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Eighth Circuit Court of Appeals Upholds Summary Judgment for Cedent on Finding an Unambiguous Follow-the-Settlements Provision in Treaty

Employers Reinsurance Co. v. Mass. Mut. Life Ins. Co., No. 10-3099, 2011 US App. LEXIS 18561 (8th Cir. Sept. 7, 2011).

The Eight Circuit Court of Appeals has upheld a district court’s grant of partial summary judgment in favor of a cedent based on finding an unambiguous follow-the-settlement provision in the treaty contested.

In 1996, the cedent assumed a merger partner’s rights and obligations under an excess disability income reinsurance treaty, under which it would retain the full amount of a loss for an initial period and subsequently be indemnified by the reinsurer for part of “the damages to which this agreement may apply.” The agreement defined reimbursable loss as amounts that are “actually paid by the Reinsured for disability benefits afforded under the policies, in settlement of claims for [same], or in satisfaction of judgments for [same].” The parties had entered into several successive agreements allowing third-parties to review claim files, but in each case the third-parties’ recommendations were non-binding, and the underlying agreements expressly stated that no rights were altered as a result of these agreements.

In 2004, the cedent notified the reinsurer that it had overcharged by approximately $6 million over the span of the treaty, largely as a result of misidentifying some claims as “continuing” instead of “new,” but also had undercharged for residual benefits under certain policies for which it offset approximately $700,000 against the overcharges. The reinsurer then questioned reimbursement for 12 claims, and the cedent rejected these requests on “follow the settlements” grounds. The reinsurer sued cedent for breach of the treaty as well as the implied duty of good faith and fair dealing and stopped reimbursing cedent for all claims. The cedent asserted similar counterclaims against the reinsurer.

In upholding the district court’s findings, the appellate court rejected the reinsurer’s argument that the treaty was ambiguous as to whether it contained a follow-the-settlements provision and that the court relied on extrinsic evidence, finding that the treaty provisions were unambiguous. The court declined to precisely distinguish “follow the fortunes” from “follow the settlements” and expressed no opinion as to whether follow-the-settlements was an implied term of the treaty under Connecticut law. The court also rejected the reinsurer’s argument that reimbursable loss would not include payments or settlements made to insureds that were beyond the benefits afforded under the policies, finding that under the definition of loss in the treaty, payment for all settlement amounts was triggered when amounts were paid in settlement of claims for benefits under the treaty.

The appellate court also upheld the district court’s finding that Connecticut’s statute of limitations period barred the reinsurer’s challenges to several of the contested claims. The court found that the terms of the treaty did not indicate that the parties agreed to toll the statute of limitations for challenges and that the cedent’s continuing course of conduct did not require such a finding due to subsequent wrongful conduct under Connecticut law. The court noted that “ignorance of the fact that damage has been done does not prevent the running of the statute.”

 

New York Federal Court Disqualifies Law Firm After Acquiring Arbitration Panel Email Communications

Northwestern Nat’l Ins. Co. v. INSCO, Ltd., No. 11 Civ. 1124 (SAS), 2011 WL 4552997 (S.D.N.Y. Oct. 3, 2011).

In a lengthy and detailed opinion, a New York federal court held that the disqualification of a lawyer was a matter properly decided by the courts rather than an arbitration panel, and that the disqualification was proper in circumstances where the lawyer obtained private email exchanges between members of an arbitration panel.

The cedent commenced an arbitration against the reinsurer for amounts owed under the reinsurance agreement. A dispute arose as to whether the cedent’s arbitrator was biased because of an alleged close relationship with the cedent’s lawyers. The reinsurer’s party-appointed arbitrator shared a large number of private email communications among the arbitration panel members with the lawyers for the reinsurer that allegedly demonstrated a conflict of interest. The reinsurer alleged a conflict of interest, after which the cedent expressed a belief that panel communications had been leaked by the party-appointed arbitrator. This belief was confirmed when the emails were submitted to the court as an exhibit in a separate motion.

