Reinsurance Focus

In a case on which we previously reported, a federal court in New York recently denied plaintiff insurer’s motion to reconsider the court’s order granting defendant reinsurer’s motion for partial summary judgment. In that order, the court granted defendant Clearwater Insurance Company’s (Clearwater) motion for partial summary judgment because it found that the Liability Clauses in the facultative reinsurance certificates that Clearwater issued to plaintiff Utica Mutual Insurance Company (Utica) established limits on Clearwater’s liability. Specifically, these clauses capped Clearwater’s overall liability for losses (amounts an insurer pays to indemnify its policyholder) and expenses (amounts an insurer pays to defend its policyholder). Applying New York law, the court concluded that the contract was unambiguous and that the caps should be honored.

In its motion for reconsideration, Utica asked the court to deny Clearwater’s motion for partial summary judgment, arguing that a recent Second Circuit order represented an intervening change in controlling law. The court, however, denied Utica’s motion for three reasons: (1) because it was untimely; (2) because the order cited in Utica’s motion did not constitute an intervening change in controlling law; and (3) because even if the order were such an intervening change, it was distinguishable from the case at bar. Utica Mutual Ins. Co. v. Clearwater Ins. Co., No. 6:13-cv-01178 (USDC N.D.N.Y. July 23, 2015).

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

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A reinsurer filed a complaint in the Eastern District of Pennsylvania seeking declaratory relief regarding its obligations under a reinsurance contract on May 7, 2015. The defendants filed an action concerning the same parties, facts, and issues in the District of Connecticut on May 12, 2015. Despite the fact that the Pennsylvania action was filed first, the court declined to exercise jurisdiction under the Declaratory Judgment Act.

On May 1, 2015, the defendants requested payment by May 15th from the reinsurer under the parties’ reinsurance contract and indicated that they would file suit in the District of Connecticut if payment was not timely received. Instead of either paying or responding, the reinsurer filed its complaint for declaratory judgment, preemptively, in the Eastern District of Pennsylvania. The defendants moved to dismiss. Noting that the timing of these events suggested an improper first filing, the Pennsylvania court dismissed the reinsurer’s complaint. Fatal to the reinsurer’s action were the court’s finding that the Pennsylvania filing “was filed in bad faith, as it was improperly anticipatory and solely for declaratory relief.” Additionally, the court found that the reinsurer’s first filed action was merely an “attempt to secure better procedural law by rushing to the [Pennsylvania] courthouse ahead of [the defendants].” Finally, because the defendants were able to establish a nexus between Connecticut and the dispute, and because the plaintiff had improperly “fired the first shot” while the defendants’ pre-litigation demand was pending, the court held that the reinsurer was not entitled to the benefits of the equitable “first-filed” rule. Excalibur Reinsurance Corp v. Select Ins. Co., et al., Case No. 15-2522 (USDC E.D. Pa. July 7, 2015)

This post written by John A. Camp.

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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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The United States Court of Appeals for the Second Circuit issued a summary order affirming a decision by the district court for the district of Connecticut compelling arbitration pursuant to an employee handbook’s mandatory arbitration provision. Reviewing de novo, the court upheld the lower court’s order compelling arbitration based on its finding that (1) plaintiff’s employment had been at-will since its inception and (2) her continued employment after the amendment of defendants’ employee handbook, which included the mandatory arbitration requirement, equated to an acceptance of the new terms. The court noted that in Connecticut, the terms of employment may be determined even in the absence of an express written agreement. Focusing on whether plaintiff validly accepted the modification to her original unilateral employment contract, which at the time of hiring did not contain a mandatory arbitration requirement, the court answered in the affirmative. The fact that plaintiff continued to work for defendants for approximately 15 years following the arbitration amendment to the employee handbook, coupled with the fact that defendants produced evidence that plaintiff electronically accepted the modified employee handbook several times after it was amended, together demonstrated plaintiff’s consent to the added arbitration provision. McAllister v. East, No. 11-4696 (2d Cir. May 5, 2015).

This post written by Brian Perryman.

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A recent case out of the District of Massachusetts reviewing an arbitration award against Ace American Insurance Company (“Ace”) found that an arbitrator did not exceed her power in crafting an arbitration award when she relied almost exclusively on her equitable powers under the arbitration provision. In the underlying dispute, Ace had insured a thirteen year old boat, which sank following severe weather. Ace denied coverage claiming that such an incident would fall under the wear and tear provision of the coverage. However, the arbitrator disagreed, finding that “if the ‘wear and tear’ exclusion were enforceable in this case, Ace would comfortably insure boats beyond a certain age without an expectation of ever having to pay” and that allowing Ace to deny coverage would violate Massachusetts Chapter 93A. Where the arbitration provision gave the arbiter authority to resolve “any controversy or claim based in any legal or equitable theory,” the District Court found that the arbiter was well within her powers in making this finding, thereby making a vacation of this arbitration award unwarranted.

Ace American Ins. Co. v. Puccio, Case No. 15-cv-10262-IT (USDC D. Mass. June 4, 2015).

This post written by Zach Ludens.

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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 purpose of the Act is to provide Delaware businesses with the ability to resolve disputes within 120 days in a “cost-effective, and efficient manner, through voluntary arbitration conducted by expert arbitrators.” The Act streamlines the process for seeking court assistance with appointing arbitrators, if necessary, which may occur only in the Delaware Court of Chancery. The Act gives the arbitrator exclusive jurisdiction to determine the scope of the arbitration and to determine the type of relief, “including any legal or equitable remedy appropriate in the sole judgment of the arbitrator.” Only one direct challenge to the Delaware Supreme Court is authorized, and only the standards of the FAA are utilized on appeal. Among other limiting measures, the Act may not be used in controversies between businesses and consumers, in controversies in which parties have not expressly consented in writing to arbitration, and in controversies in which choice of Delaware law has not been expressly selected. To ensure rapid resolution of arbitrations, the Act contains a schedule for the reduction of the arbitrator’s fees depending upon the lateness of the award: (1) between 0 to 30 days late, the reduction is 25%; (2) between 30 to 60 days late, the reduction is 75%; and (3) greater than 60 days late, the reduction is 100%. While the arbitrator is required to issue a written award, there is no requirement that it be a reasoned award. Thus, the award can be as simple as “plaintiff wins.” Delaware House Bill No. 49 (eff. May 4, 2015).

This post written by Barry Weissman.

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The Third Circuit affirmed an arbitration award under the Labor Management Relations Act (“LMRA”) as the decision reached by the arbitrator comported with the collective bargaining agreement (“CBA”) between the parties. Washington Hospital (“WH”) employed Deborah Holden, an LPN, before terminating her employment pursuant to the CBA’s absenteeism policy. Holden’s union filed a grievance protesting Holden’s discharge. An arbitrator decided that the termination was improper and reinstated Holden, because WH failed to follow contractually agreed upon discipline procedures. The arbitrator made this decision despite noting that Holden’s ten absences in a 12-month time period would be sufficient grounds on which to terminate an employee. WH sought to vacate the award, but the district court upheld the award.

On appeal, WH argued that the court abused its discretion by denying WH’s request for discovery based on remarks by Holden that put her honesty at issue. However, the court found that Holden’s testimony was not fraudulent, and further, that Holden’s testimony was “immaterial” to the arbitration decision. Instead, the court upheld the district court’s decision because WH did not follow the CBA’s procedures, specifically—WH failed to give two warning notices before terminating Holden. Washington Hosp. v. SEIU Health Care Inc. Penn., Case No. 14-3951 (3d Cir. June 12, 2015).

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

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