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2014 INSURANCE & REINSURANCE LAW REPORTINSIDE:
RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW
WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
NAIC CREDIT FOR REINSURANCE UPDATE
RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS
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2014 INSURANCE & REINSURANCE
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2014 INSURANCE & REINSURANCE LAW REPORT
CONTENTS
4 RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW
8 WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
14 NAIC CREDIT FOR REINSURANCE UPDATE
26 RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS
RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW
By Thomas D. Cunningham and Jen C. Won
Every state has unclaimed property laws that declare property abandoned after
a certain dormancy period. The property is then turned over to the state, which
tries to find the rightful owner. But in many instances no one steps forward,
and the state retains beneficial use of the money. With budgets becoming
increasingly stretched, state regulators have shown renewed vigor in enforcing
unclaimed property laws. Several states and their contingency fee-based audi-
tors are increasingly targeting the life insurance industry, including small to
mid-sized life insurers, through unclaimed property audits and market conduct
examinations. These actions have brought to the fore the question: must life
insurers affirmatively search for potentially deceased insureds or permit their
regulators to do so? This article highlights some of the statutory, contractual
and litigation elements of that question as respects unclaimed property law.
Historical Unclaimed Property Practices
Laws requiring abandoned or unclaimed property to be turned over or
“escheated” to the state have existed since feudal times. Modern statu-
tory unclaimed property regimes generally are based on one of three Uniform
Unclaimed Property Laws, enacted in 1954, 1981 or 1995. These statutes are
custodial in nature, such that the state holds the property for its rightful owner
and attempts to return it to the owner. Under these laws, the state stands in the
shoes of the true owner. That is, the state’s rights in the unclaimed property are
derivative of those of the owner, and the state can only take whatever interest
the owner has in the property. Accordingly, the state can only escheat property
that is due and payable by the holder to the owner.
Outside of insurance, the trigger for unclaimed property laws is generally
based on loss of contact with the property owner. This makes sense because
it is clear to whom such property belongs and when it is due and owning. For
example, deposits in a bank account or credits on a gift card belong to the
respective owners and not the bank or gift card issuer. Moreover, such monies
are immediately due and payable upon demand. Thus, if the bank or gift card
issuer has lost contact with the owner of those funds and the dormancy period
has expired, the holder is to report those monies and escheat them to the state.
The same is not true for life insurance. Under most life insurance policies and
the laws regulating them, a life insurer’s obligation to pay death benefits arises
only after being notified that an insured has died and receiving due proof of
death. Accordingly, for life insurance proceeds, “property” is defined as the
amount “due and payable” under the terms of a life insurance policy. Life
insurance proceeds due and payable are “presumed abandoned” for unclaimed
property law a set number of years (typically three to five) after the obligation
to pay arose. Absent such notice and due proof of death, no death benefits are
due and payable and so there is nothing to escheat. But what if the insured
dies and no claim is ever made? To address that situation, a second trigger for
RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW
Under most life insurance policies and the laws regulating them, a life insurer’s obligation to pay death benefits arises only after being notified that an insured has died and receiving due proof of death.
[…] must life insurers affirmatively search for potentially deceased insureds or permit their regulators to do so?
4
escheatment has developed for life insurance proceeds. When the insured on
a life insurance policy attains or would have attained the “limiting age” (i.e.,
the age by which actuaries assume an insured has died, typically around 100
years old), state unclaimed property laws require the life insurer to escheat any
death benefits associated with that policy. The life insurance industry and its
regulators operated for decades with this common understanding of when life
insurance proceeds become unclaimed property.
Changing Landscape in Unclaimed Property Laws
Over the past few years, however, certain contingency fee unclaimed prop-
erty auditors and the states retaining them have grown dissatisfied with this
approach. These entities have taken the position that life insurers must use
the Social Security Administration’s Death Master File (“DMF”) to ascertain
whether insureds are deceased and benefits are payable under life insurance
policies, or to permit the states and their outside auditors to achieve the same
result by themselves using the DMF and reporting the results to life insurers.
These obligations, some insurers respond, have no basis in law and are contrary
to the terms of life insurance policies and statutes, which require settlement
and payment of death benefits only upon receipt of a claim and due proof of
death, for which an insurer may require a certified death certificate.
Some states, such as New York, Maryland and Kentucky, have enacted rules
or laws requiring DMF searches. Other states have enacted no such laws, but
arguably sought to achieve the same result by undertaking seriatim unclaimed
property audits or market conduct examinations of life insurers on potential
violations. To this end, a task force from the National Association of Insurance
Commissioners (“NAIC”) has announced multi-state market conduct exami-
nations of more than 40 life insurers respecting unclaimed property law and
unfair claim practices and thereafter has announced settlements with 18 of
those insurers. The settlements, called Global Resolution Agreements, gener-
ally require the companies to perform DMF searches on a regular basis and
generate monthly reports for review.
Litigation Developments
This increase in regulatory activity has also spawned increased litigation.
State regulators, as well as private litigants, have alleged that life insurance
companies have breached their duties of good faith and fair dealing and have
not complied with state unclaimed property laws in failing to cross-check their
in-force business against the DMF. In response, some insurers have challenged
certain aspects of recently enacted legislation and regulatory audits. To date,
however, every court to have considered the assertion that life insurers are
obliged to conduct DMF comparisons or otherwise affirmatively search for
potentially deceased insureds in the absence of an express rule or statute has
rejected it.
These entities have taken the position that life insurers must use the Social
Security Administration’s Death Master File (“DMF”) to ascertain whether
insureds are deceased and benefits are payable under life insurance policies, or
to permit the states and their outside auditors to achieve the same result by themselves using the DMF and
reporting the results to life insurers.
These obligations, some insurers respond, have no basis in law and
are contrary to the terms of life insurance policies and statutes [...]
To date, however, every court to have considered the assertion that life
insurers are obliged to conduct DMF comparisons or otherwise affirmatively
search for potentially deceased insureds in the absence of an express
rule or statute has rejected it.
5SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
Private Litigation Against Insurers
In one such case, Andrews, private plaintiffs filed class action complaints alleg-
ing that their insurers breached their duty of good faith and fair dealing by
failing to use the DMF in identifying possible deaths of policyholders. Andrews
v. Nationwide Mutual Insurance Company, No. 979891, 2012 WL 5289946 (Ohio
Ct. App. Oct 25, 2012). The court rejected the argument, noting that the
life insurance contracts “expressly require[d] ‘receipt’ of ‘proof of death.’”
Use of the terms “receiving” and “receipt” “demonstrate[d] [the life insur-
ers’s] passive role” in establishing proof of death, the court found. The court
expressly refused to “import additional unspoken duties and obligations” into
the contracts. Likewise, in Total Asset Recovery Servs., LLC v. MetLife, Inc., No.
2010-CA-3719 (Fla. Cir. Ct. Aug. 20, 2013) (appeal pending), a court held that
Florida “has not adopted a law requiring [insurers] to consult the Death Master
File” or “to engage in elaborate data mining of external databases . . . in connec-
tion with payment or escheatment of life insurance benefits.”
More recently, in Feingold v. John Hancock Life Ins. Co., No. 13-2151 (1st Cir.
May 27, 2014), the First Circuit upheld the dismissal of a beneficiary’s claim that
a life insurer had an affirmative duty to search the DMF. In reaching this deci-
sion, the Circuit Court held that language in the policy requiring submission of
a proof-of-death form before paying a claim was consistent with state law. Id.
at *13. The court also rejected the argument that the plaintiff could bootstrap
common law claims against the insurer based solely on its signing of a Global
Resolution Agreement. Id. at *9.
