IN THIS MONTH'S EDITION:
In a 5-3 Decision, Supreme Court Vacates Second Circuit Decision Permitting Class Arbitration Where the Arbitration Agreement Was Silent on the Issue
Eleventh Circuit Confirmed that Arbitrators' Award Providing An Equitable Lien Does Not Violate the FAA
Second Circuit Dismisses Final Cause of Action Involving A Reinsurance Fraud Dispute
District Court Concludes That Facultative Certificate Contained A Valid Cap On Cedent's Expenses
District Court Orders Unauthorized Reinsurer To Post Pre-Pleading Security
District Court Allows $23 Million Reinsurance Dispute To Proceed Forward In The United Kingdom While Allowing U.S. Action to Remain Active
SUPREME COURT DECISIONS
STOLT-NIELSEN V. ANIMALFEEDS INT'L CORP.
(CIVIL ACTION NO. 08-1198 APRIL 27, 2010)
2010 U.S. LEXIS 3672 [lexis.com]
In a 5-3 decision, the Supreme Court reversed the Second Circuit's ruling which allowed an arbitration panel to compel parties to class arbitration even though the arbitration clause was silent on the issue. In November 2008, the Second Circuit claimed that the arbitration panel did not overextend its powers when it imposed the class arbitration despite the fact there were no specific provisions that addressed it in a contract.
By way of background, this action arose when a class of purchasers of parcel tanker transportation services sought arbitration in their antitrust suit against a shipper for price fixing. Although the charters contained an arbitration agreement, the agreement was silent as to whether class arbitration was permitted. The parties agreed to submit this question to a panel of arbitrators who would be bound by class rules developed by the American Arbitration Association. The parties selected an arbitration panel, designated New York City as the arbitration site, and stipulated that their arbitration clause was silent on the class arbitration issue. The panel determined that the arbitration clause allowed for class arbitration. However, the U.S. District Court vacated the award on different grounds concluding that the arbitrators' award was made in "manifest disregard" of the law, because they applied the wrong law to the contracts at issue. The Second Circuit reversed concluding that an arbitration panel's decision to impose class arbitration was not made in "manifest disregard of the law." The Second Circuit determined that its ability to evaluate an arbitration panel's ruling "is highly deferential to the arbitral award" and obtaining judicial relief "for arbitrators' 'manifest disregard' of the law is rare." Moreover, the Second Circuit declared that the context of contractual interpretation is left for the arbitrators to decide correctly (or incorrectly) stating "[w]e are required to confirm arbitration awards despite 'serious reservations' about the soundness of the arbitrator's reading of the contract."
The United States Supreme Court vacated the arbitration award and the Second Circuit's decision, finding that a decision which imposes arbitration on parties who did not agree to authorize arbitration is inconsistent with the Federal Arbitration Act (FAA). Since the parties decided that their agreement was silent on the class arbitration issue, the Supreme Court concluded that the arbitrators' proper task was to identify the rule of law governing that situation. Rather than inquiring whether the bodies of law contained a default rule permitting an arbitration clause to allow class arbitration absent express consent, the panel proceeded as if it had a common-law court's authority to develop what it viewed as the best rule for such a situation. In the end, the panel imposed its own idea of sound policy and permitted class arbitration. Since the arbitration panel exceeded its powers by imposing its own decision as opposed to applying proper law, the decision was vacated pursuant to the FAA on the ground that the arbitrator strayed from interpretation and application of the agreement and effectively "dispense[s] his own brand of industrial justice."
Addressing the merits of the inquiry concerning class arbitration where the agreement is silent, the Supreme Court held that imposing class arbitration is inconsistent with the FAA which follows the basic precept that arbitration "is a matter of consent, not coercion." The FAA requires a written provision in any maritime transaction to call for arbitration of a controversy arising out of such a transaction "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," and allows a party to an arbitration agreement to petition a federal district court for an order directing that arbitration proceed "in the manner provided for in such agreement."
