In 2023, arbitrability and who must arbitrate continued to be litigated issues, with courts often sending the parties to arbitration consistent with public policy. Courts also addressed arbitrator bias, allocation, discovery of reinsurance information issues, jurisdiction, and direct right of action. And in one case, the court addressed a lost policy issue.
Arbitration
In the reinsurance context, questions of arbitrability continued to arise in 2023 and the courts continued the trend of enforcing arbitration clauses and compelling arbitration.
Arbitrability and Motions to Compel Arbitration
In January 2023, a Washington federal court addressed a risk-sharing pool’s claims of breach of a reinsurance contract and a reinsurer’s motion to compel arbitration of the dispute. In Washington Schools Risk Management Pool v. American Re-Insurance Co., No. 21-CV-00874-LK (D. Wash. Jan. 17, 2023), a pool issuing coverage to school districts in Washington state indemnified a school district for a settlement involving allegations of sexual abuse against the school district and a teacher. The pool was reinsured and sought coverage under its reinsurance agreements for the settlement. The reinsurers rejected the claim and the pool brought suit in court (originally in state court, but one of the reinsurers removed the case to federal court).
McCarran-Ferguson Act reverse pre-emption, based on Washington’s anti-arbitration statute in the insurance context, Wash. Rev. Code Ann. § 48.18.200, was on display in this case because of a non-US reinsurer. See 15 U.S.C. §1011. Here, the court and the magistrate judge, following a recent Ninth Circuit case, found that reverse pre-emption did not apply to the non-US reinsurer. This was because the non-US reinsurer sought to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), and because the New York Convention was not an act of Congress it was not reverse-pre-empted by application of the McCarran-Ferguson Act.
Because one reinsurer was domiciled in the US and the other was not, this led to a split result on arbitration. The magistrate judge recommended granting the motion to compel arbitration of the non-US reinsurer and also recommended that the action against that reinsurer be dismissed. For the US reinsurer, the magistrate judge recommended that the litigation be stayed because it would be inefficient to have two proceedings where the same facts and circumstances applied to both reinsurers and separate results would not make sense.
Not all motions to compel succeed, however, especially when the motion is made against a non-signatory to the reinsurance contract. In The Travelers Indemnity Co. v. Grapeland Independent School District, No. 12-22-00311-CV (Tex. Ct of App. 12th Dist., May 11, 2023), an insured school district obtained insurance from a municipal risk pool that in turn entered into a reinsurance contract with the reinsurer. A coverage dispute arose after windstorm damage and the policyholder sued several entities, including the risk pool and the reinsurer for breach of contract and other violations under Texas statutory provisions. The reinsurer moved to dismiss the complaint to stay the litigation in favor of arbitration under its reinsurance contract. The motion court denied the motion and the reinsurer appealed.
In affirming the motion court, the appeals court rejected reinsurer’s argument that the dispute was subject to the terms of the reinsurance contract based on direct benefit estoppel. Direct benefit estoppel applies to parties who seek to derive a direct benefit from a contract with an arbitration agreement. Thus, a non-signatory may be compelled to arbitrate if it (1) seeks to derive a direct benefit from the contract through the lawsuit or (2) deliberately seeks and obtains substantial direct benefits from the contract itself.
Unfortunately for the reinsurer, the court noted that it had recently decided a similar case involving the reinsurer and rejected nearly identical arguments. See Travelers Indemn. Co. v. Alto ISD, No. 12-21-00143-CV, 2022 WL 1668859 (Tex. App.-Tyler May 25, 2022, pet. denied) (mem. op., not designated for publication). The court declined the reinsurer’s invitation for the court to disavow its holding in the prior case.
As the court stated:
Here, as in Alto, we disagree that the petition excerpts constitute “allegations seeking additional insurance funds from [the reinsurer], which, if owed, would necessarily arise from a payment obligation under the Reinsurance Contract.” Instead, the excerpts, especially when considered in context of the petition as a whole, show that [the insured] alleges it was damaged by receiving an inappropriate settlement for its claims under the Policy—not the Reinsurance Contract, and that [the reinsurer’s] liability, if any, is premised on insurance code, tort, and DTPA duties that are general, noncontract obligations arising from its role as the adjuster of the claims under the Policy—not the reinsurer of [the cedent’s] liability under the Reinsurance Contract.
Because the reinsurer did not show that the arbitration clause in the reinsurance contract was valid and enforceable against the policyholder, the court concluded that the motion court did not abuse its discretion by denying the reinsurer’s motion to dismiss or stay the litigation and compel arbitration. The reinsurer’s attempt to relitigate this issue in Connecticut federal court met with the same result.
