Reinsurance Focus

The United States Supreme Court denied certiorari in the Louisiana Safety Association case on October 5, 2010, leaving standing the en banc Fifth Circuit opinion described in our November 16, 2009 post. The issue was whether the laws of individual states that restrict or prevent the enforcement of an arbitration agreement in insurance agreements prevent the enforcement of such arbitration agreements that are subject to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the New York Convention”), because the New York Convention is “an Act of Congress” preempted by the McCarran-Ferguson Act. The Fifth Circuit answered the issue in the negative, finding that the New York Convention prevailed over state laws. The Court requested that the Solicitor General submit an amicus brief addressing whether certiorari should be granted. The government submitted an amicus brief which took the position that the opinion below was correct, and that the Supreme Court should deny certiorari. A conflict remains as to this issue with the Second Circuit’s decision in Stephens v. American International Ins. Co., 66 F.3d 41 (2nd Cir. 1995), although the government’s amicus brief took the position that there was an inter-panel conflict on the issue in the Second Circuit, rendering any conflict immature. La. Safety Assn. v. Certain Underwriters, et al., No. 09-945 (US Oct. 4, 2010) (see page 10).

This post written by Rollie Goss.

A New York State appellate court recently affirmed the lower court’s order compelling a non-American Arbitration Association (AAA) arbitration and staying a separate AAA arbitration that was later demanded by the respondent to the original non-AAA arbitration demand. The court based its decision on the fact that the respondent had demanded AAA arbitration nearly four months after service of the petitioner’s demand for the non-AAA arbitration, that the respondent had participated in the petitioner’s non-AAA arbitration by advancing a counterclaim and designating an arbitrator, and that the respondent did not seek a stay of the petitioner’s proceeding. The court agreed with the lower court that the respondent’s tactics were designed to delay the matter and effectively refuse to arbitrate pursuant to the petitioner’s demand. Nachmani v. By Design, LLC, No.04847 (N.Y. Ct. App. Aug. 25, 2010).

This post written by Michael Wolgin.

Greenlight Reinsurance, Ltd. reinsured Medicus Ins. Co. under a stop-loss reinsurance contract covering a certain portion of Medicus’s medical professional liability insurance risks. Medicus terminated the contract according to its termination provisions. Greenlight asserted, and Medicus disputed, that those provisions require a commutation payment or “break up fee,” which Medicus refused to pay. Greenlight demanded arbitration and Medicus thereafter filed suit. After failing to respond to Greenlight’s motion to compel arbitration, which was granted, Medicus sought reconsideration. The Court upheld its decision compelling arbitration, noting that the dispute inarguably arose under the contract, and that the FAA required a broad rendering of the arbitration provision as covering all such disputes. Medicus Ins. Co. v. Greenlight Reinsurance, Ltd., Case No. 10-00277 (USDC W.D. Tex Je. 24, 2010). Reconsideration has been denied.

This post written by John Pitblado.

Following a denial of its motion to vacate an adverse arbitration award, plaintiffs ABS Financial Services submitted a Motion for Reconsideration requesting that the US District Court for the District of New Jersey reverse its prior ruling and judgment. In its earlier decision, the Court had confirmed the arbitration award even though it contained errors of law because it determined that the the award was supported “by at least some of the evidence in the record and was an arguably reasonable construction of the parties’ contracts.” Noting the extremely difficult standard of review for motions for reconsideration, the Court denied the instant Motion, holding that it had not committed a clear error or manifestly disregarded the law in its prior ruling and judgment. ABS Brokerage Servs., LLC v. Penson Fin. Servs., Inc., Case No. 09-04590 (D. N.J. Aug. 16, 2010).

This post written by John Black.

In a suit between a law firm and Citibank, the Eleventh Circuit reversed the district court’s denial of Citibank’s petition to compel arbitration despite its one-month delay in demanding arbitration. The Eleventh Circuit held that even assuming that Citibank “acted inconsistently with the arbitration right” by filing an answer that was silent on arbitration, the law firm did not provide adequate evidence that its research and filings prior to Citibank’s arbitration demand constituted sufficient prejudice to preclude arbitration. Although the law firm may have suffered some prejudice “when it expended time and resources preparing and filing an offer of judgment, reply, and notice of readiness for trial,” waiver was inappropriate because of the “brevity” of the one-month delay and because the law firm “could not point to any portion of the record that reveals either the amount of money it spent or the number of hours it dedicated to conducting litigation-specific discovery and preparing litigation-specific documents.” Citibank, N.A., v. Stok & Assocs., P.A., No. 09-13556 (11th Cir. July 20, 2010).

This post written by Michael Wolgin.

Recently, the Seventh Circuit issued an opinion in Janiga v. Questar Capital Corp. on the issue of whether the court or an arbitrator is responsible for deciding whether a particular document signed by the parties constitutes a contract and, if so, whether that contract includes an arbitration clause. The Court of Appeals – noting that arbitration itself is a matter of contract – determined that the District Court must decide whether a contract exists before it decides whether to stay an action and order arbitration. The question of enforceability, however, falls squarely on the arbitrator. Applying governing state law on the formation of contracts, the Seventh Circuit then ruled that Janiga had signed a valid contract and thus assented to arbitration. The case was remanded for further proceedings consistent with the opinion. Janiga v. Questar Capital Corp., Case No. 09-2982 (7th Cir. Aug. 2, 2010).

This post written by John Black.

