INSIDE THIS ISSUE
Southern District Of New York Applies New York Insurance Law Section 1213 To Strike Unauthorized Insurer's Pleading For Failing To Post Security
The Argonaut Decision: A Federal Court Declines An Invitation To "Rewrite" An Arbitration Agreement Provision Regarding The Selection Of Arbitrators
A Portion Of The Loss
Texas Loosens Its Grip On Insurers With Respect To Bad Faith Claims
INSERT - - Sing a Song of Reinsurance
SOUTHERN DISTRICT OF NEW YORK APPLIES NEW YORK INSURANCE LAW SECTION 1213 TO STRIKE UNAUTHORIZED INSURER'S PLEADING FOR FAILING TO POST SECURITY
-Elisa T. Gilbert
The Southern District of New York recently struck the answer of an unlicensed foreign insurer that failed to post pre-answer security, and ordered the imposition of statutory penalties of pre-judgment interest and attorneys' fees for its vexatious and unreasonable failure to make payment on a contract of insurance. (Odyssey Reinsurance Corp. f/k/a Skandia America Reinsurance Corp. v. Caja Nacional De Ahorro y Seguro, No. 96 Civ. 2301 [KMW], S.D.N.Y.; See, Mealey's Litigation Reports: Reinsurance, Vol. 9 #1 p. 4.
On August 11, 1995, Odyssey Reinsurance Corporation was awarded $394,462 in an undefended arbitration proceeding against Caja Nacional De Ahorro y Seguro, an Argentinean public insuring entity. Odyssey sought confirmation of the award in the Southern District of New York and argued that under New York Insurance Law §1213 Caja must first post security in the amount of the award to oppose confirmation. Failure to post such security, Odyssey argued, should subject Caja to a default judgment in the confirmation proceeding and the additional relief of statutory attorneys fees and pre-judgment interest from the date of the award.
New York Insurance Law Section 1213
Section 1213(c) of the New York Insurance Law requires that before an unauthorized insurer can file any pleading in a proceeding brought against it in the State of New York, the entity must either obtain a license to do business in the State or post a bond in an amount sufficient to satisfy any final judgment entered against it.
The Court of Appeals in Curiale v. Ardra Insurance Company, 644 N.Y.S.2d 663 (April 30, 1996), said that "[t]he purpose of the pre-answer security is evident from the statute itself. Alien insurers must maintain sufficient funds in the State to satisfy any potential judgment arising from the policies of insurance (including reinsurance treaties) they issue." The Court of Appeals further stated that "since insurers, licensed and unlicensed alike, capitalize on the legitimate expectations of the public that funds to satisfy judgments on insurance policies are readily available within the state, the Legislature enacted section 1213(c) to ensure that those expectations would be met."
Therefore the Curiale Court concluded that the "State's interest in ensuring the availability of funds from which a judgment against a foreign or alien unlicensed insurer may be promptly paid, instead of requiring claimants to resort to far-flung forums for satisfaction of their judgments, justifies striking the answer of a foreign or alien insurer if that insurer fails to provide adequate pre-answer security." Id. 644 N.Y.S.2d at 669.
Attorneys' Fees and Pre-Judgment Interest
Section 1213(d) provides that where a nonresident insurer "vexatiously and without reasonable cause" fails to make payment pursuant to a contract of insurance for thirty days after a demand and prior to the commencement of a lawsuit, the court may grant attorneys' fees and pre-judgment interest on any judgment and include such fee in the judgment. Section 1213(d) further provides that "the failure of an insurer to defend an action shall be prima facie evidence that its failure to pay was vexatious and without reasonable cause."
Here, Caja unsuccessfully argued that attorneys' fees in the undefended arbitration proceeding should preclude it from being subjected to such additional relief during the award confirmation process. Odyssey noted, however, that attorneys' fees and pre-judgment interest are a statutory penalty for Caja's failure to either post the mandatory security or pay the award within thirty days and that it could only obtain these statutory remedies through a judicial proceeding.
