In 2016, courts continued to reinforce principles and precedents familiar from recent years. On the threshold subject of the agreement to arbitrate and arbitrability, multiple decisions reinforced the federal policy in favor of arbitration and the extremely narrow scope of review of arbitration awards. The Bellefonte Principle gained more prominence with the Second Circuit Court of Appeals seemingly questioning its earlier precedent and certifying a question of law to the New York Court of Appeals. Late notice cases continue to appear and follow-the-settlements is still evolving. Courts also cut back on allowing reinsurance information discovery, but overall continued the trend of ordering production if there was any reasonable relevance to the underlying dispute.

Arbitration 

Courts in 2016 addressed a variety of arbitration issues, including arbitrability, enforceability, arbitrator and panel selection, and the review of arbitration awards. The majority of the decisions continued the trend toward allowing arbitrators to determine most issues and enforcing arbitration awards except for unusual circumstances.

Arbitrability

Whether enforcing or declining to enforce arbitration clauses in reinsurance agreements, courts in 2016 upheld the longstanding principle that arbitration is a matter of consent and not of coercion. In addition to deciding on whether a party is subject to arbitration, courts reinforced the established rule that matters within the scope of an arbitration clause can only be decided by arbitrators.

For example, the court in Applied Underwriters, Inc. v. Top’s Pers., Inc., No. 8:15-cv-90, 2016 U.S. Dist. LEXIS 78568 (D. Neb. May 26, 2016), reinforced the rule that an arbitration clause cannot apply to a party who did not agree to be bound by it. There, the cedent fell behind on premiums and executed a promissory note in favor of the reinsurer’s affiliate. The cedent breached the promissory note and sought to stay an action for breach of the note and compel arbitration under the reinsurance agreement. The court held that the affiliate – a non-signatory to the reinsurance agreement – was not bound by the arbitration clause. As a non-signatory, the affiliate could only have been subject to the agreement to arbitrate if the promissory note had incorporated by reference either the entire reinsurance agreement or expressly incorporated the arbitration provision.

In S. Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assur. Co., 840 F.3d 138 (3d Cir. 2016), the Third Circuit vacated the district court’s judgment and remanded the case, finding that courts can only consider whether an arbitration agreement is enforceable if an arbitration provision-specific challenge is made. If the challenge encompasses the contract as a whole, i.e., the validity of that contract, the court held that the matter was for an arbitrator to decide.

Multiple decisions in 2016 upheld the longstanding principle that courts should decline to rule on issues within the scope of an arbitration clause. For example, in Emplrs Ins. of Wausau v. Cont’l Cas. Co., No. 15-cv-22-wme, 2016 U.S. Dist. LEXIS 18850 (W.D. Wis. Feb. 17, 2016), the reinsurer sought to preclude re-arbitration of a final decision reached by an arbitral panel in 2004 between the same parties to the same treaty. The court held that the unpaid billing issues arising after the 2004 decision were within the scope of the treaty’s arbitration provision. Therefore, it was within the arbitral panel’s sole discretion to determine whether that issue needed to be re-arbitrated. 

In Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No. 1412915, 2016 U.S. Dist. LEXIS 9136 (E.D. Mich. Jan. 27, 2016), after an arbitration award was issued in favor of a reinsurer, the cedent moved to modify the award of prejudgment interest, which it argued had been miscalculated. The parties, however, disputed the relevant calculations and backup material, and the amount at issue could not be readily ascertained by a formula. Thus, given the substantive nature of this dispute, the court held that it could only be decided by the arbitral panel. 

n Jade Apparel, Inc. v. United Assur., Inc., 2016 N.J. Super. Unpub. LEXIS 2250 (N.J. App. Div. Oct. 13, 2016), the court found that the language contained in the parties’ agreement clearly and unmistakably set forth the parties’ decision to submit all disputes regarding execution, construction, enforceability and breach of the agreement to arbitration under the rules of the American Arbitration Association and, therefore, the arbitrator was to decide arbitrability. Furthermore, the Jade Apparel court recognized two exceptions allowing non-signatories to compel arbitration. First, a non-signatory may compel arbitration against a signatory to an arbitration agreement when an agency agreement exists between a signatory and the non-signatory against whom arbitration is sought. Second, a non-signatory may compel arbitration against a signatory to an arbitration agreement via equitable estoppel, which does not apply absent proof of detrimental reliance. Where the agreement incorporates non-signatories, an agency relationship exists and arbitration of claims involving those non-signatories is required.

While an arbitration provision-specific challenge brings the enforceability of the provision into the purview of the courts, if a delegation provision is contained in the arbitration provision, then the courts’ ability to determine arbitrability is further narrowed. Indeed, in Mike Rose’s Auto Body, Inc. v. Applied Underwriters Captive Risk Assur. Co., No. 16-cv-1864-EMC, 2016 U.S. Dist. LEXIS 133747 (N.D. Cal. Sept. 28, 2016), the court considered whether the parties clearly and unmistakably delegated the issue of arbitrability to the arbitrator. The court ultimately found that, by incorporating the American Arbitration Association rules by reference (which have been found equivalent to a delegation provision), the parties intended to delegate adjudication of disputes concerning the validity and enforceability of the arbitration clause to the arbitrator. Therefore, because the party opposing the motion to compel arbitration challenged the entire arbitration clause rather than just the delegation provision specifically, the validity and enforceability of the arbitration clause was for the arbitrator to determine.