Litigation Involving Regulators
In West Va. ex rel. Perdue v. Nationwide Life Ins. Co., No. 12-C-287 (W. Va. Cir.
Ct. Dec. 27, 2013), a West Virginia court considered several lawsuits filed by
the West Virginia State Treasurer against life insurers for failure to turn over
unclaimed life insurance proceeds to his office. The allegations were that each
insurer’s statutory duty of good faith and fair dealing required it to conduct
annual examinations of life insurance policyholders to determine if they are
deceased or three years past the limiting age. The West Virginia Treasurer
alleged that such information is readily available by searching the DMF or
other third party databases. The court began its analysis with West Virginia’s
Unclaimed Property Act (“UPA”). That law, it found, defines “property” as
respects life insurance proceeds as “an amount due and payable under the
terms of an annuity or insurance policy, including policies providing life insur-
ance.” Id. at 5. Only property “presumed abandoned” must be turned over
or reported to the administrator, the court noted. As respects life insurance
proceeds, property is “presumed abandoned” under West Virginia unclaimed
property law “three years after the obligation to pay arose or, in the case of a
policy or annuity payable upon proof of death, three years after the insured has
attained, or would have attained if living, the limiting age under the mortality
table on which the reserve is based.” Id. at 5-6. Turning next to the insurance
laws, the court noted that the West Virginia Insurance Code requires life insur-
ance policies delivered or issued in the state to include language conditioning
RECENT DEVELOPMENTS IN LIFE INSURANCE UNCLAIMED PROPERTY LAW6
an insurer’s liability upon the presentation of a claim, which in turn required a
claimant to provide an insurer with notice giving rise to liability under a policy.
Id. at *6.
Reading the UPA and the Insurance Code in conjunction, the court found that
“receipt of due proof of death” required to be in each of the subject policies
was the trigger giving rise to an “obligation to pay” under the UPA. Absent
statutorily required receipt of due proof of death, the court found, there were
no life insurance proceeds “due and payable” and hence no “property.” Thus,
the court found, the “State Treasurer’s argument that the UPA applies to life
insurance proceeds before those proceeds meet the definition of ‘property’ and
before they are ‘presumed abandoned’” must fail. Id. at *7. Furthermore, the
court found, the argument that the UPA imposes an affirmative duty to search
the DMF is inconsistent with the UPA’s limiting age trigger, which expressly
provides a mechanism for unclaimed life insurance proceeds to be remitted
in the event the insurer never receives due proof of death from a claimant.
Id. at *8. Under the UPA, the “only two statutory triggers for the unclaimed
property dormancy period are receipt of due proof of death and the limiting
age.” Id. Based upon the “clear and unambiguous” language of the UPA and the
Insurance Code, the court found that defendants “have no obligation to sur-
render the life insurance proceeds under the UPA until the obligation to pay
arises – either upon receipt of due proof of death or once the insured reaches
the statutorily imposed limiting age” and dismissed the case. Id. at *9.
Other lawsuits challenging regulator actions respecting life insurer unclaimed
property audits or market conduct examinations are pending in California and
Illinois.1 Decisions in these cases should shed further light on the important
question of what obligation, if any, do life insurers have to affirmatively search
for deceased policyholders in the absence of an express rule or statute.
1 E.g., Chiang v. American National Ins. Co., Case No. 34-2013-00144517 (Sup. Ct. Cal. Oct. 9, 2013); Chiang v. Kemper Corp., et al., Case No. 34-2013-00148154 (Sup. Ct. Cal. Oct. 16, 2013); United Ins. Co. of America, et al. v. Boron, et al., Case No. 13-20383 (Ill. Cir. Ct., Sept. 4, 2013).
Decisions in these cases should shed further light on the important question
of what obligation, if any, do life insurers have to affirmatively search
for deceased policyholders in the absence of an express rule or statute.
7SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES
By Eric S. Mattson
Think back to elementary school. Some of you will remember teachers who
thought it was a good idea – sound discipline, even – to punish the entire class
when a few kids misbehaved. Class actions, when improperly certified, are kind
of like that, only in reverse: an entire class of individuals, including people who
suffered no harm and were subjected to no misconduct, can obtain a windfall
because a handful of people within the class arguably suffered harm. And the
consequences to the legal system and defendants alike can be dire.
Mind you, class actions are not supposed to work like that. In general, a class
should be certified only when the claims of everyone in the class can be fairly
and efficiently resolved by adjudicating the claims of a single class represen-
tative. As one court put it, “As goes the claim of the named plaintiff, so go the
claims of the class.” See Sprague v. General Motors Corp., 133 F.3d 388, 399 (6th
Cir. 1998) (describing “typicality” requirement of Rule 23(a)(3)). In other words,
if everyone in the class is truly “in the same boat” vis-à-vis the defendant, then
the legal outcome for one can fairly stand as the binding legal outcome for many.
“If everyone in the proposed class is, in some sense, the victim of the same
wrong (though, perhaps, to varying degrees), then it would seem straightfor-
ward for the court to recognize that cohesiveness by way of class certification.”
Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U.
L. Rev. 97, 102 (2009).1
Why is this principle so important? One reason is that the class certification
device, a procedural tool, cannot be used to change the substantive law. Elements
of claims do not magically disappear in class actions, and defendants do not
lose their right to assert affirmative defenses just because a class is certified.
Indeed, the Rules Enabling Act, 28 U.S.C. § 2072 – the statute that authorizes the
Supreme Court to promulgate rules (including Rule 23, the foundation of class
action practice in federal courts) – comes with a critical limitation: The rules
“shall not abridge, enlarge or modify any substantive right.” 28 U.S.C. § 2072(b).
Of late, courts around the country have been taking these principles more
seriously than in years past. Gone are the days when courts would routinely
assume the truth of the allegations in a complaint when deciding whether to
certify a class. In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551-52 (2011),
and again in Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013), the Supreme
Court emphasized that a class action plaintiff “must affirmatively demonstrate
his compliance” with the requirements of Rule 23. In Wal-Mart, the Court tight-
ened the requirements for demonstrating the existence of “questions of law or
fact common to the class” under Rule 23(a)(2); in Comcast, it tightened the Rule
23(b)(3) requirement for showing that common questions “predominate over
any questions affecting only individual members” of the putative class.
1 Available at http://ssrn.com/abstract_id=1247720
In general, a class should be certified only when the claims of everyone in the class can be fairly and efficiently resolved by adjudicating the claims of a single class representative.
[…] the class certification device, a procedural tool, cannot be used to change the substantive law.
8
Understandably, the legal commentariat has closely scrutinized Wal-Mart and
Comcast, which, taken together, have tilted the playing field in favor of class
action defendants. But the vast majority of class actions never reach the Supreme
Court, and despite the enactment of the Class Action Fairness Act of 2005, 28
U.S.C. § 1332(d), and its expansion of federal jurisdiction over class actions,
many class actions are still adjudicated in state courts. Out in the trenches –
in state courts, in federal district courts and in federal appellate courts – the
results have not been as one-sided as they have been in Washington, D.C.
This article discusses two starkly different approaches to class certification
taken this past year by two different state supreme courts. Both cases were
brought against insurance companies over claims-handling practices, but the
similarities end there. The cases illustrate the fact that, while the balance of
power in class actions has shifted in favor of defendants, cases that should not
be certified as class actions still can be.
Class Actions Against Insurance Companies
Insurance companies have been regular targets of class actions for nearly two
decades. The subjects of these lawsuits have been many and varied, ranging
from “vanishing premium” policies to senior citizen annuity sales; from the use
of the Ingenix database to the use of “retained asset accounts”; and from the use
of “aftermarket” auto parts to the receipt of “revenue sharing.” It would be a
mistake to underestimate the creativity of the plaintiffs’ class action bar when
it comes to crafting legal theories to pursue against the insurance industry.