In Travelers Indemnity Co. v. Grapeland Independent School District, No. 22-1760-cv (2d Cir. Dec. 11, 2023) (Not for Publication), the Second Circuit affirmed the district court’s denial of the petition to compel arbitration and, just like the Texas court, rejected application of the direct benefit estoppel theory. The Second Circuit held that:
[The reinsurer] has failed to show that it may avail itself of the direct benefits estoppel theory under Texas law. Every Texas court to consider the issue has held that the theory does not apply to the suit between [the reinsurer] and the [insured school district] or to suits between [the reinsurer] and other [insured school districts) involved as insureds in this and similar cases.
When a party receives an arbitration demand and there is a dispute about whether there is an agreement to arbitrate between the parties, participating in the early stages of the arbitration may be problematic when subsequently disputing arbitrability. In Employers Insurance Company of Wausau v. Dominion Insurance Receivable Inc., No. 653628/2022 (N.Y. Sup. Ct, N.Y. Co. Jun. 21, 2023), the assignee of reinsurance recoverables obtained from the receiver of an insolvent company brought an arbitration demand against the insolvent company’s retrocessionaire to recover recoverables the assignee claimed was owed. The retrocessionaire, while reserving all rights, participated in the early stages of the arbitration, including whether to consolidate the disputes arising from several agreements and provisionally appointing an arbitrator subject to its reservations over consolidation.
Some five months after the arbitration demand was served, the retrocessionaire petitioned to stay the arbitration because of language in the assignment agreement that gave exclusive jurisdiction to the court over disputes. The assignee countered with a motion to compel arbitration under the retrocessional agreement.
In denying the motion to stay and granting the motion to compel arbitration, the court held that the retrocessionaire’s participation in the arbitration selection process was sufficient to waive any right to challenge arbitrability in court. The court found that the retrocessionaire’s actions were inconsistent with its claims that it did not participate in arbitration.
The court held that it need not determine whether a valid agreement to arbitrate existed because of the retrocessionaire’s participation in the arbitrator selection process. The lesson here is that even preliminary participation in arbitration may waive the right to dispute arbitrability.
Sometimes a motion to compel arbitration is intertwined with a question concerning the powers of an arbitrator. For example, who decides whether a prior arbitration award precludes a subsequent dispute between the parties? In National Casualty Co. v. Continental Insurance Co., No. 23 cv 3143 (N.D. Ill. Nov. 15, 2023), the parties entered into three reinsurance agreements during a six-year period, each with the same arbitration clause. A dispute arose between the parties over the manner in which the cedent was billing losses and whether the methodology the cedent used was permitted under the definition of loss occurrence.
The cedent separately arbitrated the dispute with two reinsurers and, in 2017, final awards were issued and confirmed by the Illinois federal court. A new dispute arose under the same contractual provisions as in the 2017 disputes. The cedent once again brought two separate arbitration proceedings. In response, the two reinsurers brought an action for injunctive and declaratory relief seeking to preclude the cedent from pursuing the second set of arbitrations. The cedent moved to compel arbitration and the reinsurers moved to stay the arbitrations so that the preclusion issue would be addressed by the court.
In granting the cedent’s motion to compel arbitration and denying the reinsurers’ motion to stay, the court found that the preclusive effect of the 2017 awards on the current proceedings or on future arbitrations was within the scope of the arbitration clauses and, therefore, the arbitrators must decide what, if any, effect the prior awards have on the parties’ disputes.
The court set forth the standard for a motion to compel arbitration: (1) an enforceable written agreement to arbitrate, (2) a dispute within the scope of the arbitration agreement, and (3) a refusal to arbitrate. Here, the court found that the parties agreed that there was an enforceable written agreement to arbitrate in the form of the arbitration provisions of the reinsurance contracts. The parties also agreed that the scope of the arbitration clause was broad.
The court stated that the issue before the court was a narrow inquiry into the arbitration clause’s scope: whether a dispute over the preclusive effect of a prior arbitration is arbitrable. “More specifically, when a federal court order confirms an arbitration award, is the preclusive effect of that award on a subsequent arbitration a matter for the court or the arbitrator to decide?”
The court noted that there was a narrow exception to the presumption of arbitrability, but that it did not apply in this situation. Instead, the court held that “[i]t is well settled in the Seventh Circuit, and other circuits, too, that the preclusive effect of a prior arbitral award—whether or not confirmed by a court—is a defense subject to arbitration.
