DISTRICT COURT GRANTS MOTION TO STAY PENDING ARBITRATION OVER NON-SIGNATORY’S OPPOSITION

In late August, a federal district court in Louisiana granted a group of defendants’ motion to stay pending arbitration. Plaintiff alleged breach of fiduciary duty, negligence, and fraud in connection with a trust account set up for plaintiff’s benefit. Benjamin Geller, a sports agent and financial adviser to former football player Frank Warren, recommended Mr. Warren purchase a $1,000,000 life insurance policy. Upon Mr. Warren’s death, those benefits were paid to an irrevocable insurance trust held by one of the defendants, Morgan Keegan & Co., with Geller acting as trustee. Plaintiff alleged that Geller conspired with Morgan Keegan employees to deplete this trust. The motion to stay centered on an arbitration clause in the client agreement that established the trust account. Defendants argued the doctrines of equitable estoppel, third-party beneficiary, and agency theory in support of arbitration. Plaintiff asserted that as the client agreement was induced by fraudulent representations and “never consummated,” arbitration was therefore inappropriate.

The court looked first to whether a valid agreement to arbitrate existed and then to whether the dispute fell within that agreement. Because the plaintiff never challenged the arbitration agreement, instead questioning the validity of the client agreement, the question must be heard before an arbiter. Furthermore, as a third-party beneficiary of the client agreement, plaintiff was bound by the arbitration agreement even though he was a non-signatory. Finally, as plaintiff had accepted benefits under the client agreement from Morgan Keegan, plaintiff was also bound to those terms on equitable estoppels grounds. Warren v. Geller, No. 11-2282 (USDC E.D. La., Aug. 22, 2014).

This post written by Matthew Burrows.

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COURT CONFIRMS AWARD OVER ARGUMENTS OF “MANIFEST DISREGARD,” “EVIDENT PARTIALITY,” AND “CORRUPTION”

A transported liquid chemical had been found degraded after shipping from Texas to South Korea. The chemical company contended that the shipper was responsible for the losses as samples taken from the chemical prior to its transport tested satisfactorily. The dispute went to arbitration where the panel determined that the company failed to show that the chemical was damaged aboard the ship, and denied the claim. The chemical company attempted to vacate the award but the court found there was no manifest disregard of the law, because the petitioners could not show error beyond a possible erroneous interpretation of the Carriage of Goods by Sea Act, and in any event, “there [was] no indication the majority [of the panel] knew that was not the law but chose to hold petitioners to a different standard.” The court also found there was no misconduct by one of the arbitrators who failed to disclose that he was suffering from a terminal brain tumor at the time of his service on the panel, notwithstanding potential arbitration rule or ethics code violations. The nondisclosure did not cause prejudice and did not rise to “evident partiality or corruption” or misconduct under the FAA, under which “an arbitrator is under no duty to disclose medical conditions.” Finding no reason to vacate the award, the court ordered the award confirmed and granted the respondents’ motion to award attorney’s fees and costs incurred in connection with the motion to vacate. Zurich American Insurance Co. v. Team Tankers A.S., Case No 13cv8404 (USDC S.D.N.Y. June 30, 2014).

This post written by Michael Wolgin.

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CEDENT LOSES MOTION FOR REINSURANCE PAYMENTS DUE TO LATE NOTICE AND “UNSATISFACTORY” PROOF OF LOSS, NOTWITHSTANDING “FOLLOW THE SETTLEMENTS” PROVISIONS

In a reinsurance coverage dispute involving coverage for an underlying settlement of asbestos liability, a New York court considered whether the defenses of failure to provide prompt notice and failure to provide satisfactory proof of loss precluded summary judgment in favor of the cedent. The cedent relied on “follow the settlements” provisions contained in each of the relevant four facultative reinsurance certificates. The court, however, was not convinced that these provisions entitled the cedent to coverage. One of the certificates, the court found, provided for prompt notice as a condition precedent to coverage. The court ruled that the cedent, which had submitted notice of claim to the reinsurer in 2010, had been required to provide notice of the asbestos settlement “in 2006 at the latest, when the settlement agreement was executed.” As a result, no prejudice from the late notice needed to be demonstrated, and the reinsurer was not obligated to indemnify the cedent for unpaid losses under that certificate. For the three other reinsurance certificates, which did not contain provisions deeming prompt notice a condition precedent to coverage, the court still denied the cedent summary judgment as premature, finding that the cedent failed to demonstrate that it had satisfied the certificates’ requirements to “provide[] proofs of loss in a form satisfactory to” the reinsurer. The court did rule in favor of the cedent, however, with respect to one of three reinsurance billings, where the reinsurer waived its defenses by making an initial payment without any reservation of rights. Lexington Insurance Co. v. Sirius America Insurance Co., Index No. 651208/2012 (N.Y. Sup. Ct. Sept. 18, 2014).