Foreign Sovereign Immunities
Endeavoring to avoid the Curiale holding, Caja contended that because it is an "agent or instrumentality" of a foreign state, section 1609 of the Foreign Sovereign Immunity Act ("FSIA") immunized its property (i.e., the funds to finance a security) from pre-judgment attachment.
Odyssey argued that Caja did not enjoy immunity under these circumstances because the FSIA explicitly states that:
The property of a foreign state . . . shall not be immune from attachment prior to the entry of a judgment in any action brought in a court of the United States . . . if . . .
The purpose of the attachment is to secure satisfaction of a judgment that has been or may be entered against the foreign state and not to obtain jurisdiction. 28 U.S.C. Section 1610(d) (emphasis added).
Conclusion
The Southern District struck Caja's answer and determined that Caja "failed vexatiously and without reasonable cause to pay the amount awarded by the arbitration panel [or] to answer" the confirmation proceeding. Accordingly, pursuant to §1213(d), the Court awarded Odyssey attorneys' fees in the amount of $61,016, calculated at the statutory rate of 12.5% of the entire arbitration award plus 9% simple interest from the date of the award. In addition, the Court granted Odyssey pre-judgment interest in the amount of 9% simple interest per annum from the date of the arbitration award.
THE ARGONAUT DECISION: A FEDERAL COURT DECLINES AN INVITATION TO "REWRITE" AN ARBITRATION AGREEMENT PROVISION REGARDING THE SELECTION OF ARBITRATORS
-Diana E. Goldberg
An Illinois federal judge recently reaffirmed the rule that requires courts resolving disputes under arbitration agreements to defer to the express language of such agreements. See In the Matter Of the Arbitration Between Argonaut Midwest Ins. Co. v. Gen Reinsurance Corp., No. 96 C 6437, 1998 WL 474142 (N.D. Ill. Aug. 6, 1998).
In Argonaut, the court was asked to resolve a dispute that involved the appointment of arbitrators under an arbitration agreement in a reinsurance contract. According to that agreement, in the event of an arbitration between the parties, Argonaut and its reinsurer, Gen Re, each were to nominate an arbitrator. The arbitrators were to be officials of insurance or reinsurance companies. In addition, the agreement gave one party the right to choose both arbitrators if the other party failed to appoint its arbitrator within thirty days after receiving a written request to do so.
Instituting the process under the arbitration agreement, Argonaut sent a demand for arbitration to its reinsurer. Gen Re, in turn, nominated Mr. Robert Brownley to serve as its arbitrator. Subsequently, Mr. Brownley retired and ceased to be an active official of an insurance or reinsurance company.
After Mr. Brownley retired, Argonaut wrote to Gen Re, objecting to Mr. Brownley serving as Gen Re's arbitrator and requesting that Gen Re appoint another arbitrator. Gen Re did not, however, comply with Argonaut's request.
The Argonaut court considered whether Gen Re had forfeited its right to appoint an arbitrator when it failed to comply with Argonaut's request to replace Mr. Brownley. Argonaut argued that under the terms of the arbitration agreement Argonaut was entitled, by virtue of Gen Re's failure to appoint a replacement for Mr. Brownley, to select both arbitrators. The court rejected Argonaut's argument, finding that, even though Gen Re did not respond to Argonaut's later request to nominate a replacement for Mr. Brownley, it had complied with the terms of the arbitration agreement when it appointed Mr. Brownley within the appropriate time period.
The court compared the situation in Argonaut with the facts in Evanston Ins. Co. v. Kansa Gen'l Int'l Ins. Co. Ltd., No. 94 C 4957, 1995 WL 23063 (N.D. Ill. Jan. 13, 1995). In Evanston, the reinsurer, Kansa, nominated an arbitrator after receiving Evanston's initial arbitration demand. Later, when Evanston asked Kansa to appoint a replacement arbitrator, Kansa refused. The Evanston arbitration agreement, which was similar to that involved in Argonaut, permitted one party to select both arbitrators if the other party did not select its arbitrator within the prescribed time period. Evanston urged the court to find that Kansa's refusal to appoint a replacement arbitrator entitled Evanston to appoint both arbitrators. By its refusal, the insurer argued, the reinsurer had forfeited its right to nominate an arbitrator.