The court disposed of the reinsurers’ arguments as follows:
Cloaked as a “threshold question of arbitrability,” the Reinsurers ask the Court to disregard well-established law, and to determine the preclusive effect of the 2017 Awards on the New Arbitrations. But deciding that question would require the Court to inappropriately delve into the merits of the claims, assessing the presence of all prerequisites for collateral estoppel. This the Court cannot do.
* * *
Any dispute—whether old or new—concerning “the interpretation of [the parties’] Contract or their rights with respect to any transaction involved” is subject to arbitration. . . . It will be for an arbitration panel to determine what impact, if any, the 2017 Awards have on the current and future disputes.
Ultimately, the court granted the motion to compel arbitration and sent the parties back to their respective arbitration panels to address whether the 2017 awards have any preclusive effect on the current disputes. The court also dismissed the complaint without prejudice rather than staying the litigation.
Arbitrator Bias
Attempting to remove an arbitrator at the early stages of arbitration for alleged bias is difficult to do. The ability to make the challenge depends on the law of the jurisdiction governing procedural issues in the arbitration. Nevertheless, even if entertained, a petition to remove an arbitrator for bias continues to be an uphill battle.
In Endurance Specialty Insurance Ltd. v. Horseshoe Re Ltd., No. 23-cv-1831(JGK) (Jul. 5, 2023), two Bermuda domiciled companies began arbitration proceedings under two materially identical reinsurance contracts with identical arbitration provisions. The parties could not agree on an umpire and the arbitration provisions required them to petition the Secretary General of the Court of Arbitration of the International Chamber of Commerce (“ICC Court”) to appoint one. The ICC Court appointed an umpire, but one of the parties objected. The ICC Court rejected the petition to disqualify the umpire for bias in a written decision.
The objector then petitioned the New York State Supreme Court to remove the umpire for lack of impartiality and the other party removed the matter to the New York federal court under the New York Convention. The objecting party moved to remand the case back to the New York state court and the other party moved to dismiss the petition for failure to state a claim.
The court found that it had jurisdiction to address the bias claim under 9 U.S.C. § 203, which is Chapter 2 of the New York Convention. It then concluded that because the Bermuda Arbitration Act 1986 controlled the conduct of the arbitration, it did not have the authority to remove the arbitrator. But the court went on to state that even if it did have the authority, the petition would fail based on the facts.
On whether the court had the authority to remove the umpire for bias, the court stated that “Both parties agree that the Bermuda Arbitration Act, specifically Section 34(1), governs the removal of an arbitrator under Bermuda procedural law.” The court also found that Section 34(1) clearly stated that the court may remove an arbitrator for misconduct and that “court” was defined as the Supreme Court of Bermuda. Thus, held the court, only the Supreme Court of Bermuda could remove the umpire in this dispute.
Nevertheless, the court went on to find that the petitioner failed to identify any reasonable basis for disqualifying the umpire under the applicable law. The court held that the petition to remove the umpire was unconvincing in alleging any “real danger” of bias. The court found that the cited bases for the umpire’s supposed bias and prejudice fell far short of meeting that standard, whether considered individually or taken together. Even under New York law, the appearance of bias was not clearly apparent given the alleged facts.
This case continues the trend that real bias must be demonstrated for a court to remove an arbitrator.
Allocation
Settlement allocations of long-tail losses like pollution claims have long been a source of disputes between cedents and reinsurers. Often the allocation of the underlying settlement depends on the allocation methodology used based on the law of the relevant jurisdiction. The issue becomes more complicated where the reinsurance contract is governed by the law of a different jurisdiction that may not use the same allocation methodology. In a recent case, the United States Circuit Court for the Second Circuit addressed this issue where the cedent claimed back-to-back reinsurance and the reinsurer rejected the allocation methodology.
In The Insurance Company of the State of Pennsylvania v. Equitas Insurance Limited, No. 20-3559-cv (2d Cir. May 22, 2023), the cedent settled pollution claims and allocated the settlement based on the “all-sums” methodology used in California. The reinsurer rejected this approach, contending that because the all-sums approach is not used under English law and the reinsurance contract was governed by English law, the allocation was improper and did not have to be followed by the reinsurer. Instead, the reinsurer argued that time on the risk allocation was appropriate. Additionally, the reinsurer argued late notice.
The district court, on completing motions for summary judgment, granted the cedent’s motion holding that the reinsurer was bound by the cedent’s use of the all-sums allocation methodology. On appeal, the Second Circuit affirmed.