The cedent brought a motion before the court to disqualify the reinsurer’s lawyers from representing the reinsurer for their actions in obtaining the arbitration panel’s emails and failure to fully disclose the documentation acquired. In granting the cedent’s motion, the court first determined that the issue of lawyer disqualification was not appropriate for the arbitrators to decide. Rather, issues involving lawyer professional responsibilities, said the court, were appropriately decided by the court.

The court proceeded to find that the reinsurer’s law firm’s actions in obtaining and failing to disclose the panel communications constituted a serious breach of the New York Rules of Professional Conduct, which encompass “conduct involving dishonesty, fraud, deceit or misrepresentation” as well as “conduct that is prejudicial to the administration of justice.” The court ultimately concluded that the actions of the reinsurer’s law firm did a disservice to the “integrity of the adversarial process, and is strictly and unambiguously prohibited.” It also expressed concerns that allowing disclosure of arbitration panel communications could provide unfair advantages in legal proceedings and have a chilling effect on the internal communications of arbitrators. For these reasons, the court granted the cedent’s motion to disqualify the reinsurer’s counsel.

 

Illinois Federal Court Dismisses Reinsurer’s Second Amended Complaint Aimed at Prior Arbitration Award

Trustmark Ins. Co. v. John Hancock Life Ins. Co., No. 09 CV 3959, 2011 U.S. Dist. LEXIS 131543 (N.D. Ill. Nov. 15, 2011).

After the Seventh Circuit reversed the district court’s decision disqualifying the cedent’s party-appointed arbitrator, the reinsurer filed a second amended complaint in federal court based on fraud, unjust enrichment, and a claim for an “independent action” under Rule 60 of the Federal Rules of Civil Procedure, all aimed at challenging the original arbitration award. For details of the original case, see our summary in our March 2011 Reinsurance Newsletter. The district court dismissed the second amended complaint with prejudice.

Much of the decision deals with federal procedure. The court rejected the fraud and unjust enrichment claims at the outset because of a pending reconsideration motion on the original order certifying the original arbitration award. The court rejected the “independent action” theory for various grounds, including that the reinsurer has an adequate remedy in the second arbitration. The court commented that it was somewhat surprised to see the second amended complaint following on the heels of the Seventh Circuit’s decision considering the implication from that decision that the matter would return to its rightful place in arbitration.

 

New York Federal Court Denies Motion to Replace the Reinsurer’s Arbitrator

Northwestern Nat’l Ins. Co. v. INSCO, Ltd., No. 11 Civ. 1224 (SAS), 2011 U.S. Dist. LEXIS 50789 (S.D.N.Y. May 12, 2011).

A New York federal court denied a cedent’s motion to appoint a replacement arbitrator for the reinsurer when the reinsurer had already appointed a replacement. The arbitration concerned reinsurance recoveries for the cedent’s reimbursement of defense costs for thousands of asbestos claims.

As reported in the decision, the arbitration had focused predominantly on whether both party-appointed arbitrators have made appropriate disclosures following the organizational meeting. A few days before oral argument on the cedent’s summary judgment motion, the reinsurer asked the panel to resign based on evident partiality. The reinsurer’s arbitrator resigned. The reinsurer reiterated its request for a new panel and indicated it would appoint a new arbitrator to replace its party-appointed arbitrator, which it did a few weeks later. The cedent responded by requesting the court to appoint the reinsurer’s replacement arbitrator arguing that the reinsurer did not have authority to do so under the reinsurance agreement.

In denying the cedent’s request, the court carefully analyzed the court’s role in appointing a replacement arbitrator. The court noted that in cases where courts have acted, they have deferred to the parties’ selection of replacement arbitrators. The court stated that “while courts have the power to replace an arbitrator where the arbitration agreement provides no procedure for doing so, it is prudent to preserve the balance of arbitrators intended by the parties if possible.” Because the reinsurance agreement expressly intended that each party appoint its own arbitrator, permitting the reinsurer to appoint a replacement was consistent with the contract and the underlying goals of arbitration according to the court.