The Evanston court held that Kansa's written refusal to nominate a replacement arbitrator did not result in a forfeiture by the reinsurer of the right to nominate its arbitrator. Rejecting Evanston's argument, the court interpreted the Evanston arbitration agreement to mean that if one party never nominates an arbitrator after the initial demand for arbitration is made, the other party can select both arbitrators. In other words, according to the express language before the Evanston court, the right of one party to choose both arbitrators -- a forfeiture by the other party -was "triggered by inaction" by the other party only at the time of the initial demand for arbitration. Subsequent inaction was not addressed by the terms of the agreement and therefore could not result in a forfeiture.
The Argonaut court followed the same reasoning used by the court in Evanston, and held that Gen Re's failure to comply with Argonaut's request that Mr. Brownley be replaced was not a basis for depriving Gen Re of its right to designate an arbitrator. In particular, the Argonaut court found that Gen Re's inaction in failing to respond to Argonaut's request was not a complete failure to nominate an arbitrator and that it therefore could not trigger Argonaut's right to appoint both arbitrators. To hold otherwise, the court observed, would contradict the clear intent of the agreement to have each party choose an arbitrator.
The Argonaut court also found unsupported Argonaut's claim that the retirement of Mr. Brownley after he had been nominated by Gen Re would disqualify him from service as an arbitrator. The court recognized that the agreement required nominated arbitrators to be officials of insurance or reinsurance companies. However, because Argonaut offered no basis for interpreting the agreement as requiring the appointee to remain actively employed by an insurance or reinsurance company throughout the arbitration, the court declined to do so.
In support of its decision, the Argonaut court reasoned that the result of such an approach would be contrary to the purpose of arbitration because it could lead to an unending proceeding -- one that would have to be started again and again as successive arbitrators retired. The court also relied on the general rule that prevents federal district courts from ruling on "pre-award challenges to nominated arbitrators based on possible bias or prejudice." The court did find that the possibility of a review of an arbitrator's resume qualifications was not precluded, however, and noted that such a challenge might present a different case.
Following the Argonaut decision, insurers and reinsurers alike can rest assured that, at least in Illinois, the express language in their arbitration agreements will be given its full force and effect. By the same token, where a given result is not specified in an arbitration agreement, such a result will not be imposed on the parties.
A PORTION OF THE LOSS
-Michael T. Altman
In coverage litigation involving a loss occurring over a long period of time during which there have been multiple insurers on the risk, the court will necessarily be faced with an allocation problem -- how to apportion the loss among the different insurers on the risk and how to allocate uninsured losses. This issue has often arisen in cases involving environmental damage and in litigation concerning asbestos.
There are a number of options available to the court under these circumstances. For example, at least one court has found that each insurer on the risk is jointly and severally liable for the entire loss. Other courts have apportioned the damage among all carriers on the basis of their time on the risk as a percentage of the total insured loss. Under these two methods of allocation, the insured does not bear any liability for its loss. Finally, many courts have held in allocating losses that each insurer is responsible only for the portion of the risk that it insured, measured by the insurer's time on the risk as a percentage of the total time during which the loss occurred. Under this apportionment method, the insured is liable for any damage occurring during uninsured portions of the loss.
The allocation issue was recently addressed by Justice Gallipoli of the Superior Court of New Jersey in Crown Cork & Seal Co., Inc. v. Travelers Casualty and Surety Co., et. al., Nos. L-007456-88, L-007232-93, N.J. Super., Hudson Co. The court there was confronted with a loss arising out of continuous environmental damage that had occurred over a long period of time. Justice Gallipoli, relying primarily upon the recommendations made by the Special Master overseeing the action, determined that the loss should be apportioned on a pro-rata basis and found that portions of the loss for which the insured had not obtained insurance coverage would be treated as self-insured loss. The court held that in determining the periods of coverage the loss should be apportioned with consideration given to the entire time that the loss took place, including periods of self-insurance.
