Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SDNY Dismisses Captive Reinsurer’s Counterclaims, Finding Reinsurance Agreement Never Rescinded and Cedent’s Duty to Cede Premiums Never Arose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motion to dismiss certain counterclaims by a defendant-reinsurer, finding their reinsurance agreement was never rescinded and that the cedent adequately performed.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As an initial matter, the court rejected Signify’s argument that AmTrust unilaterally rescinded the agreement by demanding that Signify post all collateral within 30 days, finding a reasonable person would have understood the letter to be no more than a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).

Ninth Circuit Affirmed That Non-Signatories Could Invoke Arbitration Clause Under Arizona Law

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The U.S. Court of Appeals for the Ninth Circuit held that the district court did not err by allowing non-signatories Jess Smith & Sons Cotton LLC (JSS) and J.G. Boswell Co. to invoke the arbitration clause in a license agreement between Tradeline Enterprises Pvt. Ltd. and the Supima Association of America. The court explained that state law controls whether federal courts may enforce arbitration agreements against signatories at the request of non-signatories. Arizona law controlled in this case. Pursuant to Arizona law, “a non-signatory may compel arbitration with a signatory to an arbitration agreement if the claims at issue are ‘intimately founded in and intertwined with the underlying contract obligations.'” The complaint filed by Tradeline alleged that JSS and Boswell caused Supima to breach and wrongfully terminate the license agreement. Therefore, the claims raised in the complaint were “intertwined” with Tradeline’s license agreement with Supima.

Tradeline Enters. Pvt. Ltd. v. Jess Smith & Sons Cotton, LLC, No. 18-56101 (9th Cir. July 2, 2019).

Ninth Circuit Binds Plaintiff to Arbitration Clause It Never Received, Finding Clause Was “Readily Available” and Incorporated by Reference Into Purchase Order

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The Ninth Circuit affirmed an order granting a motion to compel arbitration and to dismiss, finding that a purchase order issued by the plaintiff to purchase goods from the defendant incorporated a binding arbitration clause encompassing the parties’ dispute. The arbitration clause was contained in terms and conditions expressly incorporated by reference into the defendant’s initial quotation. The plaintiff argued that it never received the terms and conditions — only the quotation — and thus that it could not have agreed to arbitrate. The Ninth Circuit disagreed, finding that the arbitration clause became part of the contract because the terms and conditions were “readily available” to the plaintiff, and the plaintiff therefore “acquiesced” to the arbitration provision by failing to reject it upon issuing its purchase order. The court also rejected the plaintiff’s argument that the arbitration clause was unconscionable, finding that the parties were both business entities with equal bargaining power and that they negotiated their agreement for months. The plaintiff’s final argument that the defendant waived its right to arbitrate was similarly rejected. The court held that the plaintiff failed to carry its “heavy burden” of showing that the defendant acted inconsistently with a known right to compel arbitration and that the plaintiff was prejudiced as a result.

Cunico Corp. v. Custom Alloy Corp., No. 18-55047, 2019 WL 2895148 (9th Cir. July 3, 2019).

Third Circuit Affirms Arbitration Award for Employee’s Breach of Employment Agreement

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Melody Shan was employed by Sabre GLBL. Shan entered into an employment agreement with Sabre, which prohibited Shan from disclosing confidential information and competing with Sabre for its employees, contractors, and customers, both during and after her employment. The employment agreement was governed by Texas law. Shan started a competing company while still employed by Sabre and solicited Sabre employees and customers. Shan thereafter resigned from Sabre and continued to work on her competing company. Sabre sued Shan in New Jersey state court, alleging that Shan breached the employment agreement by misusing confidential information, stealing employees, soliciting customers, and competing with Sabre. Shan removed the action to federal court and moved to compel arbitration pursuant to the employment agreement. The district court granted the motion, and Sabre initiated an arbitration before the Judicial Arbitration and Mediation Services (JAMS) in Dallas, Texas. The arbitrator found in favor of Sabre and awarded $200,000 in disgorgement-of-salary damages and $1,173,318 in “head start” damages based on Shan’s equity interest in the competing company. The district court affirmed the award, and Shan appealed.

The U.S. Court of Appeals for the Third Circuit affirmed the district court’s decision. The court explained that its review of an arbitration award is “extremely deferential” and can only be vacated in a select few instances. The court explained that the damages were not awarded in a “manifest disregard of the law” as Shan did not identify any clearly governing principle of Texas law that the arbitrator was aware of and chose to ignore in awarding these damages. The court further declared that the arbitrator did not exceed his powers in his damages award. The court explained that the arbitrator’s award, which fully explained his reasoning, was sufficient under the standard despite the arbitrator’s failure to address Shan’s mitigation defense. The court also found that the arbitrator was not guilty of “misbehavior by which the rights of any party have been prejudiced.” Even though Sabre did produce its expert report after the deadline, Shan was not prejudiced because the arbitrator permitted Shan to present expert rebuttal testimony at the hearing without a written expert report. Lastly, the court stated that the arbitrator did not act with partiality as Shan failed to show any bias.

Sabre GLBL, Inc. v. Shan, Nos. 18-2079, 18-2144 (3d Cir. July 3, 2019).

Court Refuses to Treat Unopposed Petition to Confirm Arbitration Award as a Motion for Default Judgment, Reviews the Merits of the Petition, and Enters Order Confirming the Award and Legal Fees

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The case involved an AAA arbitration centering on the lack of performance under an exclusive distributorship agreement (EDA) that a medical supplier signed with a product manufacturer. The supplier failed to order sufficient amounts of the product under the EDA, but contended that the manufacturer fraudulently induced the supplier to enter into the EDA by making representations that the product was unique. The EDA, however, included an integration clause stating that the agreement constituted the entire agreement between the parties. The arbitrator ruled in favor of the manufacturer, finding that the supplier was barred by the parol evidence rule from asserting that it was fraudulently induced into signing the EDA.

The manufacturer then filed a petition with a district court to confirm the award. Although the supplier failed to file a response to the manufacturer’s petition, the court refused to simply enter a default judgment, holding that a default is not appropriate on a petition to confirm an arbitration award. The court then found that the evidence and the law showed that the arbitrator’s decision was more than “colorable” and confirmed the award. Included in the award was an award of attorneys’ fees. On review, the court found that the manufacturer’s attorneys complied with evidentiary requirements, including submission of an affidavit describing their experience, rate, amount of time spent on the case, and a statement that the requested rates are reasonable in their community. As a result, the district court confirmed the requested amount of fees in their entirety, noting specifically that the supplier had not presented any evidence to the contrary.

Intellisystem, LLC v. McHenry, No. 2:19-cv-01359 (E.D. Pa. June 26, 2019).