Reinsurance Focus

On June 20th, the U.S. Supreme Court reversed a decision from the Second Circuit that refused to enforce a class waiver arbitration provision in a putative antitrust class action. The Supreme Court held that individual arbitration could be compelled under the FAA based on a class waiver contract provision, notwithstanding that the cost of arbitration exceeded the potential recovery. The Supreme Court based its decision on its prior ruling in Concepcion, and the fact that nothing in the antitrust laws or the class action procedural rules guarantee an affordable path to litigating claims. Additionally, the Court held that the class waiver did not run afoul of prior case law stating that a class waiver might be prohibited if it precluded “effective vindication” of statutory rights. The Court explained that that exception is intended to prevent only a “prospective waiver” of a right to pursue statutory remedies, which does not exist simply because it is not cost-effective to prove one’s case. American Express Co. v. Italian Colors Restaurant, Case No. 12-133 (S. Ct. June 20, 2013).

This post written by Michael Wolgin.

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A federal court dismissed claims brought by the putative assignee of rights from a previously liquidated captive insurer, against the defendant reinsurer, for alleged payment dispute under reinsurance treaties issued by the defendant to the captive between 1977 and 1986. The plaintiff petitioned to compel arbitration in 2012, and this blog has reported on the court’s denial of plaintiff’s request that the defendant post pre-judgment security, and the plaintiff’s appeal of that decision, as well as the court’s subsequent decision dismissing the case for lack of standing, as the court found the assignee plaintiff had not been assigned the right to arbitrate.

The plaintiff thereafter filed an amended complaint, ostensibly to cure the jurisdictional defect regarding assignment of the right to arbitrate. However, the court again sided with the defendant reinsurer, finding that the amendment did not cure the defect, that the plaintiff has no right to compel arbitration, and that the plaintiff’s claims should be dismissed for failure to state a claim. Pine Top Receivables of Illinois, LLC v. Banco De Seguros Del Estado, No 12 C 6357 (USDC N.D. Ill. June 11, 2013).

This post written by John Pitblado.

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Two recent appellate decisions highlight the subtleties involved in determining whether multiple contracts are sufficiently interconnected and relied upon to compel arbitration in a dispute that purportedly involves a contract lacking arbitration provisions. In Robinson Brog Leinwand Green Genovese & Gluck P.C. v. John M. O’Quinn & Associates, the Second Circuit affirmed an order compelling arbitration in a case brought by one law firm against a co-counsel firm to recover attorneys’ fees and expenses for legal work in a stock fraud case. The plaintiff firm sought fees under a joint legal representation agreement, which did not contain an arbitration clause. The defendant moved to compel arbitration, contending that the related client agreement, which contained a broad arbitration clause, supported arbitration. The court agreed with the defendant and compelled arbitration, and the Second Circuit affirmed, holding that the client agreement, which detailed the attorney client relationship, set the contingency fee, and memorialized the client’s promise to pay attorney fees and expenses “function[ed] together with the other agreements” and provided the “basis for generating a potential recovery” for the plaintiff firm’s claim for attorneys’ fees and expenses. Robinson Brog Leinwand Green Genovese & Gluck P.C. v. John M. O’Quinn & Associates, Case No. 12-2915 (2d Cir. April 22, 2013).

In contrast, in Dental Associates, P.C. v. American Dental Partners of Michigan, LLC, the Sixth Circuit affirmed an order denying arbitration in a dispute involving a service agreement for administrative services entered in connection with the purchase of dental practices. The court found that the dispute was not arbitrable because the plaintiff’s claims for breach of fiduciary duty and breach of contract, and related claims arose only under the service agreement, which did not provide for arbitration of such a dispute. The court found that the related purchase agreement, which did contain relevant arbitration provisions, was not “an umbrella agreement” and did not create the relationship between the parties. The purchase agreement, the court explained, governed only a “one time purchase and transfer of assets,” whereas the service agreement defined “the ongoing business relationship between the parties,” created the fiduciary duty in question, and was capable of interpretation independently. The court also construed the service agreement to find that the parties did not intend to arbitrate the claims at issue in the case. Dental Associates, P.C. v. American Dental Partners of Michigan, LLC, Case No. 12-1008 (6th Cir. March 28, 2013).