With some notable exceptions (such as claims under the Telephone Consumer
Protection Act, 47 U.S.C. § 227), class actions against insurance companies
tend to fall into one of two categories. The first involves how the product was
sold. Was the purchaser misled in some material way when buying a policy?
The second involves whether promised benefits were actually provided. Is the
company somehow short-changing policyholders?
The two cases discussed in this article fall into the latter category; that is, they
involve claims that insurance companies somehow short-changed their policy-
holders in the claims-handling process. In one case, we will see, the court took
the teachings of recent Supreme Court jurisprudence seriously; in the other,
the court purported to follow Wal-Mart, but in reality did not.
Ohio
Our first case involved a claim that State Farm did not tell policyholders with
damaged windshields about all of the benefits they could receive. Rather than
paying to replace the windshields, State Farm paid to repair some of them with
a chemical compound that was supposedly an inferior fix. Cullen v. State Farm
Mut. Auto. Ins. Co., 999 N.E.2d 614, 618 (Ohio 2013). According to the plaintiff,
State Farm’s claim representatives relied on a company-prepared script to per-
suade policyholders to choose the repair option rather than the replacement
cost of the windshield (minus any deductible). Id. at 618-19.
[…] while the balance of power in class actions has shifted in favor of
defendants, cases that should not be certified as class actions still can be.
9SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
Ohio’s class action rule is “virtually identical” to Rule 23, so Ohio courts, like
many other state courts, look to federal authorities for guidance on whether
a class should be certified. Id. at 622. The Ohio Supreme Court relied on Wal-
Mart and Comcast to set the stage for its holding that myriad contested issues
were individualized, and that these issues precluded certification. This ruling
was unquestionably faithful to those Supreme Court cases and the “all in the
same boat” principles underlying them.
State Farm pointed out, and the court agreed, that it could not be liable “if an
individual class member knowingly chose windshield repair – but individual
consent and knowledge cannot be proven with common evidence.” Id. at 626.
Similarly, “if a windshield repair could return a vehicle to preloss condition
. . . State Farm’s liability would be subject to individual examinations of each
vehicle, not common questions.” Id.
As for the claim that State Farm systematically failed to inform policyholders
of their options, the court found that “policyholders had various individual,
unscripted conversations” with claim representatives and others, “and there is
no common proof of what any individual policyholder knew when consenting to
windshield repair.” Id. As a result, “[d]etermining whether State Farm breached
any obligations to insureds necessarily entails an individualized inquiry into
each of these communications.” Id.
The court went on to find other fatal dissimilarities in the claims of class
members. Id. at 626-28. In so doing, it adhered to the principle that class cer-
tification is a procedural device. It is not supposed to be used to turn losing
claims into winners, or vice versa. For example, in the State Farm case, if a
class member had a losing claim because he consented, with full knowledge,
to a repair rather than a replacement, then his claim could not succeed merely
because someone else (the class representative, perhaps) did not consent.
It is no answer to this to say, as some plaintiffs’ lawyers do, that class actions
facilitate the prosecution of small claims that would never be prosecuted unless
they could be aggregated into class actions. It’s true that one of the justifications
for class actions is that they make small claims marketable through the device
of aggregation. But this cannot change substantive law. “[T]he class action
was never designed to serve as a freestanding legal device for the purpose of
‘doing justice,’ nor is it a mechanism intended to serve as a roving policeman
of corporate misdeeds or as a mechanism by which to redistribute wealth.”
Martin H. Redish, Wholesale Justice: Constitutional Democracy and the Problem
of the Class Action Lawsuit 22 (Stanford University Press 2009). Instead, it is
“an elaborate procedural device designed to facilitate the enforcement of pre-
existing substantive law.” Id. The State Farm opinion provides a good example
of a court following these principles.
The Ohio Supreme Court relied on Wal-Mart and Comcast to set the stage for its holding that myriad contested issues were individualized, and that these issues precluded certification.
WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES10
Montana
We now move west to Montana. In contrast to Ohio’s approach, Montana’s
supreme court has issued an opinion that turned a blind eye to individualized
issues and, despite purporting to follow Wal-Mart, certified a class that cannot
be squared with that precedent.
The case is Jacobsen v. Allstate Insurance Co., 310 P.3d 452 (Mont. 2013). Like
the Ohio case, Jacobsen involved the theory that an insurance company sys-
tematically short-changed its policyholders in the claims process. The theory
was based on Allstate’s use of claims guidelines that, according to the court, was
designed to “fast track settlements and reduce the amount paid out on claims.”
Id. at 455. The guidelines accomplished this goal, the court said, by encouraging
claims adjusters to establish contact with claimants quickly and to work with
them in an empathetic manner to resolve their claims. Id. at 458. What seemed
most bothersome to the court was the alleged use of an “attorney economics”
script that was allegedly intended to dissuade claimants from hiring lawyers.
Id. at 458-59. This was done, according to the court, because “represented
claimants generally received higher settlements.” Id.
The court acknowledged in passing that the plaintiff’s “requested relief and
alleged bases for damages are not entirely clear.” Id. at 464. Let’s pause and con-
sider that statement for a moment. If the requested relief and basis for damages
are unclear, how can a class be certified? One of the fundamental questions of
class certification is whether the claims can be fairly and efficiently resolved on
a classwide basis. If it is not clear what claims and theories are actually at issue,
then it is hard to see how a class can be certified. Yet in Jacobsen, it was.
The court glossed over this problem and allowed plaintiff to proceed based on
the idea that class members may have suffered “actual harm” because Allstate
engaged in “an alleged zero-sum economic plan systematically reducing claims
payments to increase profits.” Id.; see also id. at 467. But even if this is so, it
begs the question of whether a class can be certified. Even if “the allegedly
unlawful conduct caused harm to the class as a whole,” as the court suggested
(id. at 468-69; emphasis added), that is a different issue than whether the claims
of every individual in the class can fairly be resolved in a single proceeding.
It assumes, without proof, that everyone in the class is in the same boat. For
instance, if Allstate gave a class member a fair and speedy resolution of his
claim, what injury has that claimant suffered? The court never answers this
question, but the answer seems obvious: no injury at all. Yet because a class
was certified, that same claimant, having already received a fair, speedy resolu-
tion of his claim, could obtain an additional payment – a windfall – if the claims
adjustment program is ultimately determined to be unfair at some “macro”
level.
The Montana court stated that “[t]he individual context of any one [claim resolu-
tion] is not relevant” to its ruling, nor is the fact that “not all class members have
suffered actual harm or an unfair adjustment.” Id. at 472. This is impossible
to square with Wal-Mart’s statement that “[c]ommonality requires the plaintiff
to demonstrate that the class members ‘have suffered the same injury.’” 131 S.
If it is not clear what claims and theories are actually at issue, then
it is hard to see how a class can be certified. Yet in Jacobsen, it was.
11SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
Ct. at 2551 (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147,
157 (1982)). And it confirms that the Montana court was open to changing the
substantive law via the procedural tool of class certification, so that individuals
with losing claims may nevertheless recover merely because they are members
of a certified class. Regrettably, the Montana opinion proves the truth of this
observation from one class action scholar: “[T]he modern class action may give
rise to as much harm as good; if not properly controlled it may wreak havoc on
the legal system and the values that underlie it.” Redish, supra, at 1-2.