This post written by Michael Wolgin.

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APPEALS COURT VACATES ORDER GRANTING MOTION TO STOP ARBITRATION

In Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assur. Co., Inc., No. 14-5193 (6th Cir. Oct. 24, 2014), the Sixth Circuit Court of Appeals vacated the district court’s order granting plaintiff’s motion to stop arbitration.   The Sixth Circuit determined that the district court’s order determining that arbitrability of the dispute was within the court’s province, which was the basis for granting plaintiff’s motion to stop the arbitration, failed to identify what the district court found to be ambiguous about the parties’ manifest intent to submit all disputes, including disputes regarding the enforceability of any provision, exclusively to arbitration.  The Sixth Circuit, relying on Rent-A-Center, West, Inc. v. Jackson,561 U.S. 63, 67–70 (2010) and on a de novo review of the arbitration agreement, found that the parties manifestly intended to submit the threshold question of arbitrability to the arbitrator and not the court.

This post written by John Pitblado.

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COURT DENIES PETITION FOR ORDER CONFIRMING FINAL ARBITRATION AWARD AND ENTRY OF JUDGMENT

In First State Ins. Co. v. Nationwide Mutual Ins. Co., No. 13-cv-11322-IT (U.S.D.C. D. Mass. Oct. 21, 2014), a petition for an order to confirm a final arbitration award and entry of judgment was denied.  The court determined that although labeled a “Final Award,” the arbitration panel expressed no intention to resolve all claims submitted in the demands for arbitration.  Instead, the award focused on the plaintiff’s motion regarding contract interpretation, which directed the parties back to the panel with a proposed schedule leading to a hearing on remaining matters.  Moreover, although the panel proceeded to address the issues in phases, the parties did not jointly agree to bifurcation of the arbitration. Rather the record in the case showed that the defendant objected to bifurcation of the issues at an organizational meeting with plaintiff and the panel when it argued that the panel should consider all of the issues before it at the same time.

This post written by John Pitblado.

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SEVENTH CIRCUIT DECLINES TO REQUIRE PRE-PLEADING SECURITY FROM URUGUAY’S STATE-OWNED REINSURER AND REFUSES TO COMPEL ARBITRATION

The Plaintiff, Pine Top Receivables of Illinois, LLC brought an action in Illinois federal court against Banco de Seguros del Estado, an entity wholly owned by Uruguay. Pine Top claimed that Banco de Seguros owed Pine Top $2,352,464.08 under certain reinsurance contracts. Pine Top’s complaint sought to compel arbitration, and alternately sought entry of judgment for breach of contract. Banco Seguros answered the complaint, and Pine Top moved to strike the answer for failure to post pre-pleading security as required under Illinois’s unauthorized foreign insurer statute, § 215 ILCS 5/123(5).

The trial court held, and the Seventh Circuit affirmed on interlocutory appeal, that Banco Seguros was not required to post security, following Second Circuit precedent which held that an attachment of any sort (like pre-judgment security) was violative of the broad grant of immunity to foreign governments afforded by the Foreign Sovereign Immunities Act.

The Seventh Circuit also affirmed the trial court’s ruling denying Pine Top’s motion to compel arbitration, finding that Pine Top’s rights under the reinsurance contracts, which had been assigned to it by the Liquidator of the defunct primary insurer that originally entered into the agreements with Banco Seguros, were limited to the collections of certain debts, but it was not assigned all rights and duties under the treaties, and thus was not assigned the right to arbitrate. Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 13–1364 (7th Cir. Nov. 7, 2014)

This post written by John Pitblado.

