Reinsurance Focus

A federal district court compelled arbitration and refused to disqualify a party’s selected arbitrator, notwithstanding that the arbitrator was a former employee and consultant of the objecting party’s parent company. Service Partners, LLC and American Home Assurance Co. entered into a payment agreement for insurance and risk management services that contained an arbitration clause providing that each party would select an arbitrator and the two selected arbitrators would choose a third. The clause prohibited the selection of an arbitrator under either party’s control and, further, provided that, if a party refused or neglected to select an arbitrator, either party could petition a New York state court to appoint one. American Home objected to Service Partners’ selected arbitrator and refused to arbitrate because the arbitrator was a former employee of American Home’s parent, and in the past had served as a party arbitrator for American Home, and as a consultant/expert witness for American Home’s parent. Thus, according to American Home, the arbitrator was not qualified because he knew American Home’s “playbook.”

Service Partners moved to compel arbitration, arguing that nothing in the parties’ agreement or federal law provided for the disqualification of an arbitrator before the entry of an award and, moreover, that the arbitrator was qualified. The federal district court granted the motion to compel. The court first determined that venue was proper–finding that the New York court could only be accessed where no arbitrator had been appointed, not where an arbitrator’s qualifications were in dispute. The court, moreover, held that the arbitrator was qualified under the parties’ agreement because, as a former employee of American Home’s parent, he was not currently under either party’s control. Further, the court held that, absent extraordinary circumstances that did not exist in the case, a challenge to an arbitrator’s qualifications or partiality should be made only after an award is rendered. Serv. Partners, LLC v. Am. Home Assurance Co., Case No. 11-01858 (USDC C.D. Cal. June 20, 2011).

This post written by Ben Seessel.

The plaintiff in a personal injury suit arising from an automobile accident amended his petition to add Lloyd’s of London to a state court suit initially brought against the alleged tortfeasor and the tortfeasor’s primary insurer (Lloyd’s cedent). Lloyd’s removed the suit to federal court under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and sought dismissal based on the arbitration provisions of its contract with the insurer. The plaintiff did not oppose the dismissal, so long as it was without prejudice, and moved to remand the case back to state court. The court granted Lloyd’s motion to dismiss without prejudice and granted plaintiff’s motion to remand. Rossignol v. Tillman, Case No. 10-3044 (USDC E.D. La. June 17, 2011).

This post written by John Pitblado.

The present action before the US District Court in Nevada arose from a dispute between Dr. Ronald Slaughter and Laboratory Medicine Consultants regarding a stockholder agreement. A state district judge ordered the parties to arbitrate claims. A state court compelled the parties to arbitrate their disputes. Slaughter subsequently submitted an arbitration demand against LMC in September, 2007, after which he then tried to disqualify arbitrator Howard Roitman (which was denied). While arbitration was proceeding, Slaughter filed a suit in the Nevada federal court seeking to litigate issues encompassed by the arbitration. Slaughter then sought a stay of the arbitrtation pending litigation, but the Court denied the stay and dismissed the federal case in its entirety. Undeterred, Slaughter then filed another suit in federal court, this time against the AAA, Arbitrator Roitman, and two employees of the AAA alleging that his due process rights were violated during the underlying arbitration proceedings. Meanwhile, the arbitration continued, with rulings adverse to Slaughter. Defendants moved to dismiss the action, stating that they had immunity pursuant to N.R.S. § 38.229 for their conduct in administering arbitration proceedings and that the federal case was an impermissible collateral attack on the underlying arbitration. The Court agreed and dismissed the motion, specifically finding that Nevada’s Uniform Arbitration Act (cited above) protected the defendants against the suit. Further, the Court found that Slaughter’s action was an attack on the arbitration award and that his only relief would be to pursue vacatur of the award under the Federal and Nevada Arbitration Acts. Accordingly, the federal action was dismissed in its entirety. Slaughter v. American Arb. Assoc., Case No. 10-01437 (USDC D. Nev. June 2, 2011).

This post written by John Black.

In an action brought by twenty-three investors against a brokerage related to investment fraud by the broker, a California appellate court rejected the brokerage’s attempt to arbitrate with the twelve investors with whom the brokerage had signed client agreements and stay the court action as to the remaining investors. While the client agreements at issue contained express agreements to arbitrate “any and all controversies or claims,” California law provides that a court should not order arbitration where: (1) a party to the arbitration agreement is contemporaneously a party to a pending court action arising out of the same transaction; and (2) where “there is a possibility of conflicting rulings on a common issue of law or fact.” The court was not persuaded by the brokerage’s argument that no risk of conflicting rulings existed, where the twelve investors, who had signed client agreements, had a “different legal standing” than the eleven investors who were non-clients. The court explained that the brokerage failed to show how the client/non-client distinction was relevant and that, on the contrary, “a legal duty may exist outside of a written agreement.” Cianci v. Centaurus Financial, Inc., Case No. B222474 (Cal. Ct. App. May 5, 2011).

This post written by Michael Wolgin.

In response to Plaintiff Gordon Hook’s action to enjoin UBS from enforcing a promissory note it required Hook to execute after he commenced his employment at UBS, the company moved to compel arbitration and for dismissal or stay pending completion of arbitration. Hook, for his part, moved for a preliminary injunction to enjoin UBS from enforcing the arbitration provisions of the promissory note and from proceeding with the pending arbitration before FINRA. The US District Court for the District of Connecticut granted UBS’s motion to compel arbitration and further dismissed the action pending arbitration. The Court found specifically that the arbitration provision was valid and that it required that all challenges to the validity of the promissory note (and the arbitration provision itself) must be determined by arbitrators. This included all of Hook’s claims of fraudulent inducement, conversion, and statutory theft. Hook’s motion for an injunction was denied, as he failed to demonstrate the likelihood of irreparable harm. Accordingly, the Court closed the case. Hook v. UBS Fin. Servs., Case No. 10-950 (USDC D. Conn. May 4, 2011).