Conclusion
Class certification is a critical issue, sometimes bordering on outcome-deter-
minative, in any putative class action. If a class is certified, the exposure to the
defendant can grow exponentially and may create pressure to settle, even if the
claims are weak. The Supreme Court has tightened the way the rules governing
class certification are applied, and to some extent, that guidance has been fol-
lowed around the country, in both federal and state courts. The Ohio opinion
well illustrates the effect of those Supreme Court opinions. The Montana
opinion shows that the battle is far from over.
WAL-MART IS TRICKLING DOWN – UNEVENLY – TO CLASS ACTIONS AGAINST INSURANCE COMPANIES12
13SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
NAIC CREDIT FOR REINSURANCE UPDATE
By Charlene C. McHugh
Although it has been more than two years since the National Association of
Insurance Commissioners (“NAIC”) amended its credit for reinsurance model
laws, the NAIC remains active in assisting state insurance regulators with pro-
cedural aspects of the new laws. By way of background, in November 2011, the
NAIC adopted amendments to its Credit for Reinsurance Model Law (#785) and
Credit for Reinsurance Model Regulation (#786) (“CFR Model Laws”). In 2014,
the RTF will re-examine the current (reduced) collateral requirements set
forth in the Model to determine whether changes are needed (raising or lower-
ing collateral amounts). When the Model was drafted, new collateral amounts
were set with the intent that they be reviewed within two years of their use
by Certified Reinsurers. Since 2011, a number of states have adopted the CFR
Model Laws or are in the process of doing so. New York and Florida (property-
casualty only) had already amended collateral requirements by the time the
CFR Model Laws were passed.
The CFR Model Laws allow for a reduction in posted collateral from an unau-
thorized reinsurer that is approved by states as a “Certified Reinsurer.” In
deciding whether to certify a reinsurer, state insurance regulators evaluate a
number of factors, including whether a reinsurer is domiciled in a jurisdiction
the state considers to be a “Qualified Jurisdiction” (i.e., one that “effectively”
regulates reinsurers domiciled in the jurisdiction). States that have begun
certifying reinsurers include Connecticut, Florida, New Jersey and New York.
Since passing the CFR Model Laws, the NAIC through its Reinsurance (E)
Task Force has been providing a forum for multiple-state review of Certified
Reinsurer applications and has also created a process to help states determine
what constitutes a “Qualified Jurisdiction.”
Certified Reinsurer Application Review
The Reinsurance Financial Analysis Working Group (“RFAWG”) was created to
address specific applications by reinsurers that have already been approved as
Certified Reinsurers in Florida, Connecticut, New York and New Jersey. RFAWG
provides a forum for multi-state review of Certified Reinsurer applications and
for “peer review” by state insurance regulators of decisions made by other
states on applications. Peer reviews allow states to access diligence already
conducted by other states during the approval process. RFAWG has reported
that, as of year-end 2013, of the twenty-one reinsurer applications that had
been peer reviewed, eighteen were approved and two were still pending. One
application was denied (so that the reinsurer, certified in one state, must seek
individual approval in all other states).
NAIC CREDIT FOR REINSURANCE UPDATE
In deciding whether to certify a reinsurer, state insurance regulators evaluate a number of factors, including whether a reinsurer is domiciled in a jurisdiction the state considers to be a “Qualified Jurisdiction” (i.e., one that “effectively” regulates reinsurers domiciled in the jurisdiction).
Since passing the CFR Model Laws, the NAIC through its Reinsurance (E) Task Force has been providing a forum for multiple-state review of Certified Reinsurer applications and has also created a process to help states determine what constitutes a “Qualified Jurisdiction.”
RFAWG provides a forum for multi-state review of Certified Reinsurer applications and for “peer review” by state insurance regulators of decisions made by other states on applications. Peer reviews allow states to access diligence already conducted by other states during the approval process.
14
Qualified Jurisdiction ProcessTo assist states in determining whether a reinsurer’s domicile is a “Qualified
Jurisdiction,” the NAIC adopted a written process in August 2013 for devel-
oping and maintaining a list of qualified jurisdictions (Qualified Jurisdiction
Process). In drafting the Qualified Jurisdiction Process, the NAIC recognized
the importance of consistency among states and took into account that some
states (e.g., Florida and New York) had already, in effect, made decisions on
certain countries when they certified 29 reinsurers domiciled in Bermuda, the
UK, Switzerland, and Germany. An “expedited review” is used for jurisdictions
that have already been vetted by states that granted Certified Reinsurer status
to reinsurers domiciled in those jurisdictions.
Qualified Jurisdiction Working GroupThe NAIC created a specific group to perform the jurisdictional analysis –
the Qualified Jurisdiction Working Group of the Reinsurance (E) Task Force
(“Working Group”). The Working Group is responsible for:
• initiating the evaluation process and coordinating the review of a
jurisdiction;
• making a preliminary determination as to whether the
jurisdiction under consideration meets the Qualified Jurisdiction
Process’ Standard of Review and is deemed acceptable to be
included on the NAIC List of Qualified Jurisdictions;
• communicating this information in written form to the
supervisory authority of the jurisdiction under review;
• considering any response from the jurisdiction, and then
preparing a final report for recommendation to the Reinsurance
Task Force and ultimately the NAIC’s Executive/Plenary
Committees; and
• coordinating the process for ongoing and periodic reviews.
Once a jurisdiction is approved, it is added to the NAIC’s List of Qualified
Jurisdictions (if not approved, reapplication is allowed at the NAIC’s discretion).
A Qualified Jurisdiction must agree to share information and cooperate on a
confidential basis with US state insurance regulatory authority with respect to
all certified reinsurers domiciled within that jurisdiction. The NAIC has also
created a Memorandum of Understanding (“MOU”) template for negotiation by
the NAIC with the Qualified Jurisdiction; the MOU will memorialize confiden-
tiality safeguards with respect to information shared between jurisdictions.
After approval, a Qualified Jurisdiction is subject to re-evaluation every five
years. Further, Qualified Jurisdictions are required to notify the NAIC of “any
material change in the applicable reinsurance supervisory system” that may
affect the status of the Qualified Jurisdiction. U.S. jurisdictions are expected
Once a jurisdiction is approved, it is added to the NAIC’s List of Qualified
Jurisdictions (if not approved, reapplication is allowed at the NAIC’s
discretion). A Qualified Jurisdiction must agree to share information and
cooperate on a confidential basis with US state insurance regulatory authority
with respect to all certified reinsurers domiciled within that jurisdiction.
15SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
to notify the NAIC if they receive notice of any such material change, or any
“adverse developments with respect to enforcement of final US judgments” that
may affect the status of the Qualified Jurisdiction.
Expedited Review Process
The Qualified Jurisdiction Process allows for expedited review of a jurisdic-
tion, after which the jurisdiction is designated as a Conditional Qualified
Jurisdiction. The expedited process facilitates the certification of reinsurers
domiciled therein until a complete evaluation is completed. Because certain
states have already approved reinsurers in Bermuda, Germany, Switzerland
and the UK, an expedited review procedure was used by the NAIC in analyzing
such jurisdictions. At year-end 2013, the NAIC announced that it had completed
its expedited review and had granted these jurisdictions Conditional Qualified
Jurisdiction status.
Standard of Review and Evaluation Methodology
The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations
are intended to be “outcomes-based” comparisons to financial solvency regu-
lation under the NAIC ‘s accreditation program, adherence to international
supervisory standards and relevant international guidance for recognition of
reinsurance supervision. The Standard of Review for a jurisdiction’s qualifica-
tion is that the NAIC must reasonably conclude that:
• the jurisdiction’s reinsurance supervisory system achieves
a level of effectiveness in financial solvency regulation that
is deemed acceptable for purposes of reinsurance collateral
reduction;
• the jurisdiction’s demonstrated practices and procedures with
respect to reinsurance supervision are consistent with its
reinsurance supervisory system; and
• the jurisdiction’s laws and practices satisfy the criteria required
of Qualified Jurisdictions as set forth in the CFR Model Laws.