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COURT REFUSES TO SEAL “SUBSTANTIVE RULINGS” IN ARBITRATION AWARD

A federal court in Michigan was recently presented with a motion to seal the briefing associated with a motion to confirm an arbitration award. The arbitration concerned a reinsurance dispute and had been conducted pursuant to a confidentiality agreement that required the final award and any court submissions be kept confidential. Noting the “long-established legal tradition of public access to court documents,” the court ordered that only limited portions of the Final Award should be sealed – those that identified non-parties. The court refused to seal other portions of the award, rejecting the argument that public filing of the award’s “substantive rulings” could harm the reinsurer’s financial interests. The reinsurer argued that other reinsureds could cite to the blanket pronouncements in the Final Award to support their claims, despite the confidential nature of the arbitration. The court ruled that unlike situations where the arbitration award contains confidential business data or trade secrets and therefore is properly sealed, the request to seal the Final Award in this case was made merely to prevent unhelpful portions of the Final Award from becoming public in an effort to avoid future litigation. The court cited Sixth Circuit precedent holding a party’s interest in shielding prejudicial information from public view, standing alone, cannot justify the sealing of that information.  Amerisure Mut. Ins. Co. v. Everest Reinsurance Co., No. 14-CV-13060, 2014 WL 5481107 (E.D. Mich. Oct. 29, 2014).

This post written by Catherine Acree.

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COURT DENIES MOTION TO COMPEL PRODUCTION OF DOCUMENTS RELATING TO REINSURANCE COVERAGE

A federal district court has denied that part of an insured’s motion seeking to compel the insurer to produce all documents relating to its reinsurance coverage. The court ordered the production of the reinsurance agreements themselves, but found the request for all other reinsurance information was “plainly too broad.” The court also recognized the possible application of the common interest doctrine to the communications between the insurer and its reinsurer to support the denial. As to the other documents sought, the court granted that part of the motion seeking documents relating to certain drafting history of the insurance policy at issue, but denied the remaining part of the motion to compel, which sought documents ranging from the insurer’s personnel files for all personnel involved in the claim to the insurer’s loss reserve information. Harleysville Lake States Ins. Co. v. Lancor Equities, Ltd., No. 13-CV-6391 (USDC N.D. Ill. Oct. 31, 2014).

This post written by Renee Schimkat.

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UNITED STATES TAX COURT RULES ON CAPTIVE INSURANCE ARRANGEMENT

In 2003 and 2004, the Internal Revenue Service disallowed deductions taken by SHI Group, a subsidiary of the Swedish company Securitas AB, for insurance expenses related to a captive insurance arrangement established by Securitas AB. SHI Group, which maintained an office in California, petitioned the disallowance of these deductions in the United States Tax Court. The Internal Revenue Code permits deductions for insurance premiums as business expenses. Although the insurance premiums may be deductible, amounts placed in reserve as self-insurance are not and can only be deducted at the time the loss for which the reserve was established is actually incurred. While neither the Code nor the regulations define insurance, courts have looked primarily to four critieria in deciding whether an arrangement constitutes insurance for income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risk of loss to the insurer; and (4) the arrangement must be insurance in the commonly accepted sense. Based on the complicated facts before it, the Tax Court determined that the captive arrangement at issue constituted insurance, allowing deductions for the related expenses. Securitas Holding, Inc. v. Commissioner, No. 21206-10, T.C. Memo 2014-225 (U.S.T.C. Oct. 29, 2014).

This post written by Leonor Lagomasino.

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COURT DISMISSES ALL CLAIMS BROUGHT BY INSURED AGAINST REINSURANCE INTERMEDIARY AND AGENT IN CONNECTION WITH FRAUDULENT SCHEME AND ILLUSORY AGREEMENT

A federal district court has dismissed all claims brought against American Special Risk (ASR), a reinsurance intermediary and agent for insurer Signet, by insured Car Sense. Car Sense sued Signet and ASR in connection with a Buy Back Guarantee program that Signet offered as a way to increase customer participation in certain incentive programs offered by Car Sense. Signet represented that the BBG program was 100% secured via a reinsurance agreement with Hannover Re. ASR acted as Signet’s reinsurance intermediary and agent in negotiating and procuring the reinsurance agreement. As alleged, though Signet represented that the BBG was a legitimate insurance product, the BBG was in fact a fraudulent scheme engineered to generate one-time fees. Moreover, the reinsurance agreement did not provide for 100% security of the BBG as Signet represented but was, in fact, illusory. Car Sense sued Signet and ASR for various claims ranging from breach of contract to fraud.

The court dismissed all claims against ASR finding, in large part, that ASR did not owe any duty, and had not made any misrepresentations, to Car Sense. The court also gave notice of its intention to dismiss all claims against Signet for Car Sense’s failure to serve Signet within the time required by the Federal Rules of Civil Procedure. Car Sense, Inc. v. American Special Risk, LLC, No. 13-CV-5661 (USDC E.D. Pa. Oct. 24, 2014).

This post written by Renee Schimkat.

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