Accordingly, the FAA's main purpose is to ensure that "private agreements to arbitrate are enforced according to their terms." Whether enforcing an agreement to arbitrate or interpreting an arbitration clause, courts and arbitrators must "give effect to the [parties'] contractual rights and expectations." The Supreme Court recognized that the parties' intentions control and they are "generally free to structure their arbitration agreements as they see fit." The parties involved may agree to limit the issues arbitrated and may agree on rules under which an arbitration will proceed. The Supreme Court held that in this action the arbitration panel imposed class arbitration despite the parties' stipulation that they had reached no agreement on that issue. The panel's conclusion is contrary to the foundational FAA principle that arbitration is a matter of consent. An agreement to arbitrate cannot be expanded to cover an implicit agreement to authorize class action arbitration. The differences between a simple bilateral and complex class action arbitration are too great for such a presumption.
IMPACT (ARBITRATION): This decision was significant for a number of reasons. First, it limited, if not eliminated the notion that an arbitration panel has inherent authority to impose class arbitration where the contract was silent on the issue. Essentially, this decision provides some guidance to when an arbitration panel exceeds its power pursuant to Section 10(a)(4) of the FAA. Second, it is clear that the Supreme Court declared, perhaps in an indirect way, that the Second Circuit's interpretation of the "manifest disregard of the law" is not necessarily good law.
UNITED STATES CIRCUIT COURT DECISIONS
FRAZIER V. CITIFINANCIAL CORP.
(CIVIL ACTION NO. 08-15188 APRIL 30, 2010)
2010 U.S. App. LEXIS 8960 [lexis.com / lexisONE]
In this action, plaintiffs obtained a loan from a third-party lender in an effort to satisfy some of their high-interest debts. Pursuant to the terms and conditions of the loan agreement, plaintiffs were required to execute a mortgage, promissory note and arbitration agreement. The arbitration agreement outlined the broad authority in which the arbitration panel can effectively resolve the dispute. The arbitration agreement was governed by Federal Arbitration Act. The loan was subsequently assigned to the defendant in this action and when the plaintiffs became delinquent, the defendant attempted to foreclosure on their real property. Plaintiffs, in turn, commenced an action in which they claimed that the lender made material misrepresentations, specifically claiming that they were informed that this loan agreement was unsecured. The defendant moved to compel arbitration which was granted.
After a two day arbitration, the arbitrators agreed with the defendants' arguments and awarded approximately $47,957.12 in damages. Although the arbitration panel believed that it could not impose a foreclosure, it granted defendants an equitable lien on plaintiffs' real property.
Plaintiffs again sought judicial intervention in vacating the arbitration award based on the fact that the arbitration panel exceeded its powers in granting an equitable lien. The district court upheld the arbitration panel's decision to provide equitable relief. Plaintiffs appealed the decision. The Eleventh Circuit Court affirmed the decision after conducting a detailed analysis of the Supreme Court's decision in Hall Street in which it outlined the specific ways it can vacate the decision. Given that none of the provisions of Section 10(a)(4) that outlined the ways an arbitration panel's decision can be vacated applied in this case, the Circuit Court confirmed the decision. As such, the Circuit Court allowed the arbitration panel's decision granting an equitable lien.
IMPACT (ARBITRATION): This case demonstrates again the level of deference courts have for arbitration decisions especially in light of the Supreme Court's decision in Hall Street. The Eleventh Circuit, in applying Hall Street, determined that it had no basis to vacate the decision even though there was some evidence of misrepresentations made by the lenders in this action.