The circuit court held as follows:
Although the question is not without doubt, we conclude that under the better reading of English law, [the reinsurer’s] obligations under the reinsurance policy are co-extensive with [the cedent’s] obligations under the [ ] policy. The question is not whether English law would have allocated [the cedent’s] liability on an all sums basis; English law does not govern [the cedent’s] liability. Instead, the question is whether, once [the cedent’s] liability was properly allocated, as [the reinsurer] concedes that it was, English law would then interpret the reinsurance policy as providing co-extensive coverage. Under English law, there is a strong presumption that facultative reinsurance policies provide back-to-back coverage, meaning that the liability of the insured is generally equivalent to the liability of the reinsured.
Although the court acknowledged that its interpretation might not be right, it opined that its interpretation was the better reading of English law. The court also made it clear that the real question was whether, based on the cedent’s allocation, English law would interpret the reinsurance contract to provide back-to-back reinsurance coverage. The circuit court held that it would because of the strong presumption of back-to-back reinsurance coverage under English law.
This case demonstrates the important presumption under English law that, in most circumstances, a facultative certificate will provide back-to-back or coextensive reinsurance coverage to the cedent.
In Alabama Municipal Insurance Corp. v. Munich Reinsurance America, Inc., No. 2:20cv300-MHT (M.D. Ala Apr. 26, 2023), the cedent and reinsurer disputed (over several environmental claims) how many retentions the cedent was required to take and how many claims existed. The cedent settled the underlying loss and submitted the costs to the reinsurer as a single loss against one treaty. The cedent sued the reinsurer alleging breach of contract, among other claims, for failing to pay the settled loss as a single claim under the treaty.
In denying the reinsurer’s motion for summary judgment, the court noted that unlike many other reinsurance contracts, this treaty did not contain a follow-the-settlements or follow-the-fortunes clause, which helped inform whether the reinsurer was required to follow the allocation decisions made by the cedent. The court also found that there was a genuine factual dispute over what damages were being sought under the settled claim and whether damages in other years would affect the underlying liability. Neither party, held the court, established a factual predicates for their allocation arguments.
Production of Reinsurance Information
Parties routinely seek reinsurance information in insurance coverage, bad faith and defense counsel legal malpractice cases and the courts routinely allow production of reinsurance information. This clear trend toward compelling discovery of reinsurance information continued in 2023.
In Ansur America Insurance Co. v. Borland, No. 3:21-CV-59-SMY-MAB (S.D. Ill. Oct. 23, 2023), the carrier brought a legal malpractice claim against appointed defense counsel for the carrier’s insured in an underlying products liability action. The defendant law firm sought discovery, including reinsurance communications on the products case between the carrier and its reinsurers, which the carrier withheld from production on the basis of privilege. The defendant law firm sought to compel production of those documents, along with other withheld items.
The issue in Ansur was the applicability of the common interest doctrine to the reinsurance communications. The court noted that the common interest doctrine is not actually a privilege in and of itself. “Instead, the doctrine extends a preexisting ‘privilege to communications made in the presence of third parties for the purpose of coordinating a defense strategy or pooling information for common legal purpose.'” (citations omitted). Importantly, the court stated that the party withholding documents based upon the common interest doctrine bears the burden of establishing the common interest and the underlying privilege. The key issue that many people miss in applying the common interest doctrine is first establishing that the communication itself was a privileged communication.
While the court found that the carrier had demonstrated that a common interest between the carrier and its reinsurers existed, the court was unable to determine whether the common interest doctrine was applicable without first examining the communications and documents to determine whether an underlying privilege existed. Thus, in partially granting the defendant’s motion, the court ordered that the carrier review the documents it claimed were protected under the common interest doctrine to determine whether they involved privileged attorney-client communications or work product in the first instance.
In San Juan Associates, Outdoor World, LLLP v. Depositors Insurance Co., No. 22-cv-001137-CNS-NRN (D. Col. Oct. 24, 2023), a bad faith claim was brought against the carrier by its insured. The insured requested production of the relevant claims files and the carrier redacted information in the claims files, including reinsurance information. The insured sought to compel production of the redacted information, including the redacted reinsurance information.
In ordering the carrier to remove the redactions related to reinsurance, the court noted that the basis for the reinsurance redactions were relevance-based and not related to privilege. The court held that if the carrier included references to reinsurance interspersed within its otherwise discoverable claims files with no privilege attaching to them then the carrier should not have redacted those references.
In both cases, it appears that a lack of an underlying privilege will preclude the carrier from withholding or redacting reinsurance information.
Jurisdiction
In 2023, a Nebraska federal court granted the cedent’s motion to dismiss a declaratory judgment action for lack of personal jurisdiction. In TIG Insurance Co. v. National Indemnity Co., No. Case No. 22-cv-165-SE (D. NH Mar. 27, 2023), the issue before the court was the scope of in-state activity necessary to establish specific jurisdiction over an out-of-state declaratory-judgment defendant after a successor party to the subject contract has relocated to the forum state.
