Reinsurance Focus

Plaintiff Georgia Casualty & Surety Company entered into two reinsurance contracts with Defendant Excalibur Reinsurance Corporation, formerly known as PMA Capital Insurance Company. Both reinsurance contracts contained arbitration clauses. The First Excess Reinsurance Contract contained a choice of law provision but no forum selection clause, and the Second Excess Reinsurance Contract contained a forum selection clause but no choice of law provision. In 2006, Douglas Asphalt Company sued Applied Technical Services, Inc., a Georgia Casualty insured. Applied was found liable. While that judgment was on appeal, a high-low agreement was entered, which guaranteed that Georgia Casualty would pay Applied no less than $3 million and no more than $12 million. Thereafter, the Eleventh Circuit vacated the judgment against Applied. Georgia Casualty claimed that it was owed $1,418,708 under the two reinsurance contracts. In response, Excalibur argued that Georgia Casualty promised to seek malpractice damages against defense counsel for Applied and that this lawsuit would be a prerequisite to determining Excalibur’s liability. Additionally, Excalibur claimed that it did not consent to the high-low agreement. Georgia Casualty demanded arbitration of Excalibur’s alleged breach of the reinsurance contracts. Excalibur demanded arbitration on a counterclaim for unpaid premiums. Excalibur refused to consolidate the arbitration of all claims under both reinsurance contracts and requested that the arbitrators stay the arbitration pending the resolution of the malpractice claims. Georgia Casualty claimed this was a delay tactic and sued Excalibur.

The court found that if the Federal Arbitration Act or a state arbitration act lacking a statutory consolidation provision applied, then a court may consolidate arbitration only if the contracts expressly permit. Alternatively, if a state arbitration act that allows courts to impose consolidation regardless of the contracts’ terms governs the contracts, then a court may order consolidation where the statutory requirements are satisfied. Because the Second Excess Reinsurance Contract lacked a choice of law provision, it was governed by the FAA. Thus, the court could not order consolidation. Because the court could not order consolidation, it also could not designate a forum for that consolidated arbitration. With respect to a potential stay, the court believed it had to tread carefully to not violate the principle that, in determining whether a dispute is arbitrable, a court should not rule on the merits of the underlying claims. The court could not order the arbitrators not to stay the arbitration pending any potential malpractice recovery. The court also could not delve into the contract to determine if the contract required Excalibur to post security (in response to Georgia Casualty’s claim that Excalibur was delaying the proceedings). Georgia Casualty & Surety Co. v. Excalibur Reinsurance Corp., Case No. 1:13-CV-00456-JEC (USDC N.D. Ga. Mar. 13, 2014).

A federal court of appeals has affirmed a district court’s decision that parties to a pending lawsuit waived their right to compel arbitration by waiting 11 months after that lawsuit was filed to invoke their right. Instead of exercising their right to compel arbitration according to the agreement at issue, defendants actively litigated the case in federal court, conducting discovery and litigating motions. The court found that plaintiffs, in opposing defendants’ belated motion to compel arbitration, had shown that (1) defendants had knowledge of their right, (2) defendants’ actions in litigating the dispute in court were inconsistent with that right, and (3) plaintiffs would be prejudiced by arbitration at such a late date. Prejudice was founded upon the waste of time and money already spent in federal court, the additional expense the parties would incur if they now needed to educate arbitrators, and the threat of forcing plaintiffs to relitigate matters already decided by the district court judge. James V. Kelly, et al. v. Public Utility District No. 2 of Grant County, et al., No. 12-35639 (9th Cir. Jan. 13, 2014).

This post written by Renee Schimkat.

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A federal district court has stayed a case where Nationwide Mutual Insurance Company petitioned to compel arbitration of a dispute that its cedent Liberty Mutual Insurance Company claims was already adjudicated by an arbitration panel and confirmed by a state court judgment. Nationwide sought to compel arbitration on the issue of whether Liberty Mutual breached its obligations under an access to records provision of the parties’ reinsurance treaties. In support, Nationwide cited the breadth of the treaties’ arbitration clauses and the strong federal policy favoring arbitration. Liberty Mutual countered that the very issue Nationwide sought to arbitrate was already decided as part of a panel’s decision regarding Nationwide’s payment obligations under the treaties and that Liberty Mutual had already moved to enforce a state court judgment confirming that very arbitration award. The court presumably agreed with Liberty Mutual that the identical claims were at issue before the state court, a fact which Nationwide disputed, and that the federal action should therefore be stayed in deference to the state court’s pending decision to enforce its own judgment under the Colorado River abstention doctrine, or in the interests of comity and sound judicial administration. Nationwide Mutual Insurance Co. v. Liberty Mutual Insurance Co., Case No. 1:13-CV-12910 (USDC D. Mass. Feb. 21, 2014).