In evaluating a jurisdiction, the Working Group uses a specific Evaluation
Methodology set forth in the Qualified Jurisdiction Process, which considers
the jurisdiction’s:
• laws and regulations;
• regulatory practices and procedures;
• requirements applicable to US-domiciled reinsurers;
• regulatory cooperation and information sharing;
• history of performance of domestic reinsurers;
• enforcement of final US judgments; and
NAIC CREDIT FOR REINSURANCE UPDATE
The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations are intended to be “outcomes-based” comparisons to financial solvency regulation under the NAIC ‘s accreditation program, adherence to international supervisory standards and relevant international guidance for recognition of reinsurance supervision.
16
• allowance of solvent schemes of arrangement.
The specific laws, regulations, and regulatory practices are outlined below in
Appendices A and B.
Conclusion
States that have adopted reinsurance collateral reform (thus far, nineteen
states and at least five with pending bills) are beginning to process applications
for Certified Reinsurers, and many are using the NAIC’s uniform, multi-state
process. At year-end 2013, the NAIC announced that it will now review the
regulatory supervisory systems of Ireland and France, which have requested
approval as Qualifying Jurisdictions. It is expected that additional jurisdic-
tions, such as Japan, will be considered in the near future.
Appendix A: Laws and Regulations
1. Examination Authority
Does the jurisdiction have the authority to examine its domestic
reinsurers? This description should address the following:
a. Frequency and timing of examinations and reports.
b. Guidelines for examination.
c. Whether the jurisdiction has the authority to examine
reinsurers whenever it is deemed necessary.
d. Whether the jurisdiction has the authority to have complete
access to the reinsurer’s books and records and, if necessary,
the records of any affiliated company.
e. Whether the jurisdiction has the authority to examine officers,
employees and agents of the reinsurer when necessary with
respect to transactions directly or indirectly related to the
reinsurer under examination.
f. Whether the jurisdiction has the authority to share confidential
information with U.S. state insurance regulatory authorities,
provided that the recipients are required, under their law, to
maintain its confidentiality.
2. Capital and Surplus Requirement
Does the jurisdiction have the authority to require domestic
reinsurers to maintain a minimum level of capital and surplus to
transact business? This description should address the following:
a. Whether the jurisdiction has the authority to require reinsurers
to maintain minimum capital and surplus, including a
description of such minimum amounts.
b. Whether the jurisdiction has the authority to require additional
capital and surplus based on the type, volume and nature of
reinsurance business transacted.
17SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
c. Capital requirements for reinsurers, including reports and a
description of any specific levels of regulatory intervention.
3. Accounting Practices and Procedures
Does the jurisdiction have the authority to require
domestic reinsurers to file appropriate financial
statements and other financial information? This
description should address the following:
a. Description of the accounting and reporting practices and
procedures.
b. Description of any standard financial statement blank/
reporting template, including description of content/disclosure
requirements and corresponding instructions.
4. Corrective Action
Does the jurisdiction have the authority to order a
reinsurer to take corrective action or cease and desist
certain practices that, if not corrected or terminated, could
place the reinsurer in a hazardous financial condition?
This description should address the following:
a. Identification of specific standards which may be considered
to determine whether the continued operation of the reinsurer
might be hazardous to the general public.
b. Whether the jurisdiction has the authority to issue an order
requiring the reinsurer to take corrective action when it has
been determined to be in hazardous financial condition.
5. Regulation and Valuation of Investments
What authority does the jurisdiction have with
respect to regulation and valuation of investments?
This description should address the following:
a. Whether the jurisdiction has the authority to require a
diversified investment portfolio for all domestic reinsurers as to
type, issue and liquidity.
b. Whether the jurisdiction has the authority to establish
acceptable practices and procedures under which investments
owned by reinsurers must be valued, including standards under
which reinsurers are required to value securities/investments.
6. Holding Company Systems
Does the jurisdiction have laws or regulations with respect
to supervision of the group holding company systems of
reinsurers? This description should address the following:
NAIC CREDIT FOR REINSURANCE UPDATE18
a. Whether the jurisdiction has access to information via the
parent or other regulated group entities about activities or
transactions within the group involving other regulated or
non-regulated entities that could have a material impact on the
operations of the reinsurer.
b. Whether the jurisdiction has access to consolidated financial
information of a reinsurer’s ultimate controlling person.
c. Whether the jurisdiction has the authority to review integrity
and competency of management.
d. Whether the jurisdiction has approval and intervention powers
for material transactions and events involving reinsurers.
e. Whether the jurisdiction has authority to monitor, or has prior
approval authority over:
i. Change in control of domestic reinsurers.
ii. Dividends and other distributions to shareholders of the
reinsurer.
iii. Material transactions with affiliates.
7. Risk Management
Does the jurisdiction have the authority to require its domestic
reinsurers to maintain an effective risk-management function
and practices? This description should address the following:
a. Whether the jurisdiction has Own Risk and Solvency
Assessment (ORSA) requirements and reporting.
b. Any requirements regarding the maximum net amount of risk
to be retained by a reinsurer for an individual risk based on the
reinsurer’s capital and surplus.
c. Whether the jurisdiction has authority to monitor enterprise
risk, including any activity, circumstance, event (or series of
events) involving one or more affiliates of a reinsurer that, if not
remedied promptly, is likely to have a material adverse effect
on the financial condition or liquidity of the reinsurer or its
insurance holding company system as a whole.
d. Whether the jurisdiction has corporate governance
requirements for reinsurers.
8. Liabilities and Reserves
Does the jurisdiction have standards for the
establishment of liabilities and reserves (technical
provisions) resulting from reinsurance contracts?
This description should address the following:
19SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
a. Liabilities incurred under reinsurance contracts for policy
reserves, unearned premium, claims and losses unpaid, and
incurred but not reported (IBNR) claims (including whether
discounting is allowed for reserve calculation/reporting).
b. Liabilities related to catastrophic occurrences.
c. Whether the jurisdiction requires an opinion on reserves and
loss and loss adjustment expense reserves by a qualified actuary
or specialist for all domestic reinsurers, and the frequency of
such reports.
9. Reinsurance Ceded
What are the jurisdiction’s requirements with
respect to the financial statement credit allowed for
reinsurance retroceded by its domestic reinsurers?
This description should address the following:
a. Credit for reinsurance requirements applicable to reinsurance
retroceded to domestic and non-domestic reinsurers.
b. Collateral requirements applicable to reinsurance contracts.
c. Whether the jurisdiction requires a reinsurance agreement
to provide for insurance risk transfer (i.e., transfer of both
underwriting and timing risk).
d. Requirements applicable to special purpose reinsurance
vehicles and insurance securitizations.
e. Affiliated reinsurance transactions and concentration risk.
f. Disclosure requirements specific to reinsurance transactions,
agreements and counterparties, if such information is not
provided under another item.
10. Independent Audits
Does the jurisdiction require annual audits of domestic
reinsurers by independent certified public accountants or similar
accounting/auditing professionals recognized in the applicant
jurisdiction? This description should address the following:
a. Requirements for the filing of audited financial statements
prepared in conformity with accounting practices prescribed or
permitted by the supervisory authority.
b. Contents of annual audited financial reports.
c. Requirements for selection of auditor.
d. Allowance of audited consolidated or combined financial
statements.
e. Notification of material misstatements of financial condition.
f. Supervisor’s access to auditor’s workpapers.
g. Audit committee requirements.
