Reinsurance Focus

PCH Mutual Insurance Company (“PCH”), a risk retention group providing insurance to assisted living facilities, entered into an Administrative Services Agreement with Casualty & Surety, Inc. (“CSI”), a wholesale insurance broker and program manager. The Agreement’s arbitration provision stated that: “Any disputes . . . may be submitted to binding arbitration. The prevailing party shall be entitled to recover all costs incurred, including reasonable attorneys fees.” After PCH filed suit (alleging breach of contract, breach of fiduciary duty, and unjust enrichment), CSI moved to compel arbitration. The court denied the motion to compel arbitration, holding the arbitration provision was ambiguous and could be read to contemplate permissive arbitration. The court focused on the use of the term “may,” which indicated that arbitration was not required, particularly when juxtaposed with the term “shall,” which signaled that payment of costs to the prevailing party was compulsory. The court also cited the lack of specifics regarding arbitration procedure in the Agreement, further indicating ambiguity to the court. For example, the Agreement did not identify an arbitrator or provide a method for choosing one.

In a separate order issued the same day, the court granted PCH’s motion to amend the complaint to add a claim that CSI had improperly issued occurrence based endorsements, in contravention of underwriting guidelines that limited PCH’s coverage to claims made policies. The court rejected CSI’s argument that PCH’s motion to amend should be denied because of CSI’s “contractual expectancy for arbitration,” finding that it was “dubious” whether a pending motion to compel arbitration could constitute grounds for rejecting a motion to amend the complaint, and, furthermore, CSI had failed to establish that the parties had agreed to mandatory arbitration. The court also held that the proposed amendment would not be futile, and was not offered in bad faith or untimely. PCH Mutual Insurance Co., v. Casualty & Surety, Inc., Case No. 08-00282 (USDC D.D.C. Nov. 11, 2010).

This post written by Ben Seessel.

Burlington Northern and Santa Fe Railway Company (BNSF) and the Public Service Company of Oklahoma (PSO) entered into a long-term agreement in 1985 pertaining to the transport of coal. A dispute about rates arose and the matter was submitted to arbitration, as per the parties’ agreement. The arbitration provision was limited to rate disputes. The panel awarded PSO the rate decrease it sought, and BNSF thereafter moved to vacate the award in federal district court, arguing the panel (1) exceeded its authority by deciding matters outside the scope of the submission; and (2) incorrectly interpreted the contract in manifest disregard of the law. The district court ultimately confirmed the award, and BNSF revived its arguments on appeal to the Tenth Circuit Court of Appeals. The Tenth Circuit affirmed, finding that BNSF was merely seeking to alter its burden by disguising the issue as one of arbitrability, when really it was seeking review of the decision on the merits. Applying the correct standard of “extreme deference” to the panel’s decision on the merits, the court affirmed the district court’s ruling confirming the panel’s award. Burlington Northern and Santa Fe Railway Co. v. Public Service Company of Oklahoma, No. 09-5133 (10th Cir. Dec. 10, 2010).

This post written by John Pitblado.

In a suit by residents of a mobile home park, of whom only some had signed leases that permitted arbitration or other ADR, against the owners of the facility, a California Appellate Court recently affirmed the lower court’s denial of the owners’ motion to compel arbitration. Under California law, the trial court has discretion to deny arbitration where there is a possibility of conflicting rulings on a common issue of law or fact. The lower court found, and the appellate court agreed, that all the plaintiffs had alleged that the mobile home park was inadequately maintained, and to permit arbitration for only some of the residents, while the others continued to litigate in court, would create the possibility of conflicting rulings on issues of law or fact. The appellate court further held that while an evidentiary showing is required under California law to show the existence of an agreement to arbitrate, no such showing is required for the court to find the “possibility” of conflicting rulings. Abaya v. Spanish Ranch I, L.P., No. A125298 (Cal. Ct. App. Nov. 11, 2010).

This post written by Michael Wolgin.

AIG insureds were directed to arbitrate their breach of contract, tortious breach of the covenant of good faith and fair dealing, unfair competition, and other causes of action based on AIG’s alleged misconduct in denying their claims for benefits. AIG moved to compel arbitration, citing a provision in the insurance contracts requiring any controversy to be settled by binding arbitration. Plaintiffs opposed, pointing to what they argued was a conflicting provision, which stated that “in the event of [the insurer’s] failure to pay any amount claimed to be due hereunder, we, at your request, will submit to the jurisdiction of a court of competent jurisdiction within the United States.” Relying on the presumption favoring arbitration, the court held that the contractual provisions were harmonious–all disputes were required to be resolved through arbitration but the insureds could bring suit in a court of their choice to enforce compliance with an arbitration award. The court also held that AIG could compel arbitration under an equitable estoppel theory, notwithstanding that it was not a signatory to the arbitration agreement. NS Holdings LLC v. Am. Int’l Group, Inc., Case No. 10-1132 (U.S.D.C. C.D. Cal. Nov. 15, 2010).

This post written by Ben Seessel.