This post written by Renee Schimkat.

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In a case of first impression in the First Circuit, Employers Insurance Company of Wausau and National Casualty Company (“Wausau”), two of three reinsurers under identical agreements with OneBeacon American Insurance Co. (“OneBeacon”), petitioned a federal court for a declaration that a prior arbitration award between One Beacon and the third reinsurer had preclusive effect over OneBeacon’s subsequent demand for arbitration against Wausau. The district court dismissed the action, agreeing with OneBeacon that a determination of the preclusive effect of the arbitration award itself was arbitrable. On appeal, Wausau argued that because the federal court confirmed the prior arbitration award, thus affording that award the same “force and effect” as any other federal court judgment pursuant 9 U.S.C. §13, then only the federal court could determine its preclusive effect. The First Circuit rejected this argument, noting that an arbitration award is distinct from the federal judgment confirming the award. Because a federal court’s review of an arbitration award does not include a review of the merits or legal basis of the award, which would be required in order to determine its preclusive effect, the First Circuit concluded that such a determination fell outside the purview of the federal court. Employers Insurance Company of Wausau and National Casualty Company v. OneBeacon American Insurance Co., et. al., Case No. 13-1913 (1st Cir. Feb. 26, 2014).

This post written by Leonor Lagomasino.

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When an arrangement to jointly design health insurance products went sour, the product company (“PBG”) brought breach of contract and tort claims against its insurance agents. Acknowledging an existing arbitration agreement, PBG admitted that the contract claims should be arbitrated, but tried to keep the tort claims alive in the judicial system based on an Iowa choice-of law provision. PBG argued that the provision evinced the parties’ intent that an Iowa statute carving out tort claims from valid arbitration clauses should apply. Finding no ambiguity in the arbitration agreement that would allow for consideration of extrinsic evidence like the Iowa statute, and relying on the strong federal policy favoring arbitration, the court disagreed and ordered all claims, contract and tort, to arbitration. Pinnacle Benefits Group, LLC v. American Republic Insurance Company, Case No. 1:13CV186 (M.D.N.C. Dec. 13, 2013).

This post written by Abigail Kortz.

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A New York federal district court affirmed an arbitration award in favor of R&Q Reinsurance Company as against its cedent, Utica Mutual, in a reinsurance dispute arising from certificates issued by R&Q reinsuring certain umbrella coverage Utica had written covering asbestos-related exposure of its insured. The parties began arbitrating a billing dispute in 2008 which, as of May, 2013, involved more than $21.7 million in disputed amounts. Utica sought coverage for four categories of loss: indemnity, defense, “orphan shares,” and declaratory judgment expense. The panel heard the case and decided in Utica’s favor only on the first category, and in R&Q’s favor on the other three. The panel did not, however, indicate in its award the precise amount owed to Utica by R&Q for the indemnity losses. Both parties made various post-award motions for clarification, but Utica never sought in any of these motions for the panel to set out the precise amount Utica was owed under the first category of loss which it was awarded. R&Q thereafter brought an action in court to confirm the award. The court found that Utica’s failure to seek clarification of the amount with the panel precluded vacatur of the award and that, “[f]or better or worse, the parties to this arbitration tasked the arbitral panel with resolving their dispute at a conceptual, rather than a mathematical, level.” R&Q Reinsurance Co. v. Utica Mutual Insurance Co., Case No. 13-Civ-8013 (USDC S.D.N.Y. Feb. 14, 2014).

This post written by John Pitblado.