NAIC CREDIT FOR REINSURANCE UPDATE20
h. Requirements for reporting of internal control-related matters.
11. Receivership
Does the jurisdiction have a receivership scheme for the
administration of reinsurers found to be insolvent? This should
include a description of any liquidation priority afforded to
policyholders and the liquidation priority of reinsurance
obligations to domestic and non-domestic ceding insurers
in the context of an insolvency proceeding of a reinsurer.
12. Filings with Supervisory Authority
Does the jurisdiction require the filing of annual and interim
financial statements with the supervisory authority?
This description should address the following:
a. The use of standardized financial reporting in the financial
statements and the frequency of relevant updates.
b. The use of supplemental data to address concerns with specific
companies or issues.
c. Filing format (e.g., electronic data capture).
d. The extent to which financial reports and information are
public records.
13. Reinsurance Intermediaries
Does the jurisdiction have a regulatory framework for
the regulation of reinsurance intermediaries?
14. Other Regulatory Requirements with respect to Reinsurers
Any other information necessary to adequately describe
the effectiveness of the jurisdiction’s laws and regulations
with respect to its reinsurance supervisory system.
Appendix B: Regulatory Practices and Procedures
1. Financial Analysis
What are the jurisdiction’s practices and procedures with
respect to the financial analysis of its domestic reinsurers?
Such description should address the following:
a. Qualified Staff and Resources
The resources employed to effectively review the financial
condition of all domestic reinsurers, including a description
of the educational and experience requirements for staff
responsible for financial analysis.
b. Communication of Relevant Information to/from Financial
Analysis Staff
The process under which relevant information and data
received by the supervisory authority are provided to the
21SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
financial analysis staff and the process under which the
findings of the financial analysis staff are communicated to the
appropriate person(s).
c. Supervisory Review
How the jurisdiction’s internal financial analysis process
provides for supervisory review and comment.
d. Priority-Based Analysis
How the jurisdiction’s financial analysis procedures are
prioritized in order to ensure that potential problem reinsurers
are reviewed promptly.
e. Depth of Review
How the jurisdiction’s financial analysis procedures ensure
that domestic reinsurers receive an appropriate level or depth
of review commensurate with their financial strength and
position.
f. Analysis Procedures
How the jurisdiction has documented its financial analysis
procedures and/or guidelines to provide for consistency
and continuity in the process and to ensure that appropriate
analysis procedures are being performed on each domestic
reinsurer.
g. Reporting of Material Adverse Findings
The process for reporting material adverse indications,
including the determination and implementation of appropriate
regulatory action.
h. Early Warning System/Stress Testing
Whether the jurisdiction has an early warning system and/or
stress testing methodology that is utilized with respect to its
domestic reinsurers.
2. Financial Examinations
What are the jurisdiction’s practices and procedures
with respect to the financial examinations of its domestic
reinsurers? Such description should address the following:
a. Qualified Staff and Resources
The resources employed to effectively examine all
domestic reinsurers. This should include whether the
jurisdiction prioritizes examination scheduling and
resource allocation commensurate with the financial
strength and position of each reinsurer and a description
of the educational and experience requirements for
staff responsible for financial examinations.
NAIC CREDIT FOR REINSURANCE UPDATE22
b. Communication of Relevant Information
to/from Examination Staff
The process under which relevant information
and data received by the supervisory authority are
provided to the examination staff and the process
under which the findings of the examination staff
are communicated to the appropriate person(s).
c. Use of Specialists
Whether the supervisory authority’s examination staff
includes specialists with appropriate training and/or
experience, or whether the supervisory authority otherwise
has available qualified specialists that will permit the
supervisory authority to effectively examine any reinsurer.
d. Supervisory Review
Whether the supervisory authority’s procedures for
examinations provide for supervisory review.
e. Examination Guidelines and Procedures
Description of the policies and procedures the supervisory
authority employs for the conduct of examinations, including
whether variations in methods and scope are commensurate
with the financial strength and position of the reinsurer.
f. Risk-Focused Examinations
Does the supervisory authority perform and document
risk-focused examinations and, if so, what guidance
is utilized in conducting the examinations? Are
variations in method and scope commensurate with
the financial strength and position of the reinsurer?
g. Scheduling of Examinations
Whether the supervisory authority’s procedures
provide for the periodic examination of all domestic
reinsurers, including how the system prioritizes
reinsurers that exhibit adverse financial trends or
otherwise demonstrate a need for examination.
h. Examination Reports
Description of the format in which the supervisory
authority’s reports of examinations are prepared, and
how the reports are shared with other jurisdictions
under information-sharing agreements.
i. Action on Material Adverse Findings
What are the jurisdiction’s procedures regarding
supervisory action in response to the reporting
of any material adverse findings?
23SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
3. Information Sharing
Does the jurisdiction have a process for the sharing of
otherwise confidential documents, materials, information,
administrative or judicial orders, or other actions with U.S.
state regulatory officials, provided that the recipients are
required, under their law, to maintain its confidentiality?
4. Procedures for Troubled Reinsurers
What procedures does the jurisdiction follow
with respect to troubled reinsurers?
5. Organization, Licensing and Change of Control of Reinsurers
What processes does the supervisory authority use
to identify unlicensed or fraudulent activities? The
description should address the following:
a. Licensing Procedure
Whether the supervisory authority has documented
licensing procedures that include a review and/
or analysis of key pieces of information included
in a primary licensure application.
b. Staff and Resources
The educational and experience requirements for
staff responsible for evaluating company licensing.
c. Change in Control of a Domestic Reinsurer
Procedures for the review of key pieces of
information included in filings with respect to a
change in control of a domestic reinsurer.
NAIC CREDIT FOR REINSURANCE UPDATE24
25SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS
By Daniel Thies
Federal courts have long had power under the Federal Arbitration Act (“FAA”)
to vacate an arbitral award because of arbitrator bias. See 9 U.S.C. § 10(a)(2).
The FAA does not, however, address the power of a court to remove an arbitra-
tor before or during an arbitration hearing. As a result, courts have historically
been all over the map on the question of whether they have power to interfere
with an ongoing arbitration because of alleged arbitrator bias or doubts about
an arbitrator’s qualifications. See Steven C. Schwartz, Reinsurance Law: An
Analytic Approach § 13.04[3] (rev. 2013) (“[T]he cases are inconsistent as to
whether the FAA permits a pre-hearing challenge to an arbitrator who does not
meet the requirements of the arbitration agreement.”). Several recent decisions
on arbitrator disqualification serve to muddy the water further, potentially
obscuring the legal rules applicable to the question and posing practical chal-
lenges to parties seeking to police arbitrator bias.
For example, in a decision from the Eastern District of Michigan, Star Insurance
Co. v. National Union Fire Insurance Co., No. 13-13807, 2013 U.S. Dist. LEXIS
130379 (E.D. Mich. Sept. 12, 2013), the court entertained a pre-hearing chal-
lenge based on alleged arbitrator conduct. Two other recent cases, however,
appear to have taken a different approach, indicating that alleged arbitrator
bias cannot be challenged in court before a final arbitral award is issued. See
Allstate Ins. Co. v. OneBeacon Am. Ins. Co., No. 13-12368, 2013 U.S. Dist. LEXIS
146826 (D. Mass. Oct. 8, 2013); IRB-Brasil Resseguros S.A. v. Nat’l Indem. Co.,
No. 11 Civ. 1965, 2011 U.S. Dist. LEXIS 136640 (S.D.N.Y. Nov. 29, 2011).