This post written by Michael Wolgin.

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In a unanimous opinion authored by Justice Kagan, the Supreme Court concluded that an arbitrator did not “exceed [his] powers” under §10(a)(4) of the Federal Arbitration Act (“FAA”) when he found that the parties’ contract provided for class arbitration. The arbitrator interpreted an arbitration clause which provided for final and binding arbitration in lieu of civil action and determined that the clause authorized class arbitration. The party opposing class arbitration twice moved in federal court to vacate the arbitrator’s decision on the ground that he “exceed [his] powers” under § 10(a)(4) and was twice denied by the district court and the Third Circuit. The Supreme Court concluded that the limited judicial review of §10(a)(4) did not allow it to find that the arbitrator exceeded his powers because the only question for a judge under § 10(a)(4) “is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Since the arbitrator “articulate[d] a contractual basis for his decision” he did not exceed his powers. Justice Kagan distinguished the Court’s holding in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., in which the Court relied on § 10(a)(4) to vacate an arbitrator’s decision approving class proceedings. According to the Court, the distinction lies in the fact that in Stolt-Nielsen the parties stipulated that they had not reached an agreement regarding class arbitration and the arbitrator simply imposed his own views rather than interpret an agreement. Oxford Health Plans LLC v. Sutter, No. 12-135 (U.S. June 10, 2013).

This post written by Abigail Kortz.

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In an uninsured/underinsured motorists coverage case, the plaintiff, an injured party in a collision with an underinsured driver, sued her insurer for underinsured motoriests benefits under her policy, which carried limits of $100,000. She was awarded $120,000 by the arbitrator, and the plaintiff then moved to comfirm in court. The insurer objected, based on the fact that there was no basis for any award beyond the policy’s limits. The trial court agreed with the insurer, and vacated that portion of the award in excess of $100,000, and otherwise confirmed the award as modified. However, on appeal, the Supreme Court of Rhode Island reversed, noting:

In modifying this award, the trial justice accepted defendant‘s contention that, . . . arbitrators may not award prejudgment interest above policy limits. . . . In effect, then, the trial justice modified the award based on his belief that the arbitrators had made an error of law. However, it is settled beyond a hint of contradiction that a mistake of law is not grounds for upsetting an arbitration award.

Wheeler v. Encompass Insurance Co., No. 2011-313 (R.I. May 24, 2013).

This post written by John Pitblado.

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UPS sued Lexington Insurance Company seeking a declaratory judgment that Lexington was obligated to defend and indemnify UPS in an underlying personal injury action and for breach of contract for failing to defend. UPS had entered into a guard services agreement with Lexington’s insured Adelis. The agreement required Adelis to indemnify UPS for liabilities UPS might incur from any injury to an Adelis employee, unless the injury was cased solely by UPS’s negligence. Adelis’s Lexington policy contained an additional insured endorsement that would cover UPS for personal injury caused by Adelis’s employees or Adelis. The policy also contained an arbitration clause providing that “in the event of a disagreement as to the interpretation of this policy, it is mutually agreed that such dispute shall be submitted to binding arbitration.”

Lexington moved to compel arbitration, arguing that the dispositive issue of whether the injury was entirely the result of UPS’s negligence was a matter of policy interpretation that should be arbitrated. The court disagreed and denied Lexington’s motion, reasoning that the arbitration clause was narrow and the issue of UPS’s degree of negligence involved application of the facts to the policy language and not policy interpretation. Thus, the court held, the dispute was not within the purview of the narrow arbitration clause. United Parcel Service v. Lexington Insurance Co., Case No. 12 Civ. 7961 (USDC S.D.N.Y. May 7, 2013).

This post written by Ben Seessel.

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VRG Linhas Aereas, a subsidiary of GOL Linhas Aereas, initiated an arbitration administered by the International Court of Arbitration for the International Chamber of Commerce (ICC) against MatlinPatterson, a New York private equity firm. The dispute concerned the calculation of the price for VRG in VRG’s purchase from two of MatlinPatterson’s affiliates. MattlinPatterson argued before the ICC arbitration panel that it was not a party to any arbitration agreement because it had not signed the purchase agreement—it had only signed an addendum. The arbitral tribunal disagreed, holding that MatlinPatterson was bound to arbirate and, furthermore, sided with VRG on the merits of the dispute.