Finally, the Sixth Circuit Court of Appeals, in granting a stay of arbitration proceedings, reaffirmed the necessity of the arbitral panel actually deciding on issues subject to an arbitration clause. In Ameritrust Ins. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 15-1403, 2016 U.S. App. LEXIS 9731 (6th Cir. Apr. 7, 2016), the parties had appealed a district court’s decision confirming part of an arbitration award while denying confirmation for the award of prejudgment interest. On the latter issue, the district court had ordered the parties to arbitration. The Sixth Circuit granted the cedent’s request to stay the arbitration of the prejudgment interest award pending the appeal, relying on the following four factors: (1) the movant’s likelihood of success on appeal; (2) whether the movant will be irreparably harmed absent a stay; (3) the harm other interested parties will suffer if a stay is granted; and (4) where the public interest lies. While granting the stay, the court made clear that the stay would have no effect on the district court order referring the prejudgment interest issue to further arbitration. 

Arbitration Panel Selection

The FAA does not authorize a court to remove or inquire into the capacity of any arbitrator to serve prior to issuance of an arbitral award, even if the challenge arises from an express term in the arbitration agreement or is based on an arbitrator’s alleged bias. In John Hancock Life Ins. Co. U.S.A. v. Employers Reassurance Corp., No. 15-cv-13626, 2016 U.S. Dist. LEXIS 80592 (D. Mass. Jun. 21, 2016), the court made very clear that there is no exception to this well-settled rule, following in line with decisions from the Fifth Circuit, Second Circuit and multiple district courts. The John Hancock court stated the following on this point: “[t]hus, based upon the express terms of the FAA, challenges to a party-appointed arbitrator, such as allegations of bias, are properly considered by courts only at the conclusion of the arbitration.” 

As decided in Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Odyssey Reins. Co., No. 162684/2014, 2016 N.Y. Misc. LEXIS 1200 (N.Y. Sup. Ct. Apr. 5, 2016), however, where the parties’ arbitration clause specifically provides for judicial appointment of an umpire, “if the arbitrators fail to appoint an umpire within one month of a request in writing by either of them,” the court may appoint an umpire. In this case, the reinsurer claimed possible bias or the appearance of bias in favor of the cedent. Therefore, the court had authority to – and, in fact, did – appoint an umpire who had no prior or current relationship with either party in any capacity. Of note, this decision was later reversed, but on other grounds. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Odyssey Reins. Co., 143 A.D.3d 626, 626, (1st Dep’t 2016).

Court Review of Arbitration Awards 

Under the FAA, a court’s authority to vacate or modify an arbitration award is exceedingly limited. On a factual level, there must be an evident material miscalculation or material mistake in the description of any person, thing or property referred to in the award. On a legal level, there must be something beyond and different from a mere error in law or failure on the part of arbitrators to understand and apply the law. And when it comes to the conduct of the arbitration, there must be a showing of evident partiality of an arbitrator, improper ex parte communications or other serious misconduct prejudicing a party’s rights. Additionally, courts have narrow discretion to award fees and costs associated with review of an arbitral award. Courts in 2016 continued the pattern of limited judicial review of arbitration awards. 

n Scottsdale Ins. Co. v. John Deere Ins. Co., No. CV-15-00671-PHX_ PGR, 2016 U.S. Dist. LEXIS 18986 (D. Az. Feb. 17, 2016), the court could not find a basis to modify an arbitration award and, accordingly, was compelled to confirm the award under Section 5 of the FAA. In denying the application to modify, the court determined that finding a computational error in the award would require improper speculation because the alleged mathematical error was not patently obvious from the face of the award. Because the court could not determine the correctness of the claim of error from the face of the award, it had no choice other than to confirm the award for lack of an evident material calculation.

In AmTrust North America, Inc. v. Pacific Re, Inc., No. 15 Civ. 7505 (CM), 2016 U.S. Dist. LEXIS 44889 (S.D.N.Y. Mar. 25, 2016), the court rejected an argument that arbitrators made their award in manifest disregard of the law where they applied a Montana federal district court ruling as they understood it to be. Here, the court determined that the arbitrators had “plainly applied” a Montana federal court ruling as they understood it to be and nothing about their decision constituted a manifest disregard of the law. As a policy matter, the court noted that where parties “choose to by-pass the courts,” they cannot then be heard to complain if arbitrators do not reach the result they think a court would have reached. Moreover, even to the extent that the award was of an interim nature, the arbitration agreement permitted interim awards and the courts could freely confirm interim awards. 