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The Ninth Circuit Court of Appeals recently affirmed the U.S. District Court of Nevada’s confirmation of an arbitration award allocating attorneys’ fees and denial of a motion to vacate the award.  After first holding, in a separate opinion, that parties may not waive or eliminate judicial review of arbitration awards under Section 10 of the Federal Arbitration Act, the court next communicated a laundry list of reasons for which a district court may vacate an arbitration award: (1) if the arbitrator’s decision is procured by corruption, fraud, or undue means; (2) if the arbitrator was evidently partial or actually biased; (3) if mediation and related fund transfers are undisclosed; (4) if communications are made ex parte; (5) if the arbitrator exceeds arbitral jurisdiction or issues biased rulings; and (6) if the arbitrator fails to disclose material conflicts of interest.  Finding that the district court correctly concluded that the arbitrator had not engaged in any such misconduct and that no prejudice was shown in any event, the Ninth Circuit affirmed.  In re Wal-Mart Wage and Hour Employment Practices Litigation, No. 2:06-cv-00225-PMP-PAL (9th Cir. Dec. 17, 2013).

This post written by Kyle Whitehead.

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For the past several years, Yahoo! has been merging its search engine and search ads system, Panama, with Microsoft’s Bing search engine. Yahoo! “paused” its efforts to integrate with Microsoft in Taiwan and Hong Kong when Microsoft CEO Steve Ballmer announced that he plans to step down. Microsoft considered this “pause” a breach of their agreement with Yahoo! and initiated an emergency arbitration in which the arbitrator ordered Yahoo! to “use all efforts” to complete the Taiwan and Hong Kong transitions in 2013. Yahoo! moved to vacate the award in the S.D.N.Y. on the basis that the injunctive relief granted to Microsoft was not interim relief as authorized by the arbitration agreement, but was final. The court denied Yahoo!’s petition and confirmed the arbitration award because the arbitrator had a “colorable basis” for concluding that an injunction was necessary to restore the status quo. Yahoo!, Inc. v. Microsoft Corporation, Case No. 13-7237 (S.D.N.Y. Oct. 21, 2013).

This post written by Abigail Kortz.

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New Mexico law considers arbitration provisions that apply primarily to the claims that one party to the contract is likely to bring to be unconscionable and unenforceable.  This law, the Tenth Circuit holds, is preempted by the Federal Arbitration Act because it is based on the underlying assumption that arbitration is inferior to litigation in court.  Supreme Court precedent is clear that arbitration provisions cannot be invalidated by generally applicable contract defenses, like unconscionability, “that derive their meaning from the fact that an agreement to arbitrate is at issue.”  Thus, an arbitration provision that permits a nursing home to litigate its most likely claims against its residents, but requires arbitration of the residents’ most likely claims against the nursing home, is enforceable.  THI of New Mexico at Hobbs Center, LLC v. Patton, No. 13-2012 (10th Cir. Jan. 28, 2014).

This post written by Abigail Kortz.

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The Eastern District of New York recently adopted the recommendation of a magistrate judge to grant a defendant-insurer’s motion to stay adjudication and compel arbitration, whilst also providing a refresher course in arbitration clause interpretation principles. First, the court dissected the arbitration clause’s condition precedent, holding that a provision requiring arbitration following the request of either party is a mandatory arbitration clause. The requirement that a dispute be submitted to arbitration within thirty days of such request “merely sets a time limit for commencement of an arbitration proceeding.” Moreover, whether a condition precedent has been satisfied is a procedural question presumptively for an arbitrator to decide, not a substantive question, such as whether the clause applies to a particular type of controversy, for a judge. Second, the court held that whether the motion to compel complied with applicable arbitration rules was inapplicable because those rules “do not come into play until an order is entered compelling arbitration or the parties agree to do so.” Third, noting the presumption of arbitrability, the court distinguished Second Circuit case law addressing an instance where a subsequent agreement to adjudicate created ambiguity in the parties’ intentions, and held that, here, “there is no subsequent agreement that abrogates th[e] agreement to arbitrate.” Lastly, the court analyzed a New York choice-of-law provision to determine the arbitrability of a punitive damages claim, holding that the provision should be read to encompass substantive principles that New York would apply, not special rules in New York that may limit the authority of arbitrators with respect to claims such as punitive damages. MQDC, Inc. v. Steadfast Ins. Co., Case No. 12-CV-1424 (ERK) (MDG) (E.D.N.Y. Dec. 6, 2013).

This post written by Kyle Whitehead.

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