Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

Southern District of New York Rejects Claim That a Letter Threatening to Terminate a Reinsurance Agreement Terminated the Agreement

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The Southern District of New York has concluded that an insurer’s threat to terminate a reinsurance agreement if the other insurer to the agreement did not comply with its obligations did not terminate the agreement or give the other insurer the right to terminate the agreement.

Amtrust North America Inc. and Signify Insurance Ltd. entered into a captive reinsurance agreement in which Signify reinsured a portion of certain policies issued by AmTrust. The agreement required, among other things, that Signify post collateral and that AmTrust cede certain premiums. Signify’s duties to post collateral continued after the termination of the agreement.

AmTrust sent Signify a letter accusing it of failing to post the requisite collateral and stating: “Accordingly, unless Signify posts security in full … within thirty days … [AmTrust] hereby terminates the Agreement from inception.” Signify caused a bank to issue standby letters of credit in response to the letter for most of the collateral AmTrust claimed was due, but also wrote to AmTrust accepting AmTrust’s “termination” of the agreement. According to AmTrust, Signify subsequently failed to increase the collateral as required by the agreement.

AmTrust filed suit claiming that Signify had breached the agreement and seeking a declaration that Signify was required to post collateral. Signify filed a number of counterclaims seeking, inter alia, a declaration that AmTrust had terminated the agreement, seeking rescission of the agreement, claiming that AmTrust had breached the agreement, asserting that AmTrust had been unjustly enriched, and seeking a declaration that AmTrust had to cede certain premiums.

The parties cross-moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c): AmTrust moved to dismiss Signify’s counterclaims seeking a declaration that the agreement was terminated and asking the court to rescind the agreement; Signify moved for judgment to dismiss AmTrust’s complaint and grant all of its counterclaims discussed above. The court granted AmTrust’s motion and denied Signify’s motion.

With respect to rescission, the court disagreed that AmTrust’s letter constituted a unilateral rescission. Even though the letter used the present tense phrase “hereby terminates,” it was clear when that phrase was read in context that AmTrust was threatening to terminate the agreement if Signify did not post collateral; not terminating the agreement at that time. AmTrust’s letter also was not an offer that allowed Signify to rescind the agreement, which Signify attempted to do in its reply letter. AmTrust’s letter was a threat to terminate, not an offer for Signify to do so.

Turning to Signify’s counterclaims, the court noted that AmTrust had adequately pleaded that Signify did not perform under the terms of the agreement and that Signify had not established that it had performed. Signify had not shown that the conditions that allowed it to cease posting collateral had occurred. With respect to AmTrust’s duty to cede certain premiums, the court noted that this duty arose only after certain triggering events, which had not all occurred. AmTrust’s duty to cede premiums therefore “never arose,” and the court denied Signify’s motion.

AmTrust N. Am., Inc. v. Signify Ins. Ltd., No. 1:18-cv-03779 (S.D.N.Y. July 11, 2019).

New York Federal Court Punts Request for Foreign Reinsurer to Post Security Back to Arbitrators

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The Southern District of New York found that New York Insurance Law section 1213(c)(1), requiring that foreign insurers post sufficient security, applied to the defendant, a foreign reinsurer in liquidation, in order for the defendant to file its motion to dismiss and compel arbitration. The court rejected the defendant’s reliance on non-binding precedent in In re Laitasalo, “in which the court held that a group of foreign bankrupt insurance companies was not required to post security to defend against the claim of a state insurance commissioner … explain[ing] that the security would transform the commissioner’s unsecured claim into a secured claim to the detriment of the other U.S. creditors who are solvent or insolvent insurance companies.” 193 B.R. 187 (Bankr. S.D.N.Y. 1996).

The subject reinsurance agreements contained “broad arbitration clauses providing for arbitration for all disputes or differences between the Parties arising under or relating to” the reinsurance agreements. As the panel in a prior arbitration concerning these reinsurance agreements previously required the defendant to post an interim security, the court held that “the arbitration panel must decide in the first instance whether its prior orders — which were confirmed by this Court on April 24 — preclude” the instant motion for security.

In re Platinum-Beechwood Litig., No. 1:18-cv-06658 (S.D.N.Y. July 10, 2019).

Fifth Circuit Holds Propriety of Class Arbitration Is “Gateway” Issue for Courts

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The Fifth Circuit has joined a number of other circuits and concluded that whether class arbitration is appropriate under the terms of a particular arbitration agreement is a “gateway” issue to be decided by courts, not an arbitrator, absent “clear and unmistakable” language to the contrary.

The court further concluded that there was no “clear and unmistakable” language allowing an arbitrator to rule on the propriety of class arbitration in the agreement before it.

20/20 Communications Inc. employs a number of field sales managers. It requires them to sign an arbitration agreement that bars class arbitration. Several sales managers initiated arbitration and sought to assert class claims. 20/20 filed a declaratory judgment action seeking a declaration that class claims were barred under the agreement. While that action was pending, however, an arbitrator concluded that the class arbitration bar was unenforceable under the National Labor Relations Act. 20/20 filed a separate action seeking to vacate that ruling. The district court denied 20/20’s request and confirmed the arbitrator’s ruling. The district court in 20/20’s declaratory judgment action subsequently concluded that the arbitration agreement at issue authorized arbitrators, not the courts, to determine the propriety of class arbitration.