In Nat’l Indemn. Co. v. IRB Brasil Resseguros S.A., No. 15 Civ. 3975 (NRB), 2016 U.S. Dist. LEXIS 30871 (S.D.N.Y. Mar. 10, 2016), a decision that has since been affirmed on appeal, No. 16-1267- cv, 2017 U.S. App. LEXIS 1686 (2d Cir. Jan. 31, 2017) (Summary Order), the district court declined to vacate an arbitration award on the ground that the umpire failed to timely disclose that he was appointed as a party-appointed arbitrator for an affiliate of the retrocedent during the period of time between his nomination as umpire (after having filled out an umpire questionnaire) and his eventual appointment (some two years later). Here, even to the extent that the umpire had served as a party-arbitrator for an affiliate of the retrocedent, he had no familial, business or employment relationships with the companies, and no financial interest in the outcome. Between the times he filled out the umpire questionnaire and was appointed, two years had elapsed, during which he had taken on 15 new assignments, and already had a roster of active and dormant cases, and was under consideration for more.

The court declined to fashion a rule whereby an umpire candidate, while waiting to find out whether the umpire appointment would come to pass, must disclose every possible conflict that might arise in all cases to all parties. Indeed, the court noted that a continuous pre-selection disclosure obligation would result in an unreasonable burden as it could “easily add up to hundreds of supplemental disclosures, and failure to make any of them would be grounds to vacate any award ultimately issued.” Thus, while “evident partiality” is a basis for vacatur under Section 10 of the FAA, the party seeking vacatur bears a heavy burden. It must be shown that “a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side.” Applied Indus. Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., 492 F.3d 132, 137 (2d Cir. 2007) (emphasis in original). That standard was not met here. 

One Circuit Court in 2016 did vacate an arbitration award in the context of misconduct prejudicing a party’s rights. In Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, Nos. 151403, 15-1490, 656 Fed. Appx. 240 (6th Cir. Aug. 18, 2016) (Unpublished), the Sixth Circuit, applying Michigan law, addressed whether to vacate an award based on ex parte communications between counsel for the reinsurer and the reinsurer’s party-appointed arbitrator in violation of the arbitration panel’s scheduling orders on ex parte communications. After analyzing earlier Michigan decisions, the panel concluded that under Michigan law, communications between a party and an arbitrator may not categorically be grounds for vacating an arbitration award, but such communications do void an award if they violate the parties’ arbitration agreement. In this case, the scheduling orders forbade the parties from communicating ex parte with the arbitration panel after filing their initial pre-hearing briefs. Despite that prohibition, the reinsurer’s counsel and its party-appointed arbitrator had, according to the court, three ex parte communications. As a result of these communications, the Sixth Circuit held that the district court should have vacated the two arbitration awards of the panel.

Courts may award fees and costs incurred as a result of an arbitral award review when the contract between the parties dictates that fees and costs may be awarded or when there is a showing of bad faith. In Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., 16 Civ. 5290, 2016 U.S. Dist. LEXIS 157061 (S.D.N.Y. Nov. 10, 2016), the cedent sought to vacate an arbitration award based on its claim that the arbitration panel incorrectly interpreted the reinsurance contract. In response, the reinsurer sought to confirm the award, while also seeking fees and costs incurred in opposing the cedent’s challenge. The court denied the cedent’s request for vacatur, finding that granting vacatur would require the court to exceed the limited scope of judicial review of an arbitral decision. The court opined that it may rule on whether an arbitrator did or did not interpret the parties’ contract, but not on whether the panel got its meaning right or wrong. The court then granted the reinsurer’s petition to confirm, but denied the reinsurer’s motion for fees and costs. Sanctions, whether sought under 28 U.S.C. §1927 or under the court’s inherent power to award costs and fees, require a showing of bad faith. The court found that even when a claim is not meritorious, unless it is objectively unreasonable, it does not merit sanctions.

n Scottsdale Ins. Co. v. John Deere Ins. Co., No. CV-15-00671-PHXPGR, 2016 U.S. Dist. LEXIS 96595 (D. Ariz. Jul. 22, 2016), however, the court did award costs and fees, though it did so based strictly on the reinsurance agreement language. The cedent filed an action seeking to have the court modify or correct an arbitration award. In response, the reinsurer filed a motion to confirm the arbitration panel’s award and to have a judgment entered on that award. The parties’ reinsurance agreements specifically provided that, if the court entered an order confirming an arbitration award, “the attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.” Therefore, the court awarded the reinsurer “its reasonable attorneys’ fees and costs [that] it incurred in seeking the confirmation of the final arbitration award.”

Finally, the court in Nat’l Cas. Co. v. Resolute Reins. Co., No. 15 Civ. 9440 (DLC), 2016 U.S. Dist. LEXIS 38797 (S.D.N.Y. Mar. 24, 2016), addressed another aspect of the FAA, namely Section 9. Under that provision, if the parties have agreed to arbitration, any party may petition for the award to be confirmed. As long as there is no basis to vacate, modify or correct an award, the court must confirm it. Even though the reinsurer complied with a final arbitration award by promptly paying the amounts due, the cedent sought confirmation of the award. 

The court granted the petition to confirm because the parties agreed to the application of the FAA and, once the statutory prerequisites of that statute were met, the court must grant the petition. It also rejected the reinsurer’s claim that the amount in controversy requirement was not met for purposes of establishing federal jurisdiction because Second Circuit precedent held that prior compliance with an award is not a ground to refuse confirmation of it. 