Another line of cases poses challenges to litigants trying to determine how and
when to pursue concerns about alleged arbitrator bias. One case addresses
ethical concerns with the use of panel e-mails in an attempt to show bias.
Northwestern Nat’l Ins. Co. v. Insco, Ltd., No. 11 Civ. 1124, 2011 U.S. Dist. LEXIS
50789 (S.D.N.Y. Oct. 3, 2011). Another case, by contrast, addresses the extent
to which arbitrators must make disclosures themselves of potential conflicts of
interest. Scandinavian Reins. Co. Ltd. v. St. Paul Fire & Marine Ins. Co., 668 F.3d
60 (2d Cir. 2012).
In light of these recent cases, parties to arbitration proceedings must care-
fully navigate the fraught issue of whether, when, and how to assert bias. With
careful planning and attention to detail, however, parties to an arbitration can
heed the lessons of these cases in their efforts to try to answer these questions.
I. Star Insurance Co. v. National Union Fire Insurance Co.
In Star Insurance v. National Union, the Eastern District of Michigan granted
a preliminary injunction enjoining an arbitration proceeding. Star Ins., 2013
U.S. Dist. LEXIS 130379, at *19. After an interim final award had been issued
against it on liability, one party alleged unauthorized communication between
opposing counsel and the opposing party-appointed arbitrator and alleged
[…] courts have historically been all over the map on the question of whether they have power to interfere with an ongoing arbitration because of alleged arbitrator bias or doubts about an arbitrator’s qualifications.
[…] parties to arbitration proceedings must carefully navigate the fraught issue of whether, when, and how to assert bias.
RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS26
that these communications took place during a time period when ex parte
communications were not permitted. Id. at *13-17. The party against whom the
interim final award had been issued also alleged that the umpire and opposing
party-appointed arbitrator supposedly issued panel orders without the input of
the third arbitrator who was copied on the communications, but contended he
was on vacation. Id. at *17-18. According to the court, these acts were grounds
for enjoining the arbitration proceeding before addressing damages and before
issuance of the final arbitral award.
According to the court, four factors are considered in determining whether to
grant a preliminary injunction: (i) likelihood the moving party will prevail on
the merits, (ii) irreparable harm to the moving party if a preliminary injunction
is not issued, (iii) possibility of substantial harm to others, and (iv) impact on
the public. In its decision, the court stated that each factor favored the moving
party (i.e., the party against whom the interim final award on liability had been
issued by the arbitrators). The court accepted the moving party’s argument that
it would suffer injury to its “reputation, goodwill, and standing in the insurance
industry” if the anticipated $25 million arbitral award was issued against it. Id.
at *12. The court also determined that an exception to the general rule against
courts intervening in pre-final award arbitration proceedings was applicable,
and thus the moving party was likely to succeed on the merits because, in the
court’s view, the moving party “need only prove the fact of ex parte communi-
cations to prevail on the merits of a request to remove a panel member” (and
the court said the non-moving party “seems not to dispute the fact of the com-
munications”). Id. at *14, *17. The court found that there could be substantial
harm to others because, according to the court, the moving party “persuasively
argue[d] that no award, even if issued could be confirmed and reduced to judg-
ment until these issues are resolved.” Id. at *18. The court also found that the
“public interest favors the issuance of an injunction of the arbitration proceed-
ings, to probe further and to preserve the status quo.” Id. at *19.1
II. Allstate v. OneBeacon and IRB-Brasil v. National Indemnity
Two other cases represent a different approach. One case, Allstate v. OneBeacon,
involved an umpire who supposedly inadvertently discovered that one of the
parties had nominated him for service, contrary to the customary practice that
umpire candidates remain unaware of who nominated them and how they were
selected. Allstate Ins. Co., 2013 U.S. Dist. LEXIS 146826, at *3-4. As a result, the
other party sought to enjoin the arbitration proceeding on the ground that the
arbitrator’s knowledge would bias him in favor of the party who nominated
him.
The court rejected the moving party’s argument, noting first that pre-hearing
challenges to arbitrator bias are generally not allowed, except for narrow excep-
tions. Id. at *7. The court then rejected the moving party’s contention that the
arbitrator’s alleged knowledge fell into those exceptions because it violated the
1 The district court’s opinion was reversed by the Sixth Circuit on April 9, 2014. Savers Prop. & Cas. Ins. Co. v. Nat'l Union Fire Ins. Co., 748 F.3d 708, 712 (6th Cir. 2014).
27SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
contract’s requirement that the arbitrators be “disinterested.” Id. at *8. Thus,
the court indicated that it would not interpret such a clause as a contractual
prohibition on alleged potential arbitrator bias. Id. at *8.
Second, the court also applied a heightened standard for showing the irrepa-
rable harm necessary for obtaining a preliminary injunction. According to the
court, even if the moving party suffers an adverse judgment from a biased arbi-
trator, a sufficient legal remedy exists “in the form of a post-award challenge
to the arbitration proceeding.” Id. at *13. Because post-award challenges are
usually available, showing irreparable harm will be difficult under the standard
articulated in Allstate v. OneBeacon.
The court in IRB-Brasil v. National Indemnity reached a similar result. In that
case, a party-appointed arbitrator had supposedly communicated with several
candidates for umpire seeking to confirm their “interest, ability, and willing-
ness” to serve. Id. at *15. As a result, the moving party challenged the umpire’s
partiality, citing numerous industry authorities it said supported its position
that such ex parte communication is improper. The court did not accept the
moving party’s argument, stating that “parties are precluded from attacking
the partiality of an arbitration panel until after an award has been issued.” Id. at
*17. The court, therefore, and unlike in Star Insurance, did not issue a prelimi-
nary injunction to enjoin the arbitration proceedings.
III. Northwestern National Insurance Co. v. Insco, Ltd.
In another recent case, Northwestern Nat’l Ins. Co. v. Insco, the court addressed
ethical rules that supposedly limit the extent to which parties may rely on a
party-appointed arbitrator to investigate potential arbitrator misconduct by
other panel members. In that case, one party-appointed arbitrator allegedly
had concerns that the other party-appointed arbitrator had failed to make nec-
essary disclosures. Northwestern Nat’l Ins. Co., 2011 U.S. Dist. LEXIS 50789,
at *3-5. The party arbitrator who apparently had those concerns eventually
informed counsel of those concerns and apparently revealed panel communi-
cations with counsel, who then attached certain communications to a motion to
the entire panel. Id. at *5-7.
After receiving the motion attaching panel communications, the other party
brought a motion in federal court to disqualify the attorney who attached the
panel communications to the motion, alleging violation of ethical obligations
and arbitral guidelines. The court granted the motion after rejecting the argu-
ment that concerns about arbitrator bias justified acquisition of the panel
communications. Id. at *27-30. The court stated that “a party is never allowed to
probe the decision-making process of an arbitration panel to prove bias, except
in the most egregious of cases.” Id. at *27. Alleged concerns about an arbitra-
tor’s “failures to disclose appointments in other arbitrations” and “personal
conflicts of interest” did not amount to the necessary “negligence” or “mal-
feasance.” Id. at *28. Accordingly, the court entered an order disqualifying the
attorneys who obtained the panel communications.
Because post-award challenges are usually available, showing irreparable harm will be difficult under the standard articulated in Allstate v. OneBeacon.
RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS28
IV. Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Insurance Co.
Finally, yet another recent case reemphasizes the role of potential judicial
review regarding arbitrator disclosures. In Scandinavian Reinsurance Co. v.