ANGLO-IBERIA UNDERWRITING MANAGEMENT V. LODDERHOSE
(CIVIL ACTION NO. 08-2666 MARCH 29, 2010)
2010 U.S. App. LEXIS 6394 [lexis.com / lexisONE]
Second Circuit Dismisses Final Cause of Action Involving A Reinsurance Fraud Dispute
In this case, the Second Circuit affirmed the district court's decision which dismissed a multi-million dollar reinsurance fraud lawsuit by Angelo-Iberia Underwriting Management Co. and Industrial Re International Inc. (collectively referred to as "plaintiffs") against the Republic of Indonesia and Jamostek ("defendants") pursuant to the Foreign Sovereign Immunities Act (FSIA). In the complaint, plaintiffs alleged that the Republic of Indonesia and one of Jamostek's employees committed a reinsurance scam costing the plaintiffs millions of dollars. The plaintiffs further alleged that the defendants did not properly supervise the employee in question. The lawsuit was submitted pursuant to the Foreign Sovereign Immunities Act (FSIA) which provides jurisdiction over foreign entities in certain incidents.
The defendants moved to dismiss the complaint for lack of subject matter jurisdiction under the FSIA. Specifically, the defendants argued that the Republic of Indonesia's foreign sovereign status applies as outlined in the FSIA and, as a result, they demanded that the complaint be dismissed. Plaintiffs, in turn, argued that the lawsuit fell within the "commercial activity" exception of the FSIA which would allow the lawsuit to remain in federal court.
The district court disagreed stating the "commercial activity" exception was not so broad as to allow indirect claims such as alter-ego against the Republic of Indonesia to provide a basis for subject matter jurisdiction. Specifically, there was no evidence to suggest that the Republic of Indonesia was responsible for Jamostek's employees. The Second Circuit affirmed the initial ruling but remanded the negligent supervision claim stating that it could fall within the scope of the commercial activity exception. The district court, after a detailed review of the negligent supervision claim, found the claim was outside the scope of the commercial exception of FSIA stating that the activities of the employee in question consisted of only evaluating health claims and again had nothing to do with the Republic of Indonesia.
The Second Circuit agreed with the district court's interpretation of FSIA stating that the alleged activities were not commercial. Moreover, the Second Circuit pointed out that even assuming some degree of commercial activity, the claim of negligent supervision was casually connected with the alleged commercial activity to trigger the FSIA exception.
IMPACT (REINSURANCE): This case demonstrates the overall difficulty when dealing with a reinsurance dispute involving multiple jurisdictions. While the facts in this case are rather unique, practitioners should be well versed in the scope and applicability of the Foreign Sovereign Immunities Act and its exceptions as they apply to reinsurance disputes.
UNITED STATES DISTRICT COURT DECISIONS
EASTERN DISTRICT OF PENNSYLVANIA
PACIFIC EMPLOYERS INSURANCE CO. V. GLOBAL REINSURANCE CORP.
(CIVIL ACTION NO. 09-06055 APRIL 23 2010)
2010 U.S. Dist. LEXIS 40506 [lexis.com]
District Court Concludes that Facultative Certificate Contained a Valid Cap on Cedent's Expenses
In 1980, Pacific Employers Insurance Co. ("PEIC") entered into a facultative reinsurance contract with Global Reinsurance Corp. ("Global") in which the Global would reinsure an umbrella commercial liability policy that PEIC issued to its insured.
On the first page of the certificate's declaration, it stated that Global would reimburse PEIC for "$1,000,000 per occurrence and in the aggregate where applicable part of $4,000,000 which is excess of $1,000,000 which in turn is excess of underlying insurance." The declaration stated that there was a $1,000,000 self-insured retention. The underlying insured was sued for various asbestos related actions which triggered the umbrella commercial liability policy that was reinsured. During the course of litigation and settlement of the various lawsuits, the indemnity obligations that PEIC paid to its insured exceeded the $1,000,000 retention on the certificate and PEIC requested Global to begin making payments. The bills submitted by PEIC totaled approximately $559,072.00.
When Global did not make any payments to PEIC, PEIC commenced this lawsuit alleging breach of contract and declaratory judgment to enforce its rights under the policy. Global, in turn, counterclaimed stating that the reinsurance certificate has a maximum $1,000,000 limit of liability in connection with the asbestos litigation liabilities.