Arbitration – Contract Interpretation 

In Leonberger v. Missouri United School Ins. Council, No. ED 103669, 2016 Mo. App. LEXIS 521 (E.D. Div. Four, May 24, 2016), the court construed the Missouri Arbitration Act, which dictates that an arbitration provision contained in an insurance contract is invalid. In determining that the contract in this case was not simply a reinsurance contract and was more like an insurance contract, the court explained that the difference between contracts of indemnity against loss and contracts of indemnity against liability is that, in the former, the insurance company does not become liable until loss has actually been suffered and the amount of the insurance does not become available until the assured has paid the loss. Reinsurance contracts, nonetheless, can be drafted so that they resemble insurance contracts, i.e., the reinsurer and cedent were co-insurers. In these situations, under Missouri law, an arbitration provision would be invalid. Additionally, while not implied in all reinsurance contracts, a reinsurance contract may be drafted in such a way as to make the cedent’s insured a third-party beneficiary of the reinsurance agreement (insured could bring bad faith claim against reinsurer).

It should be noted that this case is very fact specific and very specific to Missouri law.

In Infrassure, Ltd. v. First Mut. Transp. Assur. Co., No. 15-cv- 08230 (GBD) (S.D.N.Y. Jan. 22, 2016), the court was asked to determine where a matter between a cedent and its reinsurer was to be arbitrated under arbitration procedures (Section U) in the facultative certificate. The reinsurer filed suit seeking a declaration that the arbitration provision contained in the body of the form of the certificate was controlling. The cedent then filed a motion to compel arbitration, asking the court to order the reinsurer to arbitrate in London, England under arbitration procedures set forth in Endorsement No. 2 to the certificate.

The court concluded that Section U set forth the arbitration procedures to disputes between the parties. Endorsement No. 2, the court found, was inapplicable because it expressly stated that it governed only disputes between cedent and “UK and Bermuda Insurers,” and cedent was a Swiss insurer. The cedent appealed and the Second Circuit affirmed the district court’s decision, holding that the reinsurance certificate was not ambiguous. Infrassure, Ltd. v. First Mut. Transp. Assur. Co., 842 F.3d 174 (2d Cir. 2016). The court found that the arbitration clause in the body of the certificate controlled; it was not displaced by the endorsement because the endorsement was expressly limited to UK and Bermuda insurers. The court also rejected cedent’s argument that the title of the clause required the court to ignore the context provided by the title of the endorsement. 

“Follow-the-Settlements” Doctrine 

Under the follow-the-settlements doctrine, a reinsurer must accept the cedent’s good faith decisions on all things concerning the underlying insurance terms and claims against the underlying insured, including settlements and settlement allocation. Utica Mut. Ins. Co. v. Clearwater Ins. Co., No. 6:13-cv-1178 (GLS/TWD), 2016 U.S. Dist. LEXIS 6219 at *10 (N.D.N.Y. Jan. 20, 2016) (citations omitted). As long as the cedent settles in good faith, reasonably and within the applicable policies, the reinsurer is bound by the settlement and cannot relitigate the underlying coverage disputes. Id. at *11 (citations and quotation marks omitted).

n Utica, the cedent issued multiple primary and umbrella insurance policies to the insured. The cedent reinsured the umbrella policies and the reinsurer had those retroceded. Beginning in 1997, more than 140,000 claims were filed against the insured alleging asbestosrelated bodily injuries attributed to the insured’s pump products. The insured brought two suits against the cedent regarding its coverage obligations. One issue in dispute concerned whether the primary policies contained an aggregate limit. The cedent settled these cases, concerned that the court would determine that no aggregate limit existed. 

Several years later, cedent began to bill its reinsurer for indemnity and defense costs from its umbrella policies issued to the insured. After the reinsurer failed to pay all of the costs, the cedent brought suit. Seeking summary judgment, the cedent argued that the reinsurer was bound by cedent’s settlement with the insured under the follow-the settlements doctrine. The reinsurer argued that the cedent acted in bad faith, therefore in violation of the follow-the settlements doctrine. The court rejected the reinsurer’s bad faith argument, finding that a cedent has no obligation to strictly align its interests with the reinsurer. Also, held the court, a cedent is not required to choose the settlement allocation that minimizes its reinsurance recovery to avoid a finding of bad faith. And the cedent’s decision to enter into a settlement was reasonable in light of the uncertain liability of the lawsuit brought by the insured. The court granted cedent’s motion for summary judgment, thus continuing the trend in enforcing the follow-the-settlements doctrine.

In contrast, in Granite State Ins. Co. v. Clearwater Ins. Co., No. 653546/11, 2016 N.Y. Misc. LEXIS 2314 (Sup. Ct., N.Y. Co. Jun. 17, 2016), a New York motion court ruled that the specific language in a facultative certificate was not a follow-the-settlements clause. Instead, the court held that it was a “following form” condition, i.e., for the purpose of achieving concurrency between the reinsured contract and the reinsured policy. Id. at *26. The clause stated that reinsurer’s liability “shall follow [the cedent’s] liability in accordance with the terms and conditions of the policy reinsured hereunder.” Id. at *25. According to the court, it did not contain language one would expect in follow-the-settlement clauses, referring in some way to cedent’s claims handling decisions, such as the use of terms “settlement,” “compromise” or “allowance.” As a result, the court found that the reinsurer could challenge cedent’s allocation of insurance proceeds to the underlying claims, on a theory that cedent cannot prove that the losses it allocated to the certificate were actually covered by the certificate. 

