Reinsurance Focus

The Second Circuit affirmed a New York district court ruling that found that the FINRA arbitration rules, one of which prohibits arbitration of putative or collective class actions, was incorporated within the subject employment agreement. Former financial advisers of the progeny of J.P. Morgan Chase & Co. sued J.P. Morgan under state and federal law for violations of overtime laws. J.P. Morgan moved to compel arbitration pursuant to a clause within the advisers’ employment contracts. In denying their motion, the district court reasoned “that the arbitration clause requires arbitration of only those claims required to be arbitrated under the FINRA Rules and that, under New Rule 13204, Plaintiffs’ claims cannot be arbitrated.”

On appeal, J.P. Morgan argued against the trial court’s interpretation of the phrase “required to be arbitrated by the FINRA Rules” as well as the court’s use of the amended version of Rule 13204, which was not in effect when the parties originally entered into their contract. The court used a grammatical and definitional analysis to determine that the phrase applies to all claims and controversies. They also found that when JP Morgan agreed to arbitrate according to the FINRA rules, they also took on the risk that these rules may change. Regardless of that risk, the court noted that under either the original version of Rule 13204 or the amended version, FINRA prohibits the arbitration of collective class actions claims. Lloyd et al. v. JP Morgan Chase & Co. et al., No. 13-3963-cv (2d Cir. June 29, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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The Tenth Circuit recently held that Cox Communications, Inc., (Cox) had waived its right to arbitration while defending a class action lawsuit brought on behalf of its cable subscribers. These subscribers sued the communications company in 2009 in several jurisdictions, alleging that the company illegally tied provision of its cable service to rental of a set-top box. These lawsuits were consolidated and transferred to the United States District Court for the Western District of Oklahoma. In response, Cox moved to dismiss and while the motion was pending, began inserting mandatory arbitration clauses into its various customer contracts, including those of class members. Cox did not notify the district court it was doing so, however. Efforts to certify a nationwide class failed, so plaintiffs sought to certify various geographic classes. These class actions were once again consolidated and transferred to the Western District of Oklahoma.

Before the district court, Cox moved unsuccessfully to dismiss before the parties engaged in substantial discovery and named plaintiff Healy moved to certify the class. The district court granted class certification and Cox appealed to the Tenth Circuit, but its petition was denied. Throughout these proceedings, Cox never mentioned the arbitration clauses until it filed motions for summary judgment and to compel arbitration. The district court denied the motion to compel on the basis that Cox’s prior conduct in the litigation constituted waiver. Cox appealed, and the Tenth Circuit affirmed, noting that both plaintiffs and the two courts would be prejudiced if arbitration were allowed. Healy v. Cox Commc’ns., Inc., No. 14-6158 (10th Cir. June 24, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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In a dispute over the purchase of a car, the purchaser filed a class action in California against the car dealer, and the dealer moved to compel arbitration. The dealer invoked the arbitration agreement contained in the automobile sales contract. The agreement contained a class action waiver provision and further provided that if the class waiver is deemed unenforceable, the entire arbitration agreement is unenforceable. The trial court denied the dealer’s motion to compel arbitration, finding the class waiver, and, thus, the entire arbitration agreement to be unenforceable. As we previously reported, the Court of Appeal declined to address the class waiver issue, holding instead that the arbitration appeal provision and the agreement as a whole were unconscionably one-sided. Relying on the U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the dealer appealed.

After the trial court decision but before the appellate court ruled, the Supreme Court in Concepcion held that the Federal Arbitration Act (“FAA”) requires enforcement of class waivers in consumer arbitration agreements. The appellate court’s decision focused on whether the arbitration agreement was unconscionable, concluding that several of its provisions “have the effect of placing an unduly oppressive burden on the buyer.” The California Supreme Court noted that after Concepcion, unconscionability remains a valid defense to a motion to compel arbitration, but that state unconscionability laws must not disfavor arbitration by imposing procedures that interfere with the fundamental attributes of arbitration. The court then analyzed the arbitration agreement at issue under California’s unconscionability framework and concluded that while elements of the agreement were burdensome, the provisions the plaintiff claimed were substantively unconscionable — limits on appeals, allocation of costs, retention of the remedy of self-help — did not render the agreement unconscionable. The court likewise rejected the plaintiff’s class waiver arguments. Sanchez v. Valencia Holding Co., No. S199119 (Cal. Aug. 3, 2015)

This post written by John A. Camp.