The cedent wrote a liability policy for the State of Montana and reinsured the policy with the reinsurer’s predecessor. An asbestos claim arose and the cedent settled the claim. It billed the reinsurer, who paid. But then the cedent brought a declaratory judgment action against the insured, which resulted in a second settlement. The reinsurer, who was now operating through an entity based on New Hampshire, brought this declaratory judgment action seeking a declaration that the second settlement was not covered by the reinsurance contract.
Other actions by both the cedent and other reinsurers were brought over coverage for the second settlement. All those actions have been consolidated into an action in Nebraska federal court.
In dismissing this action, the court addressed the question of relatedness. In other words, did the cedent’s activities in New Hampshire relate to the claim being made? The court found that the reinsurer pointed to no evidence to show that the cedent’s contacts with New Hampshire were instrumental to either the formation or breach of the reinsurance contract. The court also found that the reinsurer had not offered specific facts to show that the cedent had regular contact with New Hampshire regarding the reinsurance claim or the reinsurance contract. The court held that the reinsurer failed to meet its burden to show relatedness. Accordingly, it granted the cedent’s motion to dismiss.
Missing Policy
In First Insurance Co. of Hawaii, Ltd. v. Continental Insurance Co., No. 23-00198 JMS-RT (D. Hawaii Oct. 31, 2023), an intra-company fronting deal resulted in a dispute over reinsurance coverage after the alleged reinsurer was no longer a member of the same corporate group. The alleged reinsurer brought an action to declare that it did not owe any reinsurance obligation to the cedent’s successor. The cedent’s successor brought a counterclaim for breach of an alleged reinsurance contract. The rub was that neither party could find the intra-group reinsurance contract.
The dispute is significant because it involves insurance and reinsurance coverage for revived sexual abuse claims from the late 1970s to the early 1980s against the underlying insured church.
In denying the motion to dismiss the counterclaim at the pleadings stage, the court held that the cedent’s successor adequately pled the existence of the reinsurance contract. The decision outlines the evidence describing the manner in which these companies, when they were all part of the same corporate family, entered into fronting arrangements when the alleged reinsurer could not write business directly in a particular jurisdiction. The court held that “[t]hese allegations—again, taken as true for purposes of the Motion to Dismiss—are enough to constitute a “meeting of the minds” or “mutual assent” on the basic terms of a type of reinsurance agreement.”
The court also noted that the cedent’s successor was essentially pleading a lost policy or lost contract issue and was not claiming that the parties only entered into an oral agreement. As the court stated, “Lost policy questions are matters of proof not pleading.” The court concluded as follows:
At this motion-to-dismiss stage, the Counterclaim’s allegations are sufficient to state a plausible claim for breach of an enforceable reinsurance agreement. Whether [the ceding company’s successor] can prove its allegations is not a question before the court at this juncture.
Direct Right of Action
To sustain a claim against reinsurers there must be a contractual relationship between the party making the claim and the reinsurers. That is the prevailing rule in all jurisdictions, subject to rare exceptions. Nevertheless, policyholders, when left without a recovery from their insurer, will try to make out a claim directly against their insurer’s reinsurers. The clear trend is that it is hard for a policyholder to make a case against its insurer’s reinsurer.
In Three Rivers Hydroponics, LLC, v. Florists’ Mutual Insurance Co., No. 22-1140 (3rd Cir. Aug. 29, 2023) (Not Precedential), a greenhouse operator had a crop loss and, after its claim was not fully satisfied, sued its insurer and its insurer’s reinsurer. The claims against the reinsurer were for breach of contract and bad faith. On the reinsurer’s motion, the district court dismissed the complaint. On appeal, the Third Circuit affirmed.
As the court noted, it is fundamental in a breach of contract case that there be privity between the parties. Here, as in most reinsurance contracts, there was no privity between the greenhouse and the reinsurer. The court focused its analysis on Pennsylvania law, which is similar to the law in most states requiring privity of contract. But the policyholder argued that it was a third-party beneficiary to the reinsurance agreement and that the reinsurer functioned as a direct insurer by interacting with the policyholder on the claim.
In rejecting the third-party beneficiary argument, the court stated
This argument holds no weight as it would be no different than if [the insurer] had contracted with an independent claims adjuster. In other words, outsourcing the claim adjustment function does not manifest an intent to benefit as an individual policyholder.
The court concluded that because the policyholder was not a third-party beneficiary to the reinsurance agreement, the district court correctly found that the policyholder failed to allege a plausible breach of contract claim against the reinsurer.