Bellefonte 

In 2016, two courts dealt with application of the Bellefonte Principle. In Utica Mut. Ins. Co. v. Abeille Gen. Ins. Co., No. CA2013-002320 (N.Y. Sup. Ct., Oneida Cty., Aug. 15, 2016), a group of reinsurers brought a partial motion of summary judgment on one of their affirmative defenses seeking to “dismiss[] the complaint filed by [cedent]… insofar as it seeks amounts in addition to the stated limits of the applicable reinsurance certificates.” Cedent’s claim included loss adjustment expenses in excess of the coverage amount stated in the reinsurance certificates issued by the reinsurers. The cedent presented no evidence other than the reinsurance certificates.

The court agreed with the reinsurers that there was nothing ambiguous regarding the certificates, thus no extraneous evidence could be relied upon. Accordingly, reinsurers’ total liability was limited to the amount of coverage stated in the certificates and did not include loss adjustment and legal expenses in excess of the stated coverage amount. The reinsurers were entitled to partial summary judgment on their third affirmative defense pertaining to a cap on liability “for both loss and expenses” in the face amount of the reinsurance certificates.

Contrasting Utica’s traditional Bellefonte ruling is the Second Circuit Court of Appeals decision in Global Reins. Corp. of Am. v. Century Indemn. Co., 843 F.3d 120 (2d Cir. 2016). In this case, the dispute was about the extent to which the reinsurer was obliged to reinsure cedent under certain reinsurance certificates. The reinsurer made the traditional Bellefonte argument that the dollar amounts under the “Reinsurance Accepted” portion of the certificates unambiguously capped the amount the reinsurer was obligated for both losses and expenses. The cedent argued that those limits only applied to losses and that the reinsurer was required to pay all expenses in addition to the limits. 

The reinsurer moved for partial summary judgment seeking a declaration that its interpretation of the certificates was correct. On summary judgment, the district court sided with the reinsurer, relying upon Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Ins. Co. v. North River Ins. Co., 4 F.3d 1049 (2d Cir. 1993). In both cases, the Second Circuit ruled that the reinsurers were not obligated to pay expenses over and above the limits of liability stated in the certificates. 

The cedent appealed, arguing that Bellefonte and Unigard were wrongly decided. The cedent claimed that the certificates should be interpreted to cover both loss and expenses because the certificates follow form to underlying policies, and the underlying policies expressly provide for payment of expenses in addition to loss. The cedent was supported by amici briefs filed by several reinsurance intermediaries. Noting that the cedent’s argument “is not without force,” the Second Circuit rejected the reinsurer’s contention that Excess Insurance Co. v. Factory Mutual Co., 3 N.Y.3d 577 (2004), was controlling because it did not explicitly address whether a stated limit represented a coverage limit for losses and expenses combined. The court further distinguished Excess because the expenses related to the cedent’s cost of litigating with the underlying insured, not the insured’s defense costs.

After questioning its own precedents and analyzing both sides of the debate, the Second Circuit certified the following question to the New York Court of Appeals: “Does the decision in of the New York Court of Appeals in Excess Ins. Co. v. Factory Mut. Ins. Co., 822 N.E.2d 768 (2004) impose either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defenses costs?” 

The answer to the certified question, while solely relevant to New York law, may cause the Second Circuit to rethink its precedents even more. Given the widespread adoption of the Bellefonte Principle by many courts, the ultimate decision here may have wide-ranging ramifications.

Late Notice 

Another reinsurance trend in 2016 was case law addressing “late notice.” In R&G Reins. Co. v. St. Paul Fire & Marine Ins. Co., Case No. 15-cv-7784, 2016 U.S. Dist. LEXIS 42489 (N.D. Ill. Mar. 30, 2016), the reinsurer filed a complaint for declaratory judgment against cedent asking the court to find it had no obligation to pay cedent because cedent’s notice of loss was not timely. A month later, the cedent filed a parallel suit for damages against the reinsurer in the Eastern District of Pennsylvania. Cedent asked the Northern District of Illinois to transfer the case to the Eastern District of Pennsylvania. One aspect the court looked at in determining whether transfer was proper was the situs of material events. The court held that, in a breach of contract case, the location where the business allegedly causing a breach occurred is more relevant than the location of contract formation. The court further held that, in a case involving late notice, the primary factual inquiry is when the cedent became obligated to notify the reinsurer. Material events would include communications between the cedent and its underlying insured because this information would put cedent on notice of the need to file a claim with the reinsurer. As the bulk of these material events occurred in areas much closer to or in Pennsylvania, this favored transfer.[1]

n Granite State Ins. Co. v. Clearwater Ins. Co., No. 653546/11, 2016 N.Y. Misc. LEXIS 2314 (Sup. Ct., N.Y. Co. Jun. 17, 2016), discussed above in the context of follow-the-settlements, after the cedent issued dozens of policies to the insured, the cedent entered into an agreement with the reinsurer who subsequently entered into retrocessional contracts with its reinsurer. Subsequently, hundreds of thousands of bodily injury claims were brought against insured. Insured brought suit against its insurers, including the cedent, in 2000. The cedent did not bill its reinsurer until 2010 when payments first began to be allocated under the original policy. No specific or formal notice of any kind was made to the reinsurer prior to 2010. When the reinsurer declined payment, the cedent brought this lawsuit. 