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A district court refused to vacate an arbitration award where Preis, a terminated employee, failed to produce sufficient evidence of bias or misconduct in the arbitration panel’s decision. Preis moved to vacate the award in favor of former employee Citigroup Global Markets Inc. on the grounds that (1) the panel was biased, and (2) the panel manifestly disregarded the law. Although Preis relied on New York’s civil practice laws and Citigroup relied on the Federal Arbitration Act, the court decided choice of law was irrelevant because no conflict existed between state and federal law on the grounds for vacating arbitration awards.

On the issue of bias, the court found that the examples cited by Preis were neutral, did not suggest prejudice, and “would not lead a reasonable person to conclude that the panel was biased.” The court was even more skeptical of Preis’s manifest disregard claim, finding that he failed to show the panel intentionally defied a well-defined, applicable law. His claims did not rise to the level of showing “some egregious impropriety on the part of the arbitrator,” and thus, did not warrant vacating the award. The court did, however, deny Citigroup’s request for attorneys’ fees and costs, finding it failed to show that Preis acted in bad faith in seeking to overturn the award. Preis v. Citigroup Global Markets Inc., Case No. 14-06327 (USDC S.D.N.Y. Apr. 8, 2015).

This post written by Brian Perryman.

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Collective defendants, Nationwide, appealed from a Massachusetts superior court judgment confirming an arbitration award in favor of collective plaintiffs, Liberty Mutual. The underlying dispute involved a 1972 reinsurance treaty wherein Nationwide, the reinsurer, indemnified Liberty Mutual, the cedant, for a portion of the losses paid on Liberty Mutual’s general liability and worker’s compensation policies. At issue was a provision in the treaty granting Nationwide a right of access to Liberty Mutual’s documents concerning the covered policies. The dispute arose when Liberty Mutual refused to produce documents it claimed were protected by attorney-client and work product privileges. At arbitration, the panel dismissed Nationwide’s argument that it was entitled to any and all documents relating to the covered policies, reasoning that the right of access provision excluded privileged documents. Liberty Mutual thereafter submitted an application to the superior court to confirm the award and Nationwide submitted a cross-application to vacate the access to records portion of the judgment.

Despite a de novo review, the court’s discretion was limited as it was bound by the arbitrators’ findings and legal conclusions, even if they appeared erroneous, inconsistent, or unsupported by the record. Through this lens, the court of appeals upheld the arbitrators’ decision, dismissing Nationwide’s argument that the arbitrators exceeded their powers in interpreting the access to records provision in the reinsurance treaty. The appellate court reasoned that where the parties do not dispute the scope of the arbitrators’ powers and where the claimed error is in the interpretation of the terms of the parties’ underlying contract and not in the agreement to arbitrate in the first place, it must apply a severely limited review of arbitration awards. Liberty Mutual v. Nationwide, No. 14-1129 (Mass. App. Ct. June 5, 2015).

This post written by Brian Perryman.

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The Eighth Circuit affirmed a district court’s finding that LoRoad, LLC (“LoRoad”) failed to accept an agreement with Global Expedition Vehicles, L.L.C. (“Global”) that would allow LoRoad to enforce the arbitration contained within.

LoRoad negotiated with Global to build a custom expedition vehicle. The terms of the “Assembly Agreement” called for a nonrefundable $120,000 deposit. During the exchange of agreement drafts, LoRoad sent Global $120,000 along with a modified—allegedly signed—agreement shortly thereafter. As the relationship soured, Global stopped work on the expedition vehicle. LoRoad alleged that it did not have a final set of documents, as prior draft exchanges were simply contract negotiations. LoRoad sought to compel arbitration to handle the dispute per the agreement, asserting that the arbitration provision was enforceable because the parties exhibited the requisite intent to form a binding contract. In addition, LoRoad alleged that the arbitration provision was enforceable because that particular provision remained the same throughout multiple agreement draft iterations. The court focused on LoRoad’s intent. LoRoad’s only conduct to indicate an agreement was its payment of $120,000. However, it also argued that this sum was only a “good faith deposit” and not a payment per the agreement. Further, LoRoad sent emails to Global indicating that the agreement was “not yet executed.” Without an executed agreement or a free-standing agreement to arbitrate, arbitration could not be compelled. LoRoad, LLC v. Expedition Vehicles, LLC, Case No. 14-2636 (8th Cir. June 1, 2015)

