fee and interest award.

Finally, the court turned to the appellant’s last argument that the arbitrator manifestly disregarded the law, which the court explained is based on common law, not the FAA. The court noted that the appellant bears the burden of demonstrating that the arbitrator was confronted with the correct law and then ignored it. Although the appellant presented the arbitrator with “a boatload of legal theories,” the court found that the arbitrator simply rejected those arguments, “and rejection is not ignoring” within the meaning of the manifest disregard doctrine.

Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., No. 17-2014 (1st Cir. Aug. 1, 2019).

The Southern District of New York denied class certification to a group of plaintiffs seeking to collectively sue a group of insurers over purported regulatory approval violations regarding workers’ compensation policies. The court concluded that class adjudication was not the superior method of litigation, in part because of the significant recovery purportedly available to each of the approximately 220 members of the prospective class.

A number of New York employers filed a putative class action alleging that several insurers from whom they purchased workers’ compensation policies had violated New York law requiring regulatory approval of, among other things, rates. Specifically, the plaintiffs claimed that the insurers sold them guaranteed cost policies that were properly approved by New York’s Department of Financial Services but later entered into “reinsurance participation agreements” with the plaintiffs that were not approved by the Department and that effectively converted the guaranteed cost policies to “quasi retrospective rating plans.” In essence, the plaintiffs alleged that the insurers converted the plans from fixed premium plans to variable premium plans that created the possibility that the employers would have to pay more for coverage.

The plaintiffs sought to certify a class of New York employers who were charged more for premiums as a result of the “reinsurance participation agreements.” The putative class purportedly encompassed some 220 class members collectively owed $62 million. Approximately a dozen of those class members had already initiated their own actions. In addition, the defendant insurers noted that all of the putative class members had agreed to forum-selection clauses agreeing to litigate disputes regarding the policies in Nebraska and/or class action waivers.

The district court denied class certification after concluding that the plaintiffs had failed to establish that a class action was the superior method of litigation under Rule 23(b)(3).

Under the first factor considered under Rule 23(b)(3) — whether class members have a strong interest in individually controlling the litigation — the court concluded that the individual plaintiffs had a strong interest in individually litigating this case. The value of the case per plaintiff was high ($62 million for 220 plaintiffs), and several of the plaintiffs had already initiated individual litigation. This was not a prototypical class action in which individual litigation was precluded because the cost of litigation far exceeded the value to individual plaintiffs.

Turning to the second factor — whether members of the class had already brought suit — the court reiterated that a dozen plaintiffs were pursuing individual actions and arbitrations.

With respect to the third factor — the desirability of concentrating the litigation in a particular forum — the court noted that there was some appeal to concentrating the litigation in New York because the plaintiffs were New York businesses, but the existence of Nebraska forum-selection clauses and class action waivers precluded a finding that New York was desirable.

Finally, the court concluded that the fourth factor — the manageability of a class action — weighed against certification because of the 12 individual actions, the class action waivers, and the forum-selection clauses. The court would be required to make individual determinations as to which individual actions to enjoin and which plaintiffs could remain part of the class.

In closing, the court once again emphasized that the significant potential recovery available to each plaintiff rendered a class action unnecessary in light of the above factors.

The court therefore denied the plaintiffs’ motion to certify their class.

Nat’l Convention Servs., LLC v. Applied Underwriters Captive Risk Assurance Co., No. 1:15-cv-07063 (S.D.N.Y. July 27, 2019).