The reinsurer claimed that the cedent unreasonably delayed informing reinsurer of the likelihood that the original policy limits would be reached, causing reinsurer to be substantially prejudiced. The court first dealt with cedent’s claim that the reinsurer had waived its right to assert the cedent’s alleged delay in notifying the reinsurer of the exhaustion of the original policy in light of reinsurer’s twoyear delay in denying coverage on the basis of late notice. Following California law, the court applied the standard that an insurer waives defenses to coverage not asserted in its denial only if the insured can show misconduct by the insurer or detrimental reliance by the insured. Finding neither of these, it held that the reinsurer did not waive its defense that cedent failed to give prompt notice of the approaching exhaustion of the original policy. 

The court next examined whether the reinsurer had received constructive notice that the original policy would likely be exhausted. The court found the reinsurer had not. Cedent provided various documents, claiming these advised the reinsurer sufficiently of the state of the original litigation to put the reinsurer on adequate inquiry notice that the original policy would likely be exhausted. The court rejected the argument, finding that the documents were insufficient to put the reinsurer on notice of the likely exhaustion of the original policy as they merely recounted the nature of the insured’s original claims and that many insurance policies were affected by the original litigation. 

Finally, the court looked at whether the reinsurer was prejudiced by the cedent’s late notice. The reinsurer claimed it was prejudiced because it made a disadvantageous commutation with its retrocessionaire. The reinsurer claimed it would not have commuted had it known of its exposure under the certificate. The court pointed to a case that expressly found that a failure to collect from a retrocessionaire is a “collateral matter” and found no case law to support the proposition that collateral matters may constitute prejudice so as to relieve an insurer from its liability. So, while the court found that the reinsurer had demonstrated cedent’s failure to provide timely notice, the reinsurer failed to show the “actual and substantial” prejudice that would allow it to avoid its obligations under the certificate. 

Contract Interpretation  

There were several examples of contract interpretation matters in reinsurance cases in 2016. For example, in Hartford Steam Boiler Insp. & Ins. Co. v. Int’l Glass Prods., LLC., No. 2:08 cv 1564, 2016 U.S. Dist. LEXIS 135045 (W.D. Pa. Sept. 29, 2016), the reinsurer brought suit against the policyholder of the reinsured policy. Having paid substantial claims through the cedent, the reinsurer brought multiple claims against the policyholder. The court granted the policyholder’s motion for summary judgment on the basis that the reinsurer, as a party to the reinsurance treaty with the cedent, lacked contractual privity with the policyholder and had no contractual rights relative to the underlying policy. This case represents the reverse of the typical situation where the policyholder seeks to bring a direct claim against a reinsurer and is denied because of lack of contractual privity. 

In NEM Re Receivables, LLC v. Fortress Re, Inc., 173 F. Supp. 3d 1 (S.D.N.Y. 2016), the assignee of a reinsurer’s receivables brought suit against an agent and manager for insurance companies who participated in a reinsurance pool, seeking an accounting and for breach of contract for amounts owed to it under an assignment received in 2004. The court rejected the assignee’s argument, finding that it had provided no evidence that the parties were in a relationship of sufficient trust and confidence to create a fiduciary duty or a confidential relationship. The court also found that a claim for accounting in this instance was not proper because the assignee also sought a breach of contract claim. As to the breach of contract claim, it was subject to a six-year statute of limitations that began running in 2004 when it received the legal right to demand payment. This expired in 2010. 

In Pine Top Receivables of Ill., LLC v. Transfercom, Ltd., 836 F.3d 784 (7th Cir. 2016), two reinsurance treaties were in dispute. Each treaty contained a service-of-suit clause. The cedent sued in state court, alleging that the reinsurer breached its duty to pay on the two treaties. The reinsurer removed the matter to federal court. The cedent moved to remand, arguing that the reinsurer waived the right to remove based on the language of the service-of-suit clause. The clause stated that if the reinsurer failed to pay any money claimed to be due under the reinsurance agreements, the reinsurer, at the request of the cedent, “will submit to the jurisdiction and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court.” The court found that this constituted a waiver of the right to remove the case to federal court.  

Pre-Pleading Security 

A cedent filed suit against its reinsurer for breach of the reinsurance contract in Select Ins. Co. v. Excalibur Reinsurance Corp., No. 15 CV 715 (JAM), 2016 U.S. Dist. LEXIS 31264 (D. Conn. Mar. 10, 2016). Two weeks later, cedent filed a Motion for Pre-Pleading Security when the reinsurer had not posted its pre-pleading security, despite having filed its answer. Pre-pleading security is a mandatory statutory requirement, intended to ensure that any insurer, domestic or foreign, selling insurance or reinsurance to a person in Connecticut will have sufficient assets to satisfy any judgment. Thus, under Connecticut law, before an unauthorized insurer can file a pleading in a case brought against it, it must either post a pre-pleading security, procure the proper authorization to do business in Connecticut, or seek an order from the court dispensing with the pre-pleading security requirement. Here, the reinsurer repeatedly tried to argue that the pre-pleading security statute was substantive, not procedural and, thus, the choice-of-law provision in the reinsurance contract should govern. The court rejected this, ultimately concluding that the statute is a procedural rule that is not controlled by the reinsurance agreement’s choice of law provision. The reinsurer had to pay the security, which would be determined in a future hearing. 

