Reinsurance Focus

Addressing the method of appointing a tie-breaking umpire-arbitrator in a series of reinsurance coverage arbitrations commenced by insurer Arrowood Indemnity Company, the Southern District of New York recently ordered that the parties’ already chosen arbitrators follow the steps provided in the “excess of loss” reinsurance agreements in selecting the third arbitrator. Although the relevant reinsurance treaties specified a method for such selection, Arrowood sought an alternative approach, which included the nomination by each party of up to eight candidates and a voir dire-like objection and selection process. However, the Court, acting under authority granted by Section 5 of the Federal Arbitration Act, denied that alternative, ordering that the present arbitrators select an umpire in accordance with the treaties’ requirements. Then, the Court would regard that selection as “presumptively appropriate,” albeit rebuttable, for appointment by the Court as umpire for the remaining arbitrations of the series. Employers Insurance Co. of Wausau v. Arrowood Indemnity Co., No. 12-cv-08005-LLS (USDC S.D.N.Y. Oct. 25, 2013).

This post written by Kyle Whitehead.

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The threshold issue before the Sixth Circuit on an appeal from a dispute involving LexisNexis and one of its law firm customers was whether the question of classwide arbitrability is a gateway question to be determined by the court or a subsidiary question to be determined by an arbitrator, a question expressly left open by the Supreme Court in its most recent term. Following an analysis of recent Supreme Court jurisprudence, which seemed to lean toward deciding that classwide arbitrarily is a gateway question, the Sixth Circuit definitively stated that it is a gateway question reserved for judicial determination. The Court next analyzed the arbitration clause at issue in the dispute and held that it did not authorize class arbitration because it was silent on that issue and limited the scope of arbitration to the specific order between LexisNexis and the law firm, precluding the arbitration of other customers’ orders with LexisNexis. Reed Elsevier, Inc. v. Crockett, No. 12-3574 (6th Cir. Nov. 5, 2013).

This post written by Abigail Kortz.

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In a case involving an insurer’s attempt to avoid payment of a claim under an underinsured motorist policy after a car accident on statute of limitations grounds, the Eastern District of Pennsylvania resorted to the basics of contract law in denying the insurer’s motion for summary judgment and granting the policyowner’s petition to compel arbitration. Although the parties agreed that Pennsylvania has a four-year statute of limitations for contractual actions, they disagreed as to when the limitations period begins to run in an underinsurance case. Sitting in diversity, and absent any rulings on point by the state’s highest court, the court determined that, based on relevant state and Third Circuit precedent, the Pennsylvania Supreme Court likely would rule that the statute of limitations begins to run on an underinsurance claim when the insured actually settles with the underinsured driver. Thus, consistent with both the purpose of consent-to-settlement provisions, which give insurers an opportunity to exercise their subrogation rights prior to the formation of binding settlement agreements, and contract law, the statute of limitations began to run on the date the policyowner accepted the tortfeasor’s settlement offer by signing the release absolving the tortfeasor from further liability. Wilson v. Great American Insurance Group, Case No. 12-5700 (E.D. Pa. Oct. 25, 2013).

This post written by Kyle Whitehead.

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A federal court in Missouri denied a defendant’s motion to compel arbitration. Two contracts were at issue. The first was a contract between the plaintiff, a pharmacy benefits manager, on the one hand, and a network of pharmacies – in which defendant, a chain of pharmacies in Oklahoma, participated – on the other. This contract governed the payment of pharmacy claims and did not include an arbitration provision. A separate contract directly between the plaintiff and defendant regarding claims audits contained an arbitration agreement. The plaintiff made claim for reimbursement for certain claims under the former agreement, and the defendant then initiated an arbitration in Missouri. The plaintiff resisted arbitration, and filed an action in court challenging arbitration on the grounds that the contract at issue contained no arbitration provision. The court agreed, noting that the evidence submitted made clear that the claims pertained only to the agreement with no arbitration agreement, and that therefore the claims could and should proceed in court. Express Scripts, Inc. v. The Apothecary Shoppe, Inc., No. 4:12-cv-01035 (USDC E.D. Mo. Sept. 30, 2013).