The Fifth Circuit consolidated 20/20’s appeals from both rulings against it. The court first held that whether an agreement allows or prohibits class arbitration is a threshold/”gateway” issue for courts to decide unless the arbitration agreement “clearly and unmistakably” provides that the issue is for an arbitrator to decide. The Fifth Circuit noted that this conclusion was consistent with the conclusion reached by every other circuit court (the 4th, 6th, 7th, 8th, 9th, and 11th Circuits) to consider the issue. Turning to the agreement at issue, the Fifth Circuit concluded that the arbitration agreement did not clearly and unmistakably allow the arbitrator to determine the propriety of class arbitration. The agreement “prohibit[ed] class arbitrations to the maximum extent permitted by law,” and it made no sense for the parties to have included such language yet at the same time mean for the arbitrator to decide whether he could hear class claims. The court also rejected the claim that various provisions that vested arbitrators with broad and general powers allowed them to adjudicate whether class arbitration was allowed. Those provisions did not include “the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.” Thus, the court reversed and vacated the judgments of the district court.

20/20 Commc’ns, Inc. v. Crawford, No. 18-10260 (5th Cir. July 22, 2019) (consolidated with 20/20 Commc’ns, Inc. v. Blevins, No. 19-10050).

Maryland Federal Court Denies Untimely Request to Vacate Arbitration Award

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Pursuant to the FAA, a motion to vacate, modify, or correct an arbitration award must be served within three months after the award is filed or delivered. 9 U.S.C. § 12. Thus, a Maryland federal court held that the defendants’ request, via its answer on August 27, 2018, to vacate an arbitration award issued on January 31, 2018, was untimely.

The court also rejected the defendants’ argument that there was a genuine dispute of material fact regarding the existence of the franchise agreement based on the date of the subject franchise agreement referenced in the plaintiff’s papers. The defendants admitted that they entered into the franchise agreement attached to the plaintiff’s motion for summary judgment to confirm the arbitration award. The agreement contained the arbitration clause underlying their dispute. Thus, the court held that the “[p]laintiff’s failure to reference the accurate franchise agreement date in both their application to confirm arbitration award and motion for summary judgment does not create a genuine issue of material fact regarding the franchise agreement’s existence.”

Choice Hotels Int’l, Inc. v. Gopi Hosp., LLC, No. 8:18-cv-01680 (D. Md. July 18, 2019).

SDNY Dismisses Captive Reinsurer’s Counterclaims, Finding Reinsurance Agreement Never Rescinded and Cedent’s Duty to Cede Premiums Never Arose

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The Southern District of New York granted a ceding insurer’s motion to dismiss certain counterclaims by a defendant-reinsurer, finding their reinsurance agreement was never rescinded and that the cedent adequately performed. The decision arose from a captive reinsurance agreement between Employers HR, an entity that provides outsourced insurance to the employees of temporary staffing agencies, and AmTrust North America, the ceding insurer that issued that insurance. As part of the agreement, AmTrust would reinsure the policies it issued with the defendant, Signify Insurance Ltd., a captive reinsurer created by Employers HR. The agreement required Signify to post collateral securing its reinsurance obligations, while AmTrust was required to cede certain premiums to Signify. Upon learning that Signify had not posted the required collateral, AmTrust wrote to Signify demanding that it do so in full within 30 days, otherwise it would terminate the agreement from inception. Signify posted a substantial portion of the security two days later and then wrote to AmTrust advising that it was “accepting” its termination of the agreement. The next day, however, AmTrust withdrew its intention to terminate and demanded that Signify provide all remaining collateral.

AmTrust subsequently filed this action alleging breach of contract and seeking a declaration that Signify is required to maintain its security obligations. In its counterclaims, Signify argued, among other things, that AmTrust terminated the agreement from inception or, in the alternative, that the court should rescind the agreement. AmTrust moved to dismiss Signify’s first two counterclaims, while Signify moved to dismiss the complaint in its entirety. The court granted AmTrust’s motion and denied Signify’s.

As an initial matter, the court rejected Signify’s argument that AmTrust unilaterally rescinded the agreement by demanding that Signify post all collateral within 30 days, finding a reasonable person would have understood the letter to be no more than a request to cure. The court held that AmTrust’s letter was insufficient to rescind the reinsurance agreement by itself. Signify’s “mutual rescission” theory was also rejected. Although Signify argued it had “accepted” AmTrust’s “offer” to rescind, the court found no such offer was ever made. The court observed that AmTrust merely threatened to rescind in the event Signify failed to cure its breach and that AmTrust had maintained total discretion to rescind regardless of Signify’s consent. Finally, the court rejected Signify’s claim that AmTrust failed to perform under the agreement by, among other things, failing to cede required premiums. While acknowledging AmTrust’s obligation to cede “gross ceded premium” and to remit “net ceded premium,” the court found that these duties were only triggered by a series of events, including AmTrust’s receipt of bank confirmation that Signify increased its collateral to required levels. Because Signify did not allege that it ever posted that collateral, the court held that AmTrust’s duty to cede premiums to Signify never arose.

AmTrust N. Am., Inc. ex rel. Tech. Ins. Co. & Sec. Nat’l Ins. Co. v. Signify Ins. Ltd., No. 1:18-cv-03779, 2019 WL 3034891 (S.D.N.Y. July 11, 2019).