The court further determined that for the purpose of allocation intervals for which the insured had settled with its insurers would be treated as periods of self-insurance. The court reasoned that the insured would thereby "bear[] the loss of a bad settlement and retain[] the benefit of a good settlement." Similarly, the court held that if any of the policies at issue contained an aggregate limit that would limit the insurers' liability beyond the policy's per-occurrence limit, the insured would be treated as self-insured up to the per-occurrence limit once the aggregate had been reached.
The court also applied a pro-rata allocation to the excess insurers "on a site-by-site basis weighted, based on time on the risk and excess limits, for the entire trigger period." The court held that once the triggered primary coverage had been exhausted, the remaining loss would be allocated among excess carriers and the insured's losses above the primary layer for which there was no excess insurance would be treated as self-insured.
In making the recommendation ultimately adopted by the court, the Special Master recognized that there were competing interests. On the one hand, the public policy goals of encouraging "the most efficient use of the resources available to cope with environmental damage" and providing "incentives encouraging parties to engage in conduct that would increase rather than decrease those available resources" arguably weighed in favor of providing the insured with coverage for uninsured portions of its loss. On the other hand, the public interest and legal requirement of having parties' contractual obligations controlled by the language of the agreements into which they had entered militated against holding insurers liable for portions of the loss for which they had not contracted to provide coverage. After considering the conflicting factors, the Special Master determined that as a matter of law "the mere fact that there is a clear public interest in ensuring that there are such adequate resources cannot in and of itself justify the imposition of contractual obligations on the defendants in defense of the very terms of the contract under consideration."
The Special Master concluded that the terms of the contracts made no provision for the imposition of an allocation method that would apportion loss an insurer did not cover to that carrier. Accordingly, the Special Master recommended that the loss be apportioned on a pro-rata basis, portions of the loss for which the insured had not obtained insurance coverage be treated as self-insured loss, and the loss be apportioned among all periods of coverage, including periods of self-insurance.
TEXAS LOOSENS ITS GRIP ON INSURERS WITH RESPECT TO BAD FAITH CLAIMS
-Christina M. Wood
Texas, once a jurisdiction feared by insurers potentially liable for first-party bad faith claims, appears to have lightened up a bit. In 1997, the Texas Supreme Court in The Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Texas 1997), carved out a more reasonable standard for determining whether an insurer had breached its duty of good faith and fair dealing.
Formerly, under Texas law, an insurer violated its duty of good faith and fair dealing when "the insurer had no reasonable basis for denying or delaying the payment of a claim, and the insurer knew or should have known that fact." Aranda v. Ins. Co. of N. Am., 748 S.W.2d 210, 213 (Tex. 1988). The Texas Supreme Court in The Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Texas 1997), recognized that despite the relatively straightforward nature of the standard of proof for a bad faith claim, courts were having a difficult time applying the standard. The problem was that an insured was required to prove the absence of a reasonable basis to deny a claim, yet under the "no evidence" standard of review applicable in Texas, an appellate court was required to resolve all conflicts in the evidence and draw all inferences in favor of a bad-faith finding. Applying the "no evidence" standard of review, the appellate court could not give weight to an insurer's evidence of a reasonable basis for the denial or delay, and no judgment could ever be reversed for want of evidence because there could never be any evidence of a reasonable basis for denial or delay presented on appeal. See Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597, 600 (Tex. 1993).
Thus, the Court in Universe Life chose to articulate a standard for recovery that avoided the complexities of employing the "no-evidence" standard of review with respect to bad faith claims. Upon reviewing the Texas Legislature's 1995 amendment to Article 21.1, section 4 of the Insurance Code (the definition of unfair settlement practices), the court decided to adapt the Legislature's definition to fashion a bad faith standard in positive terms. The new standard requires an insured to demonstrate that the insurer failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear. Id. at 55. Thus, the claimant has the burden of proving that "the insurer knew or should have known that it was reasonably clear that the claim was covered." Id. This standard eliminates the conflict with the no-evidence standard of review, as well as unifies the common law and statutory standards for bad faith.
