Reinsurance Focus

The Tenth Circuit Court of Appeals and a federal district court in Michigan have each issued opinions on motions to compel arbitration. In the Michigan opinion, the court granted a motion for summary judgment, in favor of the defendant, Consolidated Insurance Company, and denied the plaintiff’s motion to compel arbitration. The plaintiff, the representative of the decedent’s estate, sought to recover uninsured motorist benefits under a commercial vehicle policy issued to decedent’s employer. Prior negotiations between the parties resulted in a written agreement to arbitrate the matter. Before arbitration commenced, the defendants canceled the process, arguing that the issue was not arbitral. The defendant’s cancellation was deemed valid based on intervening caselaw holding that coverage did not extend to individuals injured while outside a vehicle. Since the decedent was outside of his truck at the time he was killed, the issue of coverage could not be arbitrated. Johnston v. Indiana Insurance Co., Case No. 13-10797 (USDC E.D. Mich. Feb 11, 2014).

The Tenth Circuit Court of Appeals affirmed a district court’s denial to compel arbitration, finding that since none of the defendant board members signed an agreement with an arbitration clause, they could not be compelled to arbitrate. The court further held that the plaintiff’s alternative legal theories to compel arbitration were forfeited or waived. Genberg v. Porter, No. 13-1140 (10th Cir. May 12, 2014).

This post written by Rollie Goss.

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Establishing that a federal court has jurisdiction to hear an arbitration dispute is not always easy. The Fourth Circuit recently affirmed the dismissal of an action seeking to vacate an arbitration award based upon lack of subject matter jurisdiction. Plaintiff attempted to show that the nexus between her claims and “commerce” fell within the realm of the FAA, and therefore there was a federal question under §1331. However, she failed to raise that argument below, so it was not properly before the court of appeal, and the Court found it to be unavailing in any event. Ball v. Stylecraft Homes, LLC, No. 13-1946 (4th Cir. Mar. 26, 2014)

The Eleventh Circuit affirmed the denial of a motion to remand for lack of jurisdiction. The issue was whether diversity jurisdiction was defeated because the action was a direct action against an insurer, defeating diversity jurisdiction under 28 U.S.C. §1332(c). The Court held that it was not a direct action, and affirmed the district court’s order compelling arbitration. Kong v. Allied Professional Insurance Company, No. 13-12305 (11th Cir. May 9, 2014)

This post written by Rollie Goss.

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The following recent cases analyzed whether the parties entered into a valid agreement to arbitrate and under what circumstances a court may consider that issue.

Dasher v. RBC Bank (U.S.A.), No. 13-10257 (11th Cir. Feb. 10, 2014) (affirming denial of motion to compel arbitration, finding absence of arbitration provision in agreement which superseded prior agreement, which included an arbitration provision, provided no evidence of the parties’ intent to arbitrate)

JP Morgan Chase Bank N.A. v. Bluegrass Powerboats, No. 2011-SC-000668-DG (Ky. Mar. 20, 2014) (affirming trial court’s order setting aside order compelling arbitration after the arbitrator had rendered a dispositive order, finding that because the arbitrator’s decision was not final, and because the evidence did not support the existence of an agreement to arbitrate, the trial court had the power to correct its prior erroneous ruling)

The Flowserve Corp. v. United States Fire Insurance Co., Case No. 2:14-cv-00676 (USDC D. N.J. May 7, 2014) (granting defendant’s motion to compel arbitration, finding that parties’ side agreement, which did not include an arbitration clause and which modified certain terms of the underlying settlement agreement which did include an arbitration clause, evidenced the parties’ agreement to arbitrate where side agreement provided that, except to the extent it modified the terms of the settlement agreement, all terms of the settlement agreement remained binding upon the parties)

Lakah v. UBS A.G., Case No. 1:07-cv-02799-MGC (USDC S.D.N.Y. March 20, 2014) (denying “what amounts to a summary judgment motion” that plaintiffs should be compelled to arbitrate on the basis of veil piercing and estoppels theories because there were issues of fact as to the making of the agreement for arbitration)

Bank of the Ozarks, Inc. v. Walker, 201 Ark. 223 (2014) (vacating appellate court’s reversal of trial court’s order denying motion to compel arbitration, and remanding matter to trial court, finding that trial court, which ruled that arbitration clause was unconscionable, must first determine whether a valid arbitration agreement existed and, if so, whether the dispute fell within the scope of the agreement)

This post written by Leonor Lagomasino.