A third-party complaint disputing the nature and extent of an obligation to reinsure an insurance company with respect to losses arising from assumed reinsurance risks has been dismissed without prejudice, to allow an arbitrator to decide the scope of a settlement agreement. Through a settlement agreement, the insurance company resolved its dispute with the defendant named in the original complaint. The original complaint was dismissed with prejudice. Thereafter, the insurance company contended that its claims against the third-party defendant reinsurer should be voluntarily dismissed without prejudice to allow arbitration of those parties’ claims. The reinsurer argued the voluntary dismissal should be with prejudice, as the insurance company’s claims in the third-party complaint were derivative of the claims in the original complaint. The court declined to dismiss with prejudice, finding that the question of whether the claims were, in fact, derivative was a question better left for the arbitrator. Eagle Star Insurance Co. v. Highland Insurance Co., Case No. 02-2165 (USDC S.D. Cal. July 22, 2010).

This post written by Brian Perryman.

A Colorado district court granted a Vail resort condominium developer’s motion to compel arbitration under a condominium purchase agreement. Residents brought suit alleging that they were denied promised parking rights at the resort-side condominium they purchased, and were instead secretly substituted with valet parking rights instead, which rights were of lesser value. The residents sued the developer. The developer demanded arbitration under the purchase agreement, which the residents resisted. The developer brought a separate action to compel arbitration. The court found for the developer, rejecting the residents’ arguments that (1) they were not bound by the arbitration provision because they were not parties to the original purchase agreement, but instead were assignees; (2) the claims do not arise out of interpretation of the agreement; (3) the developer waived its right to arbitrate by failing to assert that right as an affirmative defense to the lawsuit brought by the residents, and (4) the residents’ claims under the Colorado Consumer Protection Act were not arbitrable. Stone v. Vail Resorts Development Co., No. 1:09-CV-02081 (USDC D. Col. July 1, 2010)

This post written by John Pitblado.

After a second trip to the First Circuit, a district court has held that remand to a new panel of arbitrators is appropriate where the panel’s vacated award was earlier held to be in manifest disregard of the law. The case involved a storied procedural history involving multiple appeals to the First Circuit. The plaintiff sought confirmation of a NASD/FINRA arbitration award, which the district court granted. After the First Circuit vacated the award as manifestly disregarding the law, and remanded the case to the district court, the district court ordered a remand of the matter to FINRA for rehearing. The defendants appealed again, arguing that the district court’s remand order “tacitly adopted” the plaintiff’s allegedly erroneous assertion that the First Circuit had condoned remand to the original arbitration panel. Although it affirmed the order remanding the case to FINRA, the First Circuit directed the district court to determine whether a new arbitration panel should be constituted, the original arbitration panel should be reconstituted, or FINRA should decide the issue in the first instance. The district court found that remand to a new panel was “most appropriate” because of the First Circuit’s earlier finding that the arbitrators had acted in manifest disregard of the law. Kashner Davidson Securities Corp. v. Mscisz, Case No. 05- 11433 (USDC D. Mass. June 25, 2010).

This post written by Brian Perryman.

The Third Circuit has affirmed a judgment in favor of several foreign reinsurers confirming arbitration awards against the statutory liquidator (the Pennsylvania Insurance Commissioner) for two insolvent insurance companies, but reversed a sanctions award against the Commissioner. Following an arbitration award rescinding three of the four reinsurance treaties at issue, the Commissioner filed a motion in state court to confirm in part, and to vacate in part, the award as part of the liquidation proceedings. The reinsurers removed the case to the District Court for the Eastern District of Pennsylvania pursuant to the Federal Arbitration Act’s removal provision in 9 U.S.C. § 205, and filed a motion to confirm the award. The Commissioner moved to remand the case, arguing that the parties had selected the Pennsylvania Uniform Arbitration Act to govern the arbitration and, thus, that the parties had opted out of the FAA. The district court denied the remand motion and confirmed the award, concluding that the FAA’s vacatur standards applied, not the PUAA’s standards. The district court also sanctioned the Commissioner for filing what the court perceived to be a frivolous remand motion.

On appeal, the Third Circuit initially concluded that removal was proper. That court rejected the Commissioner’s arguments that, first, the parties opted out of the FAA and, second, even if the FAA applies, the arbitration provisions at issue clearly expressed an intent to opt out of the removal provision in § 205. As a matter of law, parties cannot “opt out” of the FAA in its entirety “because it is the FAA itself that authorizes parties to choose different rules in the first place,” and the parties did not agree to waive the right of removal. Not only did the treaties’ arbitration provisions not make any mention of removal, the only provision referring to removal, a service-of-suit provision, stated that nothing in it should be understood to constitute a waiver of the reinsurers’ removal rights.

The Third Circuit next concluded that the FAA supplied the vacatur standards. In the absence of clear intent to the contrary, the FAA’s standards apply to an arbitral award rendered in favor of a foreign party and enforced in the United States. In addition, there was no clear intent to apply the PUAA vacatur standards. Although the treaties stated that “the arbitration shall be in accordance with the rules and procedures established by the [PUAA],” the service-of-suit provision specifically referred to enforcement of the arbitration award in federal courts. The award was thus confirmable under the FAA’s limited vacatur standards.

Finally, the Third Circuit reversed the order granting sanctions for the remand motion, in part because there was no basis in existing law for the district court to conclude that parties could not opt out of § 205 and divest a federal court of jurisdiction. Ario v. The Underwriting Members of Syndicate 53 at Lloyds for the 1998 Year of Account, No. 09-1921 (3d Cir. Aug. 18, 2010).

This post written by Brian Perryman.