This post written by John Black.

Plaintiff Ellison Framing Inc. recently filed a complaint with the California Department of Insurance against Zurich American Insurance claiming that Zurich had overcharged Ellison by almost $200,000 in improper fees pursuant to a workers compensation insurance plan. Zurich subsequently made a demand for arbitration, alleging nearly $570,000 in unpaid deductibles. Ellison responded by filing a suit in California Superior Court seeking declaratory and injunctive relief, contending that the venue provision, which provides that arbitration should occur in Schaumburg, Illinois, Zurich’s principal place of business, was unconscionable. Zurich removed the action to Federal Court and submitted a motion to stay the action and compel arbitration. The US District Court for the Eastern District of California granted Zurich’s motion finding that the American Arbitration Association’s decision as to venue may not be reversed because the AAA met the minimum standards for fair dealing. Further, plaintiff had not met its burden in claiming that the arbitration venue provision was unconscionable. Accordingly, the Court stayed the action, and found that plaintiff’s claim for fraud fell with the scope of arbitration. Zurich was additionally found not to have waived its right to seek relief. Ellison Framing, Inc. v. Zurich Am. Ins. Co., Case No. 11-0122 (USDC E.D. Cal. Apr. 4, 2011).

This post written by John Black.

A federal district court denied reinsurer Allstate’s motion to compel two separate arbitrations and granted insurer Liberty Mutual’s cross-motion to compel Allstate to select an umpire to complete an arbitration panel that, in turn, could decide how many arbitration proceedings should be held. Allstate had filed two arbitration demands based on distinct issues and argued that the parties’ reinsurance treaties permitted each dispute to be arbitrated separately. Allstate further argued that the Federal Arbitration Act required that two arbitrations be held. The court denied Allstate’s request, however, reasoning that its job was to determine the validity and scope of the arbitration provision. The arbitrators should decide procedural questions related to the arbitration, including whether to consolidate the separately requested arbitration proceedings. Allstate Insurance Co. v. Liberty Mutual Insurance Co., Case No. 11-10415 (USDC D. Mass. May 19, 2011).

This post written by Ben Seessel.

General Security and AequiCap were parties to a contingent commission agreement, by which AequiCap reinsured certain of General Security’s losses under a specified formula. The parties disputed whether AequiCap owed General Security approximately $400,000 under the agreement. General Security demanded arbitration. A three-arbitrator panel ruled in its favor, and also granted it an additional $200,000 for costs and attorneys fees. AequiCap petitioned for vacatur to the district court, arguing that the award of attorneys fees was in “manifest disregard” of the law. The district court found for General Security, noting that the arbitration agreement allowed the panel to order such remedies as it deems appropriate. The court therefore denied the petition to vacate, and granted General Security’s cross-motion to confirm the award. In re General Security National Insurance Co., Case No. 10-CV-8682 (USDC S.D.N.Y. Apr. 29, 2011).

This post written by John Pitblado.

In an action by a former client to disqualify its former attorney from representing an adversary in an impending reinsurance arbitration, disqualification was denied because the two matters were “neither the same nor substantially similar.” The court first determined that the dispute was properly before the court, rather than the arbitrators, because the dispute over disqualification of counsel did not arise “out of [the] Contract,” as required by the underlying agreement between the parties. The court then held a “substantial relationship” was lacking between the attorney’s prior representation of the former client and the attorney’s representation of the adversary in the current dispute, despite the fact that both cases involved arbitrations. “General ‘litigation thinking’ – the general strategic plan or hopes of the lawyer and client on how best to pursue or defend claims – does not satisfy, without more, the substantial relationship test.” This includes “predilections” and “prejudices” on the selection of an arbitrator “gained from a small number of prior representations.” Employers Insurance Co. of Wausau v. Munich Reinsurance America, Inc., Case No. 1:10-cv-03558 (USDC S.D.N.Y. May 16, 2011).

This post written by Michael Wolgin.

The US District Court for the Eastern District of New York recently adopted the US Magistrate’s Report and Recommendation, granting United Insurance Company’s Motion in Aid of Arbitration for a Preliminary Injunction. The dispute arose out of a Binding Authority Agreement (“BAA”) authorizing World Wide Re (formerly World Wide Management Consultants) to underwrite and bind reinsurance risks on UIC’s behalf subject to the underwriting guidelines. The BAA allows both parties to terminate the agreement immediately upon notice for cause, in the event that either party breaches the agreement. The BAA also provides for mandatory arbitration of all disputes. On February 28, 2001, UIC sent a Notice of Termination to World Wide asserting that it breached the agreement when it disregarded UIC’s specific instructions not to bind the risk related to Arcelor Mittal’s reinsurance. By letter dated March 3, World Wide responded, stating that it would continue to write business until an arbitration decision was rendered granting the relief sought. World Wide has since continued to bind risks on behalf of UIC. UIC subsequently filed the instant motion for a preliminary injunction.

The Magistrate issued a Report and Recommendation (adopted by the District Court) granting the motion. The Magistrate concluded that World Wide’s continued actions to continue binding risk on behalf of UIC constituted irreparable harm, and that UIC had demonstrated a likelihood of success on the merits. Accordingly, World Wide was enjoined from writing reinsurance risks on behalf of UIC or modifying or canceling existing risks. United Insurance Co. Ltd. v. Word Wide Web Re, Case No. 11-01177 (E.D. N.Y. Apr. 27, 2011).

This post written by John Black.