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An individual had a dispute over work-related issues while working at a Citicorp call center. His employment agreement required arbitration of individual disputes but did not require the arbitration of class claims. The employee filed a class action lawsuit, and left Citicorp’s employ. In what the Sixth Circuit called “a confluence of improbable circumstances,” the former employee was rehired by Citicorp while the class action lawsuit was still pending, but this time signed an employment agreement which required the arbitration of both individual and class claims. The issue was whether he could be compelled to arbitrate the pending class claims. The Court interpreted the second arbitration provision to be prospective only, designed to head off new lawsuits rather than cut off existing lawsuits. This was a question of the interpretation of the arbitration agreement, and despite the general interpretation rule favoring arbitration, the Court found that there was “no doubt” as to the scope of the arbitration provision in the new employment agreement. Therefore, the employee was not required to arbitrate the pending class claims. The Court noted that there was an ethical issue of Citicorp dealing with an employee who was represented by counsel in a pending lawsuit concerning the subject matter of the lawsuit, but found it unlikely that Citicorp’s lawyers intended the provision to be provided to parties to pending litigation. Russell v. Citigroup, Inc., No. 13-5994 (6th Cir. April 4, 2014).

This post written by Rollie Goss.

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A federal judge in the District of Connecticut recently analyzed whether the arbitration provision in a reinsurance agreement was extinguished by a subsequent commutation agreement. The case involved an agreement between the reinsurer, Trenwick America Reinsurance Corporation, and its reinsured Commercial Casualty Insurance Company of Georgia (CCIC). The reinsurance agreement had a “cut through” provision, permitting a direct action by CCIC’s insureds against Trenwick if CCIC became insolvent. In 2004, CCIC became insolvent, and eight years later, one of CCIC’s insureds invoked the cut-through provision and billed Trenwick directly for a claim. Shortly thereafter, Trenwick and the estate of CCIC entered into a commutation agreement under which all reinsurance obligations between Trenwick and CCIC were commuted and extinguished. After Trenwick failed to pay the claim, the insured demanded arbitration, and Trenwick filed suit in federal court seeking to enjoin the arbitration.

The court refused to enjoin the arbitration and granted the insured’s motion to compel arbitration, rejecting Trenwick’s argument that the commutation agreement extinguished the arbitration provision. The court ruled that whether the insured’s claims are subject to arbitration is a question for the arbitrator. It is up to the arbitrator to decide whether the contract containing the arbitration provision was terminated and the effect, if any, of the commutation agreement on the arbitration provision. The court ruled that because the insured was not a party to the commutation agreement, that agreement’s effect on the insured’s rights must necessarily be determined by interpreting the original reinsurance agreement, which is the responsibility of the arbitrator. Trenwick America Reinsurance Corp. v CX Reinsurance Co. Ltd., Case No. 3:13cv1264 (USDC D. Conn. May 23, 2014)

This post written by Catherine Acree.

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After striking the affirmative defense of failure to mitigate, a court quashed a subpoena issued to an arbitrator seeking an unissued arbitration award in a dispute between certain defendants and their reinsurer. The case involved a lawsuit by a state-appointed receiver, Jo Ann Howard & Associates, against numerous defendants stemming from a scheme to defraud consumers in connection with pre-need funeral services contracts issued by Lincoln Memorial. After Howard was appointed, the receivership court stayed the arbitration proceedings between Lincoln Memorial and its reinsurer, Hannover Life Reassurance Company of America. One of the issues pending in the arbitration at the time was Lincoln Memorial’s claim for damages against Hannover arising from Lincoln Memorial’s allegations that Hannover’s arbitration-related conduct had brought Lincoln Memorial to the brink of insolvency.

Two of the other defendants, both banks, raised as affirmative defenses Howard’s failure to mitigate damages. The banks alleged Howard’s decision not to pursue Lincoln Memorial’s claims against Hannover caused Howard’s damages. The banks subpoenaed the arbitrator in the Lincoln/Hannover arbitration to obtain a copy of the unissued arbitration award. The court granted Howard’s motion to strike the banks’ failure to mitigate defense, finding the defense legally insufficient. The defense was not causally related to Howard’s damages claim because Howard’s claims against Lincoln Memorial arose from Lincoln Memorial’s handling of pre-need trust accounts, and not from Lincoln Memorial’s insolvency. Further, a receiver’s ability to recover assets or damages for wrongdoing is important to the public, and allowing such an affirmative defense would encumber a receiver’s ability to perform these functions. Jo Ann Howard & Associates, P.C. v. J. Douglas Cassity, Case No. 4:09CV01252 ERW (USDC E.D. Mo. May 9, 2014).

This post written by Leonor Lagomasino.