Both parties filed motions on the issue of whether legal expenses are subject to the $1,000,000 limit stated in the declarations. Judge Kelly, relying on the Second Circuit decision in Bellefonte Reinsurance Co. v. Aetna Casualty and Surety Co. which held that reinsurers were not liable for defense costs beyond the policy limit outlined in the reinsurance certificates, agreed with the reinsurers and the certificate's cap on liability coverage applied to expenses as well.
IMPACT (REINSURANCE): Again, this decision is another reason why contract language is so critical. In this case, if PEIC wanted to specifically exclude legal expenses from the cap, it should have requested and required specific language contained in the policy to express that intention.
DISTRICT COURT OF CONNECTICUT
ARROWOOD SURPLUS LINES INSURANCE CO. V. GETTYSBURG NATIONAL INDEMNITY
(CIVIL ACTION NO. 09-972 APRIL 6, 2010)
2010 U.S. Dist. LEXIS 33727 [lexis.com]
District Court Orders Unauthorized Reinsurer to Post Pre-Pleading Security
Arrowood Surplus Lines Insurance ("Arrowood") requested the district court to require Gettysburg National Indemnity ("Gettysburg") to post over six hundred thousand dollars in pre-pleading security regarding a reinsurance dispute. Arrowood relied on Connecticut General Statute Section 38a-27(a), which requires "unauthorized insurers" to post pre-pleading security.
This dispute arises out of a series of reinsurance agreements between Arrowood and Gettysburg which stated that each agreement reinsured approximately ten percent of the hundred percent quota share of the first million dollars of the cedent's net liability up to an aggregate attachment point of ninety percent of the gross written premiums. Arrowood claimed Gettysburg is responsible for over a million dollars in obligations ranging from its gap collateral obligations together with loss adjustments. Gettysburg argued that it should not be responsible for submitting security in an amount exceeding their gap coverage obligations which are approximately four hundred thousand dollars. The district court disagreed claiming the security should consist of all of its obligations under the reinsurance agreements. The court concluded that if the reinsurer is "undercapitalized ... Gettysburg has the recourse against the shareholders under the terms of the agreement."
IMPACT (REINSURANCE): The issue of a reinsurer being undercapitized or insolvent is a persistent problem and the subject of several important court decisions. Practitioners should be cognizant of the state and federal laws which allow for pre-pleading security to ensure that certain funds are set aside to potentially satisfy (or partially satisfy) a judgment. In this issue Connecticut, like several other states, requires unauthorized insurers to post pre-pleading security to satisfy any financial obligation stemming from litigation over policies.
WESTERN DISTRICT OF MISSOURI
CONTINENTAL CASUALTY COMPANY V. AXA GLOBAL RISKS (UK) LIMITED
(CIVIL ACTION NO. 09- APRIL 2, 2010)
2010 U.S. Dist. LEXIS 32850 [lexis.com]
The central issue before the Court is whether it should enjoin or otherwise dismiss either the United States action or the reinsurer's parallel action, filed in the United Kingdom. In the United States' action, Continental Casualty Co. ("CCC") sought monetary damages and declaratory relief pursuant to a reinsurance slip issued by AXA Global Risks. Shortly before the United States' action commenced, AXA Global Risks filed a declaratory judgment action against CCC in the English Commercial Court pertaining to its obligations pursuant to a reinsurance slip.
In issuing its decision that allowed the lawsuit in the United Kingdom to proceed, Judge Gaitan acknowledged that Federal Courts do have some degree of authority in issuing anti-suit injunctions. In this jurisdiction, a foreign anti-suit injunction will be issued only if the party can demonstrate: "(1) an action in a foreign jurisdiction would prevent the United States jurisdiction or threaten a vital United States policy, and (2) the domestic interests outweigh the concerns of international comity." The Judge concluded that CCC failed in its burden to establish any vital American interest in order to preclude the continuation of the United Kingdom action.