Calculation of Interest on Breach of Reinsurance Contract Claim

A New York federal court in 2016 addressed the method of calculating prejudgment interest after awarding monetary damages to the cedent. In Utica Mut. Ins. Co. v. Clearwater Ins. Co., No. 6:13- cv-1178 (GLS/ TWD), 2016 U.S. Dist. LEXIS 91413 (N.D.N.Y. Jul. 14, 2016), the court noted that, under New York law, there were two bases to calculate interest: (a) computing interest for each item from the date it was incurred or (b) computing interest upon all of the damages from a single reasonable intermediate date. The court opted to use the intermediate date methodology and calculated a midpoint between the disputed positions. This case evidences the difficulty courts often face in calculating prejudgment interest, particularly when damages are incurred at various times and there are multiple different breaches. 

Statute of Limitations 

Claims for breach of reinsurance treaties accrue under their contractual terms, and these claims are subject to the statute of limitations.

The Illinois statute of limitations for claims arising from written contracts is 10 years. The court in Pine Top Receivables of Ill., LLC v. Banco Seguros del Estado, 2016 U.S. Dist. LEXIS 70462 * (N.D. Ill. May 31, 2016), examined the application of this rule where the parties entered into numerous agreements that contained account billing provisions. The reinsurer entered into liquidation and the cedent sat on its “otherwise ripe contract claims.” The cedent attempted to argue that parties to reinsurance contracts typically do not comply with their accounting provisions once a party enters liquidation, and so the 10-year limitation did not accrue. The court found that this argument lacked merit, holding that a liquidation set-off provision does not operate to delay accrual of otherwise ripe contract claims nor does it blunt the impact of a general statute of limitations in any way.

In Alabama, however, the statute of limitations has a caveat. A party can allege compulsory counterclaims that would otherwise be barred by the statute of limitations, if the underlying causes of action are timely, i.e., all compulsory counterclaims, whether offensive or defensive, are not subject to the statute-of-limitations defense, if the initial claims triggering the compulsion to file the counterclaims are timely. Regions Bank v. Old Republic Union Ins. Co., 2016 U.S. Dist. LEXIS 108041, *8, 2016 WL 4366871 (N.D. Ala. Aug. 16, 2016).

Discovery of Reinsurance Information 

Courts in 2016 consistently ruled that reinsurance agreements should be treated as insurance agreements that are subject to disclosure under Federal Rule of Civil Procedure 26(a)(1)(A)(iv). See First Horizon Nat’l Corp. v. Houston Cas. Co., No. 2:15-cv-2235-SHL-dkv, 2016 U.S. Dist. LEXIS 142330, at *45 (W.D. Tenn. Oct. 5, 2016) (compelling the production of the cedents’ reinsurance agreements under Rule 26(a) (1)(A)(iv)); Certain Underwriters at Lloyd’s v. AMTRAK, No. 14-CV-4717 (FB), 2016 U.S. Dist. LEXIS 64088, at *67 (E.D.N.Y. May 16, 2016).

There was also a trend to liberally apply federal work product protections to reinsurers. In Amtrust N. Am., Inc. v. Safebuilt Ins. Servs., Inc., No. 14-CV-9494 (CM) (JLC), 2016 U.S. Dist. LEXIS 75906, at *16 (S.D.N.Y. June 10, 2016), the court applied the work product doctrine to protect from disclosure a reinsurer’s communications with an outside auditor. The court found that the auditor was hired in anticipation of litigation, noting that whether an attorney advised the reinsurer to hire an auditor is not determinative. Id. at *12. The trend continued in Ooida Risk Retention Grp., Inc. v. Bordeaux, No. 3:15-cv- 00081-MMD-VPC, 2016 U.S. Dist. LEXIS 12851, at *25–28 (D. Nev. Feb. 3, 2016), where the court determined that federal work product protections extend to communications between a defendant cedent and its reinsurer under the common interest doctrine. 

Another trend that can be seen in three cases decided last year is that courts will protect information held by a reinsurer unless the discovering party makes an adequate showing that the material sought is relevant. In First Horizon Nat’l Corp., the court denied the insured’s request for communications between the cedents and their reinsurers because the communications were not relevant to the plaintiff’s claims and merely reflected business information relating to the cedents’ decision to spread their risks. 2016 U.S. Dist. LEXIS 142330, at *42–45. Similarly, in Certain Underwriters at Lloyd’s, the court denied the insured’s request for communications between cedent and its reinsurer. There, the cedents sued the insured for declaratory relief. The court ruled that the insured failed to explain how the communications with the reinsurer were needed to identify policies or terms in the insurance contracts. 2016 U.S. Dist. LEXIS 64088, at *20–23.