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A federal district court has taken under advisement plaintiff’s motion for injunction and defendant’s cross-motion to compel arbitration after conducting a hearing on the matter. The issue to be decided is whether CX can compel Trenwick to participate in an arbitration based upon a reinsurance agreement as to which CX was not a party and which, according to Trenwick, was terminated. At the core of this dispute is a reinsurance agreement under which Trenwick reinsured Commercial Casualty Insurance Company. CX argued the reinsurance agreement included a “cut-through” provision which gave CX the right to collect directly against Trenwick even though CX was not a party to the reinsurance agreement. Trenwick denied liability under this cut-through provision and further denied that the cut-through provision gave its beneficiaries, including CX, any rights under the agreement’s arbitration clause. Additionally, Trenwick argued that the reinsurance agreement was terminated further to a commutation agreement between Trenwick and CCIC’s Liquidator and, as a result, terminated any rights CX may have had under the cut-through provision and any requirement to arbitrate CX’s claims. CX responded that it was not a party to the commutation agreement, which could therefore not extinguish CX’s right to arbitrate. CX also argued that Trenwick’s termination defense must be arbitrated. Trenwick America Reinsurance Corp. v. CX Reinurance Company Limited, Case No. 3:13-cv-01264 (JBA) (USDC D. Conn. Apr. 28, 2014).

This post written by Leonor Lagomasino.

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The Tenth Circuit has pointedly reversed a trial court’s decision to deny arbitration, based on the fact that the lower court failed to hold a trial (as required by the FAA) when disputed questions of fact surrounding the parties’ oral agreement remained. The case was brought as a class action against a propane gas company for overcharging customers. Despite multiple rounds of lengthy discovery, factual questions remained regarding the content of conversations between the parties, and when the “last act” of contract formation occurred for purposes of determining choice of state contract law. The Tenth Circuit concluded: “Summary-judgment-like motions practice may be a permissible and expedient way to resolve arbitrability questions when it’s clear no material disputes of fact exist and only legal questions remain. But when factual disputes may determine whether the parties agreed to arbitrate, the way to resolve them isn’t by round after round of discovery and motions practice. It is by proceeding summarily to trial. That is the procedure the [FAA] requires and the parties should have undertaken a long time ago – and it is the procedure they must follow now.” Howard v. Ferrellgas Partners, L.P., Case No. 13-3061 (10th Cir. April 8, 2014).

This post written by Michael Wolgin.

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The Third Circuit recently vacated a lower court’s decision granting a motion to compel arbitration of (1) direct claims by certain cardiac services health providers against CIGNA and (2) claims by those providers on behalf of employee benefit plan participants who were initially denied coverage of the cardiac services by CIGNA but subsequently provided such services by the providers in exchange for assignment of their rights and claims under ERISA against CIGNA to the providers. After observing that the plain language of an arbitration agreement controls and that the presumption of arbitrability applies only where an arbitration provision is ambiguous, the Court of Appeals first held that the alleged facts underlying the direct claims unambiguously did not concern “the performance or interpretation” of the administrative agreement between CIGNA and the providers, as required by the arbitration clause, because the claims involved a CIGNA policy update document distinct from, and sent years after, the administrative agreement. As for the derivative claims, which related to CIGNA’s decision to deny coverage of the cardiac services to the participants, the court concluded that such coverage decision was subject to the terms or conditions of the applicable benefit plan and governed by ERISA, not the administrative agreement. The participants’ rights to pursue their ERISA claims in court could not be diluted through compelled arbitration just because the providers, as assignees, had promised to arbitrate certain of the direct claims they might bring against CIGNA. CardioNet, Inc. v. CIGNA Health Corp., No. 13-2496 (3d Cir. May 6, 2014).

This post written by Kyle Whitehead.

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We previously reported on December 17, 2013, about a dispute in federal court between Nationwide Mutual Insurance Company, National Casualty Company, and Employers Insurance Company of Wausau (collectively, “Nationwide”) and Arrowood Indemnity Company. The dispute concerned the process for appointing a “tie-breaking” umpire in a series of reinsurance coverage arbitrations. Most of the reinsurance agreements contained express provisions regarding the steps to be taken to select the umpire, including the “drawing of lots.” However, certain of the treaties – referred to as the 1967 Treaties – did not provide a clear process for what to do if the two party-appointed arbitrators failed to agree on the selection of the umpire. The court instructed the parties to follow the procedure set forth in the other treaties, and then report back regarding how to handle the appointment under the 1967 Treaties. Once an umpire had been validly appointed pursuant to the terms of the other treaties, the same umpire would be “presumptively appropriate for appointment by the Court” for the remaining disputes under the 1967 Treaties.

After the court issued those instructions, Joseph Goldberg was selected as the umpire pursuant to the terms of the other treaties. Thereafter, Nationwide moved the court to appoint Goldberg as the umpire for the remaining disputes regarding the 1967 Treaties. Arrowood objected, arguing that the decision about Goldberg’s appointment under the 1967 Treaties was premature because the parties had not yet had an opportunity to obtain disclosures from Goldberg in connection with organizational meetings to determine whether he could be neutral. On April 9, 2014, the court agreed with Arrowood and deferred ruling until after the organizational meetings have been held and the parties have had sufficient opportunity to consider the resulting disclosures. Employers Insurance Co. of Wausau v. Arrowood Indemnity Co., Case No. 12-cv-08005-LLS (USDC S.D.N.Y April 9, 2014).

This post written by Catherine Acree.

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