St. Paul Fire & Marine Ins. Co, 668 F.3d 60, the moving party discovered two
months after the final arbitration award was issued that two of the three panel
arbitrators had apparently been involved in another arbitration involving
similar issues. Id. at 68. Although the panelists had all made a variety of other
disclosures, the moving party contended that two conflicted arbitrators had
failed to disclose the contemporaneous arbitration. Id.
The court stated that the arbitrators’ service in a contemporaneous, similar
proceeding was not, “without more, evidence that they were predisposed
to favor one party over another in either arbitration.” Id. at 74. The court
did not place any weight on the arbitrators’ alleged failure to disclose that
service, despite their disclosure of other potential conflicts. Id. at 76-77. The
court stated that arbitrators “need not live up to [their] announced standards
for disclosure” and do not need to “conform in every instance to the parties’
respective expectations regarding disclosure.” Id.
Nonetheless, the court stated that courts will continue to be concerned with
alleged nondisclosure of potential conflicts that are “material.” Id. at 77.
According to the court, the nondisclosure in Scandinavian Re—service in an
unrelated arbitration involving similar issues—was so minor that it will not
likely encourage arbitrators to leave more meaningful conflicts undisclosed.
The court, therefore, did not disturb the award.
V. Potential Significance of These Decisions
These decisions demonstrate the broad range of standards courts may apply to
questions of alleged arbitrator bias. For example, courts may give the term “dis-
interested” a unique interpretation depending on the facts and circumstances
of the dispute before them. In addition, even while acknowledging that alleged
misconduct had not been proven, a court could enjoin arbitration proceedings
to allow further investigation. Such cases, however, are few and far between,
and convincing a court to intervene in arbitration proceedings prior to a final
award will likely still require proof of actual arbitrator misconduct that explic-
itly violates a provision of the arbitration agreement.
Courts have also outlined a regime that requires arbitrators to disclose all
potential material conflicts themselves, while not encouraging arbitrators to
police the impartiality of others. Decisions in these areas give the parties them-
selves a relatively minor role to play prior to final judgment. The parties need
only remain vigilant to overt signs of bias and follow-up on disclosed conflicts
that present potential issues.
[…] the nondisclosure in Scandinavian Re—service in an unrelated
arbitration involving similar issues—was so minor that it will not likely
encourage arbitrators to leave more meaningful conflicts undisclosed.
[…] convincing a court to intervene in arbitration proceedings prior to a final award will likely still require
proof of actual arbitrator misconduct that explicitly violates a provision
of the arbitration agreement.
[…] convincing a court to intervene in arbitration proceedings prior to a final award will likely still require
proof of actual arbitrator misconduct that explicitly violates a provision
of the arbitration agreement.
29SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
Parties should be careful to raise potential indications of bias and to follow up
on them through inquiries to the panel. Parties should also document their
inquiries to avoid later accusations of waiver. Parties should not involve their
party-appointed arbitrator in the investigation of others.
VI. Conclusion
Judicial treatment of pre-hearing intervention in arbitration hearings because
of arbitrator bias continues to evolve. The conflicting messages that courts have
sent in this area require careful attention to the factual detail of the case and to
the subtleties of the applicable law. Litigants must continue to be sensitive to
potential bias claims early in the case and must pursue them vigorously. At the
same time, they must proceed with their eyes open to the significant potential
ethical and practical challenges that may stand in their way.
The conflicting messages that courts have sent in this area require careful attention to the factual detail of the case and to the subtleties of the applicable law.
RECENT DEVELOPMENTS IN PRE-JUDGMENT CHALLENGES TO ARBITRATOR BIAS30
31SIDLEY AUSTIN LLP 2014 INSURANCE AND REINSURANCE LAW REPORT
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PROFILES OF THE AUTHORS
THOMAS D. CUNNINGHAM, a partner in Sidley’s Chicago office, has extensive experience arbitrating and litigating domestic and international reinsurance disputes on behalf of ceding companies, reinsurers and receivers. His practice encompasses the property and casualty and life and health fields. Tom has arbitrated or litigated numerous reinsurance disputes, addressing such issues as aggregation of claims, allocation of loss payments, ECO/XPL, late notice, lost contracts, follow the fortunes, pre-hearing security, cessions of declaratory judgment expenses and finite reinsurance issues. He also counsels companies on privacy, escheat and unclaimed property issues. Tom is a member of the firm’s Professional Responsibility Committee. Tom can be reached at +1.312.853.7594 or [email protected].
ERIC S. MATTSON is co-head of Sidley’s Insurance/Reinsurance Disputes practice and a partner in the Chicago office. The focus of his practice is the defense of consumer fraud, RICO, ERISA and Telephone Consumer Protection Act (“TCPA”) class actions. Much of his practice is dedicated to defending the insurance and financial services industry against the expanding array of class actions that challenge the industry’s products, methodologies and procedures. Eric can be reached at +1.312.853.4716 or [email protected].
CHARLENE C. MCHUGH is counsel in the firm’s New York office. Her practice focuses on the regulatory aspects of insurance and reinsurance transactions, including mergers and acquisitions, and representing clients in obtaining regulatory approvals of such transactions from state insurance departments. Charlene assists clients in forming and licensing insurance companies, captives, reinsurance companies, insurance producers and intermediaries; advises banks, investment banks, hedge funds and other financial institutions on the potential insurance regulatory aspects of structured financial products; and advises clients on credit enhancement and financial guaranty insurance products. Charlene is a regular participant at meetings of the National Association of Insurance Commissioners and has co-authored several insurance-related publications related to federal and state insurance legislative and regulatory proposals. Charlene can be reached at +1.212.839.5957 or [email protected].
DANIEL J. NEPPL, editor of the 2014 Insurance and Reinsurance Law Report, is a partner in the Insurance and Financial Services group in the firm’s Chicago office. Before entering private practice, Dan clerked for the Honorable C. Thomas White, Chief Justice of the Nebraska Supreme Court, and worked as Legal Counsel at National Indemnity Company in Omaha, Nebraska. His practice currently focuses on litigation and arbitration of commercial disputes, including insurance and reinsurance disputes. In the reinsurance area, he has represented cedents and reinsurers in matters involving all risk types, including annuity, casualty, financial guaranty, finite, life, and property risks. He has successfully arbitrated numerous disputes to final award, tried numerous cases to verdict, and briefed and argued appeals on reinsurance issues in the Third, Sixth, Seventh, and Ninth Circuits. Dan is licensed to practice in Illinois and New York. He can be reached at +1.312.853.7334 or [email protected].
DANIEL R. THIES is a litigation associate in Sidley’s Insurance and Financial Services Group in the firm’s Chicago office. His practice focuses on insurance and financial services class action defense, reinsurance litigation, and complex commercial litigation. Daniel has served as an Adjunct Professor of Law at the John Marshall Law School, teaching Intellectual Property Trial Advocacy. He currently serves as the ABA Young Lawyers Division Liaison to the Council of the ABA Section of Legal Education and Admissions to the Bar, and also is on the Section’s Publications Committee. Daniel is a member of the ISBA’s Federal Civil Practice Section Council, Standing Committee on Legal Education, Admission, & Competence, and the Young Lawyers Division Council. Daniel can be reached at +1.312.853.7571 or [email protected].
JEN C. WON is a litigation associate in Sidley’s Insurance and Financial Services group. Her practice focuses on insurance and financial services class action defense and reinsurance dispute litigation. Jen has a J.D. from Northwestern University School of Law, where she was Executive Articles Editor of the Journal of Criminal Law and Criminology. Prior to law school, she worked as a financial policy analyst in Washington, D.C. Jen can be reached at +1.312.853.0499 or [email protected].
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