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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Plaintiffs alleged that AXA Equitable Life Insurance Company violated New York insurance law prohibiting misrepresentations by insurers of their financial condition, because AXA had not disclosed “shadow transactions” in its filings with the New York Department of Financial Services (“NYDFS”). NYDFS defines “shadow insurance” as the use of captive reinsurers in foreign jurisdictions with lower reserve requirements to do an “end-run around higher reserve requirements.” Plaintiffs contended that AXA was not as financially sound as it had represented because in failing to disclose “shadow transactions,” AXA received higher ratings from rating agencies and was able to post fewer reserves thus selling a product that had undisclosed risks and created an “increased risk to the insurance system as a whole. . . .”

The court denied class certification and granted AXA’s motion to dismiss for lack of Article III standing. Plaintiffs did not allege that their premiums were higher because of the alleged “shadow transactions” nor that they had relied upon AXA’s representations in filings with the NYDFS. Violation of rights created by state law (as opposed to federal law), standing alone, does not allege an “injury” sufficient to establish Article III standing. Plaintiffs needed to have established that at least one of them had suffered an “invasion of a legally protected interest which is . . . concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” The Court also explained that since plaintiffs never alleged that they would not have purchased the policies had the disclosures been made or that they had suffered any financial harm because of the misrepresentations, the alleged risk of harm was only in the future and was a very tenuous risk at that. Jonathan Ross v. AXA Equitable Life Insurance Co., Case No. 14-CV-2904 (USDC S.D.N.Y. July 21, 2015).

This post written by Barry Weissman.

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A district court in Kansas denied as moot defendant Liberty Mutual Fire Insurance Company’s motion to review a magistrate’s order granting plaintiff Great Plains Ventures, Inc.’s motion to compel reinsurance, reserves, and claims-related materials. The magistrate judge ruled in January that Liberty Mutual failed to establish why documents Great Plains had requested in a coverage dispute were irrelevant or privileged. Thus, the magistrate judge granted Great Plains’ motion to compel. Soon thereafter, Liberty Mutual requested that the magistrate judge stay his order in anticipation of its objection to the discovery order and its motion to review the order to compel. While the motion to review was pending, the magistrate judge denied the motion to stay and ordered Liberty Mutual to produce the documents. Liberty Mutual complied, and because it did so, the court ruled that its request for review was moot. Great Plains Ventures, Inc. v. Liberty Mutual Fire Insurance Co., No. 6:14-cv-01136 (USDC D. Kan. May 1, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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The Commercial Court (a subdivision of the Queen’s Bench Division of the U.K.’s High Court of Justice), recently held that an underwriter could not avoid the reinsurance contracts it had underwritten because it failed to convince the court that it would not have underwritten those contracts. In a case involving nondisclosure of loss statistics, the court determined that plaintiff reinsurer, Axa, could not avoid two reinsurance agreements that it had entered into with defendant insured, Arab Insurance Group (ARIG). The court made this finding even though ARIG failed to disclose – and perhaps even misrepresented – the loss statistics associated with its existing book of internal risk that was subject to the reinsurance. The court agreed with Axa that the misrepresentation of ARIG’s loss statistics was a material fact that should have been disclosed. However, even if ARIG had disclosed this information prior to the completion of the underwriting process, Axa would still have entered into the reinsurance agreements. Axa failed to prove they were induced by ARIG’s misrepresentation into the reinsurance contracts; they were therefore bound to those contracts. Axa Versicherung AG v. Arab Insurance Group [2015] EWHC 1939 (Comm).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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A New York federal court entered a stipulated judgment in favor of the plaintiff reinsurer that prevailed on its declaratory claim in a summary judgment previously ordered, which judgment capped its exposure to the dollar amount stated in the “Reinsurance Accepted” portion of the reinsurance contracts at issue.  The litigation had remained ongoing due to the cedant’s remaining counterclaims, but it agreed to forego pursuing those claims in favor of a strategy allowing it to pursue appeal of the prior summary judgment order.

Global Reinsurance Corporation of America v. Century Indemnity Company, No. 1:13-cv-6577, (USDC S.D.N.Y. June 3, 2015).

This post written by Zach Ludens.

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