VRG petitioned to confirm the award in federal district court. The district court denied the petition on the basis that, even if MatlinPatterson had agreed to arbitrate certain disputes, the arbitration agreement clearly did not extend to VRG’s purchase price. The Second Circuit vacated the district court’s order. It held the district court erred by failing to make the threshold determination whether the arbitrators or the court should decide the issue of arbitrability before interpreting the arbitration clause. The court held that, under Supreme Court precedent, if the parties clearly and unmistakably had agreed to arbitrate, then the decision as to arbitrability was properly for the arbitrators and the award should be confirmed. VRG Aeras S.A. v. Matlin Patterson Global Opportunities Partners II L.P., No. 12-593-cv (2d Cir. June 3, 2013).

This post written by Ben Seessel.

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Withdrawing its earlier opinion on rehearing, the Texas Court of Appeals held that New Hampshire Insurance Company (“New Hampshire”) is judicially estopped from compelling arbitration, therefore affirming the trial courts order denying New Hampshire’s motion to compel. The dispute centers on New Hampshire and Magellan Reinsurance Company’s (“Magellan”) Reinsurance Agreement (“agreement.”) Under this agreement, Magellan agreed to assume 100% of New Hampshire’s obligations for automobile insurance policies in return for the premiums paid under those policies. New Hampshire alleges that Magellan owes 1.4 million dollars to replenish an existing trust account, now emptied. New Hampshire filed suit in Turks and Caicos Island (“TCI”) to “wind up” Magellan’s business and also filed suit in Texas and New York.

The TCI Court found that New Hampshire was not a creditor of Magellan and therefore could not wind up Magellan’s business. Later that year, New Hampshire moved to compel arbitration, for which Magellan had initially argued for at the onset of the TCI litigation. The Court found that New Hampshire’s motion to compel arbitration had numerous inconsistencies with their previous arguments made to courts in TCI and New York. The Court held (consistent with its withdrawn opinion) that New Hampshire was estopped from seeking to arbitrate Magellan’s claims. New Hampshire Insurance Co. v. Magellan Reinsurance Co., No. 02-12-00196-CV (Tex, Ct. App. May 2, 2013).

This post written by Rollie Goss.

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Thomas Kinkade Company’s suit against Nancy and David White was submitted to an arbitration proceeding in which, as the Sixth Circuit noted, “the coincidences all break one way.” During the five-year arbitration, the arbitrator, Mark Kowalsky, defied his role as neutral intermediary in various ways. For example, Kowalsky provided the Whites multiple opportunities to bolster the proofs of their claims. Kowalsky allowed the Whites to submit as evidence 8,800 documents they had deliberately withheld from Kinkade for four years. On a straightforward breach-of-contract claim that went virtually uncontested throughout arbitration, he denied Kinkade any relief. When Kinkade raised objections to Kowalsky’s decisions as an arbitrator, Kowalsky gave no response. Kowalsky additionally awarded the Whites attorney’s fees of nearly $500,000 after the arbitration panel unequivocally denied those fees in the Interim Award. Finally, during arbitration, the Whites and their appointed arbitrator both retained Kowalsky’s law firm in unrelated matters, and Kowalsky made no effort to avoid receiving compensation for such matters. Kinkaid sought to disqualify Kowalsky to no avail. Both the AAA and Kowalsky denied disqualification requests. The arbitration panel entered a Final Award in favor of the Whites in an amount in excess of $1.4 million. The district court granted Kinkade’s motion to vacate due to the arbitrator’s partiality, and the Sixth Circuit affirmed. Thomas Kinkade Company v. White, No. 10-1634 (6th Cir. April 2, 2013).

This post written by Rollie Goss.

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An arbitration provision in an employment agreement provided that the “costs and expenses of the arbitration, including the arbitrator’s fees, shall be borne equally by the parties.” The court held the provision invalid because it would have prevented the plaintiff, if successful, from recovering attorneys fees as provided for in Title VII. However, the court severed the invalid provision and compelled arbitration. Adams v. Republic Parking System, Inc., Case No. 12-1310 (USDC W.D. Okla. April 9, 2013).

This post written by Rollie Goss.

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