C.B. Fleet Company, Inc., a manufacturer of certain FDA-regulated over-the-counter medication, sued one of its excess liability carriers, Aspen Insurance UK Ltd., alleging it breached the excess policy by refusing to provide coverage for underlying products liability suits against Fleet. Aspen moved to stay the lawsuit in favor of arbitration. Fleet contested the existence of an agreement to arbitrate, and, even if there was one, Fleet asserted that Aspen waived its right to invoke it by engaging in the litigation process. The court rejected both arguments, finding that a valid, binding arbitration agreement was incorporated by reference into the Aspen excess policy, because the underlying policy to which Aspen’s policy “followed form” contained an arbitration agreement. The court also held that Aspen’s limited engagement in the litigation process prior to demanding arbitration did not constitute waiver of the right to arbitrate, citing the policy underlying the FAA which heavily favors arbitration of disputes. Aspen had only engaged in limited discovery pertaining to whether an agreement to arbitrate existed, filed an answer raising an affirmative defense pertaining to arbitration, and then demanded arbitration ten days later. C.B. Fleet Company, Inc. v. Aspen Insurance UK, Ltd., No. 6:09-cv-00062 (USDC W.D. Va. Oct. 15, 2010).

This post written by John Pitblado.

Nancy Hurwitz Kors appealed to the California Court of Appeals an order confirming an arbitration award in favor of the law firm Benjamin, Weill & Mazer in a dispute over attorneys’ fees. Kors argued that the confirmation must be reversed because the chief arbitrator failed to disclose business relationships casting doubt on his ability to be impartial, as required by the California Arbitration Act. Shortly after the issuance of the arbitration award, Kors’ counsel discovered that the chief arbitrator was counsel for the defendant law firm in a recent case in which the law firm had sought to arbitrate a fee dispute with another client, had filed a brief on behalf of the law firm with the California Supreme Court shortly before his appointment as chief arbitrator in the present dispute and argued the case to the Supreme Court on behalf of the law firm while serving as chief arbitrator in this matter. The California Court of Appeals reversed the order confirming the award finding that the circumstances of the chief arbitrator’s business relationship with the law firm could cause a person to “entertain a doubt that the proposed neutral arbitration would be able to be impartial.” Benjamin, Weill & Mazer v. Kors, No. 07-00939 (Cal. Ct. App. Oct. 12, 2010).

This post written by John Black.

On November 9, the Supreme Court heard oral argument in AT&T Mobility LLC v. Concepcion, an appeal from an opinion of the Ninth Circuit. The issue, as framed in the briefs, is whether the Federal Arbitration Act (“FAA”) preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures — here, class-wide arbitration — when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims. The Supreme Court’s docket reflects the filing of 25 amicus briefs. It is hoped that this case will clarify the relationship between the Federal Arbitration Act and state laws and opinions holding certain arbitration provisions to be unenforceable as unconscionable. The transcript and audio recording of the oral argument are both available. Some vote counters at the oral argument suggested that the questioning by the Justices indicated deference to state law as opposed to the FAA. AT&T Mobility v. Concepcion, No. 09-893 (U.S.).

This post written by Rollie Goss.

In an action for breach of an insurance policy and the tort of bad faith, the Western District of Arkansas recently compelled arbitration and stayed the action. The court considered whether an arbitration clause in a policy governed by the Federal Arbitration Act (FAA) was invalidated by an Arkansas state law that purports to invalidate arbitration clauses “in any insurance policy” in Arkansas. The court held that although the McCarran-Ferguson Act would typically operate to preempt the FAA with the state insurance law, in this case an exception to McCarran-Ferguson existed, namely that another federal law that “specifically relates to the business of insurance” and provides for arbitration (the Federal Crop Insurance Act), applied to the policy at issue and required arbitration. The court also stayed the entire action, rather than just the claim for breach of contract, based on the language of the relevant arbitration clause, on the broad mandate of the FAA to “stay the trial of an action” until arbitration has occurred, and in the interests of judicial economy. Hays v. Rural Community Insurance Services, Case No. 1:10-cv-01020 (W.D. Ark. Oct. 7, 2010) (Magistrate Report and Recommendation adopted on October 26, 2010).

This post written by Michael Wolgin.

The plaintiff made a claim under a disability policy issued to him in conjunction with his opening a deposit account with a bank. When the claim was denied, plaintiff brought suit against both the bank and the insurance company, alleging several causes of action, including breach of trust, fraud, misrepresentation, breach of contract and bad faith. Both the bank and insurer moved to compel arbitration based on the arbitration provision contained in the deposit account agreement. The district court denied the motions on the basis that arbitrability had been raised, and was an issue for the court to decide. The Fifth Circuit reversed, noting some limited circumstances in which arbitrability can be addressed by the court, but finding that the arbitration provision in question unambiguously provided that issues of arbitrability should be decided by the arbitrator and not the court, and that the language controlled. Allen v. Regions Bank, No. 09-60705 (5th Cir. August 11, 2010)

This post written by John Pitblado.

In a dispute between providers of payroll services (“payroll providers”) and the reinsurers of a movie, the Ninth Circuit, which previously held that the reinsurers were liable for the obligations of the movie’s producers, affirmed an award of attorney’s fees that were incurred in an arbitration between the payroll providers and the movie producers, and in the payroll providers’ related efforts to confirm and collect the arbitration award. The Ninth Circuit held that the underlying arbitration provision in the contracts between the payroll providers and the movie producers provided that the prevailing party would be entitled to attorney’s fees. Under California law, an arbitration provision that permits the recovery of fees includes fees that were incurred in related judicial proceedings. However, the Ninth Circuit reversed the fees award for the payroll providers’ litigation with the reinsurers, reasoning that the arbitration clause and other provisions in the contracts did not entitle a party to attorney’s fees incurred in litigation between the parties. The Ninth Circuit also affirmed the district court’s decision to award prejudgment interest, but held that it should run from the time that the amount of damages became certain – not the time that liability to pay was established. Scie LLC v. XL Reinsurance America, Inc., Case No. 08-56502 (9th Cir. Sept. 27, 2010).

This post written by Michael Wolgin.