This post written by John Pitblado.

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The Ninth Circuit affirmed a ruling holding an arbitration agreement to be unconscionable under California contract law. Attempting to narrow the limits of the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, the Ninth Circuit found the agreement unconscionable in a manner not “uniquely applicable to arbitration.” The arbitration agreement at issue was part of an employment contract, and the district court found the arbitrator selection process to be peculiarly unfair, insofar as it essentially left the choice of arbitrator to the employer. The provision employed a process allowing both sides to nominate three choices, and then strike out choices until only one selection remained. It allowed the party against whom arbitration was sought to make the first deletion from the list, with the parties to take turns thereafter. The district court found that this effectively meant that the last arbitrator standing would be one of the three employer-chosen names. It also found other terms in the contract unfairly balanced in the employer’s favor and “shocked the conscience.” The Ninth Circuit affirmed the district court’s finding that the contract was unconscionable under state contract law, in a way that did not unfairly target its arbitration provision, thus avoiding the strictures of Concepcion and the FAA, which presumptively favor arbitration. Chavarria v. Ralph’s Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013).

This post written by John Pitblado.

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In Virginia, defendant’s employment of plaintiff for house cleaning services became messy when plaintiff sued her employer for numerous torts, statutory violations and breach of contract. With foresight, defendant had required plaintiff to sign a one-page Arbitration Agreement requiring resolution of “any and all claims, disputes, or controversies arising out of” plaintiff’s employment exclusively by the National Arbitration Forum (“NAF”) and sought to enforce that Agreement. The NAF was no longer available to administer the arbitration. Plaintiff argued that designation of the NAF as exclusive arbitrator was integral to the Agreement and the NAF’s unavailability rendered the Agreement unenforceable. The lower court agreed, but the matter was ultimately tidied up in defendant’s favor. On appeal, the supreme court found the NAF designation was not integral to the agreement because: (1) the Agreement included a severability provision, (2) the sole object of the Agreement was to require arbitration, (3) the parties were presumed to know the courts are directed by statute to appoint an arbitrator when an arbitration agreement fails to appoint one, and (4) nothing indicated that the parties considered the contingency that the NAF might not be available. Schuiling v. Harris, slip op (Va. Sept. 12, 2013).

This post written by Abigail Kortz.

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On September 25, 2012, we reported on an order finding unconstitutional the confidentiality provision of Delaware’s novel business arbitration procedures, in which a sitting judge of the Court of Chancery presides in court as arbitrator. The federal district court held that since the arbitration process essentially functions like a civil trial, the confidentiality provision violated the qualified right of access to criminal and civil trials protected by the First Amendment. On appeal, the Third Circuit affirmed (with one dissenting judge), but not before conducting the First Amendment “experience and logic test,” which the lower court had failed to do. As to “experience” the court explored the history of both civil trials and arbitrations and concluded that “both the place and process of Delaware’s proceeding have historically been open to the press and general public.” Regarding the “logic” of public access to the arbitration proceedings, the court held that the “benefits of openness weigh strongly in favor of granting access to Delaware’s arbitration proceedings” and in “comparison, the drawbacks of openness” are relatively slight. The court did not give much weight to the Delaware chancellor and judges’ arguments that: (1) privacy is necessary to protect closely held information, (2) privacy is necessary to prevent the “loss of prestige and goodwill” of the disputants, (3) privacy encourages a “less hostile, more conciliatory approach,” and (4) that public access would “effectively end Delaware’s arbitration program.” The court concluded, “the interests of the state and the public in openness must be given weight, not just the interests of rich businesspersons in confidentiality.” Delaware Coalition for Open Government, Inc. v. Strine, Case No. 12-3859 (3d Cir. Oct. 23, 2013).

This post written by Michael Wolgin.