With respect to the AXA's request to dismiss the instant action on the theory of the "first to file" rule, the court decided against the reinsurer. While acknowledging the "first to file" standard, the court determined that it did not apply when the two courts are not of the same sovereignty.
IMPACT (REINSURANCE): This case demonstrates the difficulty in dealing with reinsurance slips involving reinsurers of different jurisdictions. Ultimately, the court's ruling allows for two parallel lawsuits involving the same facts and reinsurance to continue in two separate jurisdictions. Practitioners should always try to impress upon their clients the need to have adequate choice of law provisions that outline the jurisdiction and method for handling reinsurance disputes (i.e. arbitration or litigation).
UNITED STATES STATE COURT DECISIONS
STATE OF ILLINOIS
AMERISURE MUTUAL INSURANCE CO. V. GLOBAL REINSURANCE
(CIVIL ACTION NO. 09-0820 APRIL 15, 2010)
2010 Ill. App. LEXIS 198 [lexis.com]
Appellate Court Declines to Reverse Decision Vacating Attorneys Fees as Part of the Award
In a recent decision, the Illinois Court of Appeals, First Division, refused to reconsider its previous decision in vacating a portion of an arbitration award regarding attorneys' fees. As discussed in our earlier publications, the issue before the court was whether to uphold an arbitration panel's decision that awarded the cedent attorneys' fees pursuant to a reinsurance dispute. In 2001, the parties entered into a quota share reinsurance agreement. According to the agreement's express terms, the reinsurer agreed to reinsure certain policies issued by the cedent.
Five years later, in 2006, the cedent submitted an approximate 1,500,000 dollar claim to the reinsurer seeking reimbursement. The reinsurer allegedly requested that it review certain documents relative to the claim in order to determine whether the claim was made in good faith. The cedent contended that the reinsurer never expressed its intention to review the documents prior to paying the claim and demanded arbitration. In addition to the principal claim, the cedent requested attorneys' fees. It based the request on Section 155 of the Illinois Insurance Code. The reinsurer argued that the arbitration panel did not have authority to award attorneys' fees. In 2008, the arbitration panel issued an award of 1,560,000 dollars which included interest and attorneys' fees. When the cedent moved to confirm the arbitration award in Illinois State Court, the reinsurer made a motion to reject the portion of the award regarding attorneys' fees. The reinsurer's primary argument was that the arbitration panel exceeded its express and implied authority in making such a determination.
In attempting to confirm the entire award, the cedent replied that the reinsurer waived its rights to dispute the award by failing to challenge the issue when the arbitration was conducted.
The Illinois Appellate Court sustained its decision in dismissing the arbitration panel's decision with respect to attorneys' fees. The court based its conclusion on the interpretation of Section 155 of the Illinois Insurance Code. According to its review of Section 155, the court found that the section expressly precluded awarding attorneys' fees to a party "by way of an arbitration panel." As such, the arbitration panel's award was a gross "mistake in law."
IMPACT (ARBITRATION): This is not a surprising decision by the First District. Courts rarely alter their position based upon the same papers. In light of Stotl-Nielsen decision, it appears that courts are beginning to take a closer look at an arbitrators' decisions - particularly whether it properly interpreted the law when it rendered its decision. An incorrect application of a code or statute may lead a court to invalidate an arbitrator's decision in whole or in part.
OTHER NEWS AND NOTES
BP EXPECTS ITS CAPTIVE INSURER TO COVER EXPENSES INVOLVED WITH GULF OF MEXICO OIL SPILL
British Petroleum ("BP") announced that it fully expects its self-insurance and captive insurance to cover the costs involved with the cleanup and repair of the oil spill in the Gulf of Mexico. Currently, BP is expending approximately six million dollars a day.