Texas also has recently clarified and narrowed the conditions under which an insured may recover the two primary forms of extra contractual damages, punitives and mental anguish. With regard to punitive damages, an insured can recover only when the bad faith is "accompanied by malicious, intentional, fraudulent, or grossly negligent conduct." Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 18 (Tex. 1994). Similarly, the courts will closely scrutinize mental anguish claims. A plaintiff cannot recover unless he or she demonstrates "direct evidence of the nature, duration, and severity of the mental anguish, thus establishing a substantial disruption in the plaintiff's daily routine." Parkway Co. v. Woodruff, 901 S.W.2d 424, 444 (Tex. 1995).
Several recent decisions highlight the Universe Life decision's value to insurers faced with defending bad faith claims. One such decision is Lawson v. Potomac Ins. Co. v. Illinois, Civil No. 3:98-CV-0692-H.
On August 14, 1998, Judge Barefoot Sanders, a U.S. District Judge for the Northern District of Texas, granted summary judgment in favor of Potomac Insurance Company on claims of bad faith and Insurance Code and Deceptive Trade Practices Act violations. 12 Mealey's Litigation Reports No. 41 at D-8 (September 9, 1998).
Patricia Lawson filed a claim with Potomac, her homeowners insurers, for foundation damage and plumbing repairs that she alleged were causally related. Potomac denied the claim. After extensive litigation between Lawson and the plumber retained to make repairs, Potomac agreed to pay for the plumbing costs. Potomac refused to reimburse Lawson for the foundation damage, however, asserting that the damage was not causally related to the plumbing leaks, and that even if it was causally related, the damage was excluded under the terms of the policy.
Lawson brought an action in Texas state court asserting, inter alia, breach of contract for failure to pay that portion of the claim related to the foundation repairs, breach of the duty of good faith and fair dealing, violation of several sections of the Texas Insurance Code and Deceptive Trade Practices Act ("DTPA"), and mental anguish.1 Potomac moved for summary judgment on the grounds that the policy excluded coverage for foundation damage and the extra-contractual claims lacked merit.
In its well-reasoned opinion, the court cited several recent cases in which Texas courts held that where coverage was questionable the insurer has a reasonable basis to deny or delay claims without threat of bad faith. See e.g. Higginbotham v. State Farm Mut. Ins. Co., 103 F.3d 456, 459 (5th Cir. 1997) and U.S. Fire Ins. Co. v. Williams, 955 S.W.2d 267, 268 (Tex. 1997). In fact, one court held that bad faith is not established where the jury determines that the insurer denied coverage because it was simply wrong about the proper construction of a policy term. See Pioneer Chlor. Alkali v. Royal Indemn. Co., 879 S.W.2d 920, 939 (Tex. App. 1994). Relying on these decisions, Judge Sanders accepted Potomac's argument that it denied coverage for the foundation damage because, relying on its engineer's report, it believed the damage was caused by soil movement. The court noted that Lawson provided no evidence to the contrary.2
The court also pointed out that under Texas law the same burden must be met for extra-contractual tort claims under the Texas Insurance Code and the DTPA. Thus, the court concluded that because Lawson could not establish that Potomac had acted in bad faith, she could not prevail on her extra-contractual tort claims under the Insurance Code and DPTA.
Additionally, the court noted that Lawson could not recover for mental anguish because she had failed to provide any direct evidence of the nature, duration, and severity of her alleged anguish, nor had she presented evidence of a substantial disruption of her daily routine.
CONCLUSION
Although there are a few proponents of complete abolition of the bad faith tort, at this point insurers doing business in Texas must be satisfied with the fact that the changes reflected in the Insurance Code and the Universe Life decision go far towards eliminating past excesses that adversely affected the insurance industry.
1 The action was later removed to federal court upon the motion of Potomac.
2 Note that while an insurer can refute claims of bad faith by showing there was a reasonable basis for denying coverage, the question of an insurer's liability is usually a question for the jury. It is only where there is no conflict in the evidence that a court can decide whether there is bad faith as a matter of law. Universe Life v. Giles, 950 S.W.2d at 56. |