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Although federal policy strongly favors arbitration and waiver of a right to arbitrate is not lightly inferred, the Second Circuit recently affirmed the Southern District of New York’s finding of waiver in a case involving “protracted litigation that prejudice[d] the opposing party.” While bright-line rules do not exist for determining when a party has waived its right to arbitration, there are certain factors that courts consider: (1) the time elapsed from commencement of litigation to the request for arbitration, (2) the extent of litigation (including any substantive motions and discovery), and (3) proof of prejudice. The Second Circuit found waiver because the defendant, with knowledge of the arbitration provision, had waited fifteen months after the complaint was filed to raise its contractual rights and had already argued two substantive motions to dismiss, engaged in extensive written discovery requests, and deposed a key plaintiff witness. Additionally, the court defused the defendant’s argument that Second Circuit arbitration jurisprudence conflicted with the Federal Arbitration Act, ultimately holding that its waiver case law “derives from the uncontroversial premise that affirmative defenses like arbitrability ‘are subject to forfeiture if not raised in a timely fashion.’” Technology in Partnership, Inc. v. Rudin, No. 12-3699-cv (2d Cir. Sept. 17, 2013).

This post written by Kyle Whitehead.

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A Wisconsin Court of Appeals recently affirmed an order enjoining a reinsurer from withholding or failing to make payments to an insurer’s segregated account, which the insurer had established for troubled parts of its insurance business, including mortgage-backed securities, credit default swaps, and municipal bonds. Under an approved rehabilitation plan for the troubled segregated account, policyholders were to receive 25% of their claim amounts in cash and the remaining 75% in surplus notes. Although the reinsurer acknowledged an obligation to pay proportionately for the cash portion of any settlement agreements reached, it refused to reimburse the segregated account for the value of any surplus notes provided to policyholders unless and until the segregated account made cash payment on those notes and sought to compel arbitration. The rehabilitation court disagreed, and the Court of Appeals affirmed, finding: (1) that the rehabilitation court in Wisconsin had personal jurisdiction over the nonresident reinsurer based on minimum contacts and the reinsurer’s notice of the pending rehabilitation plan; (2) that the rehabilitation court had exclusive jurisdiction to determine any matter relating to a delinquent insurer that would otherwise be subject to an arbitration proceeding; and (3) that the reinsurer’s payment obligations stemmed not only from the contracts themselves, but also from the policies underlying the reinsurance contract. In re Rehabilitation of: Segregated Account of Ambac Assurance Corp., Case No. 2010CV1576 (Wis. Ct. App. Oct. 24, 2013).

This post written by Kyle Whitehead.

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California’s appellate courts have had a strained relationship with the U.S. Supreme Court when it comes to enforcement of the FAA in the last few years. Illustrative of this tension is a recent decision captioned Sonic-Calabasas A, Inc. v. Moreno, No. S174475 (Cal. Oct. 17, 2013) (“Sonic II”). The Court in Sonic II was instructed by the U.S. Supreme Court to reconsider its ruling in Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (“Sonic I”), which invalidated an arbitration agreement.

The dispute arose from an employment wage dispute. The heart of the case was whether California’s statutory employment dispute mandatory ‘pre-screening’ process (referred to as a “Berman hearing”) could be waived by an arbitration agreement, such as the one in the employment contract at issue. In Sonic I, the Court held that an arbitration agreement that waives a Berman hearing is unconscionable and unenforceable. Shortly after Sonic I was released, the U.S. Supreme Court released its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ [131 S.Ct. 1740] (2011) (“Concepcion”). The defendant thereafter sought review of Sonic I by the U.S. Supreme Court, which granted certiorari and reversed, citing Concepcion and the FAA’s strong presumption in favor of arbitration.

On remand, in Sonic II, the Court held that, consistent with Concepcion, “the FAA preempts our state-law rule categorically prohibiting waiver of a Berman hearing.” However, it left the trial court some wiggle room to nevertheless find the agreement unconscionable on remand, holding (and citing Concepcion) that “state courts may continue to enforce unconscionability rules that do not interfere with fundamental attributes of arbitration.”

Based on its finding that evidence relevant to such an unconscionability claim was not developed, it remanded to the trial court to determine in the first instance whether the present arbitration agreement is unconscionable.

This post written by John Pitblado.

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