Based on various reports, the oil slick stems from a leak resulting from an explosion. The oil slick is expected to hit the United States Gulf Coast. At this time, the United States government issued a moratorium on future oil drilling pending an investigation. The oil rig that was involved in the oil spill is insured for approximately five hundred and sixty million dollars which includes provisions for total loss and wreck removal. The total amount is expected to be approximately two to three billion dollars in clean-up costs.
For more information, click here.
ANALYSTS EXPECT A "SURGE" IN REINSURANCE MOTORIST CLAIMS IN THE UNITED KINGDOM
According to recent analysts, United Kingdom motor reinsurers are expecting to experience an unforeseen "surge" of claims. Analysts stated there has been a sharp rise in personal injury losses, particularly in accidents covered by Excess of Loss policies. Reports released this month indicated an approximate ten percent or "even higher" rise in claims for the rest of the year.
HANNOVER RE EXPECTS A 53 MILLION CLAIM FROM THE OIL SPILL IN THE GULF OF MEXICO
Hannover Reinsurance Co.'s CEO, Ulrich Wallin, stated that he initially expects a loss of approximately $53 million arising from the deepwater oil drilling in the Gulf of Mexico. Despite the expected loss, he declared that "Hannover Re remains considerably below our major loss expectancy for the second quarter."
Those statements were made Mr. Wallin before reports indicating that the oil spill was nearly five times larger than first indicated and the loss is near $2,000,000,000.
FLORIDA CFO PUBLICALLY QUESTIONS STATE POSITION'S ON CAT REINSURANCE REQUIREMENTS
On April 23, Alex Sink submitted a written request to Florida's Office of Insurance Regulation inquiring as to why the state regulators removed specific requirements on property insurers to maintain certain levels of cat reinsurance. He believes that the removal makes Florida vulnerable to large losses as well as being out of step with the rest of the states.
During the past year, Alex Sink has been highly critical of the state's recent positions on insurance regulations and copied Florida's Governor Crist on the letter.
NUMEROUS CLAIMS FILED FROM MISSISSIPPI STORM
A storm that ravaged Mississippi caused approximately ten deaths and resulted in thousands of home and automobile claims. Some insurance carriers created centers in the most damaged areas to answer questions and process claims.
Representatives from Allstate Insurance did not give a specific number but several insurance carriers have indicated claims in the range of 300 per carrier.
UNITED STATES FINANCIAL REFORM PROPOSAL COULD OPEN THE UNITED STATES REINSURANCE MARKET
Officials from Swiss Re, Ace and Lloyd's of London agreed that the recent proposal to significantly alter the United States' financial regulations would make it far easier for foreign reinsurers to secure a larger marketshare in the United States. Specifically, they are focusing on the idea of pre-empting state regulations in favor of a United States Treasury Department office covering international regulations.
As stated previously, the National Association of Insurance Commissioners, which represents state regulators, opposes interference in their state regulations.
This edition of Reinsurance Review was originally published in The Insurance and Reinsurance Report blog.
Goldberg Segalla's Reinsurance Review provides timely summaries of and access to the latest reinsurance law developments worldwide, and is published monthly. Cases are organized by court and date. In addition, it provides the latest information regarding news in the insurance and reinsurance industries. Reinsurance Review is the collaborative effort of Goldberg Segalla LLP's Global Insurance Services Practice Group, as is its blog The Insurance and Reinsurance Report. Goldberg Segalla's Global Insurance Service Group is comprised of over 25 attorneys throughout 10 offices in the firm's four states (New York, New Jersey, Connecticut, and Pennsylvania). The Global Insurance Services Group routinely handles matter of national and international importance for both domestic and foreign insurers, cedents, and reinsurers. This includes: a comprehensive audits, policy reviews, regulatory advice, positioning dispute for resolution at the business level (either through interim funding or non-waiver agreements), negotiations among counsel, mediation or fully-involved arbitration or litigation.
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