But in Western Ins. Co. v. Rottman, No. 2:13-CV-436-DAK, 2016 U.S. Dist. LEXIS 180161, at *9–10 (D. Utah Dec. 29, 2016), the court ruled that the insurer had to produce its reinsurance policy, payment and settlement information. There, the insurer admitted that the information was relevant by arguing that the defendants should have caused reinsurance claims to be made before the litigation and that their failure to do so resulted in losses.

In Amtrust N. Am., Inc. v. Safebuilt Servs., Inc., 186 F. Supp. 3d 278, 279 (S.D.N.Y. 2016), the court noted that it was continuing the trend of declining to recognize a general insurance-examination privilege. There, the defendant captive reinsurance companies asserted under Montana law a statutory state-law privilege over an examination report and related material. The court rejected the defendants’ privilege claims, stating that the statutory provision did not expressly create a privilege nor did case law reviewing similar statutes prohibit disclosure of the material. 

Jurisdiction and Venue 

During 2016, courts demonstrated that they will carefully scrutinize a party’s contacts with a forum state in deciding whether specific personal jurisdiction exists. In Am. Ins. Co. v. R&Q Reinsurance Co., No. 16-cv-03044-JST, 2016 U.S. Dist. LEXIS 141467, at *8 (N.D. Cal. Oct. 12, 2016), the court dismissed the cedent’s claims against its reinsurer. The court determined that neither the reinsurer’s contracting with a California company nor its contacts with the cedent’s California office made while adjudicating the cedent’s claims created personal jurisdiction. Id. 

In Nat’l Indemn. Co. v. Companhia Siderurgica Nacional S.A., No. 15- 752 (JLL), 2016 U.S. Dist. LEXIS 14873, at *46 (D.N.J. Feb. 8, 2016), the court denied a motion to dismiss a declaratory judgment action brought against a Brazilian company, CSN. There, the retrocedent entered into an arrangement with a New Jersey reinsurance broker to obtain retrocessional coverage. When the retrocedent was unable to pay its premium, CSN paid it. Several years later, the retrocedent disclaimed that it had entered into retrocessional agreement and CSN sought the return of the premium. The retrocessionaire sought a declaration that the retrocessional contract was enforceable and also filed tort claims alleging, among other things, that CSN had tortiously interfered with its retrocessional contract. The court found that a meaningful link existed between CSN’s contacts with New Jersey and the retrocessionaire’s request for declaratory relief, but that its tort claims were not sufficiently related to CSN’s New Jersey contacts.

A Pennsylvania court showed that it was not apt to allow parties to play games by using the first-filed rule to dismiss a complaint. In St. Paul Fire & Marine Ins. Co. v. R&Q Reinsurance Co., No. 15-5528, 2016 U.S. Dist. LEXIS 72136, at *14 (E.D. Pa. June 2, 2016), the court dismissed a cedent’s action against its reinsurer. The reinsurer had filed a declaratory judgment action against the cedent in Illinois federal court. The cedent moved to transfer venue to Pennsylvania. 

While that motion was pending, the cedent filed a declaratory judgment action in Pennsylvania. The Illinois federal court transferred to Pennsylvania, the venue of the reinsurer’s action, concluding that the location where “the business decisions allegedly causing a breach occurred [were] more relevant than the location of contract formation.” Id. at *4. The Pennsylvania federal court dismissed cedent’s complaint, concluding that the suits substantially overlapped and that cedent identified no exception to the first-filed rule. Id. at *8–14.

Preemption

In Ludwick v. Harbinger Group, Inc., 161 F. Supp. 3d 769 (W.D. Mo. 2016), a Missouri federal court dismissed a putative class action claim brought under the Racketeer Influenced and Corrupt Organizations Act (RICO) by purchasers of annuities against a variety of insurance entities. The claim was that the various contracts, including the transfer of liabilities to offshore captives and reinsurers, falsely shored up the insurer’s financial condition in violation of various accounting standards and rules. In dismissing the complaint, the court found that the allegations overlapped with state insurance regulators’ responsibilities and powers and were, therefore, preempted. Under the McCarran-Ferguson Act, “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance…unless such Act specifically relates to the business of insurance.” 15 U.S.C. §1012(b). Moreover, on the issue of reverse preemption, the court followed Eighth Circuit precedent, which holds that RICO claims are reverse preempted where a private right of action under the state insurance code is unavailable. Under the respective insurance codes of Iowa and Missouri, there were no private rights of action; thus, the availability of common law remedies under those states’ laws did not save the RICO claim from reverse preemption. 

Intermediaries

n Boomerang Recoveries, LLC v. Guy Carpenter & Co., LLC, 182 F. Supp. 3d 212, 215 (E.D. Pa. 2016), an auditor concluded that the cedent had been overcharged by its reinsurer. An intermediary performed an independent review, concluding that the auditor failed to offset the premiums that the cedent owed to its reinsurers. The auditor, who was supposed to collect a percentage of the overcharges recovered, sued the intermediary in state court for, among other things, tortious interference with a contractual relationship, commercial disparagement and unfair competition. Id. at 216. The intermediary removed the action to federal court. The district court did not reach the merits of the intermediary’s claim, but instead remanded the action back to state court on the basis of the forum-defendant rule. Id. at 220. This case remains pending in state court.